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Thursday, 15 May 2014

Trinity of Fundamental Analysis Investing

In investing, the trinity are:

1) Cash Flow

2) Asset Values

3) Profits


Just like the trinity of trading, these 3 components are best viewed as a holistic whole.

Most newbies are so fixated on a particular financial ratio or metric that they become like the 4 blind men touching each singular part of an elephant - and missing the overall big picture. 

Example? Fixation on P/E only. If it's only that simple....

 
These 3 components are the basic building blocks for these popular fundamental analysis strategies:

1.  Value play (Buy low; sell high).

2.  Growth play (Buy high; sell higher).

3.  Asset play.

4.  Turnaround play.

5.  Dividend play.   


Notice I used the word "play"?

Let's use the example of a "newbie" value investor to illustrate what I mean.

Newbies and "born-again" (failed traders) value investors tend to have lots to say about what they intend to do. High conviction here; strong beliefs there.

They intend to or have bought when prices are below the intrinsic value of stocks they are tracking.

Now ask them what they will do when the prices have recovered and are at fair value - price is the same as intrinsic value? 

Or better still, what will they do when prices exceed their intrinsic values?

Exactly.


That's how I would test for real conviction and check for deeper understanding beyond regurgitating popular buzz words.

Not convinced? Try asking yourself why the long time majority and controlling shareholders of F&N decide to sell to ThaiBev? 

Some plays take decades to complete. 


Reminisces of a sofa salesman

A sale is not completed until the customer pays in full.

This was not evident to me when I was working in Metro and Robinsons. Since the customer pays up immediately, a sale automatically results in instant profit and cash in pocket.

When I moved to selling sofas at IMM, I found out quickly that we only take a 30% deposit when the sale is made. Balance 70% is collected only when we deliver the made-to-order sofa one month later. And if the delivery gets delayed...

A sale here may result in instant "accounting profit", but the cash flow is not the same.

Apply it to investing and you will understand the meaning of "play".


And yes, this is a poke to those who says unrealised losses are not real; using the same logic, unrealised profits are not real too. Wink, wink.







24 comments:

  1. Ten years ago if one buys term insurance for $1 mil.
    Today, he feels that he needs at least $100 mil term.

    Not an issue of conviction, when long term investor holds a stock for perpetual time frame; way above its intrinsic value. Could be due to other personal reasons.

    ReplyDelete
    Replies
    1. Money Honey,

      1. Thank goodness Singapore does not have hyper-inflation - $1 mil to $100 mil is 100 baggers!!!???

      Not even Peter Lynch can match this rate of inflation in 10 years ;)


      2. Yes, if its for "personal reasons", then its not Value Investing ;)


      Delete
  2. this weekend i decide to go and do something i had never done in...i don't know, maybe 10 or 15 years!

    watching a movie!! with my wife. she is jumping up and down with joy i guess.

    and the movie we decided to watch is "godzilla"!!!

    its a good way to go back to childhood. i remember watching godzilla vs kingkong when i was like 6 or 7 years old, where kingkong was good and godzilla was bad!

    haha, temperament, can you remember that movie?

    ReplyDelete
    Replies
    1. coconut,

      Good for you!

      OK, next Tuesday I go and watch too ;)

      Delete
    2. er how much is one ticket nowadays, $10? back then children ticket was sold for 10 or 20c, open roof one haha....

      Delete
    3. and yes, you have to bring your own roof (umbralla), no kidding!

      Delete
    4. however there is a small band of shelter at the side and behind the cinema, be quick if you think its going to rain.

      the show will go on regardless how heavy is the rain! and there will be no refund hor! watch at your own risk!

      Delete
    5. Ah! Open air cinema!

      Athens also have open air cinemas during summer.

      The last time I watched open air in Singapore was around 14 years ago? It was free airing of our local movie production: "Eat Wind".

      Delete
    6. back then children tickets were half price not becos we were children, children will definately at the disadvantage when comes to movie watching, rain or no rain!

      Delete
    7. still have open air in s'pore?

      i remember there was also drive in cinema in jurong, i watch once and its the show "dragon go oversea"??? bruces lee ofcos.

      Delete
    8. sorry, the title is actually "猛龍過江 (The Way of the Dragon)".

      Delete
    9. smol, your investing principle sound like trading to me le. you have a very different concept of investing vs mine.

