Recently, there was a book "The Most Important Thing: Uncommon Sense for the Thoughtful Investor" by Howard Mark.
This is a good book. The book strongly emphasize on a term called "SECOND LEVEL THINKING", which is very important for one who wants to be successful in investment. Howard Mark is implying that most people do first level thinking spontaneously, while only minority carries the habit of second level thinking.
First Level Thinking is a shallow way to interpret things without much effort needed to assess it's validity. It is simplistic and superficial, just about everyone can do it.
Second Level Thinking is deeper, complex and convoluted. It takes many things into consideration.
Examples of 1st vs 2nd level thinking in the book
1st Level Thinking says "It's a good company, let's buy the stock"
2nd Level Thinking says "It's a good company, but everyone think it's a great company, and it's not. So the stock is overrated and overpriced; lets sell"
1st Level Thinking says "The outlook calls for low growth and rising inflation. Let's dump our stocks."
2nd Level Thinking says "The outlook stinks, but everyone is selling in panic. Buy!"
First Level Thinking plays a very important role in all the bubbles happened in the past:
- The internet will change the world, let's buy internet stocks!
- China will grow forever, let's buy Chinese stocks!
Everyday, the market, the financial press, are full of information promoting first level thinking. In order to be successful, it is important to start develop SECOND LEVEL THINKING within ourselves.
Sunday, 4 November 2012
Sunday, 28 October 2012
Characteristics of a Bubble
1. A convincing idea, concept, or product. With potentials of rapid growth, and unlimited wealth
2. There are lots of excess capital in the market, or hot money "artificially created" through certain channel or policy. Once those capitals are all focused in this area, it will grow like a snow ball.
3. The idea must be simple but yet complicated. It has to be so simple until every ordinary people thinks it is a good idea, but yet it has to be complicated enough to have hard facts and data to prove it wrong
4. There are people start making money from the idea. The most attractive thing to the public is quick and easy money. It spreads even faster than virus.
5. When the bubble grows to certain extend, there will be lots of experts who come out to support and promote the bubble. Those experts are typically iconic figure, representing wisdom, authority, role model. The public believes they are modelling the highly successful people.
6. The duration of the bubble growth will last longer than expected. Those who initially pointed the danger of bubble burst will be taunted and laughed when the bubble is growing bigger.
7. It bursts.
Bubbles are well known in stock market. It happened and will happen again. However, bubble is not only limited to stock market, it can happen to anything: flower, stamps, watches, wine, oil, property, land, stones, gold, silver...as long as it is able to trigger GREED
Thursday, 18 October 2012
The Story of a Cow
This is not to talk about the bullish market, it's about a story of a cow and a smart guy.
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John just bought a cow at $100, and he leave the cow at his backyard.
1 week later, John is running out of cash. He have no choice but to put the cow up for sale. He intend to sell it at $120 to pay his debt. Unfortunately, all potential buyers are only willing to pay maximum $100 as they think the cow only worth $100.
Being so desperate for money, John came out with an idea. John register a company called Cow Technologies Limited, with the cow as the asset of the company.
John applied for IPO and managed to get approval to issue 100 shares at the price of $3 each. In total, the IPO practice will raise $300 cash for John. In John's prospectus, Cow Technologies is described as "a conglomerate operating various business units to provide solutions for food and beverage industry in local and regional market".
The IPO get strong response with 10 times over subscription. John happily receives $300 from the IPO, while keeping the cow in his backyard. On the opening day, the share price of Cow Technologies Limited closed at $3.30, 10% higher than the IPO price.
In week 1 - $4.00
The price closed strong at $4.00
In week 2 - $6.00
Some experts start to analyze the productivity of the cow and conclude that, base on some calculation, after 3 years the number of cows will grow to 30 cows, hence the share price should worth much more than $4. Investors are encouraged and rush to market to buy at higher price. By end of the week, Cow Technologies closed at $6.00
In week 3 - $9.00
Investors visualize how many tonnes of milk will be produced by the cow and sold to the market. Realizing the value added, investors rush in to buy again. Price close at $9.00
In week 4 - $12.00
Investors heard news that Cow Technologies is forming a capable R&D team to develop a wide range of dairy products target for local market, and then export to other regions. There were also plans in setting up a factory to mass produce the dairy products. Some heard that Cow Technologies had already identified a land nearby to build the factory. Riding the strong outlook, the share price closed at $12.
