What is the correct EPS to use ?

I mentioned before how to evaluate how much a stock is worth and what is is safe buying price and even come up with a system to calculate that.

Does this method guarantee success and nothing will go wrong if I follow this method ?  Ofcourse NO !

Just to re-enforce my stand point in Personal Finance is that one should setup an automated saving system and that would be THE ONLY thing I do NOT give way ... so far.  All others are just methods to increase chances of higher return, and all methods are to be fine tuned whenever needed.

Back to this stock valuation method.  The real Fundamental about business valuation is its management.  ( A good management can turn a lousy business into a good one vice versa.)   This stock valuation method is only a quantifiable way to analyse if the management has done good in the past.  Its ok if the management has been changing a few times in the past but if the management has changed drastically at the time you are analysing the old data, then you cannot be sure what you are analysing may happen again.  In that case, qualitative accessment may need to come first before you perform this quantitative valuation using EPS and PE.

Basically what this stock valuation method does is to take away most of the variables and narrow down to 2 only : EPS and PE.  So if you use the right EPS and PE, then you will get the Right assessment.  

However, if you really understand what these 2 numbers mean, there is no such thing as Right EPS and PE !  Therefore using the best figures still go back to the art of finding best matched answers.  Anyway, this is how I determine what EPS I use during stock valuation.  You may use it as reference either way.

1.  I first plot down all the past year EPS data into a graph

2.  then I find out a linear trend of that graph

3.  then I find two years' EPS that can best match the linear trend

For example, the blue dotted line below is the EPS graph for KNM.  The straight solid black line is the trend line.   I find that year 2006 EPS exactly fall on the trend line so I will use 2006 EPS.  At the other end, the trend line cross the EPS graph between 2000 and 2001 so you may use either one of them.  I want to be conservative at recession time like this so I use 2000 which will show a slower growth - which is what I would expect the company to be at time like this - slower growth.

After a while, I still think EPS growth rate from year 2000 to 2006 may or may not be able to repeat in 2008 to 2014.  So I further assess the situation more conservatively assuming worse growth so I use 1999 to 2004 EPS.

Basically I have made 2 projection base on what I want to feel more comfortable about, in this case all I want is to be more conservative and play safe in today's situation.

My 1st assessment is what I normally do so that is what I hope to happen.  My 2nd assessment is my worst case scenario taking into consideration of my expectation they will not be able to grow as much as they did before but yet strong enough to continue growing.  So if both assessments give me positive results then I would be able to consider further to own this business.

An example of using the wrong EPS would be using 2004 to 2007 EPS to calculate future growth for 2009-2012 which I think is a bit over optimist.

Hope this helps a bit on question like which EPS to use ...

Know the Trends

Anything that has the posibility of repeating pattern has a trend.

A trend analysis is trying to determine what pattern will occur next base on historical occurance.  Sounds familiar ?  Indeed it is, historical records do NOT guarantee future result.

Performing simple trend analysis is simple and straight forward :

First plot the pattern in a graph,

Then try to connect all the low points using a straight line,

Likewise do the same with all the high points.

Not ALL points can be connected perfectly.  You will have to use your judgement to 'best match' them.

Do not make guesses or judgement when drawing these 2 lines.  ONLY connect all the LOW and HIGH points, no other adjustment is needed ( at least not for now ).

So by drawing these 2 lines, you can tell if it is in ;

UP Trend

Down Trend 

Trend Sideway or 

No Trends

When you are having a tough time to draw any of the line following above method.  Then its a No Trend iendified condition.

Once you know the trends, you can 

chase the up and down trends

trade with care on side trends and

do NOT trade in no trends

Chasing up trend is also called Long where you buy now sell later which is what normally stock investment is.

Chasing down trend is Short : sell now buy later, usually used more in derivative market.

MUST DO in your Personal Finance

A lot of specific personal finance topics have been covered recently but NONE of those are absolute truth hard cast in stone.  As a matter of fact, ALL those are merely some methods you may consider adopting only after you have done the NUMBER 1 and ONLY thing you Should Have DONE in Personal Finance - Automatic Saving.

The Number 1 thing you HAVE TO do and MUST do is to setup an automatic system saving a portion of your income into a seperate account.

Any money you receive is an income, no matter active or passive; no matter if you work for it or not.  You should even treat pocket money like Ang Pao as an income, housewife should keep some household expense aside for personal finance purpose etc. as describe in an old post.  Review the early post about income here and a controversial discussion about income with reference to Rich Dad Poor Dad.  

