[Rex217]

Notion 1 (Fundamental pain of holding)


Lets say you've studied and researched and analysed as much as you can about a particular company in doing so believing that the company currently in your watch list is worth at least 0.70cents per share, based on current and past data you used for your analysis, you determine the strength company's economic moat, strength of balance sheet and future growth. The share price now is 0.40 which give you a perceived discount of 40%. You buy into the stock , setting cut loss at 0. 20.
After a few monthers, the company posted good quarterly results , yet despite these achievements the share price continues to drop, you constantly tell yourself , i will hold the stock because the fundamentals haven't change.


Q:Now after more few months, you realised that the share price have already fallen to 19cents, what will you do?


Q: Do you cut loss because you already set a stop loss limit?


Q:Or do you hold on or buy more, because the fundamentals are still there?
Q: How does one set a stop loss in the first place? Based on dropping fundamentals then sell? Wouldn't that be too late already? or set an absolute amount?


Notion 2 (Technical advantage over you)

You have many friends, whose does investments as well. They however are not rooted in value investing and thus are traders affected by short daily movements of the market. One afternoon on msn, there was a commotion among your investment friends. The commotion was about a rumor/ or technical revelation that strongly suggest this particular stock will raise drastically due to this and that. Your friends insist you buy NOW, before you miss the chance to make a profit. You took a quick look at the stock, a quick glance of the company's balance sheet, profit and loss account and cash flow statements, you realise that its a blue chip with an alright earnings history, decent balance sheet and strong cash flow.

Q: Do you straight away jump in and buy, just only having a quick glance?


Q: Will you feel bad and envious , should the share price rise but you didn't buy because you did;t have enough time to study proper the fundamental?

Notion 3 (Keep a constant look out?)


The balance sheet, income statement and cash flow statements are important data capsules for investors to base their determine value on a particular company. But because these capsules of information are only capture at that point in time, anything from management's decisions to economic/industry happenings, will change these accounts and the deemed value will likewise change.

Q: So a true value investor is one that constantly is on a constant look out for any development with regards to the companies that he/she holds?


Q:So what if the company you re holding loses it's fundamentals? Will this fact force you to sell? What happen if next year the fundamentals improve or become even better? This will result in a buy action ? If so, isn't this a result of trading and not value investing?


Notion 4 (The problem with valuation)

Discount cash flow model, the favourite technique used by Buffet and many value investors out there to derive a value of a company. But upon closer look, the discount cash flow requires a lot of guess work, from guessing the company's operation this year to the next, estimating discount rates to forecasting weighted average cost of capital. Other valuation techniques like Dividend discount model to relative ratio comparison, likewise requires one to guess guess and guess.


Q: Since valuation is a big part of value investing, isn't it somewhat similar to Technical analysis? Both school of thought revolves around guessing. Some will argue that one school of thought requires more effort and thinking then the other, then the next question is , who are you to judge which school of thought is better then the other? Based on your perceptive thoughts?


Q: Some investors feel that valuation is pointless and problematic as well..which leaves me even more bewildered and confused, if valuation is pointless, then what for invest on a company in the first place? Since there is no determined value, wouldn't every stock in the exchange seem extremely overvalued too you?


Q: What other valuation techniques is used besides the ones already mentioned?


Notion 5 (How big is BIG?)

Gross and net profit margins, return of equity (ROE), operational cash flow margins discount to intrinsic value, discount to price to book value and even discount to net cash value are some of the ratios used to determine whether the stock price gives the investor this so called margin of safety.
Many analysts will report statements like, company A has a healthily profit margin of 15%, a ROE of 12% which indicates this and that..
Q: What determines a healthy margin? 15%? What if its 14% then its consider not healthy? Who or what factors were used to determine that this number "15%" is deemed as a healthy implication for the company?

Proper answers will be posted on my blog secret-gems.blogspot.com and accredited to you :]

[henry14]

Notion 1 (Fundamental pain of holding)

if the share price drops from 0.40 to 0.19 and the fundamentals haven't changed, the share should be even more of a bargain to you. the last thing that you should do in this situation is sell.

However, if the fundamentals are no longer any good then you should sell. To minimize this, you should look for companies that have consistently good fundamentals over a long period of time. this will usually lead you to companies with solid economic moats, and good management, which will minimize the chances of fundamentals dropping.

Notion 2 (Technical advantage over you)

if you can handle the risk involved in investing in a company which you don't completely understand, go ahead. remember, warren buffett said that "you pay a very high price in the stock market for a cheery consensus"

Notion 3 (Keep a constant look out?)

If a company has a solid economic moat and good management in place, the chances of fundamentals deteriorating is reduced. however, if it does deteriorate, the question to be asked is if this is the result of a one-off external event or the eroding of the company's moat. if the company's moat is being eroded, then sell. the chances of the company regaining its original earnings power is quite slim without its economic moat.

Notion 4 (The problem with valuation)

true, the valuation models used by value investors requires a lot of guess work.

Originally Posted by "Security Analysis" by Benjamin Graham and David Dodd

The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish either that the intrinsic value is adequate - e.g. to protect a bond or to justify a stock purchase - or else that the value is considerably higher or considerably lower than the market price. For such purposes, an indefinite and approximate measure of the intrinsic value may be sufficient. To use a homely simile, it is quite possible by inspection that a woman is old enough to vote without knowing her age, or that a man is heavier than he should be without knowing his exact weight.

but if a stock is under priced, it should be quite obviously under priced, or else, the margin of safety is too small to be considered safe. the margin of safety will ensure that if you were to guess wrongly, you won't take too much of a hit. take for example, the GSI group (NASDAQ:GSIG). it has a market cap of $22.51m, but as of June 2008, it has no long term debt, $183.27m in cash and equivalent and a price/book ratio of 0.06. If not for its accounting issues, this is an example of "knowing that a woman is old enough to vote without knowing her age"

Notion 5 (How big is BIG?)

"How big is big?" is a very subjective question. the only way we can make sense of ratio is if we compare it to similar companies. the bigger the margins are when compared to competitors, the higher the chances that the company has a strong competitive advantage. If a company consistently has a higher profit margin or ROE than its peers, it is probably due to some competitive advantage, and a sign of an economic moat.

i am relatively new to investing, so do correct me if i have said anything wrong.