Questions with (Answers) to value investors updated*

Notion 1 (Fundamental pain of holding)
Lets say you've studied and researched and analysed as much as you can about a particular company in doing so believing that the company currently in your watch list is worth at least 0.70cents per share, based on current and past data you used for your analysis, you determine the strength company's economic moat, strength of balance sheet and future growth. The share price now is 0.40 which give you a perceived discount of 40%. You buy into the stock , setting cut loss at 0.20.

After a few monthers, the company posted good quarterly results , yet despite these achievements the share price continues to drop, you constantly tell yourself , i will hold the stock because the fundamentals haven't change?
Q:Now after more few months, you realised that the share price have already fallen to 19cents, what will you do?
Q:Do you cut loss because you already set a stop loss limit?
Q:Or do you hold on or buy more, because the fundamentals are still there?

Q: How does one set a stop loss in the first place? Based on dropping fundamentals then sell? Wouldn't that be too late already? or set an absolute amount?
Notion 2 (Technical advantage over you)

You have many friends, whose does investments as well. They however are not rooted in value investing and thus are traders affected by short daily movements of the market. One afternoon on msn, there was a commotion among your investment friends. The commotion was about a rumor/ or technical revelation that strongly suggest this particular stock will raise drastically due to this and that. Your friends insist you buy NOW, before you miss the chance to make a profit. You took a quick look at the stock, a quick glance of the company's balance sheet, profit and loss account and cash flow statements, you realise that its a blue chip with an alright earnings history, decent balance sheet and strong cash flow.

Q: Do you straight away jump in and buy, just only having a quick glance?

Q: Will you feel bad and envious , should the share price rise but you didn't buy because you did;t have enough time to study proper the fundamental?

Notion 3 (Keep a constant look out?)

The balance sheet, income statement and cash flow statements are important data capsules for investors to base their determine value on a particular company. But because these capsules of information are only capture at that point in time, anything from management's decisions to economic/industry happenings, will change these accounts and the deemed value will likewise change.

Q: So a true value investor is one that constantly is on a constant look out for any development with regards to the companies that he/she holds?
Q:So what if the company you re holding loses it's fundamentals? Will this fact force you to sell? What happen if next year the fundamentals improve or become even better? This will result in a buy action ? If so, isn't this a result of trading and not value investing?

Notion 4 (The problem with valuation)

Discount cash flow model, the favourite technique used by Buffet and many value investors out there to derive a value of a company. But upon closer look, the discount cash flow requires a lot of guess work, from guessing the company's operation this year to the next, estimating discount rates to forecasting weighted average cost of capital. Other valuation techniques like Dividend discount model to relative ratio comparison, likewise requires one to guess guess and guess.
Q: Since valuation is a big part of value investing, isn't it somewhat similar to Technical analysis? Both school of thought revolves around guessing. Some will argue that one school of thought requires more effort and thinking then the other, then the next question is , who are you to judge which school of thought is better then the other? Based on your perceptive thoughts?

Q: Some investors feel that valuation is pointless and problematic as well..which leaves me even more bewildered and confused, if valuation is pointless, then what for invest on a company in the first place? Since there is no determined value, wouldn't every stock in the exchange seem extremely overvalued too you?

Q: What other valuation techniques is used besides the ones already mentioned?
Notion 5 (How big is BIG?)
Gross and net profit margins, return of equity (ROE), operational cash flow margins discount to intrinsic value, discount to price to book value and even discount to net cash value are some of the ratios used to determine whether the stock price gives the investor this so called margin of safety.
Many analysts will report statements like, company A has a healthily profit margin of 15%, a ROE of 12% which indicates this and that..

Q: What determines a healthy margin? 15%? What if its 14% then its consider not healthy? Who or what factors were used to determine that this number "15%" is deemed as a healthy implication for the company?


Some possible answers are (subjective to ones opinons and own thinking if it's ture of false)

My answer to all the questions would be :-

1) to select fundamentally sound companies and use trend lines to determine when to get in and when to get out.

