SYWBS Part 4: Putting it all together

I guess this is a good time to illustrate in a bit more details the stuff that we have been talking on the "So you wanna buy shares" series. It was also opportune that we had a great piece of news of Norges' additional investment into the small and mid cap companies on Bursa Malaysia.

Lets recap.

1. Know yourself and what you want to do

The first thing we want to do before we invest is to get our objectives clear. In order to do that we would need to know our investment horizon: long term or short term. This horizon is not dictated by our preference, really, but rather our constraints in terms of capital, the need for cash (liquidity) and our time to monitor the market.

In this 'simulation' I would assume that the investor (Lets' give our hypothetical investor a name: Adam) does not have the time to monitor the shares hourly. At best daily at the end of the day or weekly. He has a day job that occupies his time. He has some money that he sets aside each month from the paycheck for investment purpose, so he does not need regular cash from his investments. Based on that, the investment horizon would be a mid to long term and by that I would mean he would not need to touch his investment money for at least 12 months.

2. Know what you got to do (strategy)

As Adam does not have the time to punt the market, he would need an alternative investing strategy and that would be building a portfolio. In our previous article, we touched on a top down strategy as one of the thought process that we could apply in trying to narrow down our investment focus.

The strategy may be different if Adam has the time to say monitor the market on full time basis. For the time being, let's stick to the top down approach.

3. Do what you got to do

The first thing that Adam would need to do is decide which market would he want to invest in, i.e. the top of the top. Assuming that Adam is only investing in Malaysia, that would mean he has to select which market sector to invest in. Well, the choice is not as easy as it seems. There is activity-based sector (utilities, O&G,  Banking) and there is cross-activity size-based sector (Large Cap, Mid Cap, Small Cap, Fledgling). So where does he start?

Well, there is where the economic outlooks and reports that appear in the newspapers come in handy. And more tellingly, we have indices to help Adam decipher the health and wealth of a particular sector. Bursa Malaysia, via its index series has the following sectors indexed:

• FTSE Bursa Malaysia KLCI - 30 largest companies in FTSE Bursa Malaysia EMAS Index (FBMEMAS) by full market capitalisation.
• FTSE Bursa Malaysia Mid 70 Index - next 70 companies in FBMEMAS.
• FTSE Bursa Malaysia Top 100 Index - sum of constituents in the above two indices.
• FTSE Bursa Malaysia Hijrah Shariah Index - 30 largest Shariah-compliant companies in
• FBMEMAS screened by Yasaar Ltd and the Securities Commission's Shariah Advisory Council
• FTSE Bursa Malaysia Asian Palm Oil Plantation Index (USD and MYR) - companies earning substantial proportion of revenue from palm oil activities in the Asia Pacific Region.
• The FTSE Bursa Malaysia EMAS Index - constituents of the FTSE Bursa Malaysia Top 100 Index and FTSE Bursa Malaysia Small Cap Index.
• FTSE Bursa Malaysia EMAS Industry Indices - 10 Industries, 19 Supersectors and 39 Sectors.
• FTSE Bursa Malaysia Small Cap Index - top 98% of the Bursa Malaysia Main Market excluding FTSE Bursa Malaysia Top 100 Index constituents.
• FTSE Bursa Malaysia EMAS Shariah Index - Shariah-compliant constituents of the FBMEMAS that meet the screening requirements of the SAC.
• FTSE Bursa Malaysia ACE Index - all eligible companies listed on the ACE Market.
• FTSE Bursa Malaysia Palm Oil Plantation Index - based on FBMEMAS and comprising companies earning a substantial proportion of revenue from palm oil activities.

Now Adam has to bear in mind that these indices would differ from one index provider to another and be mindful to read the fact sheet.

Broad based

Lets assume that Adam was interested with the news that Norges is investing more in Mid and Small cap companies in Bursa Malaysia. He would therefore would like to know more about the companies within this categories that would be on the radar of Norges. But since there are hundreds of companies out there, how could Adam narrow down the list further? His monthly investment coffer cannot buy them all.

