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Post by oldman on Oct 17, 2013 8:54:44 GMT 7
Never catch a falling knife
If a share crashes from $2.40 to 14cts, this share may now look 'cheap' compared to its trading price in the past. If one buys the share at 14cts and it then collapses further to 5cts, his loss is as significant as someone who bought it at its height.
Let me share some numbers to illustrate this point. If you were to have bought at the height of $2.40 and the share collapses to 5cts, your loss is 98%. If you were to have bought at 14cts and it collapses to 5cts, your loss is 64%.
Assuming that in both cases, you invested $10,000 in the stock. Scenario 1 will mean that you have lost $9,800. For Scenario 2, you would have lost $6,400.
Hence, in both cases, the loss is very significant as compared to the initial capital. This is why investors must realise that it is foolish to think that buying a share that has collapsed from $2.40 to 14cts is a safe bet. It is not.
A share is not cheap just because it has collapsed in price. You must still do your due diligence to arrive at a fair value for the shares that you intend to buy. The market is not always right with regards to the share price. The share price is determined by demand and supply and many times, it does not truly reflect its fair intrinsic value.
There is no margin of safety when a share collapses in price. Margin of safety is only applicable when you buy below its fair intrinsic value. The only way to estimate the intrinsic value is to analyse the company using traditional fundamental analysis methods.
On the other hand, if you are a trader, you probably do not care about the fundamentals as you are trading based on the momentum of the stocks. Good traders have a good sense of demand and supply. If they sense heavy selling from fund managers or know of forced selling by the banks, they are unlikely to be buyers.
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Post by gemini on Oct 17, 2013 9:51:51 GMT 7
Oldman, can you show us how you estimate the intrinsic value of a company using traditional fundamental analysis methods?
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Post by oldman on Oct 17, 2013 14:59:54 GMT 7
The estimation of intrinsic value is an art. It is really up to one self to make his own definition of intrinsic value. For me, it is simple. I look at its assets, strip off everything and only consider net cash, local properties and liquid equity shares. Local properties because I am more familiar with the local market. A company having properties in China will not excite me. Liquid equity securities is as good as cash.... but the securities must be blue chips or else, I will discount these as well. Sometimes, I even discount the cash holdings as I only trust our local banking system.  Then, I will look at its businesses and apply a PE of not more than 5 to these. Sometimes, I will discount these as well. You see, a business with a PE of 5 which carries a heavy debt is not the same as a business with a PE of 5 with no debt. Ideally, I like investing in businesses where the market capitalisation is significantly less than its cash holdings and I get the properties and its businesses for free. Lately, I have tweaked my investment strategy a little and don't mind investing in companies that are in the process of transformation.... either with new substantial shareholders that are well respected or a new business line that I am excited over. |
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Post by puregold on Oct 18, 2013 11:49:04 GMT 7
Hi, Oldman
Yes, valuing intrinsic value can be very abstract. Your definition of intrinsic value is to me a "bao jiak" valuation, very stringent.
Besides looking at your definition of intrinsic value, PE< 5, do you look at dividend yield?
Cheers,
puregold
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Post by oldman on Oct 18, 2013 12:07:32 GMT 7
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Post by zuolun on Oct 19, 2014 10:34:00 GMT 7
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Post by oldman on Dec 13, 2014 5:01:06 GMT 7
During a market downturn, it is important to be able to distinguish between a falling knife and a possible multi-bagger stock. Given the fall in oil and commodity prices, I am inclined to classify all related stocks as potential falling knives. As I am equally as bearish on Singapore properties, I too will stay away from such stocks.
But there are stocks that have been beaten badly and are not in any of these related industries. At the end of the day, the stock market is about supply and demand and if lots more investors want to sell, it is likely that the prices will drift southwards. Investors may have to sell these non related stocks to cover for their losses in the related sectors. There may also be forced selling for those who have bought shares with margin and are currently under margin calls.
To bottom fish, one has to read the supply and demand of the stock correctly. I will certainly not be buying any stocks where a major shareholder is liquidating his positions. Yes, it is not easy to read market volume but I feel that all investors (fundamental investors included) must learn this art of deciphering market volume and then making a decision whether the selling volume is temporary or more permanent.
