Wednesday, February 14, 2018

The Ultimate Scorecard Criteria In "Words"

For readers who have been reading too much about Fundamental Scorecard website on my blog, such as the IN member below, I have to remind you that this article is again on Fundamental Scorecard website.

Screenshot from IN

However, for this post, I will explain in detail about the methodology of The Ultimate Scorecard – one of the scorecard database on the Fundamental Scorecard website. This will be useful to those who do not understand the criteria within the scorecard or are not familiar with the numbers.

Having created the Value StockScorecard – the very 1st version – in March 2015, I realize I have yet to write in words about my scorecard methodology.

Before I start, let me repeat that The Ultimate Scorecard is created based on value investing concepts and contrarian investing methods.

So here are the thoughts that created The Ultimate Scorecard:

1. Cash Is King! You Cannot Deny It.

In the recent market downturn, did you wish that you should have more cash on hand?

This is the same for the companies. During a crisis, companies with CASH can acquire others, give dividend, do share buy-back and grow while its competitors can only tighten their belts.

Furthermore, companies with CASH can even try to ask their suppliers for a bigger discount when they make upfront payment to their suppliers. In this way, their inventory cost will also become lower which will potentially lead to a higher net profit in future. 

Companies that are able to produce FREE CASH FLOW on a regular basis will also tend to benefit. With predictable cashflow, the companies will be able to make the future decisions earlier.

2. Gearing Is Bad. Period.

If you pay your bills on time, you will not need to worry about payment if your cash suddenly dries up.

During a crisis, companies with LOW GEARING (low trade payables or debts) will not need to worry about finding CASH to pay its suppliers or creditors, while companies with high gearing may need to dig deeper to source for additional cash to make the necessary payments.

This was explicitly illustrated during the recent oil and gas crisis where companies (Swissco, Swiber, Ezra, Ezion, etc) with high gearing went into judicial management, while those with lower gearing survived the downturn and came out stronger.

3. Dividend Are Great. But Not Too Much!

I like companies that give out DIVIDEND because they helped to keep your mind focused! This is especially true when you are a value investor and have to wait very long, sometimes years, for the value of the counter to be realized.

At times when you want to “give up” on a counter, DIVIDEND will act as a comforter to keep you focus on your initial decision on why you purchased that company.

Nevertheless, it is important that companies should not give out all its net profit as dividend. They should still keep some cash to support its growth and operations!

4. Companies Have To Make Profit. Hopefully In Cash!

Although I do not really look at net profit, but I still believe a company have to be able to generate a profit. If it is not possible, why make the effort to continue to do business?

In addition, all of the profit should thrive to be CASH EARNED. Because there are possibilities of non-cash item, such as revaluation of investment properties, reported within net profit.

Thus, if the net profit is not able to convert fully to cash, it is just like diluted sugar cane – slightly sweet, and able to quench your thirst, but just not nice enough for you to buy another cup.

5. Management Meeting Its KPI!

Since you bought into the company, you will want to make sure its management, whom are being paid extraordinary salary, are doing a good job. But how do you gauge them?

The simplest way is RETURN ON EQUITY. Their KPI should be judged by the amount of net profit they make.

6. You own Part of The Company.

This is something I am learning as well.

When you buy a share, you should view it as you own part of the company. In addition, you should only own the best out of the best. So as retail investors, we should thrive to buy GREAT COMPANIES AT FAIR PRICES!

Concentrate your efforts because your funds are limited. No point looking at any cheap Tom, Dick or Harry, because there will always be Tom, Dick and Harry around. But there is only 1 unique “You”.

After reading the thoughts behind The Ultimate Scorecard, you will realize that the scorecard has a focus on Cash. But you may still wonder how will this Ultimate Scorecard help me in selecting a company to invest in?

Quantitatively, The Ultimate Scorecard's 15 criteria can be breakdown according to:

The 1st 5 Criteria are focused on Balance Sheet.
Next 3 Criteria are focused on Dividend.
Next 4 Criteria are focused on Free Cash Flow.
Next 2 Criteria are focused on Revenue and Earnings.
Final Criteria is focused on Management Capability.

