Sun Tzu: Know Yourself

More from Sun Tzu On Investing

When you know others, then you are able to attack them. When you know yourself, you are able to protect yourself. Attack is the time for defense, defense is a strategy of attack.

If you know this, you will not be in danger even if you fight a hundred battles. When you only know yourself, this means guarding your energy and waiting. This is why knowing defense but not offense means half victory and half defeat.

Pg 12.
Before you think about buying stocks, you should have made some basic decisions about your trust in corporate structures, about whether you can control your fears of economic loss, about what you expect in short-term or long-term oriented, and about how you will react to sudden and unexpected moves in the market and the price of your stocks. It is essential to clarify your objectives, expecatations and attitudes beforehand, because if you are undecided and lack conviction at critical points, then you are a likely victim, one who abandons all hope and reason at the worse moment and sells investments at a severe loss just to escape. As legendary fund manager Peter Lynch says, "It is the personal preparation, as much as knowledge and research, that distinguishes the successful stockpicker from the chronic loser. Ultimately it is not the stock market nor even the companies themselves that determine an investor's fate. It is the investor."

Here is another issue for consideration...

Do you know what you are doing?

Are you investing...

or...

do you think you are investing but in all reality you are merely speculating?

I think this is as much as an important issue for our stock market players, don't you agree?

Myth of Long Term Investing

The myth of long term investing. The myth of buy and hold .

In the book Bull! by Maggie Mahar she explains how market players were taught to buy and hold their stocks for a longer term based on the then investing bible stocks for the long run by Jeremy Siegel, a professor from the famous Wharton School.

Folks were made to belief that if you bought a stock and held it long enough,the stock investment would have otperform all other investments.

Siegel used stocks such as Kodak, Polariod, Avon, Merk and Texas Instrument as the example. Dubbed the Nifty Fifty they were the equivalent of the Microsofts of today.

Siegel declared that if an investor bought these stocks and held it long long term (ze buy and hold) near the end of 1972 and held on to November 2001, the investors' return would average out some 11.76% a year. (see why the investing public were seduced so much by this theory?)

Now Steve Leuthold, a venered Minneapolis money manager, had a research which totally disagreed and contradicted Siegel's view point.

According to Leuthold, Seigel's hypothetical example ASS-U-MEd that an individual who invested in these Nifty Fifty stocks in 1972 had divided his portfolio evenly among the fifty stocks, putting 2 percent of their savings into each company and even if these group of stocks plunge, the investor would still rebalanced their portfolio each month for all these 19 years, cashing out on his profits and then adding money into the losers (fiyoh! Would you accept and follow such an investing strategy?) so that each stock position remained exactly at 2 percent.

Well, according to Leuthold (me too), such exercise is 'wholly unrealistic' to imagine that anyone would plow the gains from say Merck back into a loser such as Polariod, Burroughs or Xerox, year after year. (ahh.. u see Merck climbed a whopping 382%! .. and according to Leuthold, if this exercise did not include Merk, ie the investor failed to pick Merck into their portfolio, their portfolio in the long run would have sank by 12%. Err stock picking is important mah!)

Leuthold pointed out that from 1972 to 1982 the 10 worst performers in the group lost between 37% and 75%.

With losses that much, the commonsense question is that who would continue to send good money after bad money each month, each year? (make sense mah! tiok boh? Who on earth would put more money into a stock whose business is losing more and more money each year?)

And Leuthold argued that the investors who bought such stocks in 1972 would surely have been discouraged long before stocks started picking up again in 1993.

And according to Mahar, these investors would probably have dumped their fallen angels, probably at a much lower point than what Leuthold numbers had suggested.

(much of what's written is based on pages 41-42 of the book Bull )

How what's your opinion on this and long term investing?


ps:

Here is a good review of what Mahar wrote:

How did it happen that the very real risks of investing in stocks were forgotten? Mahar explodes the myth of "stocks for the long run," explaining how the market's promoters crunched the numbers to create the illusion that if an investor stays in the casino just a little longer, he is guaranteed to come out a winner. Casting Warren Buffett in a new light, she explains how a value investor is, in the end, a long-term market timer who understands that success depends on how much you pay when you get into the market -- and when you get out. By putting the bull market of 1982–1999 in a larger historical context, she shows how, over time, longtime bull markets beget longtime bear markets.

