• Six categories of stocks
  1. Slow growers – Large and ageing companies expected to grow slightly faster than gross national product. Started off once as fast growers but mature now. Paid generous and regular dividends, stock price fluctuate within bounded range at slow pace. Sell when fundamentals deteriorate.
  1. Mid growers (Stalwarts) – Faster than slow growers, 10-12% annual growth in earnings. Buy for 30-50% profit and sell to repeat process. Sell when p/e gets too high.
  1. Fast growers – New enterprises that grow at 20-25% annually. Higher risks associated with these stocks. High fluctuations in price. Sell when p/e gets too high, check growth story and sales.
  2. Cyclicals – Company whose sales and profits rise and fall in regular if not completely predictable fashion. Expand, contract pattern. Coming out of recession and into a vigorous economy, cyclicals flourish, their stock price tends to rise much faster than prices of stalwarts. Timing is everything in cyclicals, only buy at the right cycle. Sell at end of cycle e.g. oil price goes up, inventory build up.
  3. Turnarounds – These are potential fatalities, waiting to spring a rebound. Sell after it turn around.
  4. Asset plays – These are company that’s sitting on something valuable that everyone has overlooked. It could be cash or real estate. It takes time to unlock the value, investors need to be patient.

Avoid:

• Avoid buying hottest stock in the hottest industry, it can fly and fall just as quickly. Profit could very quickly turn in to losses if you aren’t clever at selling hot stocks.
• Beware the next something stocks e.g. “Next Apple”, “Next netflix…” the list goes on…

Take note of:

• Earnings – earnings and stock price go hand in hand and in tandem. If one deviate from another, they will always return to normalization. Use PE ratio of compnay to determine valuation.
• Assets – Liquidate all your assets and minus off your debts – long term and short term and this is your book value.
• Understand the P/E of the market to determine the valuation of the market
• Understand future earnings of the company by:
  • Reduce costs
  • Raise price
  • Expand into new market
  • Sell more of its product in old market
  • Dispose of losing operation

Numbers to note:

• If growth rate/PE by 1.5 is okay, >2 is better. Growth rate is defined by (growth of annual earnings compared to previous year earnings + dividend yield). I wondered how many such companies exist nowadays.
• E.g. $38 share with $20 in net cash/share. $38-$20=$18. If company is expected to earn $6/share, PE = 3 instead of 6.33.
• Watch out for debt: Equity to debt: 75/25%
• Buying stock based on book value need to understand what exactly was counted as part of book values.
• A 20% growth rate company A selling at 20 PE is always better than 10% growth rate company B selling at 10 PE.
• High profit margin for long-term stock. Low profit margin more advantageous in a successful turnaround.