“KC, your intrinsic value (IV) from the discount cash flow analysis (DCFA) for Magni-Tech was RM5.29. Its share price has risen to close to this value now and there is little Margin of Safety (MOS) now. I have already made more than 100% profit now. Shall I sell?”

I first talked about Magni-Tech in i3investor sometime in 16^th April 2013, some four years ago, in the link here when I compared it with Prolexus,

http://klse.i3investor.com/servlets/forum/900229424.jsp

I found it a great investment when it was trading at an adjusted price of RM1.07 then. It was used as case studies for my first online investment course and subsequently all my online courses as an example of a good company selling at cheap price, the very essence of fundamental value investing (FVI).

I wrote my first analysis and posted in i3investor less than three years ago, on 3^rd May 2014 when it was trading at an adjusted price of RM1.93 then.

http://klse.i3investor.com/blogs/kcchongnz/51356.jsp

There is a whole lot of analysis there, with the intrinsic value computed as RM3.62, or an adjusted price of about RM2.90.

Magni-Tech is also one of my stock picks in my stock pick service not long ago in mid-December 2016. It is also one of my picks for 2017 in i3investor published later here,

http://klse.i3investor.com/servlets/pfs/71070.jsp

Magni-Tech closed in the morning today on 14^th February 2017 at RM5.07, for a gain of 400% in less than 4 years ago. Figure 1 below shows the share price movement of Magni-Tech.

Figure 1: Share price movement of Magni-Tech

The opening question above is a typical question from my online course and stock pick service participants. It is a very tough question even for most people who are dabbling in the stock market to comprehend; and it is very tough for me to answer.

It is tough for most retail investors because most speculate in the stock market base on tips, rumours, hypes and fads with tens of thousands of Ringgit, hundreds or even millions of Ringgit. You have heard many times from some gurus out there telling that all you need to make money in the stock market is to follow the rich and famous do, intuition, “dynamic investing”, “pivotal moment”, or the most a little “rudimentary knowledge” is suffice, although few understand what those terms in brackets are. They do not have the faintest idea what IV, DCFA, or MOS are, some of the concepts one must know if he serious does investing (not necessary must use them to be successful), and not speculating, and worse, gambling.

The above question is tough for me to answer because although it is good to have a feel of the value, there are a few problems.

1. IV is not cast in stone. It is vague. It is subjective.
2. It is just an estimation based on two important assumptions; future cash flows and discount rate. Hence over-valuation is a range which can be widely off by a few 100%.
3. Value is like beauty. It is in the eye of the beholder. It depends on who is valuing it, and for what purpose.
4. Value is not a static number, it is constantly changing due to the ever-changing future;

Hence it is difficult for me to give a straightforward answer. It depends on many things; one’s personal risk profile and personal circumstances. What I can do is to give a few of my personal pointers to help you think this decision through.

Let me share with you another stock, SKP Resources, which was in my first published portfolio in i3investor, “GE13 Watch” posted on 23^rd January 2013 here.

http://klse.i3investor.com/blogs/kcchongnz/112906.jsp

Figure 2: Share price movement of SKP Resources

Figure 2 above shows that SKP Resources was trading at an adjusted price of just a few sen less than 10 years ago, before it went up to about 30 sen when I included it in my “GE13 Watch”. Investors who bought the shares earlier would have made a few hundred percent profit then, if they had sold off the share at 30 sen. However, they also would have lost the opportunity to make another 350% in three years when its share price closed at RM1.35 yesterday on 13^th February 2017 as shown in Figure 2 above.

But haven’t we heard of, “Why don’t you sell and then buy back later at lower price and make more profit as no share would continue to go up in price?”

As I look at investing in a stock as investing in part of a business, it makes no sense to go in and out, unless I am guaranteed that the business I have sold off, someone would sell back to me at a cheaper price. Can anyone guarantee that?

If you look at the price movement of SKP Resources, can anyone able to see that he could buy back the share at cheaper price, when and with certainty? Otherwise, does it make sense to sell off at a lower price and buy back at a (much) higher price later?

Same for MagniTech. Those investors who had bought Magni-Tech at RM1.07 in mid-April 2013 would have made about 100% a year later when sold off at about RM2.00. They would rejoice when the share price retreated to about RM1.55 at end of year 2014. But how many were such good market timers that they had bought back at the low price later before the share ran up and closed at RM5.07 yesterday?

But how far more can the share price of Magni run? When should we sell? I really don’t know.

What can we do in practice?

From the above experience in SKP Resources and a few other stocks I had had, and in the perspective of a fundamental value investor, when we buy stocks, we can add Margin of Safety (MOS) to the conservative end of the estimated fair value range to absorb the impact of uncertainties and mistakes. Similarly, when selling stocks, we can add MOS to the optimistic end of the fair value range, for the same reasons as illustrated in Figure 3 below.

Figure 3: Margin of safety when buy and sell stock

For example, the “Fair value range” could be between RM3.00 to RM7.00, and the “Sell” MOS could be from RM7.00 to RM10.00. This would avoid selling the winner too soon.

But would I buy more when the price continues to run up above my estimated revised IV of RM5.29?

“Dare to buy more or not?” “Dare to use margin and buy more to make more money?”

I have a friend whom I respect a lot as a great investor who encourages others to average up, and I believe he did make a lot of money doing so. He has his points. However, he is like me, he still never encourages people, especially the public from using margin finance, as he got burnt badly in 1998, even without using margin finance.

For me it is a “No”. I won’t buy more, or average up at this level, especially it has already formed a major portion of my portfolio. I am not greedy. I follow my basic principle of MOS in buying. This is just me, and I am not telling you to follow.

When I posted it in i3investor as a stock pick one and a half month ago as a Magic Formula stock, its share price was RM4.20 then, not RM5.06 as now. It was even lower when I published in my stock pick service in December 2016.

As a retail investor, there are limitations of what we know about a company. For example, why the major shareholder and director keeps on buying it relentlessly?

http://klse.i3investor.com/servlets/stk/annchdr/7087.jsp

Investing is an art more than a science. It is best one chooses the method best suited to himself. There is no one size fits all, the same for buying and selling of shares. There are many successful investors using other methods for investing, not necessary follow IV, DCFA, MOS. But at least they also look at investing in a stock as investing in a business, and especially, not following the “greater fool theory”.

Again, anyone who wish to learn about fundamental value investing in a business-like manner and at the same time hope to get some investing ideas may contact me at

ckc13invest@gmail.com

The links below show our performance in Bursa as well as in the regional markets so far,

http://klse.i3investor.com/blogs/kcchongnz/115211.jsp

http://klse.i3investor.com/blogs/kcchongnz/115513.jsp

Happy Valentine Day

K C Chong on Valentine Day