Post Mortem Analysis
Reflections after One and a half years of investing.
1) I need to refine the spreadsheet I have been using to value my shares. The discount rate is flawed in a way due to the STI bring negative returns in the previous year. I need to find a work-about (maybe use risk free rate of 10 year SGS bonds to give a new discount rate)
2) I need to refine my valuation models
i) Price Earnings model (from historical 5 years to forecasted 5 year model)
Deriving from peter lynch and John Templeton, I am following the traditional Benjamin Graham model whereby I only use historical numbers that do not lie. I however use the historical quantitative track record to support the qualitative outlook.
My methods has its merits from the value standpoint but not growth orientated. For actual valuation of growth stocks, I need to improve on my intrinsic valuation of the stock 5 year onward. Granted, predicting 5 years into the future is a very foggy business and even the best get it wrong, but it is still the most reliable way to forecast the future orientation of the company. I shall separate the traditional PE from the forecasted PE as 2 different valuation models.
I shall try these methods.
i) Forecasting the 5 year forward PE.
ii) Forecasting the 5 year forward PS ratio.
iii) Acknowledge that P/BV ratio although important is not suitable for asset light companies. iv) Traditional companies like KhongGuan, Hyflux and SMRT is cheap on P/BV but poor on the P/E and PS. (Turnabout plays and Asset Play)
v) Implementing the PEG ratio by Peter Lynch.
vi) Refine my dividend discount model. My flawed discount rate is creating issues with the dividend discount model.
vii) Work on the challenging FCFE model. I have done it up before. I can do it up again.
3) Implement a margin of safety
I got greedy and bought Singtel and Raffles Medical when it is trading at a 52 week low. Those great stocks very rarely came at a discount and I may have insufficient margin of safety and bought at a high price. Although I price the purchase below resistance lines, stocks that fall can simply fall further. Buying at a recession is far more easy than buying at the recovery phase as bull markets have to climb a wall of worry. I still love the stocks I own. But I need to implement a sufficient margin of safety.
Based on Templeton, normal share prices fluctuation is a square root of the price.
I need to estimate the appropriate intrinsic price to use. Then use square-root of the price to evaluate if it is sufficiently undervalued and achieve my margin of safety. Together with Market Depth, support resistance lines and candlestick charts.
Additionally, I should consider lowering my position sizes (as per professional traders do) and use averaging down and up as an additional risk management tool. The 3 value investors I studied has this perpetual problem of poor market timing. Even if market timing is random walk, I can space out the duration which I buy / sell the stocks and have reduce the risk I buy at high and sell at low.
4) Building up cash reserves
I see a lot of good stocks. My hands are itchy all the time. A lot of non blue chip stocks are still pretty cheap. Obsession is a young man's game. It is a miracle that despite all the excitement about the stock market all the time, I am able to stay rooted to the rules I made for myself to stick to my 3-5 years horizon and ride the market out. I have been drawing down my cash reserves and I see there is a market correction (3 days continual decline). Discount season is near and I need to hold off purchase. I also need to wait for my may-bank custodian account to be set up before I can take pricing action.
I have no stocks to liquidate at the moment. Luckily, I can now take a position size of approximately 1000 per trade to keep the $10 transaction fee to 1%. This is also aligned to my margin of safety
5) Dont get too attached to a stock. Stay loyal to the profitability/ outlook of the company. Stay loyal to the money and identify when it is time to take profit.
1) I need to refine the spreadsheet I have been using to value my shares. The discount rate is flawed in a way due to the STI bring negative returns in the previous year. I need to find a work-about (maybe use risk free rate of 10 year SGS bonds to give a new discount rate)
2) I need to refine my valuation models
i) Price Earnings model (from historical 5 years to forecasted 5 year model)
Deriving from peter lynch and John Templeton, I am following the traditional Benjamin Graham model whereby I only use historical numbers that do not lie. I however use the historical quantitative track record to support the qualitative outlook.
My methods has its merits from the value standpoint but not growth orientated. For actual valuation of growth stocks, I need to improve on my intrinsic valuation of the stock 5 year onward. Granted, predicting 5 years into the future is a very foggy business and even the best get it wrong, but it is still the most reliable way to forecast the future orientation of the company. I shall separate the traditional PE from the forecasted PE as 2 different valuation models.
I shall try these methods.
i) Forecasting the 5 year forward PE.
ii) Forecasting the 5 year forward PS ratio.
iii) Acknowledge that P/BV ratio although important is not suitable for asset light companies. iv) Traditional companies like KhongGuan, Hyflux and SMRT is cheap on P/BV but poor on the P/E and PS. (Turnabout plays and Asset Play)
v) Implementing the PEG ratio by Peter Lynch.
vi) Refine my dividend discount model. My flawed discount rate is creating issues with the dividend discount model.
vii) Work on the challenging FCFE model. I have done it up before. I can do it up again.
3) Implement a margin of safety
I got greedy and bought Singtel and Raffles Medical when it is trading at a 52 week low. Those great stocks very rarely came at a discount and I may have insufficient margin of safety and bought at a high price. Although I price the purchase below resistance lines, stocks that fall can simply fall further. Buying at a recession is far more easy than buying at the recovery phase as bull markets have to climb a wall of worry. I still love the stocks I own. But I need to implement a sufficient margin of safety.
Based on Templeton, normal share prices fluctuation is a square root of the price.
I need to estimate the appropriate intrinsic price to use. Then use square-root of the price to evaluate if it is sufficiently undervalued and achieve my margin of safety. Together with Market Depth, support resistance lines and candlestick charts.
Additionally, I should consider lowering my position sizes (as per professional traders do) and use averaging down and up as an additional risk management tool. The 3 value investors I studied has this perpetual problem of poor market timing. Even if market timing is random walk, I can space out the duration which I buy / sell the stocks and have reduce the risk I buy at high and sell at low.
4) Building up cash reserves
I see a lot of good stocks. My hands are itchy all the time. A lot of non blue chip stocks are still pretty cheap. Obsession is a young man's game. It is a miracle that despite all the excitement about the stock market all the time, I am able to stay rooted to the rules I made for myself to stick to my 3-5 years horizon and ride the market out. I have been drawing down my cash reserves and I see there is a market correction (3 days continual decline). Discount season is near and I need to hold off purchase. I also need to wait for my may-bank custodian account to be set up before I can take pricing action.
I have no stocks to liquidate at the moment. Luckily, I can now take a position size of approximately 1000 per trade to keep the $10 transaction fee to 1%. This is also aligned to my margin of safety
5) Dont get too attached to a stock. Stay loyal to the profitability/ outlook of the company. Stay loyal to the money and identify when it is time to take profit.
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