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Introduction: After I have practiced various methods of selecting shares for more than 30 years, I realise the best way is to invest in companies with good profit growth. I found out that buying undervalued shares as preached by all the investment gurus takes a longer time to make profit. For example, currently there are a lot of undervalued shares in the property, plantation and oil & gas sectors but I do not buy them because it will take a long time for these industries to turn around.
Among all the criteria such as NTA, return of equity, discounted cash flow etc, I consider profit or EPS growth as the most important catalyst to move share prices. As a result, I have formulated my golden rule for share selection.
Although all my selected stocks which comply with my golden rule have gained in price in the last one year, they have also fallen quite severely in the last few weeks. This has taught me a new lesson. I need to think of various ways to ensure my stock selection golden rule works well.
My golden rule: I must make sure that the company can make more money in the current year than last year by looking at the profit of the last few quarters. To ensure that the golden rule works perfectly, I need to do the following:
You must understand the company business and it must have a good track record of making profit.
The projected P/E ratio must not exceed 10. This will reduce some unforeseen risk in share investment.
When the company reports increasing profit the share price will surely go up and you can borrow more money to buy more shares. You must not borrow more than 25% of the allowable limit to avoid margin call when the share price drops suddenly.
No share can go up or down indefinitely for whatever reason. When it has gone up too rapidly, you must sell some shares which were bought with margin loan so that you have more funds to buy back when it drop. If you look at the VS Industry price chart below, based on its 1st quarter 5.22 sen EPS I believe VS price should go up. Latest report from MPI and Unisem has shown encouraging profit growth. I notice that many foreign funds are selling, probably due to our political uncertainty.
http://koonyewyin.com/2016/03/03/how-to-ensure-my-stock-selection-golden-rule-works/
