Buy Low Sell High... ... The missing part?

Buy low sell high...... the missing part???

Whether you are a Fundamental or Technical investor, buy low sell high is the rule to earn money isn't it? 

But what is the catch here?

When the stock's price really fall hard, for example supermax. It fall from rm 2-2.2 to rm 1.75 and still in falling trend. 

Buy or sell???

Dilemma again.

For TA, if the chart showing oversell signals, they will dump the stock (if my understandings towards TA is not wrong). This will cause the aldy low stock plummets further to the ground (or hell?). They will feel happy whereby in the short duration (which i believe within 1yr) their fund has not beed caught by the falling stock price. And therefore the capital can be used for other investments to generate income. 

Their concepts and methods are not wrong (for sure) but i felt i am not comfortable with it and i can't master it. 

Therefore buy low sell high for TA will become buy in raising trend and sell in down trend. (This is subject to argue depending on the time you access the entry and exit point) 

As for fundamental or value investor, the pivotal thing is to estimate the intrinsic value of the stock. 

Discounted cash flow, dividend model, nta, PE, npv etc has been used as measurement method for intrinsic value. 

As warned by Mr Charlie Munger; an investor should avoid the man with one hammer syndrome, the value investor should access all the methods of measurement and aware that for certain situation, one method will be preferred/ more suitable over others. 

Investing is an art, it is not a rocket science but neither an precise science. It couldn't be as precise as mathematic but shouldn't sway much also if correct method being implied. 

Seth Karman's book Margin of Safety have some examples of accessing stocks in different situations. A brief example, for stock going to be bankrupt and filed for dissolution, nta ( net tangible asset) will be a more appropriate way to measure intrinsic value rather than DCF (no future to worry about isn't it?) 

That maybe is the situation for stock in USA but in Msia the dissolution procedures for bankrupt company may take way too long time to process and assets forced to be sold way below its price. Different situation required different consideration and thus the art. 

兵无长势，水无长形。

Back to intrinsic value measurement. If the stock's price dropped way below its intrinsic value then a margin of safety will be formed. 

However...... When the stock's price drop, sure it is a sequela to some bad news, bleak future outlook, uncertainty, doubt, weak financial results, operating problems, government policy change, fierce peer competitions etc etc. 

The value investor has to logically considers these factors and determine whether the intrinsic value still remain intact as before the bad newssss hit or its intrinsic value simply has to be adjusted. 

Good stock should has fundamentals that are difficult to change and competitive advantages (moat of the company). <easier to talk than pick. LoL i confide to this> 

However... Even for a poor company, when the price dropped to a very low level, then even a lousy company can give an adequate amount of margin of safety thus contributing profit to investor. 

Certainly the decision to invest more or sell in this situation is difficult, thus the investor has to have crystal clear mind about the intrinsic value of company and able to act correctly while withstanding the psychological pressure to act as contrarian. (being be greedy when others are fearful and be fearful when others are greedy)

The value investor has to be able to roughly estimate the time required by company to improve its bottom line together with the magnitude of possible profit (selling point, or time to leave the party). This should be done to access the worthiness of the investment. 

Formula from Benjamin Graham:

Let G be the expected gain in points in the event of success;
L be the expected loss in points in the event of failure;
C be the expected chance of success, expressed as a percentage; Y be the expected time of holding, in years;
P be the current price of the security 

Indicated annual return = GC – L(100% - C)/YP 

We may take as a current example the Metropolitan West Side Elevated 5s selling at 23. It is proposed to sell the property to the City of Chicago on terms expected to yield in cash about 35 for the bonds. For illustrative purposes only (and without responsibility) let us assume (a) that if the plan fails the bonds will be worth 16; (b) that the chances of success are two out of three—i.e., 67% (c) that the holding period will average one year. Then by the formula: 

Indicated annual return = 12 x 67% - 7 x 33%/1 x 23 = 24.7% 

Note that the formula allows for the chance and the amount of possible loss. If only possible gain were considered, the indicated annual return would be 34.5%. (Sequel: The purchase was affected, and the bondholders have since received $33.5 in cash, retaining also “stubs” currently worth about $5.) 

☝🏻info of this formula comes from Value Walk's article

Security Analysis, 1951 edition (Pages 729 – 734) by Benjamin Graham 

The opinion of majority usually is not much worth for investment opportunity because that piece of knowledge already knew by everyone. But if you make a choice in contrary to the crowd, the peers will try to influence you. In between you may feel uneasy or stressed because acting in contrary to others. 

Psychological factors are important for value investor. 

Following the crowd will get average results; going contrary will get better or worse results. 

For value investing to works, the stocks should be bought by cash and not by margin. Margin call will force you to sell the stocks that went south while actually you should buy more (for good stocks of course). 

Buy low, sell high. Easy to say, difficult to do and so thus to become rich and financially successful. 

Lastly although the future can not be predicted precisely, we should know where we stand today (ideal from Howard Marks). 

Something about Bitcoin. 

The excitement for majority of people is not its function as an alternative currency but its speculative trading nature. 

It is just a greater fool game that waiting/ hoping another greater fool to pay for the bills. 

It would be a WORST scam than the tulip mania. 

The market is never efficient, the madness flows in humans' blood. 

Only when the tide cease we know who is swimming naked. 

勤能补拙。

一点善心胜过一桶黄金。

Contemplator

24 Sept 2017

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