Greater Fool Theory

Oh yes, there is a "theory" in stock market called the greater fools theory where people buy at new highs just hoping that a greater fool will buy at higher price so they can get a profit from it.

There are a few historical example of greater fools theory at work, the Tulip Mania of 1635, the Missisipi Scheme of 1719, speculative investment bubble involving the East India Company in 1672. You can find these stories in "A Random Walk Down Wall Streets" or Charles Mackay's Extraordinary Popular Delusions and Madness of Crowd written in 1841 (very old book).

So you think man have learn their mistake after so many examples? No, the greatest of all was the internet bubble in 2000.

Sun Tsu on Investing - Book extract

Just want to share some extract from the book " Sun Tsu on Investing" by Curtis J. Montgomery from wallstraits.com.

"Investing is all about risk. The more risk you take, the higher your potential returns. And this is all correct, except for the fact that it is exactly wrong. Investing is all about perceived risk. Where you as an investor have an advantage is only in situations can correctly assess that the market has overestimated (or underestimated) future risk or returns. That requires foreknowledge)"

Markets always overreact when there is bad or good news. When there is good news, market tends to overestimate the future returns and push the price of the stock to unreasonable new highs and when there is a bad news the market tends to underestimate the future returns and bring the stock price to new lows. That is why i think CANSLIM point N for buying at New highs are not a very wise move. One good example is the internet bubble where P/E ratio reaches 300 plus for some stocks.

"... low price are usually offered only on less-than-excellence business, or at least those business currently perceived to be less-than-excellent by other investors and analysts. Since the majority of investors and analysts regularly and predictably overestimate the value of the business perceived to be excellent, and just as regularly and predictably value the business they perceived to be less-than-excellent, Sun Tsu style investors learn to intelligently discern victory as they investigate those low-priced out of favour stocks. A good place to begin your search is a list of low P/E stocks."

Hence in comparison to the CANSLIM method of selecting leaders, this suggest that we should select companies that have not emerge as leaders but will be in the long term. This way you would not pay high premiums for stocks (i.e. high P/E) that are already leaders, paying lesser for emerging leaders. Of course, in some sectors the leaders are too strong to be overtaken and there are small probabilities that others will emerge as a leader. For example Starbucks in the coffee retail industry. Its easier said than done to find emerging leaders as good foresight are required.

CANSLIM Review Part 3

L: Leader or Laggard
It is necessary to decide what companies are the leaders in a sector, and which are the laggards. We can use the above characteristics like EPS, Current quarterly earnings etc to differentiate the good picks from the others. The author only encourages investors to buy market leaders and avoid laggards. An indicator called the "Relative Price Strength" of a company is used to estimate the position of an individual company from its competitors. This indicator is solely found in the "Investor's Business Daily" and only applicable to the NYSE/SESDAQ. We shall not further mention this as it is not clearly defined in the book how this indicator is calculated.

I: Institutional Sponsorship.
When a company has many major institutions such as banks, fund managers backing them, their shares are considerably more liquid. Moreover, some institutions have ownership over thie company, which gives investors an added assurance when buying their shares. For example, Temasek holdings having a share in Singtel. Note that it is important to look at the track record of the institutions supporting the company. Only the best performing ones should be noted.

M: Market Direction

It is the last but perhaps the most difficult characteristic to determine. Even if a stock possess the above 6 qualities like strong annual growth, good quarterly earnings and is a leader in the market, it's price can still fall short of expectations in a bear market. The author suggests that one should learn to determine the overall market direction by intepreting daily market prices, volume movements and the action of market leaders. Furthermore, one should also study the "general market" by looking at various market indices. In our case, it is the STI. The index may indicate emerging trends in the market.

This ends the review I have on the CANSLIM method. It only serves as a short summary and one should read the book in order to appreciate its details. There are many other interesting concepts and examples which I've not included here. They might not be relevant to this review, nor maybe relevant to the local context. Over the following weeks, I shall try to apply this CANSLIM method to some listed companies to see how it works.

CANSLIM Review Part 2

A: Annual Earnings Increase.
Apart from quarterly earnings, the author also looks at the annual growth of the company for the past 3 years. He suggests a good pick would be one with annual earnings pre share increase every year for the past 3 years. Further, the increase should be at least 25-50% each year. Keeping this in mind, it is then possible to sort out the "winners" and the "losers" from the group. More discussion on a normal stock market cycle and the significance of the EPS is documentated in this chapter. In summary, concentrate on stocks with significant earnings in growth each year for the past 3 years. In addition to strong recent quarterly earnings.

N: New Products, New management, and New highs
It is always heartening to hear good news in the market, and when it comes to investors, nothing beats the attractiveness of a company which is launching a new and innovative product or service. The author adopts a belief that we should purchase stocks when they are emerging from a price consolidation or are close to hitting a new high. He draws this conclusion from "The Market's Great Paradox", where he illustrates scenarios where shares which dip tend to stay down, and stocks going up tend to stay up before any consolidation. He believes that this is due to the investors' mindset: that investors feel that as a stock moves higher, it seems riskier to buy, and when a stock is at a low, it seems more of a bargain.

S: Supply and Demand
It is self-evident that supply and demand of a stock greatly influences its price. Shares with large volume tend to have more inertia, and less fluctation to daily trading. However, situations might still arise which causes a large cap stock to crash. Small cap stocks, on the other hand are more prone to fluctations. There are pros and cons in each type of shares. Larger cap stocks tend to be lower in volatility and possess greater liquidity. The opposite can be said of small cap stocks. The Author notes that the CAN SLIM method can be applied to any cap stock, and that the market, from time to time, shifts its emphasis between small cap and large cap stocks. An example of this would be the prior introduction of Mutual Funds (or Unit Trusts as they call it locally). Fund managers allocated more on large cap stocks to reduce risk, and so alot of money was pumped into the latter.