The future defies prediction, but the history of financial markets makes one thing clear: markets always revert to a mean. Taken as a single story, Bull! is both an illuminating history and a cautionary tale about investing. Analyzing the economic and psychological forces that drive financial cycles, Mahar shows how an extraordinary influx of cash and credit, combined with the obsessive attention of a new financial media, created a cult of equities. Challenging the notion that stocks always outperform all other investments, she reveals why many of Wall Street's most experienced investors believe that the 21st-century investor needs to throw out the old rule book and make a new beginning as he plans for his financial future.

No investor should keep his or her money in the stock market without first reading this book.

Buy and Hold

BUY and HOLD.

Two of the most misunderstood simple words in the share market.

For an investor, what is a BUY? here's some stuff for one to ponder.

• Is any stock a BUY?


• Does a have stock have a price where it is deemed a BUY?


• Are all good stocks worth a BUY at any given price?

What is HOLD?

Hold means hold, not letting go.

Is this really applicable?

Once we get a good stock at a good price, do we hold it forever and ever? What if...

• The stock we had bought b4, no longer resembles the same stock. do u wanna HOLD? The papaya tree u planted, which gave u all the juicy and sweet papaya no longer bear fruits, do u still keep (HOLD) the same tree? don't u wanna plant a new one?


• Talking about papaya trees... trees they get diseases.... how?
  What if it contracts a deadly disease, do u just HOPE that things wud get better or are u gonna realise that the tree is a goner? Like in business, if something happens to the business model of the company, and business starts to deteriorate, are u gonna recognise the potential risk in ur investment or are u gonna just HOPE that things wud get better?


• If someone offers u a ridiculous high price for ur prized holding, do u wanna HOLD for the sake of the HOLDing principal or do u wanna take their money? for example, u got a dollar for a nickel, and now someone wants to offer u twenty dollars for that nickel. How? Is it a HOLD or is it a ...


• Now back to that papaya tree. Now if the papaya tree is still consistently giving u loads of papaya, which are still as sweet and juicy as ever, what do u wanna do with it? Dun u want to continue HOLDing on to it forever and ever.... until....

So what you think of BUY and HOLD?

Sun Tzu on Investing

Sun Tzu On Investing by Curtis Montgomery

This is a really decent little book written by the Chief Sage @ Wallstraits.com.

Applying the timeless pearls of wisdom and strategic insight from Taoist warrior and philosopher, Sun Tzu, this book simply makes great sense for everyone.

To win without fighting is best. Go forth armed without determining strategy, and you will destroy yourself in battle.

Much strategy prevails over little strategy, so those with no strategy cannot but be defeated. Therefore it is said that victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.

To win without fighting is the best.

As Master Sun says, "When you know yourself, you are able to protect yourself."

Ask yourself some tough questions about why you want to invest in stock markets, here's a list to get you started.

• What are my financial goals throughout my life.
  
• Why should i buy stocks instead of fixed deposits, bonds or mutual funds?
  
• Based on my personal/family budget, how much capital can i deploy into stocks?
  
• Do i have the stamina to survive bubble and panic markets?
  
• Do i have the desire to understand businesses and investigate management?
  
• Do i have the patience to wait for business values to be expressed in share price?
  
• Can i emotionally detach myself from the daily market "buzz"?

These are the simple basic commonsense personal financial planning issues mentioned by Montgomery in his book (pg 4).

So why is personal financial planning so important?

Remember the blog entry: Is Market For Suckers?

Let me reproduce what is mentioned in the originating blog again.

Its amazing how life intervenes. Kids, whatever. its a fortunate few that can just shell it away and never touch it. Your “horizon” hits a dead end when you have to put money into a checking account. I have never seen any investing research that deals with random withdrawls that represents real world. And boy oh boy, if life hits you hard when the market is down, you make a withdrawl and you wont ever catch up.

If you do not plan your financial planning well enough, there is always a possibity that sometime in the future an incident might occur requiring some emergency funding. And if it does happen, would you then withdrawl from the stock market?

And as mentioned in the blog, what if this incident happens when the market is down?

Would the forced withdrawl cause a huge damage to your investment?