But could he? Technically, he can. He can buy the exposure into the sector by investing in a collective investment scheme that invest in the same sector and share the same objective (of course after reading the prospectus). He can look up the unit trust funds that invest in small and and mid cap companies and invest there. There are plenty of unit trust agents who could advise him over a cup of coffee and an EPF form in hand :-).

But if that is not his cup of tea, he could also try investing in a close-end fund. Which is also a collective investment scheme but is close-end (as opposed to the open-end unit trust schemes) and is listed and traded on Bursa Malaysia. We have only one example on Bursa Malaysia and that would be icapital.biz Berhad. Based on its annual report, the investment strategy are : "Your Fund invests in undervalued companies which are listed on the Main Market of Bursa Malaysia Securities Berhad (Bursa Securities) and the ACE Market of Bursa Securities". Well, that investment 'universe' is a bit too wide for Adam's Small and Mid cap strategy hence no can do...sigh.

He can try investing in an exchange traded fund ("ETF"), a passive collective investment scheme that tracks an index. An ETF that tracks the (say) FTSE BM Mid 70 index and FTSE BM Small Cap Index would fit in nicely in this strategy. Investing in ETF, would relieve Adam of the headache of punting in the sector.Let's have a look at the ETF's that are available in Bursa Malaysia:

List of ETFs

Equity ETF

• FBMKLCI-ETF (0820EA)
• CIMB FTSE ASEAN 40 MALAYSIA (0822EA)
• CIMB FTSE Xinhua China 25 (0823EA)

Equity ETF (Shariah Compliant)

• MyETF-DJIM25 (0821EA)
• MyETF MSCI Malaysia Islamic Dividend (0824EA)

Fixed Income ETF

• ABFMY1 (0800EA) 

Hmm... no ETF on Small and Mid Cap indices... so ETF is also out of the question on this strategy. It looked like all the broad based options are not really there, so Adam have no choice but to try to look at the individual stocks and building his own portfolio.

Narrowing it down

In order to narrow it down, Adam would need to have to know the relevant stocks that would be on the radar of the fund manager and other investors. Where could he find the clues?

The first clue would be from the index constituents. If Adam were to look at the FTSE website, he would stumble upon (I choose this phrase for a reason) the fact sheet and reports on the indices we mentioned earlier. Unfortunately the index provider does not release the list of all the index constituents unless you pay them a lot of money. FTSE however did give out this information to the public in the June 2013 report on the indices (all information here are sourced from the FTSE website). 

FMB 70 index had 70 companies listed in it. The top ten (by weight) is as follows:

• Gamuda
• IJM
• Dialog Group
• Malaysia Airports
• Alliance Financial Group
• AirAsia
• Bumi Armada
• IOI Properties Group
• Lafarge Malaysia
• YTL Power International

FMB Small companies index has 167 companies in it. The top ten is as follows:

• Star Publications Malaysia
• KNM Group
• MPHB Capital
• TA Enterprise
• Cb Industrial
• Muhibbah Engine
• Sumatec Resources
• Perdana Petroleum
• Scomi Energy Services
• Kian Joo Can Factory

If you would want to have a look at the report (which contains the best and worse performing of the sectors), please drop your email address in the comment box and I will try to email the pdf copy of the report to you soon.

The second source of clues are from the research reports and recommendations of research houses. For example, the following which appeared in the Star Newspaper recently where it delivered a report by UOBKayHian which said:

“We advocate being selective, picking beneficiaries of compelling investment themes or with specific event catalysts. These include Deleum, Barakah Offshore and Malaysian Resources Corp Bhd (MRCB),”

In order to narrow it down further, Adam should perform the fundamental analysis (and technical too) on these companies before buying the shares.  A topic for next time.

Well, that is all for today folks. Till next time :-)

SYWBS Part 2: So you still wanna buy shares...

