I saw this poll on a klse site

When i buy stocks,i don't use all those technical terms like candlestick , PE etc , As long as i feel there is a potential with it,i am willing to part with my money

punter

I usually follow this..
1. Select which country with the best potential, and allocate how much i want to invest there.
2. Then select the sector. I normally go for banking stocks as it's a proxy to economy and telecom if country is backward with plenty of growth..
3. Then select individual stock based on management, value, earning growth etc.
4. Then time the entry..

wow ,so many value investor?true or not?or just pretend to be so called "value investor"?

To be more objective, someone could start another poll asking about how long they hold a stock on average once they buy it. The value investors should hold it for quite long.

That is not necessarily true. A value investor invest based on the value it can derived from the stock. If they think a current stock is undervalued, they buy and sell if fully valued or over valued. A stock can reach fully valued and overvalued regardless of time held and rather on market movements.

Yup agreed. Most people equate "buy and hold" investing with value investing because it is practiced by Warren Buffett. But, most people miss the first rule in "buy and hold" which is to buy when the stock is undervalued so that you can hold it in the long run.

If you study people like Graham and Buffett carefully, most of their early days gains is from a form of investment called "special situations". This type of investment is generally on shorter term to profit from price differences on stocks. Buffett only switch to buy and hold when his capital base become too big that make it very inconvenient to move in and out of a stock.

value investing doesn't mean only buy and hold.
It means buying something at a price which is cheaper than its value.
Some of the stocks value increases over time so value investors hang on to them. So it looks like buy and hold.
But we also buy and sell in short term eg. during arbitraging. In this case we buy something at a price which is cheaper than its value and wait for the
market to realise its actual value by which time we will sell.
SO Value investing is about buying something at a price which is Cheaper than its Value.

I've read quite a few books on value investing. I think I know when a stock is undervalued, but.... my problem is, I don't know when a stock is overvalued. So..
1. How do you guys tell when your own stock is overvalued?
2. Have you sold a stock that you think is overvalued, but later turned out you were wrong? What lessons have you learned from that?

Folks,

My answer DOES NOT FIT any of those categories.

A) I do asset allocation. Hence, I SELL HIGH and BUY LOW based on my allocation percentage.

B) For one stock that I invest on. I am a dividend investor. I do not sell as long as the stock pay attractive dividend.

Dreamer

In turbulence time likes this, I think going for the undervalued stocks is still one of the best options. In FACT it is an evergreen method , meaning suited in most situations.

Looking at Dow, if a fundamentally ok stock of US 40 dropped to 1sen, don't you think it is a good buy ? if you know it is grossly undervalued. Even at US $ 10, you would still buy, knowing well that some powerful force is using HFT to suppress the prices to let say US $5 or below. Bocs sooner or later you would see the price moving close to US $ 30 to 40 .

And lot of investors are saying CI is odeli too high at 1300 or Dow is high at 11,000, I think it is not justify to say that. So long the undervalued stocks that we hold are still grossly undervalued, we are safe. And the economy is still in a healthy shape.

And talking about Asset Allocation Model . It evolves from the earlier concept of buying low and sell high. So it is still the UNDERVALUED that we buy and SELL HIGH when it is overvalued. Only various types of valuations are incorporated now. For example PE or DCF are added , instead of merely basing the raw form of buying low and selling high ( earlier model )

So asset allocation shares some similarities or growing from the same family tree. It also recognizes the important of keeping some portion of money in cash equivalent form ( Risk Adverse ) until such a time the stocks are undervalued again. It can be Auto ( computerised ) for fund investors , or using Manual for small investors like us.

Whether it is a High end or low end computer, it is still basically a computer.

If you invest in Unit Trusts , basically they are the same, only using a more complex computer model to do the computations.

I think in time like this , we need to go back to the basics ( valuations )

If not , it would be highly speculative likes the DOW, right now. Up and down a few hundred points a day though the fundamentals of a company does not change much within a day.

This post has been edited by SKY 1809: May 9 2010, 05:16 PM

1) when the particular stock return rate offer is similar to other lesser risk alternative, then surely it is overvalued.

Typically if a stock forward PER for the next 2-3 years is 25, which implied a 4% return rate, why should a investors invest into equities which is considered high risk if there is FD rate of 4% which you can sleep well and capital protected?
In this situation, there is no solid reason for putting money into equities.

Why we want to invest in stock market?
To get better reward and return.
This is the mother of all investment purposes.

2) The stock can be overvalued currently, but due to improving fundamental in later stage, then at the same price, it is not overvalued.
No one can forsee correct the future, things evolve differently from time to time. Can't say it is wrong or right if one sold the stock which currently being seen as overvalued.

---

Added on May 9, 2010, 9:37 pmJust want to add a point on value investing.

Value investing is not equal to buy and hold for life or long term although most of the time associated with it.

You want to buy a undervalued stocks, because it has higher potential given better return to you.
For eg. you invest in
A PER 10x stock, which implied 10% profit/return rate made by the company on your capital, which in turn the company has potential to give a 10% dividend to you.
as compared
B PER 20x stock, which implied 5% profit, which in turn the max company can give is 5% dividend.