Is how your investment could be hampered by your own doing?

You could buy a good stock at a good price, but if you are forced to cut short on your investment before the investment could bear fruit for you due to poor personal financial planning, then the chances of you finding success in the stock market will be severly hampered!

Think of every footy match.. :P

Will it do your team any good if you are forced to play each match with 3 play players short?

Sooo.... if you cannot and do not "know yourself, then how are you are able to protect yourself.?

Tiok boh?

let me repeat Sun Tzu teaching one more time..

To win without fighting is best. Go forth armed without determining strategy, and you will destroy yourself in battle.

Much strategy prevails over little strategy, so those with no strategy cannot but be defeated. Therefore it is said that victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.

Magnum Fall Out of Favour!

Number forecasting operators (NFOs), Magnum, was reported to be falling out of favour with investors.

Ahem!

This means no longer LAKU , isn't it? :P

In that Singapore Business Times article, some of the issues were rather worth saying out loud once more.

Magnum's luck, or lack of it, is one of the reasons the NFO has fallen out of favour with investors.

Hmmm.... this one I really, really, really do not understand lor.

Tell me...

How come and how cannnnnnnnnn it be that their numbers are so easy to be 'kena' by other punters?

Strike Ze Number so easy one, ah?

How cannnnnnnnnnnnnnnn??

Why not mine?

Why my 0001 no come out one?

And when the punters strikes, they strikes it soooooo much that Magnum loses money!

Take a look at what is mentioned..

0101. It was a number many 4-D punters were banking on for a happy start to 2006. Although the number apparently was sold out at some number forecasting operators (NFOs), Magnum, however, drew the short straw when the number landed the second prize in its draw.

0101!!!!

Fiyoooooh!

And mine was 0001!!!!

And even if i want to buy 0101... olso sold out mah.... so how come???? (Sky oh Skyyyyy..... why? Why you so like dat one?)

So anywayyyyyy because of 'so easy to win' (Ahem!), according to the article "exceptionally high prize payout ratio in 2004 which dragged earnings down.."

Wahhh... see onot?

Strike until Magnum lose money wor!!!

:P:P:P

Anywayyyy... on a more serious note.... here are some of more pressing issues mentioned:

Magnum needs to greatly improve its corporate governance. Its cross holding structure with its parent Multi-Purpose Holdings which owns 34 per cent of the company and in which Magnum has some 10 per cent stake, is viewed negatively.

'There's no clear reporting line when it comes to inter-company transactions,'

Magnum's lack of earnings transparency is another concern... the company made big provisions in the past three years which did not relate to its core business, but to overseas investments which had not paid off.

...has received permission to launch MMatch, a new game, but any impact on earnings is still uncertain.



ps.

Me got a tip for all lah...

MMatch.... doesn't sound too happening for punters isn't it?

Don't get it?

Say it in Cantonese.... MMMMMMMMM Match!!

Doesn't it sound like NO Match?

Like dis.... how this new game going to be laku?

Cheers!

Is Ze Market for Suckers?

Came across this interesting blog entry from this posting posted on the Berkshire Hathaway Shareholders group: The Stock Market is for suckers

I'm going to highlight some of the points mentioned in the blog: The Stock Market is for suckers

You can have as long a term horizon as you want, but like most other long term plans we have, most peoples lives dont match up to their “horizons”... And boy oh boy, if life hits you hard when the market is down, you make a withdrawl and you wont ever catch up.

Hmmm... understanding one's own personal finance is very important, isn't it? Tiok boh?

Don't underestimate this issue lor. For example, what if our children needs educational fund? What if an emergency happens and we do not have other funds to cover that emergency? Cashing out due to circumstances such as these could turn our potential success into an immediate failure if and when the need to make the withdrawl happens when the market (and ur portfolio) is down!

Wall Street has done an AMAZING job of creating conventional wisdom . “Buy and Hold ” is the 2nd most misleading marketing slogan ever, after the brilliant “rinse and repeat” message on every shampoo bottle. We as a country have fallen for it. Every message from every marketer of stocks tell us. Young or old, if you can hold for the long term, things will work out for you.

That is total bullshit. Its for suckers.

Totally agree!!