This is a continuation to the first part of the series of writings on my views as to how we can break down the logic and rational of investing in shares, especially for the very first time.

In the previous post, I shared my belief that:
1. Share price move based on expectations of making profit
2. People invest with the expectations to make profits
3. The starting point of investment is pitch black and there are thousands of choices and noises in the market.
4. Expectations are elusive and unpredictable, sometimes (most of the times) it defies logic and reason.
5. Most of people starting out have limited capital, so best to first see the surrounding, the battlefield, before making any move. That distinguishes between the brave and the idiot (while not forgetting idiots do have some luck sometimes).
6. One of the ways, by which we can try to 'see' in the dark  or feel the surrounding, systematically is by a top down approach.
7. Top down approach starts with industries within the country. Actually you can even go higher with which country, but i will explain this on if anybody asks. For the time being, we shall keep it local.

So lets continue with the top down approach and look at industry.

A country's economy is divided by industries and each industry has its own 'health'. The health of the industry depends on many things, internal and external. I am not going to explain how to assess the industry here, like the Porter's Five Forces etc, but sufficient for us to understand that we need to find out which industry harbors the most expectation to be prosperous.

Why do we need to find this out? The logic behind this is that the industry that is prosperous would give more chances for the companies within it to be prosperous. Therefore, as the company prosper, the shareholders would prosper alongside it too. That is the general nature or logic of the human brain.

The need to to have the ability to systematically/ logically narrow down choices above is further enhanced by the fact that the human beings are limited by capital and brain power.  Capital is limited in a sense that it is no one person / organization has enough capital to be invested everywhere. Choices has to be made as to where be to invest in. More importantly, in general, the decision making process of investments are done by humans and the ability to have a multiple lateral analysis is very limited.

As I have argued before, the prices of shares are determined by expectations of trading profits. It is not determined by fundamental or analytical calculations. If someone had carried out a fundamental or analytical calculations and comes out with a price, that price is not going to be force fed into the market / system.  They can't do that; they can't determine the price. Otherwise how do we explain all the price targets? If the prices of shares are determined by these calculations there will be no price targets as the next price will be set at that.

In my eyes, the fundamental (FA) and analytical analysis (TA), calculations and outcomes feeds into the expectation of the share concerned. And the magnitude of this expectations depends on the visibility of the shares and how much people believe in it.  Take for example a share which is trading at $1.00 each. We did our own FA or TA and arrived at a price target of $2.00 each. GREAT! Really? Not really.

Our price target above are not visible to others. That means that others does not share our price target hence the magnitude of that expectation that the price will increase to $2.00 has only the strength of whatever capital we have.

But if an analyst comes out with his/her own calculations and sets the price target to $0.50 and that target is then published in the newspaper, it would have an impact on the share price of the company as the visibility of this opinion would affect the expectations of many more investors.

You could probably be right  and the analyst wrong, but since the price is determined by expectations, the price would more probably be swayed by the much larger expectations generated by the analysts.

This also explains how can one share have multiple target prices from multiple credible analysts. Each analyst may have been correct in arriving at their target price calculations but the actual price movement is determined by how much and how many people believed in the upside (of 50%, 20% or even 100%).

So back to the industry selection above, it is important for us to identify the industry that is most visible for the right reason. The more visible the industry is the more investors will be looking at the companies within the industry.

Take for example the oil and gas industry. For the past few years there has been many good news about the industry, mainly that the oil price is at a very high and profitable level. That made it stand out and make people believe that there is more likelihood of success for the companies involved in this industry. And the investing public expects that it is going to generate more and more attention and hence attract more investing money.

In general, the expectations on making a profit in oil and gas companies should be high because  most of the factors that would be fed into the the expectations of rising share prices are all there. The fundamental calculations should be looking good as the industry is doing well. And as sentiment translates into positive share price movements, the TA would also be showing a good sign.

So first, pick your industry or industries.

