If you’re here looking for some quick stock tips, look no further.
You won’t find them here.
Instead, what you will find is a process I use to find undervalued, high-quality shares with a strong momentum in their share price in Singapore.
First off, a caveat.
I have no formal training in finance.
So don’t come looking for fancy discounted cash flow models here.
But if you are…
If you:
- Don’t have formal training in finance
- Don’t really know how to figure out the stock market
- Can’t really tell the difference between a balance sheet and income statement in the Annual Report…
It might be time to read more.
Play to your strengths
For years, I tried to learn how to read financial statements, and understand more about the long list of terms that were used in accounting.
I made little headway.
And if you’re a little like me, remember.
There’s no shame in not knowing these.
Instead, it might well be a strength.
Later, I realised there was a skill I could use – my understanding of communication.
Famed investors like Warren Buffet have spoken a lot about investing within one’s circle of competence. And forcing myself to go outside of my circle of competence, to try and understand financial statements, simply wasn’t going to work out in the longer term.
I started reading more into the shareholder’s letter that the Chairman would write to their stakeholders.
And that was when I saw myself begin to outperform the market.
Combining software, and Heartware
Whilst studying in the U.K. between 2016 and 2019, I was introduced to the stock picking tool Stockopedia.
I started using it in August 2018.
It would rank stocks according to three factors, value, quality, and momentum. Based on those factors, it would assign them a score.
I then studied the top-ranked stocks in fields I thought I understood.
I would trawl through lists like that (yes, there was a lot of time in university) to figure out where there were opportunities.
Learning how the management executes
The next step is to read through the Annual Reports, and the Chairman letters. You might find them boring, but I’ve naturally gravitated towards Chairmen that are able to articulate their thinking well through their letters.
It might also leave me biased.
But whenever I read these letters I look out for:
- Integrity
- I like it when chairmen bravely acknowledge the mistakes they have made, or how the group might suffer in the short run.
- For an example, just look at how honest Ian was in his Annual Report for Avarga this year.
- Foresight, insight, and hindsight
- We continue to love companies like Hour Glass because of how well they communicate their convictions. They don’t simply share that business is booming, but why they predicted such a boom.
- Sees shareholders as equal partners
- If you read these annual reports enough, you will broadly see 2 types of annual reports. Those, for whom this is just a regulatory requirement, and don’t bother.
- And then those who see this report as a way to communicate with shareholders about what’s happening.
- I tend to prefer the latter, because this shows that they take shareholders not just as people who are funding their operations, but as people whom they are accountable to.
Recognising hits and misses
The first two I ever chose with the help of Stockopedia were Hour Glass (a luxury watch retailer selling you $1 million dollar watches, which apparently many people buy) and Sino Grandness (a beverage maker based in China).
I can point out the neat and tidy gains from the likes of Hour Glass, which has so far gone up by 211%, but I must also point out the likes of Sino Grandness, which has lost me $3000.
Fortunately I got out $200 of my $3200 investment, before it was eventually suspended from trading.
Therefore the second rule is to recognise when you need to get out.
When you see the drop, you might conveniently tell yourself, it’s going to recover.
It’s okay. Or you might even tell yourself,
I’m a contrarian thinker.
That’s why I will win.
But if you were, then why are you not buying more?
In Lee Freeman Shor’s book, The Art of Execution, he tried to figure out why investors still won, even though they got on average, 49% of their investment decisions, wrong.
He found that there was this precious window that they did something, when the stock fell between 20 to 33%.
They despatched their losers at slightly different predetermined points depending on their own experience and preferences: almost always somewhere between 20% and 33%.
Have a stop-loss limit
This might sound very counterintuitive, especially when you are holding onto something that you believe is very, very good.
But if the stock becomes cheaper, and it remains equally attractive in quality, then why are you not buying more?
The only reason why you should not buy more is if, and only if, you don’t have more money to invest.
Investing is a cycle
As we look into the crystal ball of 2023, it can be difficult to imagine what will happen.
But it’s also important to realise that in investing, there’s no such thing as quick wins.
All that’s needed is patience, and conviction to ride out the cycles.
The basics still apply. Have enough cash in the bank so you aren’t forced to sell good positions.
Continue to hold onto your winning positions.
And clear out those loss-making ones.
That last bit might well be the toughest.