In week 5 - 9.00
There are news saying the cow is old, and life span is not long. A small group of investors felt uncomfortable and starts to dispose the share. Share price retraced to $9.00. Yet most people think this is healthy correction, and its time for bargain hunting.
In week 6 - $4.00
A lot of rumors saying the cow is dying. Panic spread. More people dumb the shares. Price plunged to $4.
In week 7 - $0.50
People found that the cow carries mad cow disease, and highly possible it had infected residents in that area. Cow Technologies will be ordered to cease operation, and the factories and office will be quarantined. Further panic selling, the price plunged to $0.50!
In week 8 - $0.50
There's one crazy guy named Peter, went to visit John's house to find out what's going on. He found that John is sitting at home as usual, and cow the lazing around in the backyard. Nothing has changed. The cow is still worth $100, and the share worth $1. Peter decided to purchase the share at $0.50 from the market. Peter was laughed by other investors as being crazy to "catch the falling knife".
In week 9 - $3.00
Some people start to realize "the situation is not as bad as predicted" and start to rush into market to buy. Share price rise back to $3.
...........................
John lives happily ever after with his cow and $300 cash. End of story.
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Nothing has changed on the cow, John did nothing to the cow. Nothing happened, except for the extra $300 for John.
While nothing happen to John and his cow, many things happened in the stock market in a few weeks. Investors had ride through a rough roller coaster, enjoying the greed, and enduring the fear.
That's why, stock market is a fun place, for investors to imagine, hope, anticipate, fear, and panic.
Monday, 15 October 2012
A joke about Share Price vs Share Value
This is a joke.
......
Once upon a time in Wall Street, there were 2 traders, Mr A and Mr B.
They trade a can of sardine with each other. Mr A sells the sardine to Mr B, and Mr B sells back the sardine to Mr A, then Mr A sells it back again to Mr B.....the process keeps on repeating without end.
In every trade, each party is able to sell the sardine at a selling price higher than buy price. Therefore, this ensures each party make profit in every trade!
In the long run, Mr A and Mr B both made good money by just trading the sardine to each other.
One day, out of curiosity, Mr A decided to open up the canned sardine to see what's inside, to understand why it is worth such a high price. Mr A was shocked to find that the sardines are actually rotten!!
He was so angry and go confront Mr B for selling rotten canned sardine to him.
Mr B replied, "Why do you want to open the can??? The sardine is meant for trade only, it is not meant to be eaten!!!"
......
Moral of the story:
1. Stock price movement is solely based on investors recognition on the share, and the price they are willing to pay. Price may not match the value.
2. It is all about investors' imagination and perception towards the stock.
3. A lot of times, hot stocks traded at high price are actually lousy companies, like the rotten canned sardine, until one day investors started to find out the truth, before the stock price plunged.
4. It is about the art of avoiding buying rotten sardines
5. It is about the art of exiting the market before people realize the market is full of expensive, and may be rotten canned sardines
6. Trading stock is just a game of trading a virtual contract, base on the market's hope, greed and fear.
......
Once upon a time in Wall Street, there were 2 traders, Mr A and Mr B.
They trade a can of sardine with each other. Mr A sells the sardine to Mr B, and Mr B sells back the sardine to Mr A, then Mr A sells it back again to Mr B.....the process keeps on repeating without end.
In every trade, each party is able to sell the sardine at a selling price higher than buy price. Therefore, this ensures each party make profit in every trade!
In the long run, Mr A and Mr B both made good money by just trading the sardine to each other.
One day, out of curiosity, Mr A decided to open up the canned sardine to see what's inside, to understand why it is worth such a high price. Mr A was shocked to find that the sardines are actually rotten!!
He was so angry and go confront Mr B for selling rotten canned sardine to him.
Mr B replied, "Why do you want to open the can??? The sardine is meant for trade only, it is not meant to be eaten!!!"
......
Moral of the story:
1. Stock price movement is solely based on investors recognition on the share, and the price they are willing to pay. Price may not match the value.
2. It is all about investors' imagination and perception towards the stock.
3. A lot of times, hot stocks traded at high price are actually lousy companies, like the rotten canned sardine, until one day investors started to find out the truth, before the stock price plunged.
4. It is about the art of avoiding buying rotten sardines
5. It is about the art of exiting the market before people realize the market is full of expensive, and may be rotten canned sardines
6. Trading stock is just a game of trading a virtual contract, base on the market's hope, greed and fear.
Sunday, 30 September 2012
Profit from the Crash
This is a simple sharing about crash of stock market.
