In investment the most important is looking at stocks as a business. And it doesn’t really matter whether the ST Index is up one day and down the next day. Don’t be side-track by the daily market fluctuation.
If we find a business with good economic characteristics at a fair price in relation to its underlying intrinsic value, just gradually accumulate its shares as core stock.
We must be able or willingness to overlook what the Fed does and invest based on the relationship between a business’s price and its underlying value is what individual investors like us can learn from as well.
The Fed’s actions have the capacity to TEMPORARILY INFLATE or DEFLATE asset prices, particularly stock market prices. But that doesn’t necessarily change the underlying long-term value of businesses quoted in the exchanges around the world and in Singapore.
Ultimately, what drives a company’s stock price over the long-term would be the amount of CASH FLOW and PROFITS it can make for its shareholders by selling its products or services, not what the Federal Reserve can do.
A recent article in the Business Times caught my eye. It was about penny share fever in the Singapore stock market.
The writer pointed out that on one particular trading day some 9.4 billion shares worth around S$1.7 billion were traded. That would suggest the average price of each share bought and sold was just 18 Singapore cents.
That got me thinking.
I know it when I see it
Although there is no formal definition for a penny stock, I suspect most of us know what one would look like if we saw one. Or as US judge Potter Stewart once remarked about pornography: "I know it when I see it".
Penny shares, as the name suggests, are shares whose price is just a handful of cents rather than several dollars. In Singapore, the average price of a share is around 40 cents.
In the Straits Times Index, the median price for Singapore's blue chips is roughly $4.50. In the midcaps it is about $1.30. But down in the small caps they tend to be around $0.20. And amongst the Catalist stocks, it is just $0.10.
Many people mistakenly believe that just because a penny share price is already so low, it cannot possibly go any lower. Consequently, they feel that the only way for these shares must be up.
How low can it go?
In reality, though, the reverse might be true. Any share can fall to zero, which means that you could lose all your money. In fact, penny shares are probably more likely to do this because they are smaller companies and they also tend to also be in riskier sectors.
Thing is, just because the share price is so low does not automatically give it more potential to rise. Instead, it is how the company will perform that determines this.
It is also worth bearing in mind that the cost of dealing can be proportionately higher too. This is because the spread, which is the difference between the buy and sell price of penny shares, can be significantly wider than for larger companies.
Penny shares, it should be noted, are also more prone to rumours because of their small market valuation. Their price can move more easily because only a handful of shares might be traded.
But it is important to remember that rumours are just that - rumours. So, if you own penny shares, you may find that their market value may gyrate for no reason other than because someone might be spreading tales about the company.
Boring blue chips
Whenever I think of penny shares, I am reminded of a story about Bob, a private investor.
Bob, you see, felt that blue chips were a little boring. In his mind, he could not see the attraction of buying a stock that only returned around 8% a year. (Oh dear. If only Bob knew that such an investment could double in value in around nine years.)
So, Bob decided he would chance his hand on a stock tip he got wind of at a local coffee shop. It seems that a little birdie told him that a particular penny stock was set to explode into life.
So at the first available opportunity, Bob phoned his broker to place an order for one lot. As it turned out, the shares rose sharply. So, a delighted Bob phoned his broker to buy more.
It could be you
His broker advised him against it. But Bob was adamant. And sure enough the shares rose even further. Every time the shares rose, Bob would be on the phone straight away to buy even more. And every time that he did, his broker would warn him against it.
Then one day, the shares fell.
So, Bob quickly called his broker to sell his holdings. However, his broker was unable to find any buyers.
A perplexed Bob asked his broker why he couldn't find a buyer for his shares. After all, there must have been plenty of buyers out there since the shares had risen so sharply previously.
"Not really", his broker replied. Then came the shocker. "You see, Bob, the only person out there buying the penny shares was you".
Foolish best
David Kuo
Director, Motley Fool Singapore
(THAT IS HOW BB DRAW PENNY PLAYERS INTO THE GAMES)
We've seen compounding referred to as "the most powerful force in the universe," "the royal road to riches," and "the greatest mathematical discovery in human history."
Albert Einstein called compounding the eighth wonder of the world.
Compounding is a simple investment strategy in which you put your money in an investment that pays a return. At the end of the year, you take your return and reinvest it with your original stake. Your dividend, or interest, earns a return, too, building a bigger dividend - or higher interest payments - the next year.