Even more important than that, investors must believe in their own analysis and be willing to risk part of their wealth in what they believe in. To me, there is no point just taking a small position in any stock as this will not increase your net worth. It will be more like an ego trip. I invest to increase my net worth and not just to feel good. To be successful as an investor, you must learn to overcome this fear of putting sufficient meat into your investments... otherwise, your game of investing will always remain, just a game.
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Post by me200 on Dec 13, 2014 10:17:32 GMT 7
IMO, some good fundamental companies revenue and share price are pull down due to external factor like oil price.
It may be a temporally setback to these companies.
Yes, it is falling knife, but I will term as fallen angel.
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Post by kenjifm on Dec 13, 2014 12:18:15 GMT 7
My personal style is to focus on company that is within my circle of competence.
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Post by gemini8 on Dec 14, 2014 12:29:59 GMT 7
"Given the fall in oil and commodity prices, I am inclined to classify all related stocks as potential falling knives."
Hmmm, ... i wonder.
During the 2008/09 crisis, oil price was falling off the cliff too. As would be expected during those periods of "falling knives", analysts were keen to join the herd and forecasting lower and lower prices of oil. As oil price were dipping towards $50/bbl, then $40/bbl, analysts and soothsayers were trying their utmost to outdo one another by being the more bearish. CNOOC, 883 HK, understandably crashed thru the roof, hurdling towards sub-HK$5 during the trough.
Yet, if one had dilligently accumulated during those times, one would have done very well. Not too long ago when oil price was still at about $100/bbl, CNOOC was trading well above $20. And yes, you guessed it, the same herd of analysts were calling for big buys with target prices gunning towards $25-30/sh! With oil price having seen a sharp correction in the past two months, CNOOC is now barely holding at $10.
I am no expert on oil price. Of course, the dynamics of the oil industry also appear to have changed with the advent and success of the shale evolution in recent times.
Still, there must be an intrinsic value for oil. The question is finding out what that breakeven cost is, whether between the different exploration companies or between the traditional oil and shale.
my point is, classifying all oil-related stocks as falling knives seem rather harsh. Just as spot oil could go up, come down, ... who could say it would not go up again? OPEC could decide to cut supply drastically, demand could pick up, a large number of the shale operators could be out of business. While it would be a tad optimistic to believe oil price could return to $100/bbl anytime soon, surely a price of $70/bbl isn't as out of reach as we think? Recall that when oil was $70/bbl, many of the oil majors would still be very profitable.
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Post by zuolun on Dec 14, 2014 12:59:04 GMT 7
Most of the smaller oil & gas and related company share prices had already collapsed beyond recognition due to oil price decline; chartwise, I totally agree with oldman that "Given the fall in oil and commodity prices, I am inclined to classify all related stocks as potential falling knives." "Given the fall in oil and commodity prices, I am inclined to classify all related stocks as potential falling knives." Hmmm, ... i wonder. During the 2008/09 crisis, oil price was falling off the cliff too. As would be expected during those periods of "falling knives", analysts were keen to join the herd and forecasting lower and lower prices of oil. As oil price were dipping towards $50/bbl, then $40/bbl, analysts and soothsayers were trying their utmost to outdo one another by being the more bearish. CNOOC, 883 HK, understandably crashed thru the roof, hurdling towards sub-HK$5 during the trough. Yet, if one had dilligently accumulated during those times, one would have done very well. Not too long ago when oil price was still at about $100/bbl, CNOOC was trading well above $20. And yes, you guessed it, the same herd of analysts were calling for big buys with target prices gunning towards $25-30/sh! With oil price having seen a sharp correction in the past two months, CNOOC is now barely holding at $10. I am no expert on oil price. Of course, the dynamics of the oil industry also appear to have changed with the advent and success of the shale evolution in recent times. Still, there must be an intrinsic value for oil. The question is finding out what that breakeven cost is, whether between the different exploration companies or between the traditional oil and shale. my point is, classifying all oil-related stocks as falling knives seem rather harsh. Just as spot oil could go up, come down, ... who could say it would not go up again? OPEC could decide to cut supply drastically, demand could pick up, a large number of the shale operators could be out of business. While it would be a tad optimistic to believe oil price could return to $100/bbl anytime soon, surely a price of $70/bbl isn't as out of reach as we think? Recall that when oil was $70/bbl, many of the oil majors would still be very profitable. |
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