Stock market crash does not sound like a good thing to happen. Most people do want to see stock market crash.
People used to related stock market crash to
These are conventional wisdom.
Why not we view stock market crash from another angle - If we do things correctly, stock market crash benefits smart investors:
This is the only time great counters are offered at dirt cheap price. Time for bargain hunting. It is time to buy low. We can enjoy great appreciation in long term. For those with good dividend payouts, we can buy it at low price which mean high yield. For a share offering 0.10 dividend per year, there is huge difference in dividend return if we buy it at $1 vs buying it at $3. It is 10% vs 3%
For more aggressive investors, they can take further step to short sell. The more the market crash, the more they earn.
The conclusion is, we should look at market boom and crash neutrally, and take necessary actions to benefit ourselves.
[Note of Caution: Stock Short Selling is strictly prohibited in Malaysia. We can do shorting on the KLCI via FKLI futures contract. For further details you may Google it]
Stock market crash does not sound like a good thing to happen. Most people do want to see stock market crash.
People used to related stock market crash to
- Money losses in stock market
- Bad economy
- Loss of jobs, high jobless rate
- Bankruptcy
These are conventional wisdom.
Why not we view stock market crash from another angle - If we do things correctly, stock market crash benefits smart investors:
This is the only time great counters are offered at dirt cheap price. Time for bargain hunting. It is time to buy low. We can enjoy great appreciation in long term. For those with good dividend payouts, we can buy it at low price which mean high yield. For a share offering 0.10 dividend per year, there is huge difference in dividend return if we buy it at $1 vs buying it at $3. It is 10% vs 3%
For more aggressive investors, they can take further step to short sell. The more the market crash, the more they earn.
The conclusion is, we should look at market boom and crash neutrally, and take necessary actions to benefit ourselves.
[Note of Caution: Stock Short Selling is strictly prohibited in Malaysia. We can do shorting on the KLCI via FKLI futures contract. For further details you may Google it]
Wednesday, 26 September 2012
Windows 8 and Microsoft (NASDAQ:MSFT)
http://windows.microsoft.com/en-US/windows-8/release-preview
Windows 8 is expected to launch in end October. After so many rounds of Windows upgrade, this seems to the most revolutionary and probably most ambitious.
It's a platform to cater for all hardware from smart phones, tablets, laptop PCs...everything.
In short, it covers ARM based and x86 based products. It comes with a Windows RT version
In one single platform, it can support touch and mouse control.
It can switch between 2 interface: a touched based interface more suitable for smaller gadgets like smartphones and tablets, and mouse based interface which is more towards what we have today, and it is meant for more commercial and heavier work.
The intention is very clear: To cover every area and extend it's domination. Past few years smartphones and tablets had been growing extremely fast, a term "Death of PC" are commonly heard. Actually it is implying The Death of Windows. This was an area Windows left out passed few years.
The term "Death of PC" sounds exaggerated. If we are to remove all Windows product from the world from now on, the world will collapse. It's serious. If we think carefully, all our daily activities are directly and indirectly supported by Windows based PC. If we are to remove all iOS and Android based products from now on, life will still go on as it only affects some of your leisure activities. Worst thing would be those tech fans will cry for a few days, but then you can go purchase other OS (Windows, Blackberry) gadgets to continue with you mobile surfing, gaming, and social networking.
Tablets don't allow you to do much things except for leisure and communication purpose, but Wintel based laptops are lack of the Cool factor of tablets. So here's how current market works: most consumers still own a Wintel based laptops as usual (as they still need to work, and can't live without it), and yet purchase another tablet for leisure purpose and to look COOL.
If I am a consumer, this might make me think twice before I spend money on another Android or iOS tablet. For necessity, I will still own a Windows product - it could be a hybrid product: A x86 processor tablet with laptop performance attached to separate keyboard and supports mouse. It can be used as a laptop or tablet depends on my need. Do I still have good reason to buy another tablet, since I already have one? Even if I justify myself to buy another extra tablet which is smaller and less powerful for leisure purpose, I can still chose between Win8, iOS and Android. So far, SURFACE and Samsung Win8 tablet look Cool.