A snowball is the best analogy for compounding. As you roll the ball through the snow, the surface area gets bigger. The more surface area on the snowball, the more snow it picks up. The snowball gains mass slowly at first... but pretty soon, it's so large you can't move it.
Compounding is slow and boring at first. But gradually, the dividends grow, and your reinvestments increase. One day, you wake up to find your account producing thousands of dollars per year in dividends and your wealth a giant snowball.
THEY started out as penny stocks, one small coin being stacked atop another, but at such a head-turning pace that in just months, many were dollar pieces balanced on towers of pennies.
Yesterday, those towers came crashing down. Singapore Exchange undertook one of its most wide-ranging interventions in recent memory by querying six companies and swiftly suspending three of them within an hour.
The market opened yesterday with the six queried stocks - Asiasons Capital, Blumont Group, Innopac Holdings, ISDN Holdings, ISR Capital and LionGold Corp - falling sharply. They had a combined market capitalisation of $10.3 billion as at Thursday's close; by the end of yesterday, their market value had more than halved to $4.7 billion.
Just before SGX suspended their stocks, the market cap of Asiasons, Blumont and LionGold had fallen to $4.1 billion from $9.3 billion the night before.
One trader said: "These penny stocks, with no fundamentals to speak of, are easily manipulated with various kinds of announcements. Some of them, just a few cents several months ago, are now trading at such lofty prices.
A story about Smart-bie, a private investor.
Smart-bie felt that blue chips or REITs were a little boring. In his mind, he could not see the attraction of buying a stock that only returned around 7% a year. (Oh dear. If only Smart-bie knew that such an investment could double in value in around ten years.)
So, Smart-bie decided he would chance his hand on a stock tip he got wind off, which he believe to be hot tips. It seems he was told tips that a particular stock was set to explode into life.
So at the first available opportunity, Smart-bie phoned his broker to place an order for one lot. As it turned out, the shares rose sharply. So, a delighted Smart-bie phoned his broker to buy more.
His broker advised him against it. But Smart-bie was adamant. And sure enough the shares rose even further. Every time the shares rose, Smart-bie would be on the phone straight away to buy even more. And every time that he did, his broker would warn him against it.
So, Smart-bie quickly called his broker to sell his holdings. However, his broker was unable to find any buyers. His stock price fall sharply just like down the cliff as what had happen to the 3 stocks. (LionGold, Asianions Capital & Blumont & worst still trading was eventually suspended)
For Smart-bie and those speculators, holding the 3 suspended counters, the biggest question is when the SGX will allow trading to be resumed on them again. For them, it is going to be a nail-biting weekend.
When applied to investing, it means that we should focus on what really matters, namely the economics of the businesses that we own shares in. If a company is doing all the right things to grow its business profitably, then the share price should reflect that over time. It may not happen immediately but in time it should.
Unfortunately, many of us tend to use share prices as a barometer to gauge our success or failure when investing. But as Buffett pointed out about his own investments: "We don't need a daily quote on our 100% position in See's or H.H. Brown to validate our well-being. Why then, should we need a quote on our 7% interest in Coke?"
Successful investing is about having absolute confidence in the companies that we choose to be a part-owner of. But to do so, we have to understand how the business functions and, more importantly, how it goes about making money.
If you can do those two things well, then you are unlikely to fall into the trap of letting fear of the unknown (of which there are many) deter you from investing, even when anxiety about macroeconomic events is at its highest.
On the other hand if the company left many questions unanswer, then that is a difference story. Market are no fool. Example below:
1) Company have RMB502 million cash yet even cannot secure RMB100 million loan from bank.
2) Company on paper profitable and profit margin better than most companies.
3) Company with cashflow of RMB502 million yet desperate for loan of RMB100 million and paying way above market rate interest.
4) Company able to generate cashflow positive yearly, last year by more than RMB200 million yet so desperate for cash? (Profit more than double the amount it desperately want to loan - RMB100 million)
5) Any companies able to generate such impressive cashflow yearly maybe trading at over PE 20x. Why such great performance yet trading only at PE 1.5x
6) Company NAV of 44 cts and half of it is in cash, yet share price trading down to 9.5 cts from high of over 40 cts.