You cannot simply hold any shares! See this blog entry of mine: I wanna Hold your hand..

Simply put, If you buy and hold an investment gone bad, most likely than not, your investment would most likely go bad too!

So why do they want you to HOLD these shares gone bad?

Simple lor. They want you to be ze sucker!

If you are going to trade stocks, you just have to follow one rule and remember one thing. That rule is always have a definite knowledge advantage about the company you are trading, and always remember that every stock transaction has a sucker, and you have to know whether its you or the person on the other side of the trade. No one buys a stock from your, or sells one to you knowing they are leaving money on the table.

The bottom line is that unless you plan on making it a full time job to do your research and put yourself in a position to have an advantage, you are going to get your ass kicked at some point by someone who does. You just have to hope that it doesnt put a big financial hurt on you when it happens

Another good point, eh?

The same logic applies to funds. Funds are in the business of making money for themselves first. You 2nd.

Ahem! Funds are in the business of making money for themselves first.

Same rules applies here!

Repeat after me.... Funds are in the business of making money for themselves first. You 2nd!!!

Thats why I buy stock in public companies that relate to my other business entities. When i pick up the phone and call the CEO of a company i own shares in, they call me back very quickly. When I ask if there are business opportunities that make sense for the company and another company of mine to work together, I wont always get the business, but I will always get a meeting. If Im smart about the investments I make, the more important returns come from the relationships with the companies than the action of the stock.

Hmm... investing from a business perspective?

If the best you can do is buy shares that are going to be continuously diluted, then you are merely a sucker. There is a good chance that the shares you bought came from shares an insider who got stock options. You just helped dilute yourself with your first share purchase.

Ahhh.... beware very much of this issue. Private Placements, ESOS.... these stuff dilute earnings.

Very, very, very important issue hor.. Do NOT end up buying diluted earnings!

Such exercises are done at the very expense of the minority shareholder!

They make a sucker out of the minority shareholder!

Surely you do not want to be a sucker, rite?

:D

TSH Resources

Osk Research had a research article on TSH Resources.

Now I am one who always like to refer back to what was written previously.

TSH reported 2005 Q2 earnings on 25th Aug 2005.

Quarterly rpt on consolidated results for the financial period ended 30/6/2005

On the next day, OSK had a research article on TSH.

TSH's annualised 1HFY05 revenue is within our expectation as all of its divisions recorded an improved sale figures. However, its net earning was 36.8% below market and our estimates. The disappointing earning was mainly due to its 65% owned Ekowood which recorded a thinner margin, as the increase in raw material costs and weakened EURO cannot be transferred to the customer immediately (90% of Ekowood's sale is exported and denominated in EURO). Besides, TSH's oil palm also posted a lower profit due to seasonal factor as FFBs production was generally lower during the 1H. This is further compounded with the lower CPO price and increase fertiliser costs.

Ahh... ze below estimate thingy yet again.

Osk notes that TSH performance was 36.8% below market and our estimates!

OSK was estimating a net profit of 61 million for TSH's fy 2005.

TSH only did 19.290 million for the first half of its fy 2005 and based on an annualised basis, TSH should be earning around 38 million or so for its fy 2005.

38 million is very far from the 61 million hor.

So what does OSK do?

We have decided to revise downward TSH's earning forecast by 8.7% and 6.8% for FY05 and FY06 respectively as we think Ekowood need time to gradually pass on the costs increase to customers. Weakened in CPO prices lately compounded with increase in fertiliser costs will also further impact TSH's bottom line. However, we like TSH for its promising Bio-Integration projects and maintain our Buy call with a 12-month target price of RM2.19 based on Sum of Parts method, implied a PER of 11.2x against FY06 FD EPS.

Hmmm.. they revised TSH's earnings from 61 million to 55.7 million... but... butt... buttt.... their fy 2006 earnings is estimated at 68.7 million.

So for a stock that failed to meet their estimations, OSK still managed to maintain a BUY call on it.

Price of TSH then was 1.74. OSK target price was 2.19.

TSH reported its next earnings on 25th Nov 2005.

Quarterly rpt on consolidated results for the financial period ended 30/9/2005

Net profit was 8.963 million.
Total ytd net profit fy 2005 was 28.253 million.

