Saturday, February 7, 2015

What to Buy, When to Buy?

I read this interesting article regarding TA that inspired me to write this post.

Today, I am sharing my logic when it comes to my investment process.

I believe that both Fundamental Analysis (FA) and Technical Analysis (TA) are important. As the title suggest, FA helps me decide what to buy, while TA helps me decide when to buy it.

Using FA, I have tried to filter out all the nonsense from the entire SGX landscape.

Personally, I will never invest money into a company that does not pay dividends. Stop, don't criticize first. I do not exclude companies that do not distribute yearly. On the contrary, I think companies that strategically decide to withhold distributions are actually superior companies. If cash is tight, I do not think that the company should be compelled to distribute to it's shareholders. On the flip side, I know all too well the dangers of companies that are not run with the shareholders best interest at mind. I believe a simple dividend policy is required for me to be a shareholder. I am actually mid-way writing a post about my preference for dividend companies. However, some of you might have your own preference to "growth" companies, which is fine. To each their own. I just prefer not to buy future growth promises. I rather buy companies that don't promise anything and surprise to the upside. Underpromise and over deliver.

Another fundamental things that I look at is the amount of debt a company holds. I used to be extremely picky about this metric, but I've slowly come to realize that a distinction between "good" and "bad" debt has to be made. In that regard, I completely throw away a company that has a lot of "bad" debt. I think overall low levels of debt makes a company very attractive in my eyes.

There are other fundamental factors that I look at as well, like gross profitability and cash levels, but I would say that those are the 2 main things that I look out for. Using FA, I can decide which companies are fundamentally good business that I would like to own.

So, it's a good stock. Now the question, what price? Even a great underlying investment can turn into a bad investment if the price tag is wrong.

Here it is kind of a mix of FA and TA. Using some FA metrics and calculations, it is possible to find out if the company's valuation are low compared to its peers and even compared to itself in history. It helps you come up with a good case to figure out if a company is selling at a good price, or what a good price might be. There are many metrics that can be used, but I like to look at P/E or EV/EBITDA and P/NAV the most.

Once I have figured out that based on FA, the stock in question is looking very attractively priced, I turn over to look at TA to tell me when to buy, and at what price.

There are tons of ways to do TA, however I like to use a combination of leading and lagging indicators to signal to me a buy entry. Usually all my leading indicators are screaming oversold while my lagging indicators are showing an imminent reversal anytime soon. Couple that with divergences in price and RSI and to me, that is about as close as I believe to be the perfect entry point.

I think being skewed too extremely in the FA or TA camp is very bad for your investing health. I don't see why both methods co-exist together. In fact, I believe that using together improves your investing. Although I lean more towards FA myself, I believe too many people fall in live with the quote to "Buy what you know" by Peter Lynch. Because of that they end up piling into "brand" name stocks, regardless of price. If you don't respect valuations, they will make you respect it eventually.

This is just my personal investment process and my thinking about it. There are a million ways to get to Rome, we all walk our different paths. Of course, some paths are easier and get us there quicker.

Which path are you walking? Do you even know where you are heading?

6 comments:


  1. I do FA, TA and PM (Pain Management)

    :-)

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    1. PM? Do you have any previous post about PM? I want to know more!

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  2. Hi GMGH

    I respectfully disagree with your thoughts above on using FA to know what to buy and TA on when to buy.

    For me I am usually on the camp on FA knowing what to buy and further TA (valuation method) on when to buy. Maybe it's just me but the TA could give a signal of when its good to enter but valuation can still be as high or as low. I dont really use TA any at all. But thats again because I am from the FA camp :)

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    1. Hey B,

      I still mix FA and TA to get a good buy signal. I am very sensitive about valuations actually, so one of the first things I always look at is valuations. Anything with a PE over 25 my brain switch off already, hahah! But if it is still a fundamentally but just with high current valuations, then I just add it to my watchlist waiting for less demanding valuations, much like your recent bit about Silverlake.

      Sometimes I feel TA isn't that important, but it helps brings in some math. Things rarely stay in statistical extremes and TA is pretty good in signalling if something unusual going on. Then again, TA can give a million and one signals. It makes it hard to cut through the noise and focus on the most important thing - Price!

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  3. Replies
    1. Thanks Oldman! Let's just hope it works in the long run, haha

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