CANSLIM Review Part 1

This is a review on the Book "How to make money in stocks" 3rd Edition, by William J O'Neil (ISBN 0-07-137361-6) This review is broken into 8 parts, where each part, I'll focus on the CANSLIM method of chosing the right stock. Hence the focus of this review is only on the first part of the book.

In the first part of the book, O'Neil brings us to the "CANSLIM" formula; "7 chief characteristics of a great stock", as he claims.

1) C: Current quarterly Earnings per Share
2) A: Annual Earnings increases
3) N: New products, new management and new highs in the company
4) S: Supply and Demand
5) L: Leader or Laggard
6) I: Institutional Sponsorship
7) M: Market Direction

I'll start off with the first characteristic.

Current Quarterly Earnings per Share.
This refers to the earnings each share makes every quarter. In other words, it is the EPS for the current quarter. It seems obvious that such a stock is attractive, but there are some points which first need to be considered. Firstly, we need to compare its quarterly earnings with the quarterly earnings of the previous year. This is to eliminate any confusion it might cause on different types of stocks. Some stocks possess an inherent cyclic demand, and might raise and fall according to different "seasons". Such companies, for instance, might be dependant on the price of crude oil, or on other natural resources (eg poultry, rice harvests etc) . Hence we need to compare quarterly earnings this way, not just with consecutive quarters of the same year. Secondly, one should always disregard any one time extraordinary gains. Such gains do not truly affect the growth of the company. An example would be a one time sale of the companies' assets. Such a sale may generate alot of revenue for the company, but yet does not reflect its true growth. Thus it is prudent that whenever we review a companies' EPS, we have to take not on what is happening to the company, and not place overemphasis on crude numbers.

The author notes that besides comparing EPS internally, one should compare them with their competitors' EPS. We will discuss in more detail in the 5th point "L: Leader vs Laggard". For this moment however, let us assume that the company we are focusing on is a leader of the market, and it is having exceptional growth in its current quarter (as compared to last year). But the question remains. How do you define exceptional growth? The author suggests that a minimum of 20% is required. However, in my opinion, it is still up to the investor's discretion whether or not he or she is interested in that particular sector. Even a leader in a particular section might be underperforming because the sector as a whole is not strong. Hence, relatively speaking, even a 100% growth in one company might not make it a good pick because of the sector as a whole. One must take into account many other factors before picking a stock, like in this case, the sector.

If all this seems confusing do not fret. After summarising all of the 7 characteristics, I'll try to apply them to local stocks on the SGX and see how they fair as a whole. This will give a better picture of CANSLIM at work.

HTL International Review

A stock in my portfolio, a post extracted from my personal blog www.xanga.com/tradingdiary. Thought of just sharing with you.

HTL internatonal

Company Information:
The Group is one of Singapore's largest manufacturers of leather upholstered furniture. More than 70 percent of its furniture products are exported. It was founded in 1976 by the Phua brothers as a small furniture manufacturer. In 1981, an agreement was made with G Laauser GmbH & Co, a leading German furniture manufacturer, to produce quality furniture for export. With this successful collaboration, HTL was able to tap on the design and advanced production techniques of Laauser to market its furniture internationally. The Company has entered into an agreement with Musterring AG, an internationally-reputed name in furniture and furnishings to manufacture and market furniture under the prestigious Musterring label for major cities around the world. HTL has also secured the right to offer sub-licences to retailers to distribute Musterring furniture to a number of countries worldwide.Its manufacturing facilities today include a 14,000 sq m plant in Kulai, West Malaysia, and 21,000 sq m plant in Kunshan, China, and a 44,000 sq m plant cum warehouse at Jurong, Singapore. It has sales offices in Singapore, Malaysia, China, Taiwan, Japan, Hong Kong, UK and USA. Its immediate and ultimate holding company is BEM Hldgs Pte Ltd, incorporated in Singapore.
- From www.sgx.com

Stock split:
10 Dec 2001 - 1 for 2
19 May 2004 - 1 for 4
25 Aprill 2006 - 1 for 4

That is to say 1000 shares (1 lot) bought before 10 Dec 2001 will give you 3125 shares (3.125 lot) after 25 April 2006

Dividend yields:
Increasing dividend yields from
2003: 2.6% 2004: 2.7% 2005: 3.3%

P/E ratio:
8.7

Historical growth rate:
2003-2004: 42% y-o-y
2004-2005: 30% y-o-y

Review:
If you have bought the 1000 shares in 2001 at a mean price of 28 cents, it will cause you around $280. Since 2001 till now, it went through 3 stock splits that causes 1000 share to become 3125 shares. Each share is currently priced at $1.51, that means the 1000 share bought in 2001 would have cost $4718.75 now, almost 17 fold increase. With dividend payout at 4.85 cents per share (which is about 3.3%), it converts to a yield of 54.1% [(4.85 / 28) x 3.125] of the price you pay for the stock in 2001.

This is an excellent stock to buy if it still promises the results achieved in the past. With consistent growth (increasing stock price) and increasing dividend yield, the dividend yield with respect to the price you pay for the stock will be very substantial in time to come, as shown in the example.

Recently HTL International has acquired Domicil Moebel GmbH, a German home furnishing business unit. In the year 2007, HTL main focus is to develop a megastore concept in Germany from the acquired Domicil.