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Hope, a psychological pitfall in investing kcchongnz
Hope, a psychological pitfall in investing
Hope, begging, blind faith, wishful thinking etc. Whatever you want to call it, it deserves no place in your portfolio. It is a dangerous pitfall one should avoid.
In Investing, Hope = Hopeless.
Let us look at KNM, a “shining star” in my “Model” portfolio of lemons.
There are people who have bought KNM at an adjusted price of more than RM4.00 5 years ago with the wonderful promises given by the management, exaggerated by the bullish reports of many analysts. At that time KLSE was just recovering from the US Sublime crisis with the index at 1072. Since then KLSE has risen 74% to 1866 today on 12th May 2014, whereas KNM kept on falling in price to the lowest of less than 40 sen half a year ago. It has risen a little and closed at 77.5 sen on today’s closing. The loss is a whopping 81%.
But but but:
[Posted by speakup > Jan 29, 2014 11:22 PM | Report Abuse 
FreeThink then u must buy KNM now before it surge to rm1 :) ]
This is the share price chart for KNM for the last 5 years.
Yes, KNM was a high growth company. It forayed around the globe and made numerous acquisitions and grew its top line big time. How can investors accept that a high flier KNM loss 81% and the broad market rose by 80% in the same period? It can’t be. It would sure to recover, if not to RM4.00, must be at least RM1.50. So they hope again for the following:
- KNM will get big contracts soon. But do they know that the prospective gross (note ‘gross’, not ‘net’) margin is 5%, or even zero %. So how could big projects securing, if any cure for the problem of KNM? Let’s look at KNM’s profit margin last year:
|
Year |
2013 |
Margin |
|
Revenue |
1984006 |
|
|
Gross profit |
355716 |
17.9% |
|
Operating profit |
98663 |
5.0% |
|
Net profit |
17966 |
0.9% |
What can you say about its profit margins?
- KNM is getting 300 m Euros in loan. So all KNM’s financial problems (big one) would be all solved? I don’t know if this is true or not because if I am a banker, I won’t want to lend to them knowing their earnings prospect and weak balance sheet and poor cash flows.
- Ringgit is weaken so good for KNM. Really? Is KNM earnings and getting big cash flows from USD or Euro, or is it likely it is going to pay higher interest, or to fund the losses in overseas operations from money remitted from Malaysia (right issues, more bank borrowings?) because of the lower exchange rate?
- The high earnings subsidiary Borsig is going to list in Singapore soon. So all financial problems would be solved. Really? But how does it improve KNM’s business? The proposed listing has been talking for ages, why is it still not listed? Any problems?
- KNM management is going to reward the shareholders soon with bonus issues, free warrants (of course also have to buy the right issues also lah). Are they really “free”? Or just free for the insiders who can benefit from the exercise?
In actual fact, KNM has announced the proposed par value reduction of its stocks from RM1.00 to 50 sen recently. The share price seems to be rising after the announcement. OMG!!!
- This is the best. General Lee is going to privatize KNM (with his backside). All shareholders can redeemed their shares for RM1.37, its net asset backing per share.
Yeah, these are all the hopes. But think and analyze, what is the probability of any of these hopes to be realized?
It is also hard to sell losers as it would confirm your loss. But is it better to sell out and put your money to work in a better investment opportunity?
Whatever the outcome, you should heed a prime rule of investing:
You don’t have to make it back the way that you lost it. – Buffett
And also hopefully people can learn from the mistakes of the past.
K C Chong (12/5/14)
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Discussions
2 people like this. Showing 33 of 33 comments
Very high and Doubtful Receivable. Manipulation of accounts. Not Honest.
2014-05-12 22:22
after writing off the bad debt, company is in negative cash flow and negative asset position.
2014-05-12 22:34
High Receivables Plus Close to zero margin Business might even suggest this is just a SHELL company.
2014-05-12 22:56
I would advocate the very first criteria of stock valuation is the Business Model evaluation and people/management evaluation as you cant do Business with Dishonest people.
2014-05-12 23:12
Hi stockoperator, nice to meet you. Mind to share your ideas as to how to evaluate the biz model and people/management? ^^
2014-05-13 08:02
'KNM management is going to reward the shareholders soon with bonus issues, free warrants'. I read the same statement at Fitters financial report (can't remember which year). Bonus issue and free warrants really a reward to shareholders?
2014-05-13 08:38
survey the market ask people who knows the Business especially employees/creditors /debtors and competitor for example and study the business edges and know how of Business in areas of technology or where is their market/demand or how they can get cheaper sources of input and how company manages their cost.
2014-05-13 08:43
Anyway if you Really Really Really investing like an Owner on Business Perspective, you know what to look for.
2014-05-13 08:46
In Investing, Hope = Hopeless? but most of the shares with price now are also based on hope, so we got this kind of thing called PE. a lot of stock, PE quite high. because we "hope" in feature can earn back that amount or more?. So Hope != Hopeless. Hope is the only rule to make people buy share. Because people hope can earn in future. If Hope are based on company previous performance and the fundamental growing record, then hope is never equal to hopeless.
2014-05-13 13:12
In my early days I asked a stock broker, "What is P/E?" He replied, "P/E stands for Punter's Expectation."
This same remisier was caught in early 1994 KLSE Market Collapse after the bull run of 1993. He told me he lost RM600,000 & couldn't sleep at night.
Later this same remisier learnt that P/E is Price Earning ratio and turned into a fundamental investor.
I am so thankful he shared his experience and warned me of the impending collapse of KLSE in 1997 & told me to SELL EVERYTHING AND GET OUT WHEN KLSE WAS AT ITS PEAK AT 1332 POINTS THEN. It later Collapsed to an all time low of 262 points.