So here might be the vision of Msft:
1. First, defend the fortress of PC - tell the world that PC (Wintel) will not die. It will evolve to something even stronger. I want all Wintel to remain powerful or even better, and now friendly for touch screen application
2. Launch a massive counter attack to tablet market. Now I am Cool enough for smaller tablet, while having the functions and versatility of wintel laptop
3. Then penetrate into Smartphones area. If number 2 starts to work well, now Cooler Windows 8 phone might look attractive, as it has good interoperability with my Wintel tablets or laptop.
DANG DANG DANG.
Sensitive and greedy investors already started to figure out the share price of MSFT in relation to the new Windows 8.
FACTS:
For so many years until now: Revenue, profit, EPS, DPS had been an almost perfect growth pattern.
Operating margin remain solid and high.
Balance Sheet: Cash and Debt level excellently managed at very healthy level
For punters, the price pattern had been very boring. Company growth and profitability remain positive. At current price of $30, this translates into PE of 15, which means it is not at super bargain price. But again, we have to consider the EPS growth in future. Dividend yield is 3+%, looks OK but not impressive for Malaysia and Singapore standard.
You may refer to Morningstar.com to retrieve further details:
http://quote.morningstar.com/stock/s.aspx?t=MSFT®ion=USA&culture=en-us
Windows 8 is expected to launch in end October. After so many rounds of Windows upgrade, this seems to the most revolutionary and probably most ambitious.
It's a platform to cater for all hardware from smart phones, tablets, laptop PCs...everything.
In short, it covers ARM based and x86 based products. It comes with a Windows RT version
In one single platform, it can support touch and mouse control.
It can switch between 2 interface: a touched based interface more suitable for smaller gadgets like smartphones and tablets, and mouse based interface which is more towards what we have today, and it is meant for more commercial and heavier work.
The intention is very clear: To cover every area and extend it's domination. Past few years smartphones and tablets had been growing extremely fast, a term "Death of PC" are commonly heard. Actually it is implying The Death of Windows. This was an area Windows left out passed few years.
The term "Death of PC" sounds exaggerated. If we are to remove all Windows product from the world from now on, the world will collapse. It's serious. If we think carefully, all our daily activities are directly and indirectly supported by Windows based PC. If we are to remove all iOS and Android based products from now on, life will still go on as it only affects some of your leisure activities. Worst thing would be those tech fans will cry for a few days, but then you can go purchase other OS (Windows, Blackberry) gadgets to continue with you mobile surfing, gaming, and social networking.
Tablets don't allow you to do much things except for leisure and communication purpose, but Wintel based laptops are lack of the Cool factor of tablets. So here's how current market works: most consumers still own a Wintel based laptops as usual (as they still need to work, and can't live without it), and yet purchase another tablet for leisure purpose and to look COOL.
If I am a consumer, this might make me think twice before I spend money on another Android or iOS tablet. For necessity, I will still own a Windows product - it could be a hybrid product: A x86 processor tablet with laptop performance attached to separate keyboard and supports mouse. It can be used as a laptop or tablet depends on my need. Do I still have good reason to buy another tablet, since I already have one? Even if I justify myself to buy another extra tablet which is smaller and less powerful for leisure purpose, I can still chose between Win8, iOS and Android. So far, SURFACE and Samsung Win8 tablet look Cool.
So here might be the vision of Msft:
1. First, defend the fortress of PC - tell the world that PC (Wintel) will not die. It will evolve to something even stronger. I want all Wintel to remain powerful or even better, and now friendly for touch screen application
2. Launch a massive counter attack to tablet market. Now I am Cool enough for smaller tablet, while having the functions and versatility of wintel laptop
3. Then penetrate into Smartphones area. If number 2 starts to work well, now Cooler Windows 8 phone might look attractive, as it has good interoperability with my Wintel tablets or laptop.
DANG DANG DANG.
Sensitive and greedy investors already started to figure out the share price of MSFT in relation to the new Windows 8.
FACTS:
For so many years until now: Revenue, profit, EPS, DPS had been an almost perfect growth pattern.
Operating margin remain solid and high.
Balance Sheet: Cash and Debt level excellently managed at very healthy level
For punters, the price pattern had been very boring. Company growth and profitability remain positive. At current price of $30, this translates into PE of 15, which means it is not at super bargain price. But again, we have to consider the EPS growth in future. Dividend yield is 3+%, looks OK but not impressive for Malaysia and Singapore standard.
You may refer to Morningstar.com to retrieve further details:
http://quote.morningstar.com/stock/s.aspx?t=MSFT®ion=USA&culture=en-us
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