It is easy to master the basic fundamentals of share selection. There are a few selection criteria such as NTA, discounted cash flow, return of equity, EPS etc. The most powerful catalyst for moving share price is EPS growth. After many years of trial and error, I have formulated my share selection golden rule. I must be sure the company can make more profit in the current year than last year by looking at the last few quarterly result before I buy the share.
Now I advise readers to check their holdings, bearing in mind that when the companies report reduced profit, the price of your shares will drop.
Our brain has 3 basic functions. The first one is to control your breathing and blood flow. The second is emotional thinking like fear, greed, jealousy, envy, anger, craziness etc. The third is logical thinking. Very often, investors cannot control their emotion to think logically.
If all investors can think logically, all the listed shares would be fully valued and you cannot find any undervalued shares to buy.
After having said all that, 3 persons can buy the same share at the same time and all 3 can end up with 3 different results.
There are basically 3 types of investors.
Type 1. are the common day traders who diligently watch the stock market and trade. They buy and sell frequently. Most of them can manage to make a good living. Some who trade too frequently will lose money because of transaction cost.
Type 2. are the professional investors, analysts, fund managers and normal investors. They all earn more money than most people in other profession. They are very well informed and they know which companies have good profit growth. But they often sell their good shares too early. As a result they miss to maximize their profit.
Type 3. are the serious long term investors, entrepreneurs and super investors. They make a lot of money. With the money they made, they can make more money. Moreover, they dare to use their shares as collateral to borrow money to buy more shares. They are confident to make more money than the interest in margin finance.
They can wait patiently to catch the big fish. They seem to be able to buy and sell at the right time.
Let me explain using the price movement of VS Industry as an example. After I visited VS in Johore about 18 months ago, I started buying VS and I told all my friends to buy it.
One of them sold it when it went up 20 % and he bought it back later at a higher price. He is a day trader and follows the price chart to trade. He buys and sells frequently and he makes a good living.
Another friend, a professional chartist sold it when he made 100% profit and he did not buy it back even he knew it was still worth buying. He cannot overcome his psychological problem of loss aversion. He is always afraid of losing money and to admit the shame of buying back at a higher price than he sold.
To be really successful, one must invest like an entrepreneur and be willing to venture. One must always look at the profit growth prospect of the company. VS is the largest computer chip and package assembly company in Malaysia with 4 factories in Johore, 2 in China and one in Indonesia.
Since I started buying 18 months ago, I have been buying continuously with margin finance. As the price went up, I could borrow more money to buy. As a result, I am a substantial shareholder.
Eventually VS went up more than 550% within 18 months as shown on the chart below.
Unfortunately it dropped too rapidly in the last 3 months due to the strengthening of our Ringgit. Investors always overreact on good or bad news. In this case, they think VS will not make profit which cannot be true. You can see from the chart that the price has dropped 25% in the last 3 months which is unreasonable.
The last closing price was Rm 1.21 per share. Its first half year ending January 2016 revenue was Rm 1.1 billion and its EPS was 7.6 sen. I think it is a good buying opportunity.
Koon Yew Yin 官有缘 - Koon’s Investment Lesson #2: My Golden Rule
http://koonyewyin.com/2016/06/04/koons-investment-lesson-2-my-golden-rule/