Therefore, in the event a company passed The Ultimate Scorecard with a score of at least 8 points, the company must be performing fundamentally well (or undervalued) in at least 2 categories.

This also meant that a company that passed the Ultimate Scorecard must have some form of margin of safety. In the event of a market downturn, the margin of safety will be able to buffer the fall in the share price for that company, minimizing the drop in its share price.

In addition, if you purchase a company based on fundamentally sound principles, it will also recover back faster than other companies.

Notwithstanding the above, you maybe still thinking, "Will this be enough?"

The Ultimate Scorecard has gone through simple backtesting of 20 randomly selected counters over the period of 2015 to 2017. Over the same period of time, STI was a “U” shape.

Generally, the testing has concluded that the Ultimate Scorecard accuracy on determining that a counter is undervalued range from 60% (during a downtrend) to 80% (during an uptrend).

This meant that if The Ultimate Scorecard state that the counter is undervalued, the chance of you making a gain as small as 0.001/making minimal losses are from 60% to 80%.

In my opinion, this only satisfy the quantitative portion of investing. The other 20% to 40% should be analyze from a qualitative approach. This will have to come from an investor's understanding of the business. After all, since you intend to own a part of the business, you must also understand the business.

In Short

I hope this post explain clearly the thoughts and the usefulness of the Ultimate Scorecard. It may not produce a 100% accurate decision. But I personally believe, especially for newbies, that this is a start to learn to invest fundamentally. For the investing veterans, this could become another source of finding undervalued companies.

Once you make a fundamental decision, daily changes in share price should not affect you IF THE FUNDAMENTAL OF THE COMPANY DID NOT CHANGE. Even in a market downturn, you will be less affected if you continued to believe in the fundamentals of the company. 

Before I end, here is a screenshot of a subscriber whom has benefited from using the scorecard since the “olden” days:

If you are interested to sign up on The Ultimate Scorecard, do click here!

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.

Monday, February 12, 2018

More Thoughts From This Market Correction

This is just my thought process and I wanted it to be recorded down.

In addition to what I wrote in the last post, I had a few more thoughts:

1. Every Counter Will Drop in a Market Downturn.

When there is “blood on the ground”, every counter will be on a downtrend. The only difference is drop more or drop less. Cash will become the main call option at that point.

2. Diversify Less.

This is my main problem. I am trying to reduce my counters to have a more concentrated portfolio. I still preferred a portfolio of 15 to 20 counters.

3. Invest in Great Companies at Fair Prices, not Fair Companies at Cheap Prices.

In order to have a more concentrated portfolio, I have to invest only in Great Companies at Fair Prices. This was stated by Warren Buffett and repeated to me by Simple Investor SG. Eventually this will reduce my portfolio from falling too much in a major downturn.

4. Why Should Someone Subscribe To Fundamental Scorecard website during a Major Downturn?

Firstly, it is to give confidence to a subscriber to purchase at that point in time. As the share price of a counter falls, a retail investor’s target price will start to shift. Hitting the purchase button is a burden. 

Friends started asking me at what share price should they purchase Singtel? Then I asked them instead, although there is still a possibility that Singtel could hit below $3 (Just look at ComfortDelGro and M1), but does it matter if you purchase it at $3.3 or $3.37 if you are keeping it for at least the next 2 to 3 years?

At that point, I believe every retail investor will need some help to guide us along and I believe Fundamental Scorecard website is a solution.

If you are interested to know more about The Ultimate Scorecard or Full Analysis, do visit the website for more information and sign up here! 

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.

Friday, February 9, 2018

Steps To Take In A Market Correction

I am not sure how you are feeling about this market correction, but I do feel pretty excited because I felt there will be more opportunities coming and I cannot wait for it.

Nevertheless, I came out with a few thoughts on my own to keep myself in check.

So here I goes:

1. Keep Calm and A Clear Mind

Some people will feel scare, some will feel despair, some, like me, will feel excited. Regardless, I believe we should still try to keep calm and a clear mind. Focus on the necessary information and block out the “noises”.