Also buy a share price that undervalued than its NTA or profit level, it just means that share price has higher potential to go up,
as compared to a overvalued stock, which the chance of share price go lower is higher.

Value is always associated how much the company can make profit for you, which is the basid of stock market investing.

So with undervalued stock, it just means you have better odd chance to gain/win afterwards.

This post has been edited by cherroy: May 9 2010, 09:37 PM

SKY 1809,

As per asset allocation

1) I use INDEX FUND. So, I do not pick individual stocks.

2) The "BUY LOW SELL HIGH" is based on the relative pricing between ASSET CLASSES and its effect on the ALLOCATIONS.

<< It evolves from the earlier concept of buying low and sell high. So it is still the UNDERVALUED that we buy and SELL HIGH when it is overvalued. Only various types of valuations are incorporated now. For example PE or DCF are added , instead of merely basing the raw form of buying low and selling high ( earlier model )>>

3) I use RAW FORM. I do not consider all those advanced form as proven themselves over the low period of times.

Dreamer

I see, then in an environment of rising interest rate, stocks will become overvalued? And people will sell down stocks? Makes sense to me. In your past experience and observation, how many basis points will the interest rate have to go up for people to start selling down their stock holding?

Stocks Vs Interest Bearing Instruments basically got a lot to do with asset allocations.

You start with lower risk assets to produce the expected yields.

For example if your expected yield is 8% a year, then you need to go for lower risk ASSETS such as ASB or REITS instead of investing in High Beta Stocks. If you have exhausted these sources, then you move to assets of higher risks.

Likewise if Interest rate goes up and meets the expectation of a group of investors, they would sell stocks in favour of Interest Bearing Instruments of lower risks.

If EPF could give a dividend of 8 to 10% a year, more investors would sell their unit trusts and park back the money since the objective of 8% is met.

Likewise people would sell off stocks in favour of Cash ( FD ) etc if they believe stocks could produce negative returns in the near future in a bad economy likes the recessions. If lower risk FDs outperform STOCKS. Though interest rates might be falling likes in Year 2008/2009. Cash is King is true in that sense.

So it is not necessary mean a stock becomes overvalued if interest rate is a bit higher.

For those who believe in asset allocations ( and risk factors ), so far wisely accepted by the investment experts worldwide.

This post has been edited by SKY 1809: May 10 2010, 07:09 AM

forumers,

The yardstick used in order to determine "Value" can be numerous. for example, one can use the P/E ratio, D/Y ratio, Nett Book value, etc.

The raw numbers in the balance sheet need to be adjusted to reflect any hidden loss/gain or possible dilution in earnings. For example, the existence of warrants / convertible loan stocks that will impact on the final analysis.

It is hardly adviseable to rely on a single item alone as this might lead to inaccuracy in determining a stock is"undervalued". Normally, a basket of ratios are used together in conjunction with an analysis of at least 5 years (the longer the better) of high - low stock prices and also the high - low levels of the respective ratios used.

Again there's cases of undervaluation in certain stocks by a quick glance on the balance sheet alone.

Example would be POS Holdings (the former entity before all its cash horde being drained away in the massive capital repayment). That was about 5 - 6 years ago, the stock selling for around RM1++ And a quick calculation reveal that it's cash per share ratio is more than 1X. And with no debts to speak off; An investor buying in at RM1+ is just getting the entire postal operations F.O.C (its land / buildings / vehicles / equipment).
The current listed company is definetely not attractive at all in terms of value.

Back to now; then we have this out-of-favor counter known as KIMHIN (ceramic tiles manufacturer). With no debt, it's cash + liquid assets (mostly unit trust investment) is already abt RM1.20/share. It's stock price at RM1.26 mean it's tiles business can be bought for F.O.C

So it all boils down to one willingness to do the Homework and hunt down the undervalued stocks.

o mayne, doing them homework make meh feel laik going back to skool aite

most of the time meh cant interpret them ratios dawg, just brings too many meanings and possibilities dawg?

how yall do it?

There are plenty of ratio, data and number which is useful, but do not judge merely on those number alone. Rigid number sometimes doesn't reflect the real situation nor guide us to the future. For eg. during 2008, all O&G sectors were having good time and earn big buck, but since after the financial crisis, business condition no longer the same. Some are struggling to secure contracts, some are struggling for cashflow etc issue.
So if one uses the old data then it could be misleading.

There are many others aspect need to consider as well.

Another eg.
The company may have an asset of Rm2.00, and share price is trading at Rm1.00.
Based on number alone, it could be severe undervalued. But you need to see whether the company management utilise the Rm2.00 asset efficiency or not and how well and sincerity they treat shareholders across.
The management taking care of minority shareholders generally being well received and has higher premium than a company management never take care of minority shareholders benefit.

Dreamer says that he uses ETF or index funds?

I know those are pretty good for US, not sure about Malaysia. Need to do some research