Making Profitable Investments

WHAT DOES YOUR CHECK-LIST LOOK LIKE?

profitable investment decisions.

WE CAN CONTROL in our research and analysis.
http://www.eurosharelab.com/newsletter-archive/293-what-does-your-check-list-look-

http://myinvestingnotes.blogspot.com/2010/03/what-does-your-check-list-look-like.htm

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the following check-list:

Yes
Mark 'x' in the appropriate column
Operating cash flow higher than earnings per share
Free Cash Flow/Share higher than dividends paid
Debt to equity below 35%
Debt less than book value
LT debt less than 2 times working capital
Pre-tax margins higher than 15%
FCF Margin higher than 10%
Current asset ratio greater than 1.5
Quick ratio greater than 1
Growth in EPS
Management shareholding (>10%)
Altman Z Score > 3
Substantial Dilution?
Flow ratio (Good < 1.25, Bad >3)
Management incentives?
Are the salaries too high?
Bargaining power of suppliers?
Is there heavy insider buying?
Is there heavy insider selling?
Net share buybacks?
Is it a low risk business?
Is there high uncertainty?
Is it in my circle of competence?
Is it a good business?
allocators, integrity)
Is the stock screaming cheap?
How capital intensive is the business?
High Profitability
High Return on Capital
Enormous moat
Profitable reinvestment
Future growth
Strong cash flow
with the cash?
Where is Free Cash Flow invested?
a) Share Buybacks
b) Dividends
c) Reinvested
ROE ( > 15%)
ROCE
Incremental BV growth

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Making Profitable Investments

Add the number of 'x' in each column

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Making Profitable Investments

No

Remarks

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Making Profitable Investments

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To Sell or to Hold
B. WHY ARE YOU CONSIDERING A SALE?

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To Sell or to Hold

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To Sell or to Hold

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To Sell or to Hold

B. WHY ARE YOU CONSIDERING A SALE?

http://myinvestingnotes.blogspot.com/2008/12/investment-philosophy-strategy-and.html
http://myinvestingnotes.blogspot.com/2009/01/anxiety-of-selling.html

REASONS/CONSIDERATIONS
Not so good reasons
To "lock in a profit."
WARNING: Trading results in higher taxes and commissions, and lower returns.
Concentrate on cutting losses instead of "protecting your gains"
Stock has reached predetermined limit.
WARNING: Prices don't move in linear, consistent fashion, but in spurts.
Remember that price growth follows profits, eventually.
Determine if a stock is languishing for a reason.
Company is subject of temporary bad news.
WARNING: Avoid knee-jerk reactions, though market may respond negatively.
Re-evaluate to determine possible LONG-TERM IMPACT of news.
Company has missed earnings estimates by small amount.
WARNING: Focus on long term, not short-term results.
Re-evaluate to determine if there is a FUNDAMENTAL SHIFT underway at the company.
An analyst has downgraded the stock.
WARNING: Analysts have short-term, not long-term objectives.
May have lowered rating to protect realized gains, NOT DUE TO LONG-TERM POTENTIAL.

Good reasons
To raise cash
Consider it an opportunity to PRUNE UNDERPERFORMERS.
If you don't have any underperformers, then consider tax impact of selling.
To raise cash for club withdrawal.
Consider it an opportunity to PRUNE UNDERPERFORMERS.
Don't sell highly appreciated stock, transfer shares to departing member instead.
The stock is possibly overvalued.
Relative Value using forward PE is greater than 150%.
Stock in SELL ZONE on SSG.
Projected total return LESS THAN long-term returns on bonds.
To take a capital loss.
Sell stocks at loss in taxable accounts to offset any gains.
Part of YEAR-END PORTFOLIO REVIEW.
After offsetting losses, can use $3,000 of capital gains to offset ordinary income.
Evaluate for repurchase after 30 days (to avoid wash sale rule).
To upgrade quality or expected return of portfolio.

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To Sell or to Hold
Determine round trip cost, amount to invest in new stock after taxes and commissions.
Use Toolkit Challenger or Stock Analyst Cost of Switching tool to evaluate.
Use NAIC Challenge Tree to evaluate.
Because fundamentals have changed.
See how to evaluate changing fundamentals below.