2. Reduce Your Watchlist and Focus on Your Portfolio

I removed all unnecessary counters in my watchlist. After all, I have been told too many times that my portfolio is too diversified. Thus, just focusing on my portfolio will be using up a lot of my time.

3. Focus on Individual Company and Not The Market

If you focus too much on the market movement, such as STI, you will probably be too affected by the unnecessary “noises”. The first thing that you do should be to re-evaluate each counter in your portfolio and understand if its’ fundamental still stands.

4. Pace Yourself, Funds Are Limited

I know the whole market is dropping. But you cannot buy everything. Furthermore, you do not know how long this correction will last. Pace yourself because you only have limited funds.

5. Buy Strong Fundamental Companies

I don’t think I can emphasize more on this point. If you speculated or do not know anything about the company, I will say good luck to you. At the end of the day, understand why you purchase the company in the first place or why you intend to purchase the company now. At least make sure its balance sheet is strong or at least its business is positive cash-flow generating.

If you really do not know how to find or select fundamental companies, you can always write to me as well as many other experienced people out there.

Finally, I am going to put myself out there and tell you to subscribe to Fundamental Scorecard Website if you still don’t know where to start. I still believe our scorecards will be able to value add to your investing journey.

Good luck!

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.

Saturday, February 3, 2018

Fundamental Scorecard Counters Reaction to Last Friday's Market Correction

This is just a short post to emphasize on how my Fundamental Scorecard strategy works out.

The global market (STI, Hang Seng Index and DJI) has become all red last Friday (2 February 2018).

For my portfolio, I tend to break them into different segments.

From all the segment shown below, you realized that only the Fundamental Scorecard segment did not have a counter that make losses.

Do note that the change is calculated between the share price on 26 December 2017 and as of 2 February 2018:

If you are interested to know more about The Ultimate Scorecard or Full Analysis, do visit the Fundamental Scorecard website for more information! 

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.

Thursday, February 1, 2018

Explanation For The Bull Market

Recently, my mum has re-emphasized to me that the bull market is the result of DT being the US president.

This is the 3rd time I heard it from her. I had always brush her off as I don’t believe that is the reason.

However, my sudden enlightenment recently made me felt that DT could really be the reason for the current bull market.

The bull market could mainly be due to DT’s protectionism policies that created a better economy for the US citizens. More companies hiring US citizens, more jobs, more pay, more spending, etc…

Furthermore, the current tax rebate policy will allow corporations to report EVEN better earnings report this year. Do note that 2017 is supposed to be a very good year for many companies.

Thus, when the US market reacted positively to DT’s policies, the global markets also reacted the same way.

A booming US economy will also have an effect on HK market. My research of the HK market made me realised that there are still many companies listed in HK (but not necessary operating directly in HK or China) that are manufacturing for the major brands in US. One such example is Win Hanverky Holdings Limited.

This has also led to SEA booming as well due to the large trading relationship that China and HK have with SEA.

Hence, this following chain reaction emerges:

Higher spending in US >> Earnings Growth in US companies >> Manufacturing Firms in HK/China start getting more orders >> Earnings Growth for these Manufacturing Firms >> Suppliers and Supporting companies in SEA get more orders as well >> Leading to earnings growth as well for these firm.

Do note that there could be more interconnecting chain reactions. But the above is just a more direct relationship that I foresee.

With so many companies reporting exceptional earnings growth while the share price remains constant, the PE ratio will become relatively low and be seen as undervalued. In order to bring the counter’s PE ratio back to historical norm, the share price will be pushed up as well.

So KABOOM! The bull started to run really fast and the bull market is became alive!

Do also read the article where I talk about money supply and interest rate too.

But what could cause Bull run to end? The answer could most probably be excessive inflation in US or the eventual higher Interest Rate by Fed.

These actions above will either bring down individual purchasing power (as the final product gets too expensive) or higher saving resulting in lesser spending.

Nevertheless, all of the eventual actions by Fed will be dependent on the strategy of the new chairman - Jerome Powell!

Being retail investors, we can only wait and see what happens.

Anyway if you are interested to know more about The Ultimate Scorecard or Full Analysis, do visit the Fundamental Scorecard website for more information! 

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.