This is not a normal personal finance post asking you to save first and use later.  The focus is on Automatic Saving System and This is the CRITICAL turning point whether you will make it or NOT ! 

Understanding this concept doesn't count, excusing you don't have a job now also doesn't count.  You are already saving some money in some mutual funds manually or you are already buying golds also doesn't count.  Nothing else count unless you already have it setup.

click the image below to review what needs to be done

Finance consultants who are still asking you to make finance goals, asking you to be more discipline etc. all are less important from  praticality perspective.  Because history has proven all those people are still failing to become finance independant despite all the goals they set and discipline they tried to improve.

On the other hand, people who started without any goals nor any discipline, do not understand mutual fund, property, gold nor stocks investment;  but setup such an automated saving system immediately increasing their chance to reach finance independance by 80% !!

How to Gamble to Win !

One of the most common things we do during Chinese New Year is gambling.  As a matter of fact its part of Chinese culture for good or bad.  The bad is gamblers always lost more than they can affort.  The good is the casino owner earns enough to do charity for the society.

Usually gambling is consider a bad thing, especially in finance planning.  However, it is NOT all Evil in this finance blog.  Lets look into gambling and see what it is and what we can do with it, just like any other potential finance tools we come across.  We will analyse the mathematical way, the finance methods WITHOUT the emotion factor.

For the simplicity of this write up, lets assume the type of gambling we talk about here is a 50-50 chance game, like flipping of a coin.  Its either Head or Word, all other occurances are considered void and demand a replay until a Head or Word shows up.  This chances of winning is called probability.  Bear in mind that ALL games in casino are NOT fair chance in real life.  

Method 1 : Doubling Up

Start bet with the smallest betting unit ie. $1.  If you win, bet again with $1.  If you lose, double up your bet to $2, $4, $8 etc.

In this method, you are almost guarantee to win back your initial $1 in one last win even after losing in a long series.  However, in that situation, you would win back 1 unit while risking losing 2 ^ n.  

For example, at the 4th bet, you put down $8.  If you win, you get $16 back minus out your previous bets $ 15 ( 1 + 2 + 4 + 8 ), your net win is $1.  But if you lose, you will lose the whole of $8 or a sum of $15.  Subsequently to win back your $1, your cost is $31, $63, $127 ... Imagine you are using $127 to earn just $1 only at the 8th round ...

So with this method, if you have unlimited capital and the environment allows you to make unlimited betting amount, then this method will eventually help you grow your capital one step by one step.  This method is using unlimited capital to earn one single unit of increment in each series.

If you do not have such capital and if there is a limit of betting amount, this method will mostly cause you to lose because the risk and reward are just not balance.

Win Lose ratio is 1 : 1

Risk Reward ratio is unlimited : 1

This also says : The more you use this method, the longer you use it, the worst it will get.

There is really no good way to mitigate this risk.  The best you can do is to start with a fix amount of money that you plan to give away anyway.  Then divide this money into a series of fix amount.  

For example, start with $100 and set each day limit as $8.  That way, if you lose continously for 4 times in a day, you lose all your day limit and you should stop.  Start the next day with $1 again.  This way, you can bet for 8 days in worst case scenarios.  On good days, you stop after you win $8.  What you are doing here is using the money that is not to be kept anyway and buy some experiences with it before losing them all.  If practise exactly as describe above, it may take much longer than you think before you lose all capital.  Hence its relatively a not so bad way to kill time if your other habits cost more (reminder : only when emotion is not a factor ie. you are a robot).

Method 2 : Follow Last Result

Start with a fix amount of capital, determine the smallest bet unit and each time bet on the last result.

For example, start with $100 and bet each time with $1.  So you can bet at least 100 times.  If the last result is Head, then this time you bet on Head.  If last result is Word, then you bet on Word this time.  Like wise, this time result will decide what you bet on the next time.

This way you will win if the pattern repeats no matter Head of Word.  However, you will lose if the pattern Never repeats.  Each time the chance to win is 50-50.  If you win, you earn $1 and if you lose, you lost $1.

Win Lose ratio is 1 : 1

Risk Reward ratio is 1 : 1

Since you have initially set minimum bet amount as $1 with $100 capital, then the worst case scenario is when the pattern continues to switch 100 times then you would lose all in 100 times.

Since what you want is 'repeat patterns' and avoid 'switching patterns'.  Then what you can do is to analyse previous patterns before starting your bets.  

