In my recent article titled “Stop being a patsy in the stock market” in the link below,
http://klse.i3investor.com/blogs/kcchongnz/127246.jsp
I made a strong proposition to you not to speculate in the stock market basing on rumours, hypes, hopes and fads, for the health of your personal finance. I have given examples, real life documented examples of some stocks in Bursa I was asked by some people in i3investor four years ago if they were worth buying.
The portfolio of nine such lemon stocks lost an average of 54% over the four years’ period, while the broad market has gone up by about 15% during the same period. Eight out of the nine stocks made high negative returns. That was how detrimental it was if you were to speculate in the stock market.
Subsequently, just yesterday, I wrote another article titled “Invest in good and cheap” in the link below,
http://klse.i3investor.com/blogs/kcchongnz/127444.jsp
I advocated that if one wishes to involve in the stock market to build long-term wealth safely, slowly but surely, he should invest in good companies with established and proven records, and when they are selling at reasonable prices, or better still, cheap prices. I have also presented a documented portfolio of mine established four and a half years ago following this principle. The portfolio of 10 stocks, named “GE13 Stock Watch”, returned an average of 151%, way outperformed the broad market of 19.1% with a very wide margin, without a single stock which lost money.
The pertinent question is, how can one identify a good company, and how to determine that it is selling at reasonable price, or even cheap.
There are obviously many ways to look at it, all different from different investors. Some use business sense, asset-based investing, growth investing, value investing, momentum investing, investing with good management, follow the major shareholders and management, super investors, etc.
One way I do to carry out the analysis for the determination is by using the ColdEye 5 yardsticks, a very stringent set of criteria.
In one of his presentations given to the public on 16th March 2013, ColdEye listed his investing strategy using 5 metrics that investors should look out for before he invests in that stock:
1. Return on equity, ROE,
2. Cash flows
3. PE ratio
4. Dividend yield and
5. Net tangible asset backing per share, NTA
If you have some basic knowledge in analysing and interpretation of financial statements, these metrics are simple metrics which can be easily extracted from the financial reports.
The first two metrics suggests investing in good companies as presented by its high return on equity and good cash flows.
Remember, good companies may not be good investments if the price is not right.
The later three metrics close the gap by comparing the price versus value of the companies to invest in.
The price-to-earnings ratio, or PE, measure how cheap or expensive a share is selling with respect to its earnings.it is the most common metric used in the investing circles everywhere in the world.
Dividends are tangible cash flows returning to shareholders and important to the overall returns. Besides, it gives a positive signal if a company distribute consistent increasing dividends.
Obviously, a higher dividend yield is a better investment. If a company consistently and has the capability to give sustainable dividend with a yield higher than fixed deposit, it will be a no-brainer to me.
The ColdEye investment strategy is reinforced further if the company has good quality net tangible assets, compared to its price. For if the company is liquidated, investors may get back their capitals. It seems that ColdEye is no longer emphasizing this metric, and he instead focus on growth as a new metric.
In this article below, I have attempted to explain each of the metrics above, and its importance.
http://klse.i3investor.com/blogs/kcchongnz/75946.jsp
We can see that the 5 metrics of investing of ColdEye cover almost every aspect of sound investing; good companies with the right measurements are found, and selling cheap in every angle. How intuitive is it!
Below I will use some experience of mine using the investment strategy of ColdEye in Bursa.
Return of stocks using the ColdEye 5 yardsticks
I first posted an article in i3investor regarding the ColdEye 5 metrics of investing after his presentation in a public forum in the link below:
http://klse.i3investor.com/servlets/forum/900214344.jsp
After my above post was published in i3investors, it received good response and constructive comments from many forumers. Many of them asked me about if their stocks meet the Cold Eye 5 yardsticks. These were all well documented in this thread in i3investor below.
http://klse.i3investor.com/servlets/pfs/19817.jsp
Table 1 in the Appendix shows 9 stocks met the criteria above and were chosen as good investing candidates at about the time on 17th March 2013 basing on the 5 metrics. Four years and four months have passed. How has the portfolio performed?
As on 10th July 2017, the average total return of the 9 stocks chosen is 325%, with the median return of 221.8% as shown in Table 1 in the Appendix. This return way out-performed the total return of 18.3% of KLCI over the same period.
APM is the only stock making a negative return, albeit a small one at -10.7%. There is another stock, Kumpulan Fima at +8.1%, underperformed the market, by just.
Many stocks over-performed the market by wide margins. Lii Hen more than a 10-baggers, Latitude returned +616%, Prolexus +441%, Willow +343%, Johor Tin +222% and ECS ICT +64%.
Conclusions
The ColdEye 5 metrics in investing appears to be an attractive investing strategy of buying good companies when they are selling cheap. It provides potential high return with limited downside. The metrics are easy to use and can be easily extracted from the three basic financial statements; the Income Statement, Balance Sheet and the Cash Flow Statement.
The operations involved to compute these metrics are just addition, subtraction, multiplication and division, +, -, x, /.
I found this interesting comment as posted below in the previous link above when Tan KW posted the summary of stocks discused,
[Posted by kcchongnz > Aug 12, 2013 12:04 PM | Report Abuse
TanKW,
Good effort. Something bothers me. How come all those stocks which I gave a pass using the cold Eye 5 yardsticks are all in green and those which failed are all in red? Did you manipulate the results? It is unusual.]
Aren’t you interested to make use of this proven investing strategy to buy good companies when they are selling cheap to building long-term wealth, surely, slowly and safely, rather than speculating in the stock market and most probably lose money, and lose big?
Still not convinced about buying good companies at cheap prices for building ling-term wealth?
We will discuss more with more proven and established records as shown in i3investor using other fundamental value investing strategies later.
I just can’t stop talking about the benefits of fundamental value investing, and wish to propagate it.
Again, if you are interested in learning about fundamental value investing and at the same time, getting some investing ideas for investing in Bursa, you may contact me at
ckc14invest@gmail.com
K C Chong
Appendix
Table 1: Return of Portfolio using ColdEye5 metrics
http://klse.i3investor.com/blogs/kcchongnz/127559.jsp