      Delete
    10. coconut,

      It's one of those open air screenings at Marina Bay. They sometimes have it at Fort Canning too.



      Yes, there's a lot of similarities between trading and investing ;)

      I monitor cash flow like price action.

      "Superficial" fundamental retail analysts love to look at "profits" - when it's just an accounting treatment.

      If sales only results in receivables, receivables can result in bad debts. Eh? Where's the money?

      Have they asked why "profitable" companies still need to do rights issues, share placements, secondary IPOs, and take up onerous loans with 1001 covenants?

      Asset values can be "inflated or deflated" - those working INSIDE the industry will know the difference.

      Profits can be "massaged" or "financially engineered" - those who see things from land owner or puppet master perspective know better.

      Cash flow? I think I let others figure out themselves like I figured out as a sofa salesman ;)

      Delete
    11. oh that i agree, never trust their books!

      well, i'm no investor so can't really argue with you, even though i really like to haha..

      my basic investment principle is like me starting my own business or running my own business or owning my own property or other assets. if it is through stocks, then at least i must know how it is run and not just base on their reportings. you don't let others screw up your business do you?

      anything short of that are speculation.

      Delete
    12. coconut,

      "anything short of that are speculation." - bingo!

      You have aptly described what I thought I was doing - mistakenly thinking it was "investing" - until I started seeing things from land owner perspective ;)

      Delete
    13. ok we shake hands.

      thats why people keep saying things like i'm a long term investor, 3 to 5 years something like that. got such thing mah?

      they only want/hope for capital gain, just like a trader, thats speculations as far as i'm concern.

      Delete
    14. and if i'm a investor, the only thing i'm concern is the bottom line, how fast can my company make money for me, thats all. not how high can my stock go.

      Delete
  3. Actually short term or long term we are all "speculators". Only business owners and "insiders" are the real investors. If you spot they are selling their shares heavily, you know time's up for you to.

    ReplyDelete
    Replies
    1. temperament,

      coconut was "suspicious" of my "investing" in the beginning.

      After I took off my shirt, we shook hands.

      Let me shake you hands now ;)

      Delete
  4. Hi SMOL,

    My painful journey, I think 2 elements are very important too.

    1) price
    2) growth

    Growth can make a fairly priced company cheap. Note buffet buy great companies at fair price, and let growth ( slow and steady) make them cheap.
    Growth is an art, looking at records is only accurate when u are looking at the left side of the graph. Right side is always an unknown.

    ReplyDelete
    Replies
    1. sillyinvestor,

      Ain't it the truth for everyone!

      That's why you see qian beis like coconut and temperament have a different "definition" of investing that's borne out from their experiences.

      There's no "right" definition; what matters is we define it for ourseves ;)


      1) Price - that's where my poke comes in. Buy says value this, intrinsic that. But when someone offers a price that's 2 or 3 times over our concept of fair value, what do we do? We switch to irrational exuberance?

      2) Except when shorting, when we buy, everything is about GROWTH. At least that's what we hope... Cashflow grows, asset value grows, profit grows.

      When starting out, we care a lot about semantics. After surviving for sometime, we don't care much for labelling anymore....

      For as you have correctly pointed out, the right side is UNKNOWN.

      "Labelling" can only be done on hindsight.


      CW had a short term trade on Sembawang turned into an "investment" for 400 over days...

      I had what I had planned as an investment in a stock that turned out to be a trade for less than 3 weeks when the reasons I bought were turned into shreds with the announcement of a "shocking" quarterly result.


      Investing or trading is not determined at the ENTRY; it's determined at the EXIT on hindsight :)

      Delete
  5. Will you be covering trinity of luck, skill and time?

    ReplyDelete
    Replies
    1. Welcome back from Penang CW!

      I'll defer that trinity to you ;)

      Do share when you have settled down.

      I'm a good listener :)

      Delete
    2. Hi CW8888,
      How about what this "trinity", the Guru said, "The 3 best things to have is Luck(or Blessings), Deep Pockets and Longevity" when comes to investing in the market.
      He didn't say skill. But he did say for every pro you found in a stock, you can always found a con too. He said there was always an "A" & "B" lists of any stock you can think of.
      i agree completely with him if not the Market will close for good.

      Now you like "A" or "B" list?
      i don't know leh.
      Is there a "C" list?
      Maybe i like!

      Delete

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