Unconventional Approach To Make Profits

Much has been said in this forum on the merits and demerits of investing in Eratat. Eratat does have some concerns that instill fear in some people but it also gives hope to others of getting a potential doubling of their investment value. IS ERATAT THEN A STOCK WORTH INVESTING OR ONE BEST TO BE AVOIDED?

Although the concerns are valid, one’s focus on fear and all the possible danger of investing in the stock would just lead one to a dead end. The fear could well turn out to be unfounded [see www.nextinsight.net/index.php/forum/3-sg...y-Story?limitstart=0 ].

The positive points on Eratat are also equally valid & warrant examination. A good solution in such a scenario, I believe, is to focus on how we could possibly capitalise on the positive aspects of the stock and how to reduce whatever potential risks to a lower level. Weigh the potential risks against the potential rewards.

I am vested in Eratat because I consider it to be a good undervalued stock at around 14 cts level with low downside risk and high potential capital gain (at least 100% if it reaches its 2008 IPO price of 30 cts & at PE of 5x only). It is an S-chip that is still surviving, profitable, paying dividends and without bad debts for the last few years. However, I have no intention to increase my holding in this stock under current market condition as it is NOT A GOOD GROWTH STOCK (this is a fact!). The share price of a good growth stock can be expected to double within 12 months (average of 3 to 4 quarters) while an undervalued stock like Eratat could also do that but likely to be on a longer time-span or in a hot bull market (basing on stocks behaviour over the past decades).


GOOD RISK MANAGEMENT: To me, good risk management is a very important aspect of successful investment. I am well aware of the negative aspects of Eratat but I am not the least bit troubled by them for reasons as follows:
1. Stock Selection: I made it a point to go for what I would consider good GROWTH or UNDERVALUED stocks. They are not easy to come by but it is worth waiting and searching for because one good stock is definitely worth more than 10 average ones – [Just like a saying “One good filial son/daughter is better than ten average ones”]. A recent example of such a stock is KREUZ, which I have also shared in this forum in November 2012.

2. Risk-Reward: I prefer stocks considered to have low downside risks but HIGH potential capital gain. [i.e. Low Risk High Reward – this is a lopsided winning odd that is contrary to the conventional thinking that high gains are always accompanied by high risks]. This unconventional approach is like playing a game in an unleveled field where the opponent’s goal area is very much larger and wider than that on one’s side – how can one not win in such a scenario? For risk-averse investors, the time for them to quit the game is when the opponent’s goal area starts to get smaller and one’s own goal area gets larger – [For he who wins and runs away shall live to win another day!]

3. Build Core Holdings: Having points 1 & 2 in place, the odds of winning are then clearly in my favour and I can afford to take calculated risk to build core holdings, with larger position for superior stocks. Core holdings magnify the gains (reverse is also true). For a 100-lot holding, every one-cent rise translates into a gain of $1,000. The risk of losses from core holdings not performing is normally confined to the early “gestation period”; and any stock that fails to perform can readily be divested. Hence, it is important to select good growth stocks, as a good set of quarterly results would normally add pressure to an upward re-rating of its stock price. Once a stock performs, it would usually be a case of cutting profits (instead of losses) should any premature exit is warranted.

4. Doubling Strategy: Many stocks can double in value in a prolong market up trend and many forummers here have already mastered the art of identifying such stocks. In fact, I am more than happy to exit any core holdings that doubled in value. Although my selection of core holdings is only 80% successful for the past several years, the doubling strategy provides me with a very comfortable error margin to write off completely, if need be, 2 out of every 10 holdings. [In other word, for every 10 core holdings with an investment of $100,000 each, 2 of the holdings can be allowed to go kaput and there would still be significant profit – [(8 x $100,000) profit – (2 x $100,000) loss = $600,000 Nett Profit]. The conventional thinking is that putting too many eggs in one basket is highly risky. However, using an unconventional basket with cushion padding for each egg or other innovative methods can reduce considerably such risk. So long one is prepared to think out-of-the-box, one should be able to find a better solution.

I hope the sharing above could provide helpful ideas to those still looking for a solution to improve their investment performance. I am also a kiasu and kiasi investor like many others. Thus, I need to have an “unleveled playing field” to win the game. Although this is not the best winning approach (many investors have considerably better winning ways), it is still a workable approach to making profits, especially for an average investor like me.

