This is a note from Jakarta Wealth Expo 2012 Seminar, 13 october 2012. I attended the 2nd day and only have time to see 2 of the speakers. One of them is Mr. Adam Khoo from Singapore. Here’s some of his simple ideas for picking good stocks and how to trade them effectively.
1. Identify a very good business
It should match these 6 criteria :
a. Consistent profit
The company should have consistent sales, net-profit and cash flow, altogether, for at least 5 year. All must goes together. For example, even if net-profit is up, profit may be decreasing, because the company is just doing downsizing/cutting cost, and this is not a good sign.
Watch the company’s competitors. Competitors stops a company to gain profit. Because of the existence of strong competitors, companies cut prices, etc. What also allows a company to have a big profit is also the lack of competitors.
b. Sustainable and competitive
Warren buffet’s guide for a good company :
– Have advantages from competitors
A good company have a brand that allows it to sell like a monopoly. Some company match the criteria are McDonalds, Coca Cola, indofood, etc. They’re also perform good in recession time. This is possible because the BRAND allows it.
c. Good growth
Better chance for the stock to goes up if the company have good growth.
d. Low Debt
Long term debt must not exceed 4 times of net profit.
Long Term Debt < 4x net profit
e. ROE > 15 %
90% of all The stock in the market doesn’t fit with this criteria.
f. Management is holding or buying its own stocks.
They’re called “insiders“. Insiders buying capitaland.
2. Buy when a good company is undervalued && on an uptrend.
Buying a good company is not enough. Only buy in an uptrend!
Use 50 and 150 days moving average line to identify the switch of uptrend/downtrend.
Undervalue : means that the stock price goes below the intrinsic value of the company.
Uptrend : its when the blue line(50 days avg) crosses the red line(150 days avg).
We should buy a stock in good prices. Good price = when the stock prices goes below the company’s intrinsic value. The intrinsic value is based on the company’s tangible assets. Adam didn’t explain the formula, and he tell us that he will show his “intrinsic-value-calculator” when we come to his (paid) course.
3. Sell when the stock price goes downtrend.
You should sell when it start goes to downtrend. He gave an example of BP Oil, although its a good company, when BP oil spill accident happen, BP’s stock goes down from 60 to 28. The interesting thing is that, the other oil company stocks goes down in simpathy (?), even they have nothing to do with the oil spill. That was a good time to buy the other oil company stocks.
To sum it up the tips are :
– Buy good company stocks
– That have good intrinsic value
– When it’s goes uptrend.
Overall, I think the knowledge he introduce is the same knowledge from the books. But he explain with a good style and summarize the most important point only. It helps makes me more confident in trading (again). Maybe thats the different of reading books or websites and attending a seminar.