19 January 2009

Recommend reading: Common Stock and Uncommon Profit

This is one of the best investment book in the world.

It can be found in most MPH bookstore in Malaysia. I bought it and finished reading it last year, and it change my investment thought and strategy.

The book is about how achieve great investment result by buying into some great companies' stocks and hold them for long period. A company that worth holding for long period must be one that will keep growing for decades. So, we can say that this book is about how to pick a "long-term growth stock".

In the books, Fisher list out some attributes that may concern an investor when he is trying search for a good company.

Fifteen points tolook for in a common stock

  1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
  2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
  3. How effective are the company’s research and development efforts in relation to its size?
  4. Does the company have an above-average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve profit margins?
  7. Does the company have outstanding labor and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth to its management?
  10. How good are the company’s cost analysis and accounting control?
  11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
  12. Does the company have a short-rage or long-range outlook in regard to profits?
  13. In the foreseeable future will the growth of the company require sufficient equity financing to that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
  14. Does the management talk freely to investors about it affairs when things are going well but “clam up” when troubles and disappointments occur?
  15. Does the company have a management of unquestionable integrity?

x x x

What so special about these points is, most of them are not directly reflected in the financial statements of a company.

Instead of judging a company from financial view, Fisher pay more attention on "human factors". In other words, the growth company that we should look for is the one with great management, great teams and great culture. These are the factors that makes the company's growth sustained years after years.

If you could identify some companies that meet most of these 15 points, and buy their stocks with sufficient low price, then you'll probably enjoy some great returns in the next twenty or thirty years, by doing almost nothing -- just holding them.

11 January 2009

Daily KLCI is affected by US-market, So What?


Most people in local market had heard a statement similar to this:

"The daily move of KL market is affected by US. If US market rise during the previous night then most probably KLCI will rise today."

People that believe in it may watch the US market throughout the night, and hope to get some idea to trade in the following day.

Well, if you'd ever tried to use the statement to form a day-trade strategy, you'll probably quite upset with it. While it seems to be correct from statistical view, you just can't make money from it.


Before we continue, let's look at some historical data. The following chart shows daily relationship between local market and US market. Each point indicate the change of KLCI on a certain day, and the change of S&P500 index the night before. (I only plot about 100 data in this chart, so that it won't be too populated.)

KL-US relation

From the chart, we can see that there's a weak relationship between local & US market (correlation coeficient ~ 0.45). So, we can say that the above statement is correct -- if US market rise, our market most probably will follow too.

Then why we can't make a profit out of it?

We can see the reason if we divide the change of KLCI in each day into two components:

  1. The difference between opening price and the previous close.
  2. the following move in that day. (closing price - opening price)

The sum of these two components equals the daily change of KLCI as comparing to previous close. We examine them one by one. First, we check the the relationship of the first component (opening price - previous close) with US market:

KL-US relation 2

As you see, there is a strong relationship between them. So, when US market rise in a particular night, our market most probably will "open high" in the next morning. If Us market drop, KLCI will "open low". Our market's opening price is strongly affected by US.

What happen after the market open?

Here come the second component. The following chart relate the moves of KLCI within a day to the S&P500 index change in previous night. It's very clear that after the market open, the following move within the day is totally unrelated to US market.

KL-US relation 3


When US market rise during the night, it will immediately reflect in our market with a higher opening price in the morning. After opening, the move of our market is totally independent. So, you can never make money by simply watching US market throughout the night unless you can trade KLCI at a favorable price before it open.

The statement quoted in the beginning of this article -- just like other statements made by most economist -- it is true, but useless !

02 January 2009

New Year, New Blog.

In this new year, I have decided to start a new blog. It's talk about my investment thought, just like this one, but it's in chinese.

Anybody who can read chinese, your visits are welcomed: KLSE 投资札记.


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