EVALUATING CHANGING FUNDAMENTALS

REASONS/CONSIDERATIONS

EPS or revenue growth is slowing or falling.

Company may be entering a new stage of slower growth or stagnation.
SSG.
Quarterly pre-tax profits are falling.
Use PERT graph to evaluate PTP
Three quarters of consecutive declining PTP are a danger sign.
Five consecutive declining quarters are usually a definitive sign to sell.
Cash flow is diverging from net income.
If free cash flow is falling while net income is stable or rising, company may be "PROPPING UP" profits.
Other fundamentals are deteriorating.
Accounts receivable rising faster than sales.
Inventories rising faster than sales.
There has been an uncertain change of management.
Dynamic company leader retires, replacement has questionable qualifications.
Senior executives leave en masse.
Those responsible for past success are no longer with the company.
Company faces direct or indirect competition.
Competitors threaten to affect the company's long-term prosperity.
Companies with very high profit margins are often susceptible to increased, cutthroat competition.
Company faces uncertain product cycle.
Company is too dependent on single product.
No new products in pipeline (such as pharmaceutical companies).
Company has uncontrolled raw material costs.
Can harm profit margins.
If company doesn't hedge, they may have no option but to pay higher prices for necessary materials.
Company is the victim of fraud or "accounting irregularities."
If the books are being cooked, investors will be last to know.
No way for investors to know if management is lying, or auditors are covering up.
GET OUT FAST, these are not quality companies.
Company's debt rating has been lowered.

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To Sell or to Hold
Can often be an EARLY WARNING sign of greater problems in the future.

FINAL CONSIDERATIONS
Don't hesitate to sell in retirement accounts where taxes aren't an issue.
Don't automatically buy because a stock falls in price; re-evaluate as if NEW.
If you won't purchase additional shares of a fallen stock, why would you continue to hold it?
Don't "wait to get your money back" from the stock - it doesn't know you own it.
Don't be paralyzed by uncertainty.
Don't be an ostrich with your head in the sand - FACE UP TO THE PROBLEM.
Remember NAIC's Rule of Five.
Use Challenge Tree to CONTINUALLY UPGRADE your portfolio.
THINK "REPLACE," NOT "REMOVE."

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To Sell or to Hold

COMPANY A COMPANY B

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To Sell or to Hold

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To Sell or to Hold

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Hold vs Sell Decision

20 QUESTIONS TO FOCUS THE HOLD VERSUS SELL DECISION
SELLING STRATEGY.
(not incidentally) sometimes FREE UP LAZY FUNDS FOR RE-USE.
will help the investor back onto the path should he stray from logic.

STOCK
AT THE TIME OF PURCHASE
1. Date stock bought?
2. Price paid? (For reference, what was the Market Index on that date?
3. Price target?
numbers 1,2,3,and 4.)
5. Specific expectation of what would make the stock go up?

REVIEWING THE POSITION AT A LATER DATE

when stock was bought?
If yes, did the stock reach the objective in number 3?
8. What is the price now? (Compare with number 2 and number 3; not number 6.)
discussed enthusiastically now and be purchased today?
10. Due to number 9, what price is expected now? (Compare to number 3.)
annualised percent return from numbers 8, 10 and 11?
story or concept in number 5 or number 9 proves false?
10 and number 12 with current price.)
number 2.) Is the relative performance of the stock surprising?
purchase?
removed as the stock weakened?

ANALYSING WHETHER TO HOLD OR SELL NOW

17. Why, specifically, should the stock be held now?
price?
now?
20. Does the answer to number 17 square with answers to numbers 3, 18 and 19?

INSTRUCTIONS ON HOW TO USE THE CHECKLIST ABOVE

learning.
photocopy this answer grid for future use.
responses to numbers 3,4, and 5.
enhanced by the rigor of responding to this process.
have not gone as planned. If a holding is not working, it needs to be fixed.
to numbers 3, 4 and 5 and numbers 9, 10 and 11, study them again.
executions and make a special effort to avoid falling into this pattern again.
lower prices are forecast by implication.
at the date in number 11.
up the telephone and dial the broker's number.
decision-making skills and sale executions.

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Hold vs Sell Decision

http://myinvestingnotes.blogspot.com/2010/06/20-questions-to-focus-hold-versus-sell.html
and dial the broker's number.
sale executions.

