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Trudging down the path towards the damp, dark alley of the wet market of Ampang, I watched as my mum, strapped with her shopping bag, slung over her weary shoulders, negotiated with the chicken seller for a discount. Mild-mannered but persistent, she breathlessly exchanged words of discount and compromise till the chicken seller relented and agreed to a lower one.
“Never buy something at full price”, that’s her mantra when it comes to buying things.
And I have applied that in my investment principles. I buy great companies at full price, or sometimes even higher. And I buy good and average companies at a discount. Good and average companies will be the subject of this article as they make up the bulk of my investments.
I believe in the buying low and selling high investment principle. And here’s how I have done it these 4 years for good and average companies.
Let’s Explore the Philosophy Behind this Principle
Growing up, I noticed particular patterns in my mother’s buying decisions. She does her research quite extensively. There are always multiple vendors in the market. And she weighs her buying choices according to these criteria:
- Quality: It’s not a matter of just looking. She touches it, sometimes yanking on it, and most importantly, she asks who, where and how is it made (or produced). She tries them out from different vendors to judge for herself.
- Price: Here’s where she makes the distinction between what she really wants to buy for full price (because it’s so good that it’s worth it) and what she needs for sustenance at discounted prices. It’s hard to find something truly worth it to buy since they are rare. And it’s easier to find things that are needed but easier to find.
- The vendor: She talks and interacts. And she makes her decision based on how comfortable she is and the relationship that they form. Of course, they both know it’s a business transaction at its core. But it is the conversation after the deal has been done that determines whether she’s coming back again. Topics on personal life, how the kids are doing, and how their day has been going, ensures that there is a form of personal relationship even outside of the business.
How do these all come together for the buy low, sell high investment principle? To me, I learned from my mum that it’s always best to get necessities for a discount.
Necessities are important for your daily life but not until to the degree that you have to pay an arm and a leg for it. I view investments for good and average companies the same way. I need to invest in them, but I don’t have to pay a hefty price.
There are great, good, average and bad companies in my book. And I have limited time in a day. I can research the hell out of good and average companies.
But if the rewards from them are mediocre, I am better off waiting for opportunities when they trade at cheap prices. In the meantime, I spend more time researching companies that I know are great and worth the money. Time is also an investment here.
What about the vendor? For investments, this would be the company management. Now, I don’t get to talk to the CEO or any of the big shots of the company.
However, I get to listen to their interviews and presentations during quarterly results. And I evaluate their personalities and characters. I am looking for two characteristics, 1) honesty and 2) straightforward.
The Science: The Simple Analysis that Everyone Can Do
There are just 3 simple steps that I always do to find companies that I think are cheap to buy.
Search for Companies Trading at Price-to-Earnings Ratio Below their Historical Valuations.
If you subscribe to a broker, you can use their filters to just set the price-to-earnings ratio to below 10 times. That is my first step normally. Or if you have no such tools on your brokers (I know, I have seen some of their platforms, they are horrible), you can use the stock screener from investing.com.
From the criteria, click ‘Ratios’ and ‘P/E ratio (TTM)’. Then pull the right slider to 10, and the left slider to 0. Make sure that it’s between 0 to 10. 10 times here is arbitrary. You can set it to higher but just keep in mind that most stocks in the market trade at an average of 12 times to 17 times.
Once you get a list of companies, the next move will filter the companies even more by their fundamentals.
Filter by Market Capitalization and Dividends.
Here are two things that I always look for. Big companies. And regular dividends.
Big companies can be filtered by clicking on ‘Fundamental’ and then ‘Market Cap’. I normally set the minimum market cap to 500 million as I view that as big enough. But you can change this minimum to your liking. The important point here is that it needs to be a big company. The reason why I want it is because It’s easier to invest in companies that already have a track record. And normally, these companies are big.
And a track record normally comes with a regular stream of dividends. Dividends are the money that you get from an investment. Think of it like the 4.5% return that you get from your fixed deposit. Every quarter or year, companies will declare dividends from their profits to you (if you bought their shares). As long as you hold them, you will be given dividends.
On the stock screener, click ‘Dividend’ and then ‘Dividend Yield 5 Year Avg’. Set the minimum to 5%. I prefer the 5-year average because I am looking for a company that regularly distributes dividends to its shareholders. Because even if the share price doesn’t go up, at least I am holding a stock that gives me regular and steady returns.
Examine 5-year Financial Performance, Outlook and Analyst Target Price (If there Is)
There are two aspects that I survey when I look at 5-year financial performance. Revenue and profits. It is straightforward. Go to any stock market websites like WSJ, Yahoo Finance, and Investing.com and click on ‘Financials’, and ‘Income Statement’.