Won't you agree that there is a lot of psychology at play in the market? One can have a rational approach -- in the next minute, when the stock continues to rise, one cannot help but join in the buying especially when the valuation (rational) is still cheap. Look at Sino Grandness -- my friend bought at 50-70 cents last year and wanted to take profit at 90cents-$1.00. The buying momentum got him excited and he instead bought some more at $1.10-1.20.

Hi Observer2,

I have actually been using such an approach for a number of years already. I'll quickly sum my approach just in case I'd missed out anything. I'm sure there are differences but I think the broad idea is similar.

I use FA to determine which small cap stocks I believe have limited downside risk, but strong potential upside risk. Idiosyncratic information help deal with potential risk factors (e.g. is the cash at bank really there? etc). At a broader level, I use certain phenomena to help ensure systematic gain (e.g. S-chips are really out of favor and the sentiment is so bad, can I make more by finding any S-chips that have been discounted in an unwarranted manner?).

After that, I build up a portfolio of small caps, and basically wait for some to run. Given the large upside, I can actually bear with the risk of a few actually going bust (touch wood), if I can capture high returns (e.g. 100%) on others.

Each approach I build is a separate module that attempts to gain systematic gain. E.g. FA to pick good companies. A risk module to determine differences between downside and upside risk (and not treating risk as purely variance), a psychological module to prevent what yeh had mentioned, where people tend to chase the shares up (this module involve overweighting shares I believe in, so that when it runs up, I can limit my urge to buy more to win more.... and can sell at two levels - a fundamental level to take in gains from fair value gains, and a more speculative level where I can keep a number of shares to sell based on speculative run ups... this module fits very well with my FA module and my risk module). It's also developed specifically after understanding my own risk tolerances and strengths/mistakes (e.g. historically, I've been very good at buying low, but always ended up selling too early - this module was developed to addresses these strengths and weaknesses, and have effectively altered my buying/selling patterns while not affecting my risk preference and tolerance - thus I am able to continue to invest in a manner that's very grounded to my nature, but can change actual behavior to profit more).

Sorry I took a bit, I do have a number of other modules which fit into these three modules I'd mentioned. But basically, i think that the first two modules I use is similar to what you had described. It works for me. Have worked for me for a number of years. However, I must state that it works better in certain market types (mainly a rising market type with stronger sentiment). Right now, the effectiveness is reduced given them market conditions. You can still get mileage out of it, but I believe it will be reduced. I'm glad to see someone using a system that is somewhat similar to two of my modules. I hope it works as well for you as it did for me.

In the 2007 run up, I managed to get almost all of my stocks with a minimum of 50% returns at a point of time... showing the effectiveness of this method... and that's with stock churn.

Cheers

Yeh – most people are familiar with Technical Analysis (TA) and Fundamental Analysis (FA). There is a third component – Psychological Analysis (PA) that is seldom discussed but rather useful for investors to know and understand market behavior and market participant’s behavior. What your friend did is nothing unusual as some of my friends are also doing the same thing. Why? It is herd behavior - the fear of missing out on a great opportunity to make money. The emotion of the majority of investors (the general public or the herd) remains the same throughout the decades. This emotion centered on “Fear” and “Greed” in a bull market; and “Hope” and ‘Despair” in a bear market. Such behaviors relate to just a tiny aspect of Psychological Analysis.
Look around you, you will find that at the early stage of a bull market, people are always pessimistic and fearful of buying and losing money. When the market continues to rise, the fear of buying will start to turn into fear of missing out on opportunity to make money. This will later be followed by greed to make a few cents more. The end result is always the herd makes little or no money after the bear market.

Tactician – Glad to know that you have been doing something very similar. I also use FA as well as TA and PA for picking and selling my stocks. As all us have different risk tolerance, we need to work out our individual investment strategy that we are most comfortable with. I wish you a continuing profitable time ahead.

Good discussion, tactician and observer2.

let's all huat... and may the stocks we hold give a good earning results.

What do you guys think of Meghmani Organic SDS?

Avg price traded during 2010/2011 was 25cts until it's biz got into problems. It is now trading at historical bottom at abt 7cts.

It's biz seems to be getting better with 2013 NP improved 5 times over that of 2012.

Downside risk seems low but need to monitor exchange rate. Its biz performance should get better due to lower interest [india shd have 2-3 more cut in rate], lower cost of raw materials, higher export and 2 new plants to be completed for pdn soon.

Any thot?