Hmmm... looks like it's way below OSK's estimates... and ... err... aiseh i cannot locate in OSK's website their comments on TSH earnings.... hmmmm..... mmm..... maybe me browser is koyak lah.. cannot pakai lor.

Anyhow in today's research notes... it was noted that TSH has a share sale agreement with Wilmar Edible Oils:

TSH Resources (TSH) has on 9 January 2006 entered into a Share Sale Agreement with Wilmar Edible Oils SB (Wilmar) to dispose 2.5m shares in TSH-Wilmar SB and 1 ordinary share in Bio Fuel Asia SB, representing 50% equity interest in each company. The move is to form a strategic alliance with Wilmar to undertake a palm oil refinery and kernel crushing together with an operation of cogeneration plant and electricity & steam for bio-fuel.

Now what is interesting to me is the following...

BUY. We reiterate our BUY recommendation with a 12-month target at RM1.78 based on sum of parts methodology. Coupled with a decent gross dividend yield of 3.6% for FY06, the stock may potentially deliver a 12-month total return of 25%.

Now... what is interesting is that in the earnings table, there is no longer an OSK estimates but instead it only states consensus estimates. (LOL!!!.. i wonder why! typo mistake? :P)

Anywayyyy.... ze consensus estimates:

fy 2005 earnings is at 45 million..
fy 2006 earnings is at 58.9 million.

Sooooo....... price of TSH is now at 1.47. And OSK is calling a buy based on sum-of-parts (meh leh ka?) on TSH with a target price of 1.78.

How?

I am sure if a OSK subscriber that follows the buy recommendation won't be too happy.

Just in Aug 2005, TSH was @ 1.74 with a buy and a target price of 2.19.

Now in Jan 2006, TSH is @ 1.47 with a buy and a target price of 1.78.

Die standing isn't it?



ps.

The dilution of TSH earnings caused by the conversion of warrants is a pretty interesting case study.

Buying Quality Businesses (Megan: Part VIII)

IF you are an investor, do you believe in buying quality businesses at reasonable prices (excellent article by Chetan Parikh )?

Let's do an actual case study... on.. err.. err....LOL... let's use Megan Media Holdings. (aiseh... all the data posted oredi mah..)

So what's a Quality Business? According to the article posted by Mr. Parikh:

Defining a Quality Business. A cheap price alone does not justify buy­ing a company. A corporation may sell at a bargain price for good rea­sons, such as incompetent management or waning demand for the company's products. You should disqualify the firm as an investment candidate if company-specific factors that are structural in nature drive its depressed price.

Superior businesses possess certain common characteristics, in­cluding robust profit margins, strong earnings and revenue growth, a clean balance sheet, and competent management.

Make sense?

Profit Margins. High profit margins help a business weather nega­tive circumstances. Such circumstances may be economy-wide, such as a recession; industry-wide, such as airlines after 9/11; or company specific. Poor margins have forced many corporations to fold or sell to competitors during business downturns, as low-margin firms can easily generate bottom-line losses when their revenues take a hit.

Let's look at Megan: Part V

Sales 248.323 million
Net profit 3.957 million

Net profit margin is a mere 1.5%.
Is this a good profit margin, average profit margin or a simply poor profit margin?
Does Megan pass the high profit margin test?

Ok, maybe one could argue that this could be a one-off event, a hiccup in performance.

See Megan: Part IV. In that blog article, I have noted Megan's past 6 quarterly earnings since 30th April 2004. Look at each quarterly earnings net profit. At best, Megan's quarterly net profit margins is a 7.8%. (is this 7.8% a good or an below average profit margin?) Now it's profit margin is a mere 1.5%.

So would you rate this as a quality business?

Next we look at the issue of earnings growth. Now as per the article...

Projected Earnings Growth. Strong historical growth does not guar­antee a healthy expansion in a firm's future income. New technologies make older products obsolete, demographic changes alter consumers' purchasing habits, and buyers' preferences shift over time. Before in­vesting, make sure you understand a company's products well enough to develop confidence in its future demand. Ask yourself if the firm's products are trendy, or if they exhibit growing demand regardless of changing fads. You want businesses that can sustain their earnings growth.


See Megan: Part IV.