- Revenue has been rising in the past 5 years. Preferably 5% to 10% growth every year.
- Same with profits. Preferably 10% to 15% growth every year.
Generally, as long as both trends are rising, the company is fine.
After this, go read the company’s annual report. Normally, they have a section called ‘Chairman’s statement’ or ‘Outlook’. They will normally provide their views on how they think their company and the industry they are in will perform. Just focus on answering the question of ‘Will the company rise next, be steady, or fall next year?”
Better yet, if analysts are covering the company, just read their reports. You can find them at Bursa Market Place. Click on the ‘search’ icon and type in the company name. Then, click on ‘Research’, where you will get all the analyst reports on the company. They will detail their views on how the company will perform.
Furthermore, if you click on ‘Analyst Consensus’, you will be able to see the average target price of all the analysts. If the target price is higher than the current share price, I normally take that as a sign that there are potential gains to be made by investing in the company.
The Art: Buying the Products, And Taking a Look at the Company
You might have heard the saying. Investing is part skill, part luck. And this is where investing is an art also. There are just a lot of things numbers and science that can’t tell you.
Why Feel is Important
The feel is important. And the first thing I do is to go buy the product the company is selling. I will use it and determine whether it’s good.
Like my mum, she researches and uses the things that she bought from the market. And that will tell her whether she will buy it again. Whether a company is a good investment, lies in whether its customers will keep buying its products.
If I can’t buy the products (the company could be providing IT services to other companies), I will take a look at their website. I will then ask myself or friends in the same industry whether the service provides value to its clients.
There was a time when I wanted to invest in a construction company. I drove to the highway and observed for myself how many cars were using it. When I saw that the roads were mostly jammed, I was quite convinced that a lot of cars use it. But do you see the point here? It is an art and it’s subjective. Jam as a sign that the company is doing well? Haha, I never would have thought either.
How to Use That Feel
Here’s how I use that feel. I felt good about the products that I used, and the projects that I was seeing from the company. I ask myself, will this company be still around 5 to 10 years from now? Things change. And they change fast. If I see myself still buying by then, I think it’s a good company.
The In-Between: Technical Analysis Could Help You to Buy Low
Part science, part art. Technical analysis deserves that saying. In simple terms, it is looking at the share price chart and determining just from there, whether the share price will go up or down or is cheap to buy.
Is it cheap?
I have a simple principle for this. I check the highs and lows of share price in the following periods one-year, 6-months, 3-months, and 1-month. If the current share price is consistently nearer to the lows of these periods, I can reasonably conclude that it is cheap to buy.
There are of course more complicated technical indicators to talk about. I am only going to talk about one here. The Relative Strength Index (RSI). You don’t have to know what it is. You just have to know how to use it. Anything above 50 means that it is overbought (meaning many people are buying it so the share price is probably high). Anything below 30 means that it is oversold (meaning that many people are selling it so the share price is probably low). I look for stocks with RSI below 30 to find cheap opportunities.
Will it Go Up?
This is a good question. In technical analysis, there are MANY strategies and techniques that people use. But I am going to talk about only two simple ones that I have found that worked the best for me.
The first one is just simply drawing lines. I am not kidding. I draw a straight horizontal line from the last time the share price traded at its lowest. And I draw another one from when the share price was at its highest. I then see whether the current share price is trading at near the low line. If it is, this will be a good opportunity to buy. Hopefully, the share price will trend upwards to the high line.
The second one involves a bit of looking at history. There will be periods when the share price drops and then rises again. This is called turnaround. I normally just look at the chart and determine when did it happen. And if I see more than 3 times it happened in the past week. Chances are it’s going to happen again. So, I spot trends where the price has consistently fallen. And when it suddenly goes up by a bit, I invest in it. Hopefully, the share price will turn around and go up.
I use Technical Analysis Mainly to Find an Opportunity to Enter
This point is important here. I am not a supporter of trading to make money in the short term. I am a proponent of using technical analysis to only find a good opportunity to buy the stock at a cheap price. In the world of trading (if you want to do it), 95% of traders lose money and even that 5% don’t make as much.
Do you know why? There are just so many big investors out there that could influence prices. And they use AI algorithms to trade and invest. Chances are you will probably get beat by them in the market every time you try to trade short-term.
I know. Cause I have tried it for 6 months. I made losses in the first 3 months, broke even in the 4th month and made money in the next 2 months. Even then, the money that I made was not worth it. I was better off spending my time researching the company for its long-term prospects.
Conclusion
Buying low and selling high might be suitable for you. Investments are hard enough that you spend a lot of time doing it. Let this article help you on researching and getting started on your investments. Don’t be afraid of doing it. Trust the process and everything will fall into place.
Go Research and Invest!
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