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Beginner’s Guide To Investing

Class 14

Putting It Altogether

Finally, give yourself a big pat on the back. You have reach the finale of our “Beginner’s Guide To The Stock Market Course”. Here, we will look into how to put everything you learn into practice. We talked about the three type of value to be found in the stock market. In this lesson, we will look into how we can find possible investments in each of the three segments from discovery of the stock to valuing them.

Finding Asset Value In The Market

The flow for finding Asset Value in the market can start from a simple screen process. As we discussed before in CLASS 12, you can use any of the screeners we highlighted.

  • Screen for stock with low Price to Book Ratio
    • Profitable
    • Giving a dividend

A simple way to find companies with asset value is using a low price to book or price to tangible book ratio. The range to screen for can be your own preference. For example, we can start with searching for companies with a price to book of less than 1.0 time. If you want to be more conservative, you can search for companies that are at least profitable and giving out a dividend as well. In that way, you can cancel out unprofitable companies. You can also add in size criteria such as companies that are above $1.0 billion in market capitalization if you prefer to invest only in larger companies.

  • Short List stocks, Including Hongkong Land

From our screen, we will come up with a long list of possible companies.

  • Check it out in google finance / SGX website
  • Find its annual report, use the 5-Fingers Rules

We can then look through their basic information. In CLASS 12, we talked about the 5-Fingers Rule. This is the time to use them. Basically, we are reading up about the companies and using the 5-Fingers Rule to shortlist them again.

  • Read its business, a few years of annual report
  • Make notes
  • Check its financial statement

Once we have finished with our second level of screening, we might only be left with a few companies. From the list, we can choose the ones that most appeal to us. In our example, we will look deeper into Singapore-listed Hongkong Land Holdings Ltd (SGX:H78). We will open a file on the company, it can be a simple WORD document where we write down all that we know about the company. We find out more information through its annual reports, news, financial statements, market research and even its competitors.

  • Form your story – decide which value it has
  • Translate that story into your valuation assumptions

When we are researching on a company, we are trying to form a story for the company. A simple way to form a story is by thinking about these 6 factors.

  1. Its Business – What is the business about
  2. Addressable Market – How big can the company be
  3. Strength & Opportunities – Where are the potential?
  4. Weakness and Threats – What do we need to look out for?
  5. Reinvestment Ability – Is it a high or low capital expenditure business?
  6. Business Risk Assessment – What is our general assessment of the business risk?

These are the points where we need to think about. Forming a story also allow us to organize our thoughts and think about how to describe this company to others.

  • Adjust the balance sheet
  • Form a valuation
  • Enter Margin of safety

Once we have the story of the company, we can proceed to value it. As it is an asset value-based company, we will be using its balance sheet to value the company. The idea is to adjust its asset to better reflect the current market value of these assets. Then we will be able to come up with a proper valuation of the company based on its assets.

Source: Company Annual Report 2016

You can take a look at our adjustment worksheet HERE.

Finding Current Earnings Power Value In The Market

The flow for finding Current Earnings Power Value in the market can start from a simple screen process. As we discussed before in CLASS 12, you can use any of the screeners we highlighted.

  • Screen for stock with slow growing revenue or earnings Ratio
    • Profitable
    • With a positive cash flow
    • With dividend

We can find stable earnings company by screening for slow growing revenue or earnings in a company. Slow for us might mean less than 10% per year. To be more conservative, we can make sure they are profitable and they are able to generate good strong cash flow from the business and also pays a dividend.

  • Short List stocks, Including Carlsberg Brewery Malaysia Bhd

From our screen, we will come up with a long list of possible companies.

  • Check it out in google finance / SGX / Bursa website
  • Find its annual report, use the 5-Fingers Rules

We can then look through their basic information. In CLASS 12, we talked about the 5-Fingers Rule. This is the time to use them. Basically, we are reading up about the companies and using the 5-Fingers Rule to shortlist them again.