But before we can make our pick, we need to know how to identify which industry is doing well. The first obvious source would be the newspapers and and other sources of economic outlook, including analyst reports. Look at how the industry is being reported in the news and around us.

You can also look at the indices representing these industries. What has been the trend and whether the indices has been growing in line with all the positive news out there. Comparing the indices against good news about the industry is a good way to gauge the level of visibility of the industry in the eyes of the investing public; whether the investors are paying attention the companies within that industry.

- to be continued-

Next: how do the fund managers usually narrows down which company to buy within a particular the industry.

Next next: How fund managers build equity portfolio and how you can do it with the combination of ETF and shares.

SYWBS Part 1: So you wanna buy shares...

So you have decided to buy some shares on the stock market.

So, where do you start?

I guess you may have read other blogs and articles about investing, and if you had done so, then some of the things I am going to say here would be a repeat.

1. Objective: Why do you want to do this?
To make money or profit. To exit more than you had before. You don't buy shares so that you can participate in setting the right price for shares. That would be stupid. You want to buy and trade in shares so that you make more money than you had before.

Simple objective but not so simple way to do it.

2. Why is it so difficult to make money on the stock market then?
Everyone has the same objective. And since it is a zero sum game (save for the dividend), you have to lose for them to win, and vice versa.

You are most probably quite insignificant (especially when you are starting). This is in terms of capital. The entire market is way to big for you to influence and worse some of the other players play dirty. They are significant enough to manipulate the share price, commonly known as goreng sampai hangus..You wanna get on the 'goreng'  part and leave before you 'hangus'.

The share price of a company is almost unpredictable, especially if you do not have the technical or fundamental tools. It would be like walking blind without a stick even to guide your way. The share price is subject to the expectations of everyone else and since you cannot read their minds, you would not know. Therefore, without any knowledge on how to 'feel the surrounding' you are basically gambling. You could win with almost equal luck as a flip of a coin (I vaguely remember reading a study done on this).

3. The first thing is to know yourself
Like I said earlier, buying shares is not unlike going into a battle (of wits). And as with any battle, you gotta to have to things, a great deal of knowledge about yourself and a plan.

You already know what is you objective is: to make money. However, here you would need to be a bit more specific. Do you need to make profit everyday, every month or once a year maybe. This is determined by your cash need and how long can you go without the cash you are using to invest. There is no right or wrong answer, as there is no guarantee that you can make any profit any day, month or year. But this would determine the kind of time you need to be monitoring the market and the kind of shares you can buy.

In my case, I cannot be stuck on the screen every minute, so I guess I need to make my profit on a monthly basis. Not that I need the profit for my monthly expenses, rather for the purpose of discipline. I can go for at least one year without the capital back in my pocket.

Risk level? The moment you decided to buy shares that means you are on the above average risk takers already, daring and brave. The only thing right now is to not make ourselves foolish instead, or even stupid.


4. The second thing to do is to 'un-blind' yourself systematically
A fool falls down a lot, mostly for the stupidest reasons. That is akin to being blind and refusing to learn how to feel with your other senses. Well, the 'brave' also falls down sometimes, it hurts just as much, but as he are able to feel the surrounding, he would fall less (usually a lot less) than a fool.

There are many ways to learn about the or feel the stock market. Two of them are 'top down' and 'bottom up' approaches. I like the top down approach in general as a systematic way to feel the market.

First we start with the entire market, hundreds and hundreds of companies with hundreds and hundreds of shares. It is not uncommon for first timers to then quickly look at the most active counters as a guide for the choice of shares to invest in. I don't go for that because usually by the time the counter gets on that list, the meat is already gone. Meaning the price is already stabilizing, coming down or about to come down.

If you have lots and lots of money and you do not know at all what to buy, you could buy the entire market, meaning you would buy ever types of shares there are in the market or more realistically, the shares in the indices. That way you will be taking the market  risk and return. You will make profit when the whole market makes profit.

Does it mean you need to have millions to to this? The answer is: not anymore.