2) you will miss a lot of high flyers but you will also avoid permanent capital impairment due to financially unsound companies being suspended or forever becoming penny stocks.

-by focus1974


1) I will sell if the fundamentals of the company has changed or the stock is overvalued. If the stock price has fallen though the fundamentals are still sound, I will buy more. Patience is the key here.

2) I will not jump in and buy straightaway. You have to decide which plan are you going to follow i.e. investing or trading or a combination of both or buy on news ?How about I rephrase your question in another way. Will you feel lucky and good, should the share price drop but you didn't buy because you didn't study proper the fundamental ?

3) Fundamentals don't change overnight. It is better to sell if the fundamentals have changed. You can't predict what will happen in the future but you can control what you wish to do presently.

4) I don't exactly use a discount rate. I define it as my required rate of return. If I want my counter to return 20% annually, I will use this number as my discount rate and put into the model to see what price should I buy. I would prefer to use P/E personally.

5) You can compare it with the leading companies regarding these financial ratios and numbers.

-by his blog is at


Relating to 1, 4 amd 5

I guess:"But having a margin of safety will make very sure that you will not lose your shirt. Even if you are damn wrong on your intrinsic value, you may lose a bit of money, the stock may tank 20%, below your buying price but quite unlikely to tank 80% below your buying price. And chances are after it tanked it will creep back up again, it will not bankrupt you. That's the strength if you have a huge margin of safety."

-by whatdoing367, his blog


Just trying to answer some of the questions

1) on fundamental grounds, you dont sell because of some stop loss price you set. you sell, if the outlook changes. in fact, you should be buying more because it is cheaper now. or stop buying more if you already have a substantial holding in the same stock. diversification still plays an important part

5) the absolute number in % does not mean anything. you need to compare among companies in the same industry

-by MikeDirnt78 his blog


1)I do not practise the cut loss strategy. however, i will sell if the fundamental that i buy into is beginning to fade. fundamental can mean different things to different ppl. for me, the business landscape of the sector that the company is in must have existing potential (theres alot to be elaborated on this but juz imagine selling steam locomotive today in singapore).the board should be reliable in making their statements. you can check this by referring to previous annual reports and see if they meet the KPI they set. i think it is quite fool proof that if insiders are buying or theres a buyback by the company, its a strong buy signal to average down ur existing holdingsometimes, id just leave a small holding to remind myself of my folly

2)I will not jump in. i do not have sufficient confidence and knowledge to handle speculation. lol without enough knowledge, i am only increasing my risk for speculating the same stock with someone who knows what he is doing. anyway, if someone is very good in trading, i think hes probably earning more trading derivatives with all the leverage

3)Yeah, like what the other poster has said. fundamentals do not change that quickly unless you can somehow change the board of directors and kicks the founder or ceo out overnitebut yeah, if wat u believe in no longer exists... sell

4)I do not think warren buffett's method is very applicable to me. so gotta be selective to pick from this techniquelike u said, sometimes it can get very operational and he absolutely has no prob knowing those infohe buys companies in double digit % holding and able to get 10% P.shares from GM i think!theres no way retail investor like me can do thati prefer phillips fisher style of valuation.

5)Yeah, financial ratios are sector specific, you can use industry avg or leading firms' ratiobut nowadays... its harder to determine nowtoo many companies are in many different sectors, its almost impossible to have a good gauge.unless u really dig for info and find out the revenue/cost distribution and break down into ratios againfor example, msft.... how much of their revenue are in serverware, services, entertainment, database software, desktop software, etc ??if u want to compare it with oracle or EA or ibm.... how can it be accurate when the revenue composition in all these companies are different ?if revenue composition cannot be determined, how is it possible to determine a fair profit margin at corporate level ? lol maybe product level margin is long as we are comparing orange to durian, we are nt goin to get accurate ratios or numbers imopaisae for the unstructural answers lol but i tink the qns are worth answering

-By Jarlaxle

No comments

Powered by Blogger.