A Look At Contrarian Investing Approach for Tong Herr.

Taken from Sun Tzu on Investing

Contrarian Investing

Contrarian Investing is a method of moving against the crowd, which relies heavily on a broad understanding of investor psychology, and when done successfully, you will appear to have seen the future. Sun Tzu advised his generals to devise strategies that deceived their opponents, wore them out, and put them at natural disadvantages. Rational investors will have a natural advantage during time of excessive bull market optimism and bear market pessimism. The key to recognizing such dangers and opportunities is to remain loyal to your Sun Tzu-style assessments, continue screening stocks one at a time and remain focused on determined business value. Your discipline will help you avoid paying too much during bull markets and enhance your confidence to buy bargains during bear markets. You will become a rational contrarian and your peers will think you have seen the future (or lost your mind).

Contrarian Investing is one of those terms often misunderstood. A contrarian investor doesn't move against the popular crowd simply for the sake of being different. The true contrarian is a strategic investor whose disciplined approach to stock selection is often at odds with the current trend. If you stick to any particular investing style, be it based on low asset valuations, high earnings growth rates, or high dividend yields, there will be period of times when your style will be in line with the popular thinking, and other times when it will run contrary to the style of the day.

The more long-term focused your strategy, the more likely it will be at odds with popular market trends. Contrasting styles of investing often result from investors' perspectives of the stock market. Chartists, technical analysts and speculators are looking at the short term price movement patterns in the hope they can glean some sense of a trend, able to predict what other investors are thinking. They are trying to understand the emotions of other investors and profit by anticipating their next move. As their guessing game becomes more sophisticated and everyone is observing the same charts - the professional guessers must now predict how the other predictors are guessing about how emotions of the majority investors will affect short-term price movements - this quickly becomes a frustrating guess-what-the-guessers-are-guessing game with no likely winners.

