Hi
readers, as it comes to the end of first quarter in 2017, we hope
everyone is doing well and stay healthy. In this post, let us review our
2 experimental portfolios that
we setup early of this year. Both portfolios are tracked by using
i3investor portfolio manager. First of all, these portfolios are formed
purely based on quantitative analysis or balance sheet investing. We
would like to examine and compare the performance between actively and
passively managed portfolios, more details can be accessed here.
No
trade was made for both portfolios in the first quarter of 2017. The
portfolio (insert link to portfolio) is up by 7.9% since inception,
which contributed by unrealized gain from FAVCO (+14%), HEXZA (+19.7%),
MFCB (+35.5%), OKA (+23.4%) and TGUAN (+7.8%), while FLBHD, JAYCORP, and
LIIHEN did not change much from our entry price. Nevertheless, this
portfolio has two losers which offset some of the unrealized gain, they
are : CSCSTEL (-17.4%) and HEVEA (-4.9%). So what should we do with the
losers? Should we cut loss / realize the loss and replace it with
another better companies? Or should we continue to keep the companies in
our portfolio? Before making these decisions, let us go back to the
fundamental of the companies to have a check, if any of the invested
companies including the gainers, are still in tact.
Figure 1: Current holdings in Stockify Experimental Portfolio (31/03/2017)
To
find out the current status of the company, we like to check on the FA
score of the company. The FA score basically consists of a list of all
these key quantitative metrics:
- PE Ratio
- PB Ratio
- EV/EBIT
- ROE (Dupont: Asset turnover, Financial Leverage, Profit margin)
- ROIC
- CROIC
- Quality of Earnings (CFFO/Net Profit)
- FCF/Revenue
- Debt/Equity
- Liquidity ratio (current ratio, quick ratio, cash ratio)
We
find it extremely useful to use this as a checklist, which allows us to
be more efficient in analyzing a company. However, we have to remind
our readers that, most of the criteria are solely based on general and
our personal benchmarks. From our past experience in applying the
fundamental checklist, we find that companies with over 70% FA score
appear to have solid balance sheet. Apart from that, we also like to
check on the current financial position of the companies. So, let us add
some additional columns and also some of our own criteria for EV/EBIT,
ROIC, CROIC to the previous table (Figure 1).
Figure 2: Additional columns for FA score and Financial position
As
we can see from Figure 2, all of the companies in the portfolio appear
to have solid fundamental (FA score averaging 92%) and in NET CASH
position, where 4 of them are debt free. This tells us that the
companies have low risk to be exposed to any financial issue in near to
mid term. Other than that, all of them are still remained to be Magic
Formula candidates, which still intact with our initial balance sheet
investing strategy. For these reasons, we decided to keep the portfolio
unchanged in the first quarter.
Some Notes on Diversification
Nevertheless,
despite of all these fundamental analysis, we might always keep in mind
that low risk should not be mistaken as risk free. Very often we might
face some unforeseen circumstances such as accounting fraud, company’s
integrity issue, sudden change in company business structure, etc. These
events could impose additional risks to our portfolio, hence, we could
not help to stress enough on having adequate portfolio diversification
while investing.
For
beginners who just about to step into the stock market, we suggest
to focus more on forming an adequately diversified portfolio of 5 - 10
stocks, before starting to average down on existing holding (especially
single company). This could help to reduce the volatility of your
portfolio as well as lower the concentration. As far as the market
movement is concerned, managing a portfolio of companies are far easier
than holding a "single stock portfolio". It also calms down our human
emotions during holding period the investing process. We also ought to
remind our readers that building up a portfolio does not happen in a
single day, so be PATIENT.
https://www.stockifyblog.com/single-post/portfolio-31-3-2017
