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September 2008



An email to my Classmates (Part II)

September 22, 2008 – Comments (0)


a. in the short term, things are very volatile, yesterday (this morning, SG
time), the oil spiked a record $16 jump in a day while the USD sank and the Dow
Jones Industrial Index swoon, all this because people have doubts about
Paulson's plans can pass through congress. This is quite the opposite of last
Thursday and Fridays's trading session where everybody was euphoric about the
banking rescue plan.

How should we think and react to the market conditions ? I am talking strictly
in terms of the stock market, not the overall macro picture and the global
impact, I will defer this to our upcoming macroeconomics class, I am sure the
good professor has a theory or two, judging by the multitude of accolades he has
received recently.

b. In my last article, I compared the current market conditions against
historical valuations, this of course, is predicated on the concept of
"Reversion to the Mean", meaning that markets like a pendulum will swing between
excessive fear and excessive greed. And this overreaction will continue to occur
around an invisible line known as the Intrinsic Value, and in this case, of the

c. Over 60 years ago, the granddaddy of value investing, BennyG ("Benjamin
Graham", but I think BennyG sounds more hip), wrote about the concept of Mr.
Market. Mr. Market is a buyer and seller of goods and everyday he will knock on
your door to sell or to buy your wares. On certain days, he is melancholic and
will sell you at a cheap price, and on certain days, he is very bubbly and wants
to buy your goods at a high price. Every day he will knock on your door. Of
course, you can either ignore him or you can indulge him. And unlike a real
person at the door, Mr. Market won't feel offended if you do not buy or sell
anything from him. BenngG's analogy is quite apt to the current conditions, we
do not have to react to it, but we can take advantage of it if we choose to.

d. A whole chunk of investors out there are macro traders, so folks like Jim
Rogers, George Soros and even the late old Sir John Templeton are famous for
their overall big bets, they play gold, currency, industry sectors, and themes
(housing, emerging markets, oil etc). Even with access to technology and access
to good databases, I find that this is stacked against the smaller retail
investor (ie. me). I am sure if I lose vast quantity of tuition fees to this
macro market, I will still not gain an edge against the pros out there. A case
in point: What causes the price of oil to go up or down ? 1 year ago it was
because of China and BRIC growth, 6 months ago, it was the dollar the went down
which caused the oil price to go up (since oil is traded in USD), 3 months ago
it was because of Oil Speculators price gouging the market, 1 month ago it went
down because the US, as the largest consumer of oil is going into recession. And
then how do you explain yesterday (this morning) where price spiked to $122
(from $91 last week) with the news of maybe the Paulson's 800billion rescure
package not going well ?

e. Rather than look at the macro picture and then try to spot themes in a
top-down approach, it is perhaps a more interesting and rewarding to go via a
bottom up approach to pick individual stocks. The Bottoms Up approach involves
actually doing homework like studying the financial statements, looking at
business model and then making an educated guess on the intrinsic value (not the
share price!). And then once you have identified a basket of good companies to
buy, we wait. Remember our previous class, where Karen revealed that she had
joined Ecolabs recently, I was very animated, because ECL is one of the companies
which on my watch-list basket of companies.

f. So to take advantage of Mr. Market, I will compare my list of great companies
that I want to buy against the current market price, and buy during time of
great market distress. Will the price continue to fall or is it possible to time
the bottom ? Well, most of my buys do fall, and some will fall harder because of
deteriorating business metrics (call it a permanent impairment), however, most
of my stocks will rise over time because I bough them cheap.

( Got to go now, it's 8.23am and the boss is lurking around)



An email to my classmates

September 18, 2008 – Comments (2)

hi fellow skool mates,

no doubt the recent market swoon has unnerved alot of people. I bet pretty soon people are going to start stocking up on rice and canned soup.

"How Low can it go ?" is a common refrain.

Remember Prof Perry's class, where he gave all of us a quiz on where the stock chart of price movements is going ? And in the end he concluded that following price movement is futile. I agree with that assessment that price is not the same as value.

John Burr Williams wrote in 1938 that the value of a company is the sum of all he future cash flows generated by the company discounted back to the present.

In efficient markets, value (as defined by Williams)= stock price. However  am a believer of behavioural finance, ie. people overreact in times of excessive fear or greed, and currently, we are experiencing excessive fear, people are dumping stocks.

So in inefficient markets, value is not equals to stock price. And if you aggregate the value of the top 1000 companies (in terms of DCF) and compare it against the stock price, we should be able to see an interesting picture emerge. This is what has done. is a ratings company, they rate whether a company is cheap to buy (5 stars) or expensive to buy (1 star). Their valuation method is strictly by free cash flow generating capability of the companies that it evaluates.  [more]

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