You can 'buy' the exposure to the entire market by buying ETF from as low as a couple of hundred ringgit. For more details on ETF and how it works, you may visit my earlier posting here.

But if we want to take a higher risk and hope for a higher return (or have enough money for just one or two stocks), then we have to narrow down our selection further.

The entire market is then dividend by industries. Oil and Gas, construction, banking and such. Within these industries are companies (and shares) that does business; some more profitable than others and some loses money.

The natural thing to do is to pick an industry that is gathering most positive attention from other investors. Remember, share price moves based on expectation and expectations can sometimes be totally different than the reality of the fundamentals.

How do we find this out? Which industry is getting the attention? Well, we need to read the newspapers, trading forums and the likes and judge which industry is getting the most airtime. It could be oil and gas, it could be banking it could be property or plantation. You make your call.

- to be continued-

Eyeing ETF - Removing the heartache of punting

Last Saturday we ran a workshop on Exchange-Traded Funds (ETF) and amongst other things, we discussed about one of the benefits of ETF: the ability to take a 'big-picture' position efficiently, with a much smaller capital.

Take for example the news today (7/10/2013) as reported by the STAR:

Public Bank underpins KLCI advance

by joseph chin

Email

Facebook 0

KUALA LUMPUR: Public Bank led the FBM KLCI higher in early Monday trade, linked to talk that Chinese banks could acquire stakes in Malaysian banks.
At 9.05am, Public Bank was up 16 sen to RM18.06. Turnover was 1,900 shares done. Last Friday, it rose to an all-time high of RM18.10.
The FBM KLCI rose 1.64 points to 1,778.20. Turnover was 61.21 million shares done valued at RM25.73mil. There were 137 gainers, 40 losers and 108 counters unchanged.
However, BIMB Securities Research said it was cautious on the outlook for Malaysian equities despite the recent return of foreign funds into the region of late.
“Foreign funds into the local bourse had seen a net inflow amounting to RM329mil from the last five trading days. We doubt this would continue and remain adamant that some weakness will creep into the index with 1,770 as the immediate support,” said the research house.
Lower liners were among the major gainers. Triplc was the top gainer, rising 19 sen to RM1.58 while BoilerMech added 11 sen to RM1.90 and CCB seven to RM2.49.
CSL was the most active with 6.59 million shares done, adding 0.5 sen to 23 sen. GHL Systems gained 4.5 sen to 52 sen.
BIMB was the top loser, down 10 sen to RM4.63 with 100 shares done, Genting Malaysia shed three sen to RM4.30 and Genting Bhd two sen to RM10.42. KLCC shed three sen to RM6.35.

Without the ETF, in order for an investor to ride the rise of the KLCI, he would have to be right in his stock selection. He would need to have selected Public Bank into his stock portfolio for this occasion.

Well, that is definitely possible. Normally when people wants to take a position in the KLCI index/market, they would invest in some stocks which represent the bulk of the KLCI index. And that would include major banking stocks like Public Bank.

Therefore, if the rise in the index was caused by Public Bank like today, the investor would have been able to ride on the performance of the index.

However, what if the index was driven up by another bank instead, like CIMB or Maybank which also belongs to the index's constituents? Or if the indices were driven up by another sector altogether, like construction or telecommunications? In this instance, investors holding Public Bank shares would not benefit much, despite the KLCI making an upward movement.

An ETF, one which contains the constituents of the index itself, would mitigate this risk of missing the punt. Since the ETF has all the constituents of the index, it should move in tandem with the index, regardless of which stock is responsible for pushing it up. Therefore, the investors would not have the heartache of seeing the index move up while his portfolio remains stagnant.

Disclaimer: This is for educational purpose only and does not encourage you to invest, let alone making a recommendation for investment. If you do invest, make sure you read and understand all the information about your investment and risks involved. This disclaimer is not about avoiding getting sued, I mean it people, go read or get professional advice before you invest in anything.