edited CONCLUSION
The main purpose of investing is to make money. To ensure we do not
lose money, as Warren's first rule, we need to adopt and apply
systematic and sound approach in acquiring, accumulating stocks with
low risk but high return. Does it sounds too good to be true? In fact,
it is not. This is because it makes a clear distinction of acquiring
stock with value much lower than its intrinsic value. That is buying
at good bargain stock due to its temporary mis-pricing arising from
temporary irrational market forces and it happens even in the most
efficient market where the price sensitive information is made
available on a timely manner.
Contrary to common belief of high risk with high return, value
investing is commonly mis-understood and often overlooked. This
profound investment approach of high return with almost low investment
due to a well crafted approach at the point of acquiring stocks. This
strategy requires discipline, courage and patience. It will reward
these investors with these attributes handsomely. You don't need to be
a rocket scientist to figure out how it works and it is a learn-able
skill, as it guided by sound fundamental principles and best
practices.
Entry and exit point
With this investing framework, you are able to make money at the point
of acquiring, and not at the disposal of your investment. Why I do say
so? This is mainly because we acquire stocks at bargain values with
safety margin for any human judgmental error, bias and prejudice. In
fact, it has always built in most of the significant risks. In other
words, we are acquiring the stocks that are based on their basic
fundamental values scientifically deriving from both their past and
leading indicators. This process will ensure that we do the correct
things right from the beginning, first time, every time and all the
times. This is mainly to ensure that you do not lose money in the
first deal, every deal and all the deals.
Discipline and duplication is the key to success. By repeating this
process until it becomes our habit is the key to the investing game.
You don’t drain your resources in watching the stock market daily and
hourly.
The future is hard to predict. What we need to do is to make reference
to the past trend to ascertain the key management's behavior, value
and integrity by assessing both the company's qualitative and
quantitative factors objectively to ascertain its value and shaping
our investing skills. By enhancing our quality thinking, a better
informed investment decision can be made. With effective and efficient
implementation of this sound framework, the success will be within our
grasps. This holistic approach will not only ensure the return to be
relatively higher than its associated risk.
Thereafter the investor should realize his profit once its stock price
has hit its intrinsic value and above. Hence, the real profit is made
at the exit point. Cautions must be made that if its stock price moves
downward, the investor must extend its holding time further. Be
mindful that we are not predicting the market trend to make money, but
making money by acquiring bargain stocks.
Cut through the noise
To be able to enjoy such returns, we need to stay focus on our
investing purpose and not let our emotions direct and dictate your
investment decisions. Saying is easy, but it is not easy to put into
practice, that's the reason why it demands discipline to succeed. More
often than not, many investors have been influenced by the market
noise from the surrounding environment and tend to chase after hot
stocks. Never let this noise distract your investing game plan.
Always remember your investing purpose of making money at the point of
investing.
Strong Free Cash Flow
Cash is king. Use free cash flow as a supplementary to its cash flow
statement. As we are fully aware that earnings can be easier to
manipulate compared to cash, our next challenge is to ascertain how
much cash is purely generated from its core operational activity and
how much of it is reinvested to sustain its business growth and
profitability. Again, it stresses on the reinvestment of quality
assets to sustain its core competencies. As such, extra caution must
be focused on acquisition and merger transaction with loan, leaving
its FCF intact, so as to ensure that it is purely for sustaining its
core competencies, and not for other purposes.
Sustainable Business Growth
One of the surest ways to maintain business growth is through
reinvestment of its profit. How much the company should pay out its
earnings as dividends and retains its profit to reinvest in its
business is very much dependent on its return on equity (ROE). It
makes more sense for the company to reinvest its earnings if its ROE
is greater than the market's required rate of return. However, if its
investment opportunities are limited, then it would better to
distribute its earnings rather than reinvest it.
Effective leverage strategy
To obtain a much higher rate of return from its investment, it should
employ collaborative efforts with its strategic partners as
demonstrated by Wal-mart, where it houses its collaborators under one
roof and using its infrastructures to reap the benefits of its huge
size and scale. By doing so, it can further strengthen and enhance the
efficiency of its team members and pass the saving backs to its other
stakeholders.
Company Growth Rates
Since the retention rate plus the dividend payout ratio, which is the
fraction of company's earnings paid out as dividends, equal to 1, if
no bonus share is paid out from the earnings is as follows:-
Earnings Retention Rate = 1 – Dividend Payout Ratio
By illustration, assume that a company distributes 60% of its earnings
as dividends, then its retention rate is 40% and its return on
stockholders’ equity is projected to be 20%, then its
Present Value of Growth for the coming year should be 8% ( 0.4 x 0.2 = 8%).
Mitigating downside risks
In today's fast changing business environment, the strategic risks
become more crucial. This is because these associated risks are much
more vulnerable than before. Eg. Blockbuster and Kodak were wiped off
from the market place. We have, by all intents and purposes to build
in this potential downside by picking those companies’ with sound
insight quality with convincing and compelling financial and
operational ratios. With insightful and invaluable information through
quality research, the downside will be minimized and mitigated.
With this framework and holistic approach, the probability of sound
return is very much higher than its risk. Therefore, the probability
of higher return in relatively low risk framework will favor those who
opted for these quality investing characteristics.