ABC
WRITTEN RESPONSES

WRITTEN RESPONSES

WRITTEN RESPONSES

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At a Glance

At a glance
Company
Date
Share price
Issued shares
Market cap
Beta (Unleveraged)
Operating Margin
Pretax Margin
Return on Assets
Return on Equity
Debt to Assets
Altman Z-Score
Cash & Equivalent

valuation

Company

(Mean)

Est. P/E
P/E
Div. Yld (%)
ROE (%)
P/B

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Sector Median

At a Glance
Example
At a glance
Company
Date
Share price
Issued shares M
Market cap
Beta (Unleveraged)
Operating Margin
Pretax Margin
Return on Assets
Return on Equity
Debt to Assets
Altman Z-Score
Cash & Equivalent

Genting Malaysia
03/05/10
RM 2.90
5906
RM 17128
0.84
39.27%
23.18%
6.76%
7.63%
0.12
11.11
RM 3104

valuation

Company
Genting Malaysia

Est. P/E
P/E
Div. Yld (%)
ROE (%)
P/B

(Mean)
13.65
12.51
2.41
7.63
2.06

Sector Median
46.26
69.96
1.5
-52.51
4.1

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21.27
21.59
0.22
2.73
1.46

What Money means to you

STEP 1
below.
possible

http://myinvestingnotes.blogspot.com/2010/01/what-money-means-to-you-answer-10.html
money.
This will also help set the necessary guidelines for your investment portfolio.

TIME HORIZON
1 How long can you afford to leave your nest egg untouched so that it can grow?
Less than 5 years
5 to 10 years
More than 10 years

SCORE
1
2
3

2 How far are you from retirement?

Already retired
1 to 5 years
6 to 9 years
10 to 15 years
More than 15 years

0
1
2
3
4

3 What will your cash needs be over the next 5 years?

Insignificant
Significant, with large cash withdrawals
Significant, but with enough inflows to cover expenses

0
1
2

4 new house?
Yes, with a huge impact on my finances
Yes, with a manageable impact on my finances
No, I have relative financial freedom.

1
2
3

5 dividends to cover your living expenses?

Yes, very dependent
Yes, fairly dependent
No, not really

1
2
3

RISK TOLERANCE
6 You have just received a large sum of money. You invest it in something:
safe that will earn a moderate income
with a higher income even if it means more risk
that will provide higher growth even if you have to take a higher risk

1
2
3

7 What would your reaction be if your investments suddenly lost 20% of their value?
I would be very upset and my life would be a shambles
If I still earned the same monthly income, it would not matter so much
Provided it was only for the short term, I would still be OK

1
2
3

8 lose your job. You

cancel your trip
go as planned, but do not spend as much on extras
go all out and spend all your money in a spectacular fashion

1
2
3

INVESTMENT OBJECTIVES

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What Money means to you

9 What is your primary financial goal?
To keep my capital intact and maintain my lifestyle
To save for a comfortable retirement
To create more wealth and improve my lifestyle
10 What are your main priorities at the moment?
To enjoy what I have and take pleasure from simple things
a rainy day
Building up my career/lifestyle, having fun and growing rich.

TOTAL OF YOUR SCORE

STEP 2
Less than 10:

Your total score tells you more about yourself

You cannot afford to make mistakes
regular income and stable capital.
You are probably retired or close to retirement.
You have a conservative risk profile and do not want to take unnecessary risks.

and 20:

You are carefully weighing up your options

also need income.
For you, capital growth and income generation are probably important.
dividends.
returns, but do not want major fluctuations in your financial affairs.

More than 20: You want to grow bigger and better

see your investments grow into something substantial in the longer term.
A monthly income from your investments is not crucial.
You do not need extra risk if there is a chance of a good reward later on.

STEP 3

What does all this mean?

There are no right or wrong answers in the quiz.
you at this stage in your life.
investment objectives.
but you might want to see significant growth.
with your time horizon and risk tolerance level.
take and your preferred returns.
higher the potential return, and the lower the risk, the lower the expected return.

Cash flow is another important factor

Keep this in mind when you assess your personal situation.
balancing act between the two.
advice programme.

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1
2
3

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2
3

What Money means to you

SCORE

(Example)
SCORE

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What Money means to you

25

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