Stock Picking

Next Tue 12th June 2007 will be 4 weeks since the accident that get me into what medical term called as "mid-shaft humerus fracture". Now I'm still typing with one hand.

Anyway what I'd like to put up here is some of the stuffs that can IMPROVE my chance of picking winners in the volatile stock market. The list here are sequenced from the most to the least important point.

1. Excellent/Good Management.
This sounds very logical and no-brainer. But deciding which management is good & which is not, is truly a tantamount job, especially if you are just an average retail investor which means most of the time you don't have chance to meet the management team. It's save to say that most retail investors rely on analyst coverage reports. So I think investing some monies in getting those reports is a must, however never never never made your decision solely based on analyst report. The number one thing about management is trustworthiness. You must do you homework to figure out if you can trust the management or not, if you do not have confidence or not clear about the management you better stay out of this stock. Blue chip companies tend to have more reliable management and good corporate governance. This is to me one of the key reasons why PE of blue chips is usually higher. For small caps, you really need to do lots of homework to figure out about the management. Track records are important, example consistency in delivery quality profit (= profit supported with strong cash flow) year after year, consistency in paying out dividend (= which means the profit is not just paper profit), good branding, certification of excellent (e.g. Singapore Quality Award), etc..

2. Pick the right industry, at the right time.
Timing is important as it gives us a better chance (higher probability) in selecting the BEST performers. Deep understanding on bussines cycle is extremely useful. Example: those who placed their bets on Construction/Property sector starting from last year would by now have benefited strongly from the boom in this sector, especially when compared to the laggards in the technology sector.

3. Margin of Safety.
To me there are various type of margin of safety. Those I like: High discount on Nett Asset Value (especially when the asset is backed strongly by cash) - But beware of loss making companies as the loss can easily wipe out the NAV. Another thing that I consider is intangible assets like brand, proprietary knowledge, patent, etc. Last but probably the most important: select stocks that are trading at discounted PE (to its peer in the same industry and also to general market).

4. Dividend
If you got all the above items cleared and the company is giving good dividend, then you should be ablle to bet on this company without having restless nights.

5. Speculative Buy
Invest about 15% of your portfolio in the ultra small caps. These stocks will for sure have high beta, but they could offer you great return, examples are recent RTO-mania like Digiland (10 cents to 65 cents cents, Rowsley 7 cents - 25 cents, and many more). For this type of stock, again look for management who is a potential deal-maker. Don't by them when the price is going down, but buy only after the price has stablized a the low absolute price, especially if you noticed that the price is battered down but with LOW volume. Jet Technics falls into this category: low absolute price, price down but with low volume, business is suffering loss (hence the down trend in stock price), have great potential to recover if they manage to break export market, environmental theme which offers significant long-term opportunities, and most important thing is "do you have confidence in the HONESTY of the management?". Speculative buy is only best during MARTKET UPTREND, during bearish market avoid speculative buy.