  • Read its business, a few years of annual report
  • Make notes
  • Check its financial statement

Once we have finished with our second level of screening, we might only be left with a few companies. From the list, we can choose the ones that most appeal to us. In our example, we will look deeper into Malaysia-listed Carlsberg Brewery Malaysia Bhd. We will open a file on the company, it can be a simple WORD document where we write down all that we know about the company. We find out more information through its annual reports, news, financial statements, market research and even its competitors.

  • Form your story – decide which value it has
  • Translate that story into your valuation assumptions

When we are researching on a company, we are trying to form a story for the company. A simple way to form a story is by thinking about these 6 factors.

  1. Its Business – What is the business about
  2. Addressable Market – How big can the company be
  3. Strength & Opportunities – Where are the potential?
  4. Weakness and Threats – What do we need to look out for?
  5. Reinvestment Ability – Is it a high or low capital expenditure business?
  6. Business Risk Assessment – What is our general assessment of the business risk?

These are the points where we need to think about. Forming a story also allow us to organize our thoughts and think about how to describe this company to others.

  • Adjust the income statement
  • Form a valuation
  • Enter Margin of safety

Once we have the story of the company, we can proceed to value it. As it is an current earnings value-based company and it is a company with very stable earnings, we can use its adjusted income statement to value it. The idea is to adjust its income statement to better reflect the normalized earnings of the company. Then we will be able to come up with a proper valuation of the company based on its assets.

Source: Company Annual Report 2016

You can take a look at our adjustment worksheet HERE.

Find Growth Value In The Market

The flow for finding Growth Value in the market is slightly different. We can still use a screener to sort out fast growing companies. As we discussed before in CLASS 12, you can use any of the screeners we highlighted.

  • Screen for companies with fast growth
    • Revenue
    • Earnings
  • Or just read news about where are the fast-growing sector

We can find fast growing companies by screening for fast growing revenue or earnings in a company. Fast for us might mean more than 10% per year. To be more conservative, we can make sure they are profitable as well. Apart from that, we can just be more observant on the market and spotting where are the industry and companies that are growing rapidly.

  • Short List stocks, Including Hartalega Holdings Bhd

From our screen and our research, we will come up with a long list of possible companies.

  • Check it out in google finance / SGX / Bursa website
  • Find its annual report, use the 5-Fingers Rules

We can then look through their basic information. In CLASS 12, we talked about the 5-Fingers Rule. This is the time to use them. Basically, we are reading up about the companies and using the 5-Fingers Rule to shortlist them again.

  • Read its business, a few years of annual report
  • Make notes
  • Check its financial statement

Once we have finished with our second level of screening, we might only be left with a few companies. From the list, we can choose the ones that most appeal to us. In our example, we will look deeper into Malaysia-listed Hartalega Holdings Bhd. We will open a file on the company, it can be a simple WORD document where we write down all that we know about the company. We find out more information through its annual reports, news, financial statements, market research and even its competitors.

  • Form your story – decide which value it has
  • Translate that story into your valuation assumptions

When we are researching on a company, we are trying to form a story for the company. A simple way to form a story is by thinking about these 6 factors.

  1. Its Business – What is the business about
  2. Addressable Market – How big can the company be
  3. Strength & Opportunities – Where are the potential?
  4. Weakness and Threats – What do we need to look out for?
  5. Reinvestment Ability – Is it a high or low capital expenditure business?
  6. Business Risk Assessment – What is our general assessment of the business risk?

These are the points where we need to think about. Forming a story also allow us to organize our thoughts and think about how to describe this company to others.

  • Adjust the free cash flow projection
  • Form a valuation
  • Enter Margin of safety

Once we have the story of the company, we can proceed to value it. As it is a growth value-based company and it is a company with very fast growth, we can use its future free cash flow projection to value it. The idea is to adjust and predict its free cash flow in the future to represent what might happen to the company after it reached its growth target. The value of the company would be the collection of free cash flow of the company into the future. Then we will be able to come up with a proper valuation of the company based on its free cash flow.

You can take a look at our adjustment worksheet below.

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