And he gave me a book to read before migrating to Australia. The book is "Beating The Street" by Peter Lynch.
2014-05-13 13:32
if you buy share but not surelly 100% can earn, then we call it as "hope" So hope is the valid element to support the market as well as our life to continue. PE is based on hope. This stock now worth 10. But people willing pay 100 to buy it on PE 10x. Based on what?, based on hope. Can guarantee earn more than 100 later? No matter how good a company, also nobody can tell you the future.
2014-05-13 13:36
It is not wrong kcchongnz write this article. Ya KNM price drop really make people loss. But dont blame the company. Investing & Trading is your own responsibility. Who can think KNM got today? 199x ago, How good for KNM? At that time, it is like blue chip! Same good as kcchongnz talk about ptaras. Buy share have risk. How well you prepare, does not means the share will be your blue chip forever. So Gain or loss, is your responsibility and your capability.
2014-05-13 13:45
Mr Gan Ah Sai: Nice to meet you again. Yes sometimes too many people talks about successful investing But Nobody has been taught of safeGuarding themselves for the case like KNM, MEGB, CitiBank,Enron etc.
For me Price is the single most important indicator/SafeGuard of all time as price reacts before any inside News and it should not fall more than 30% from its High. If it did, my rule is sell and I dont want to know Why.
I continuously phase out those Holdings which cant meet this single criteria during each crisis as I add on to those Holdings which continue meet this criteria and it is proven fruitful as i want to Hold Uptrend stocks either in Good time or Bad times.
2014-05-13 14:33
Conclusion: Hope is not the pitfall. People buy share are based on rumours/proposal (e.g can get a multi billion work project). They "Hope" the rumours/proposal become actual news (PE increase). When news proved and conducted (PE reduce), trader start sell. Who can calculate the success rate of rumours/proposal? How your math good and study how much history statistic report also cannot guarantee. So result = statistic (guarantee factor) + hope (not guarantee factor). For me, I more believe investing pitfall is due to too optimistic + no sell target price setting.
2014-05-13 15:02
haha, no lah, that one is just my conclusion. If no hope, that means no stock market. Hope is the only to life everything. If people can calculate the success, you still can buy the share? Everybody welcome to comment and conclude also.
2014-05-13 15:12
My 2 cents ...
To me, getting into shares with hope is not 100% wrong. It is a question of blind hope vs educated hope. Blind hope is like following what others are doing without doing one's homework. Educated hope is investing after some extensive study of a solid, sound fundamental company and at the right price.
I do not think there is any investor who buys shares and does not hope the shares will do well later. If there is no hope, then why buy the shares?
Hope for the best! Ha.
2014-05-13 15:31
Hi Plumberii,
Where have you been? I "hope" you share with us your stocks in your Magic Formula.
You probably knows what I meant by hope in this article:
1) Hope that the leopard will change its skin and keeps on deceiving the minority shareholders
2) Hope that a company will get big tender with net profit margin>20%, instead of losses even at the operating level for years
3) Hope that it will collect all its debts amounting to billion ringgit.
4) Hope that it can convert its billion Ringgit intangible assets into real money
5) Hope that its multi hundreds of million debts will "pooh", disappears
6) Hope that its management will seriously sit down and manage the company and projects well
7) Hope that it got cash to pay salaries, working capital needs, suppliers, subcontractors etc
8) etc etc etc
I hope shareholders recover their huge losses, very soon.
2014-05-13 16:46
You know there are so many version of Pyramid scheme in stock market and the manner of price drop has confirmed that. I would still say it is ONE of the SHELL company.
2014-05-13 17:13
Hope or not is pointless la... If we do pur homework well, at least it safeguard us from pitfall.. Lets hope najip resign better la..
2014-05-13 20:27
calvintaneng In my early days I asked a stock broker, "What is P/E?" He replied, "P/E stands for Punter's Expectation."
----
let " hope" we all can make it alive in klse kikikiki . hope keeps things alive. believe in miracles. believe in second chances.
2014-05-14 01:22
kcchongnz,
Hi.
Magic formula? Can't remember now. Don't think it is really magical (i.e., good) as otherwise I would be so impressed and thus able to remember it.
Using Magic Formula blindly = blind hope.
My gut feeling is, things (stock, real estate) will take a turn for the worse. Look at China's real estate now. House price index on the decline. Ditto for M'sia.
Rising inflation now + GST next year = dim hope for the next few years.
Cheerio.
2014-05-14 08:59
Dear Plumberii, bad things happen all the time. It is Not important anymore to me if it ever happens OR when it happens OR how it happens. The important thing is you need to equip yourself to know the value of Business in good times and bad times ya. Economics is One issue. Remember Businessman always think differently. They really strive in good times and bad times.
2014-05-14 10:51
Future Investment Return is governed by:
1.+ or -Dividend %
2.+ or -Growth %
3.+ or - Market Risk/Market Valuation/Business Risk/Business Valuation
From here I would advocate Boring High Quality Business which has good dividend yield just in case i am wrong. Well since it is very Boring Business there is not much trading activities so the price is quite reasonable most of time.
2014-05-14 12:29
Surely there are lots of Absolute Valuation Method that determines the cheapness of stock in term of Margin of Safety which are most widely used among under research company probably small caps and returns are fantastic when they kept outperforming during market upswings.
WELL we have to compliment their achievement and credit for their hard work.
2014-05-14 13:09
The more variables in valuation will make it more difficult such as financial risk, business risk, market risk, credit risk, earning visibility and growth prospect. As such understand the Business well enough is a prerequisite/a must.
2014-05-14 18:01
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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good sharing Sir!
2014-05-12 21:30