What do we have? What growth? We now have continous quarter of serious earnings decline. Given such indications, how would you rate Megan's growth story?

Is Megan's growth story still bang-bang sound so geng?

If the answer is a clear NO, then what about the possibility of Megan sustaining their earnings growth?

Next we look at the composition of the company. The balance sheet. As per the article.

Balance Sheet. Producing a unique product with a strong demand will not ensure a company's success. A weak financial situation can prevent a firm's management team from executing its business plan effectively. Two factors dominate when determining the health of a company's balance sheet: liquidity and debt level. A strong balance sheet with plenty of liquidity and low debt gives a company flexibil­ity and fortifies it against business downturns.

Liquidity refers to the amount of assets a business can convert to cash in a relatively short period of time. A company may have lots of assets, but if they cannot be converted to cash, the firm may not be able to pay its bills. Liquid assets are referred to as current assets. Bills that come due within a year are known as current liabilities. The ab­solute amount of liquid assets a business has on hand does not matter as much as its current assets relative to its current liabilities. There­fore, you compute a key measure of a company's liquidity, known as its current ratio, as current assets/current liabilities.

Excessive debt has plunged many corporations into bankruptcy because steep payments strangled the firms' cash flows. High fixed expenses also reduce a company's ability to adjust to changes in its operating environment.

Let's look at Megan's Current Assets (taken from Megan's latest quarterly earnings)


Inventories...................................................... 73,543
Trade receivables.............................................. 333,357
Other receivables,deposits & prepayments...............18,505
Fixed deposits with licensed banks........................ 3,589
Cash and bank balances....................................... 93,998
Tax recoverable................................................. 410
Total............................................................... 523,402

Inventory. I had not mentioned the warning sign here. A year ago, Megan's inventory is about 36 million. And if one does some research, 2 quarters ago (29th June 2005)), Megan's inventory was also around 36 million. Now it is 73.543 million. A huge increase of 37.543 million. Worrying issue? What caused the inventory level to jump soooooo much? Overstock of not-so-laku inventory such as them CD-R?

Cash and bank balances. This 93.998 million is painting a false picture. Megan's piggy bank was inflated via the recent loan.

Biggest worry i reckon is Trade Receivables. 333.357 million. That works out to 63% of Megan's current asset.

Now trade receiveables is the same as trade debtors.

This is what Megan's customers owes to Megan.

Now as mentioned sooooooo many times b4, this amount kept on increasing each single quarter.

Consider this.

In 30th April 2004 earnings report, Megan had only trade debtors amounting to 190 million.

Now? 333.357 million.

And this was just 7 quarters ago.

Isn't this strange?

Now if these accounts cannot be collected or perhaps one day, Megan's auditors would even deem it as doubtful, then the next move is Megan has to write-off these debts.

And if and when it does write-off... the investor greatest worrry is how much of this portion of debts is doubtful?

Put things into perspective.. Megan's current quarter net profit is a mere 3.957 million. However, trade debtors increased by 63.357 million.

Is this even possible?

And when you consider that the trade receivables now represent a whopping 63% of Megan's current asset, don't you think that if any reclassification of Megan's trade receivables would to happen, then wouldn't it cause a severe damage to Megan's balance sheet?!

So what do we have? Well, Megan's current assets value appears to be high but this high is boosted by 3 questionable issues. Piggy bank cash is inflated via borrowings. Inventory build up is worrying and the built-up in trade receivables is simply freightening.

And the ballooning trade receivables raises a huge question mark on Megan's ability to convert their sales revenue into liquid cash to pay for their bills

Excessive debt has plunged many corporations into bankruptcy because steep payments strangled the firms' cash flows.

Megan's debt issue? LOL... :P

How?

Does Megan even pass the Balance Sheet issue?

How has Megan fared so far? Do we even need to run the rest of the tests?

Anyway what do we have?

We have a company which had a below average profitability (7.8%) suffering two very poor quarterly earnings. With the declining earnings, the company does not even have a growth story anymore. And the company balance sheet is so poor.

Isn't it not crystal clear that Megan does not represent a quality business?

Or is my assesment delusionary?

This is just a mere mock-up exercise if i were to use Mr.Parikh's article as a guide to picking out Quality Businesses.

How?

Your say?