Taken from Mary Buffett's The New Buffettology

CONTRARIAN INVESTMENT STRATEGY VERSUS SELECTIVE CONTRARIAN INVESTMENT STRATEGY

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years. This strategy focuses on falling stock prices and pays little mind to the underlying economics of the companies. With the traditional contrarian investment strategy investors don’t discriminate between price-competitive-type businesses and companies that possess a durable competitive advantage. So long as the share price has recently fallen, the stock is a candidate for purchase.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

~~~~~~~~~~~~~~~~~~

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

As you are very well aware that the market is full of risks.

And the success of an investor or even a trader depends on how well they acknowledge and manage their risk.

Let me give you some of my views. Not sure you would agree but here goes...

So firstly i would try to understand the theory.

The main assumption in this strategy is that all beaten down stocks will one day rise again.

Which basically saying is that all stock price movements are cyclical. Stocks will have their up and their down days.

So where could one go wrong?

1.How safe is our purchase price? What if the beaten down stock gets more beaten? Or simply put... is it time to buy now?

2.Yes, in general ... most stocks that get beaten down... will rise again... but what if it rebound does not past my purchase price? Meaning will the recovery be worthwhile? Will it be profitable?

3.What if the selected stock in the beaten down industry does not rise?

4.What if shit happens? Beaten down stock gets beaten down because it is so poor fundamentally. And the real danger is what if it turns into a real disaster? Yes what if the stock really goes DOWN under?

5. How long would it take for this recovery to happen? Say if we buy the stock now.. seeing that the stock price is beaten down... what if this recovery takes much longer than we expected? Will the stock price hold?

Well these are the questions I think that require much thinking.

In fact, me myself, cannot give you a logical answer to all of it because the bottom line is that the answers to the questions is itself unpredictable.

Which is why, in my opinion, I find what Mary Buffett wrote in her book, The New Buffettology , about her ex-father-in-law is a rather more useful approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Which basically means that the beaten down stocks must represents companies which has a durable competitive advantage.

Companies that are of good quality.

This, I believe will help the investor safeguard themselves versus the issues that I had written earlier.

This would be my contrarian approach.

Being contrary just for the sake of betting against the crowd is rather silly isn't it?

There's no need to go and get ourselves killed for the sake of being different yes?

Let's do a current example on Tong Herr.

• In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

Now based on Fama and French theory, we now have a stock which had a 3 month high of around 3.40 and a 12 month high of around 4.25 (adjusted for bonus issue).

Price of Tong Herr is now 2.85, off 1.40 (or 32%) from its peak last July. And Tong Herr does have a rather better than average balance sheet.

So would one be influenced just because of the low price to adopt a contrarian investing approach on Tong Herr?

Let's see, Tong Herr stock has performed poorly and surely one would say that the stock has fallen out of favor.

So would one consider Tong Herr as a candidate under this contrarian theory approach?

If so, let's put a marker at 2.85 and do a review on it maybe a year later? Ok?

Now compare the other contrarian approach. The selective contrarian approach.

• A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Simple reasoning.

Does Tong Herr, a producer of stainless steel fastener (bolts), have a durable competitive advantage?

My answer would be NO.

This is clearly a cyclical stock which had enjoyed tremendous fortune recently due to a couple of reasoning. Back in 2002, the removal of trade barriers (there were early accusations of price dumping in this industry) helped. But the biggest factor in my opinion that the management was simply brilliant when they stocked up their raw material inventory before the amazing bull run in the nickel started. Margins were fantastic and great profits were made in the early days. But all advantage from the brilliant hindsight of the management to stock up the inventory has passed.

And as stated in the company's recent quarterly earnings:

• The higher revenue and lower profit before income tax for this quarter are due to higher demand for the product and higher cost of raw materials purchased in the preceding quarters.

And when you compare the quarterly earnings, the negative impact caused by higher raw materials is showing. Compare the recent announced earnings versus the same period last year.

And based on these facts, I would question the long term competitive advantage of Tong Herr's product.

And when you factor in the current massive changes in the local business economic environment, where the petrol and power tariffs had been increased, I feel that perhaps NOW is not the time to adopt the selective contrarian investing approach and buy Tong Herr at 2.85.

That's my opinion which obviously could be faulty.

Being Contrary: Part II

Continuation of Being Contrary

Let's use a real example, thedisc storage manufacturer, Megan Media Holdings.

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

Now based on Fama and French theory, we now have a stock which had a 3 month high of around 1.08 and a 12 month high of around 1.40.

Price of Megan Media is now 62 sen. Would one be influenced just because of the low price to adopt a contrarian investing approach on Megan?

Let's see, Megan has performed poorly and fallen out of favor. (Dun have the the previous 2 year highs ler.. )

Soo... would one consider Megan Media as a candidate under this contrarian theory approach?

If so... let's put a marker at 62 sen.. and do a reveiw on it ... maybe a year later?

Now compare the other contrarian approach. The selective contrarian approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Simple issue. Does Megan Media, currently specialising in DVD discs, have a durable competitve advantage?

My answer as per previous blog posts is a simple NO.

Margins have been poor all along and the balance sheet issues has given a clear indication that there is a very strong likelyhood for Megan Media to struggle.

So there is absolutely no reason why to buy whatsoever if one adopts the selective contrarian investing approach.


Btw..

Commonsense thingy...

A stock that is beaten down. Why? Stock lousy mah.

So does betting it based on this factor make sense?

Or put it this way.. why should the stock, Megan, rebound?

Doesn't it need a really strong set of earnings and clear sign of improvement in its balance sheet issues?

Without this two issues being solved, what will be ze catalyst to attract and seduce buyers to buy the stock?


Unless of course, one believes in the Kaki-Kia (have you heard the hokien KIA joke before? if no, feel free to click on the comments to this blog entry!) theory in stock! (ho ho ho ho!!!)


Oh... another commonsense thingy...

Now.. u see a hugely popular recommended stock in a stock message board gets beaten down teruk-teruk.. and instead of seeing the so-called advicer admitting their own faults in their recommendation(s) (simple issue mah, all of us are merely human and we all do make mistakes. Admitting and owning up to the mistake is the right thingy to do, isn't it?), the advicer twist and turns and stubbornly admits that their stock picking is spot on.

How?

How would one evaluate such a situation?

For example, using our commonsense thingy, doesn't it kinda get rather really silly when one shouts M a buy at 1.40, M still a buy at 1.20, M a buy at 0.80, M still a buy at 0.60 and so on and so on..

Why not admit the mistake and move on?

Why drag on?

Ahh.. perhaps... the advicer knows only the theory but cannot excute the theory of correcting their mistakes when they are wrong (ze theory: a good coach does not necessary equate to a good player and vice-versa! Meaning sometimes people cannot practice what they preach!). So what do they do? They continue to shout out loud-loud a buy for long term, contrarian investing and so on and so on, twisting and turning, all becuase of their own vested interest!

Think about it... The bugger has the stock and the bugger has no heart and simply do not know how to cut-loss and correct their mistakes. So what do they do? They continue digging a bigger hole.

Also think about it.. would the bugger admit the fault in the stock selection when the bugger still have vested interest in it?

Also think about it... if that is all true.. then isn't it logical why the bugger continues to advice a buy on it?

How?

ps... me just mumbling and bumbling hor.... and oh... i am still thinking about it!

:P

Being Contrary

From Sun Tzu on Investing

Contrarian Investing

Contratian Investing is a method of moving against the crowd, which relies heavily on a broad understanding of investor pyschology, and when done successfully, you will appear to have seen the future. Sun Tzu advised his generals to devise strategues that deceived their opponents, wore them out, and put them at natural disadvantages. Rational investors will have a natural advantage during time of excessive bull market optimism and bear market pessimism. The key to recognizing such dangers and opportunities is to remain loyal to your Sun Tzu-style assessments, continue screening stocks one at a time and remain focused on determined business value. Your discipline will help you avoid paying too much during bull markets and enhance your confidence to buy bargains during bear markets. You will become a rational contrarian and your peers will think you have seen the future (or lost your mind).

Contratian Investing is one of those terms often misunderstood. A contrarian investor doesn't move against the popular crowd simply for the sake of being different. The true contrarian is a strategic investor whose disciplined approach to stock selection is often at odds with the current trend. If you stick to any particular investing style, be it based on low asset valuations, high earnings growth rates, or high dividend yields, there will be period of times when your style will be in line with the popular thinking, and other times when it will run contrary to the style of the day.

The more long-term focused your strategy, the more likely it will be at odds with popular market trends. Contrasting styles of investing often result from investors' perspectives of the stock market. Chartists, technical analysts and speculators are looking at the short term price movement patterns in the hope they can glean some sense of a trend, able to predict what other investors are thinking. They are trying to understand the emotions of other investors and profit by anticipating their next move. As their guessing game becomes more sophisticatedm and everyone is observing the same charts - the professional guessers must now predict how the other predictors are guessing about how emotions of the majority investors will affect short-term price movements - this quickly becomes a frustrating guess-what-the-guessers-are-guessing game with no likely winners.

Taken from Mary Buffett's The New Buffettology

CONTRARIAN INVESTMENT STRATEGY VERVSUS SELECTIVE CONTRARIAN INVESTMENT STRATEGY

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years. This strategy focuses on falling stock prices and pays little mind to the underlying economics of the companies. With the traditional contrarian investment strategy investors don’t discriminate between price-competitive-type businesses and companies that possess a durable competitive advantage. So long as the share price has recently fallen, the stock is a candidate for purchase.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

