Notes by Ben Gan (on investing)
This note was written three years ago and my FB memory reminding me ... sharing such a good piece of note with readers. I have met Uncle Ben personally recently and these are valuable advices. Do read.
What You Need to Know To Invest Successfully in the Stock Market.
Business is all about profits.
Investing in the stock market is most intelligent when it is mo...st businesslike. This is advocated by Benjamin Graham, the father of value investing.
Business is all about profits. Therefore, earnings are the first thing you look at when you analyze a company. When you look at earnings, look at earnings per share (EPS) instead of the total amount.
When I look at earnings, two things come to my mind. One is whether these earnings are sustainable, and two, whether they will have further growth.
Whether these earnings are sustainable or not, depend to a great extend on the core business of the company, the integrity of the management and the competency of the CEO. If you are not convinced that earnings are sustainable and growing, avoid the stock.
A company should always take care of its minority shareholders. It should have a good dividend policy. Paying 30 to 50% of its earnings as dividends is to me a good dividend policy. The value of a stock depends on the amount of dividend it pays.
A strong major shareholder is very useful. It gives added advantages and protection to a company.
Barrier of Entry
Two companies that have the strongest barrier of entry are: Genting and Bursa. Why? Because even if you have money, you cannot go into this type of business, simply because you can't get a license for it.
Banks also have a strong barrier of entry because bank licenses are limited. Plantations, construction and Properties do not have such a strong barrier. This means that if you have money you can easily go into such businesses. A strong barrier of entry prevents competition from becoming too intense and is therefore valuable.
Heavy borrowings can cause bankruptcy. In fact all companies that go bust have heavy debts which they cannot repay. So avoid companies with high debts.
The Balance Sheet
The balance sheet shows you what the company has and what it owes others. You have to study this carefully. I like to look at the current assets, and compare them to its current liabilities. The bigger the current ratio is the better. A current ratio of less than one is a red flag.
A company's cash flow must be smooth. A company that has no problem collecting cash from the services it provides and the products it sells is said to have good cash flow. A poor cash-flow company may have lots of bad debts that may have to be written off over time. So, take a good look at the cash-flow statement and note how much cash they have.
The income statement shows you how income comes about. The quality of the earnings is important. If there is an extraordinary gain, be aware that this type of earning is a one-off gain. It will not be repeated next year.
Chairman/ CEO's Statements
Take note that the statements from these people must be studied closely. Listen to what they say, but don't take every thing at face value. Some people have the tendency to talk big whereas others are humble and more down to earth.
Every thing has a fair value
After you have analyzed a company, you should have a fairly good idea as to how much a share of the stock is worth. You should never over pay even for a great stock. Once you have overpaid, you have lost money. Warren Buffett said that rule 1 was never to lose money, remember that.
Never over estimate your own ability
Over estimating one's ability is a common trait. This is human nature. Many people get into the impression that they are competent enough to compete profitably after some winnings. It is better to be honest with yourself and know why you win. Is it really luck or skill? People often say they were good when they won, and that luck was against them when they lost.
Approach the market with humility
Be humble; don't try to lead the market. Follow it but try to be one step ahead of the pack. Don't set your target too high by letting greed to get the better of you.
There is a time for everything
Buying at right time and selling at the right time are the hardest things to do. Even with all the charts, you will never be able to predict correctly the tops and the bottoms. However, with technical analysis, you should be able to sell near the top, and buy near the bottom. This is a achievable.
Charts are graphic records to track the big bogs. With charts, you can see all the actions. You can sell the highs and lows of a stock at glance. You can see at what price demand comes in and at what price supply is greater than demand. Charts are like electricity, very useful if you know how to use them, but extremely dangerous when wrongly used. There is a saying that if you don't like charts, you don't belong to Wall Street. I have no quarrels with people who do not believe in charts. Everyone is entitled to his or her own belief.
In concluding, I wish to say that it is my belief that if you use fundamental analysis together with technical analysis intelligently, your chance of success in the stock market would be very much enhanced.
You can't fail if have the will to succeed, the knowledge to compete, the wisdom to plan, the discipline to implement, and the patience to wait.
Thanks Uncle Ben for such valuable sharing. I would love to have another coffee-talk with you... soon.