~~~~~~~~~~~~~~~~~~

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

As you are very well aware that the market is full of risks. And the success of an investor or even a trader depends on how well they acknowledge and manage their risk.

Let me give u some of my views. Not sure u would agree... but here goes...

So firstly i would try to understand the theory.

The main assumption in this strategy is that all beated down stocks will one day rise again.

Which basically saying is that all stock price movements are cyclical. Stocks will have their up and their down days.

So where could one go wrong?

1.How safe is our purchase price? What if the beaten down stock gets more beaten? Or simply put... is it time to buy now?

2.Yes, in general ... most stocks that get beaten down... will rise again... but what if it rebound does not past my purchase price? Meaning will the recovery be worthwhile? Will it be profitable?

3.What if the stock i chose in the beaten down industry does not rise?

4.What if shit happens? Beaten down stock gets beaten down because it is so poor fundamenetally. And the real danger is what if it turns into a real disaster? yup... what if the stock really goes DOWN under?

5. How long would it take for this recovery to happen? Say if we buy the stock now.. seeing that the stock price is beaten down... what if this recovery takes much longer than we expected? Will the stock price hold?

Well these are the questions i think that require much thinking. In fact, me myself, cannot give you a logical answer to all of it because the bottom line is that the answers to the questions is itself unpredictable.

Which is why... in my opinion... what Mary Buffett wrote in her book, The New Buffettology , about her ex-father-in-law is a rather more useful approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Which basically means that the beaten down stocks must represents companies which has a durable competitive advantage.

Companies that are of good quality.

This, i believe will help the investor safeguard themselves versus the issues that i had written earlier.

This would be my contrarian approach.

Being contrary just for the sake of betting against the crowd?

That's rather silly in my opinion. :D

Cheers!

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.