For example, every time the pattern switches, you stop betting.  If the pattern repeat once then you follow in 2nd repeats instead of the 1st one.  This is one method of 'predicting' the pattern but you may eventually find it work sometimes and NOT working for other times.  So eventually you may need to come up with many different analysis methods in different situation if possible at all.

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Just in case you still think this is just a gambling talk, I have already implicitly cover the concepts of Money Management, Stop Lose, Profit Target Setting, Trending and Technical Analysis ...

2009 Inflation January Update

I mention the Real Inflation is the Infaltion that is happening to you, not the 'number' released by your goverment in an old post titled "Inflation vs BLR".   Below describe a quick summary how and what to do ...

1. List down all your "daily routine" items and their costs

2. Determine what quantity / amount of each item is consumpt over a fix period of time

3. Sum up the total cost for that period

Then compare the difference between 2 periods give you a rate, that is the Your Inflation !

Lets get an update of this inflation rate from 3 real life examples.  Each example represend one of the Rich, Average and Poor categories.

Ahmad : found his alternative ways of life

Ahmad used to spend RM 5 to fill his stomach in a day (Jan 2008), today he is still using about the same averaging at RM 5.10.  By now, the garden he has been having has grown enough so that they can feed themselves more meals.  He also found a few more places where he packed left over food for his family before he goes home every night.  Hearing so many negative economy news, he didn't spend any extra money in clothing.  The place he is squading remains the same, no extra cost.  Bus fares increase quite a lot but he took some alternative routes and walk further to reach office, home and the stations.  Calculating all of this month's living expenses shows that Ahmad's inflation rate is 2.5% this year.  He doesn't think his life style has been degraded.  As a matter of fact, he found an opportunity to sell some used goods in a flea market on the new route when he walk further to work.

Mathew : no where to go, so just keep looking ...

Mathew is self employ but forecast to lose about 20-30% of his business income this year.  His wife stopped working since mid last year because her company was closed down.  Mat used to pay RM 3.50 to RM 3.80 for a bowl of his favourite Pork Meat Noodle Soup, now he pays RM 3.80 to RM 4.50.  His favourite drink Teh-C was RM 1.00 but now RM 1.10.  So instead of ordering one small cup of Teh-C, he ordered a big one for RM 1.60 and shared with his wife.  Prices of veggies and pork meat in wet market are not stable, he tried his best to buy whatever is cheaper at the time but still ended up an average cost increase about 5% to 15%.  In hypermarket like Carrefour and Jusco, tuna flake can food went from RM 3.30 to RM 4.50;  cheapest hot dogs from RM 2.90 to RM 3.80; salted pickle from RM 1.10 to RM 1.30 ...  Mathew's inflation is 24.3%

Ah Dung : What ?  What Crisis ?

Ah Dung continues to dine out in TGIF, Chillis, Coffee Beans, Starbuick, Old Town Coffee etc.  Average per person per meal remains the same at RM 50 compares to one year ago.  Some restaurant meal size becomes smaller but Dung just move from one restaurant to another, whichever is serving the meal the same way they did before the financial crisis.  Eventually most of these restaurants will serve proper meal size and more promotions will surface out.  Now TGIF also have kids eat free like Chillis.  MAS matching Airasia low air fares allow Dung to travel all over the world more frequent now.  Dung's bangalow architected by the same guy who designed for Dr. Mahatir continue to grow and takes up a huge chunk of his expenses but all these are rolled under his company accounts.  Dung's inflation rate is 4%

Below table shows the summarized inflation rate for these 3 person :

So while all the supermarkets are advertising for how low their prices are, what is your Very Own Personal inflation rate NOW ?  

Calculate How Much is Worth buying a stock !

http://klsmihosting.com/pfp/
stockValue.malpf.com

I have just come up with a system that can calculate how much a stock is worth and therefore what is the suitable purchase price. It is based on the concept describe in this old post : when to buy at what price ?

In short, it is using past history record to project future price. Then depends on your target return rate, today's worth can be calculated.

EPS and PE are 2 critical data needed to use that system. In case you don't know where to get these data, refer to one of my old post here : where to get EPS, PE data

some of the old posts can also be used as examples or case studies : IOICorp, KNM

For those who are more curious to ask why more than just using the system, an old post explain slightly why use EPS and PE in stock valuation ?

I haven't published this system yet and only using it on my own now. But if you are interested, you can also use it from here ...

http://klsmihosting.com/pfp/

stockValue.malpf.com

I am thinking to publish it once an anonymous browser can sign up as an user in order to use it ....

090122 Bank Negara reduces interest rate

On 22 January 2009, Bank Negara Malaysia (BNM) reduced the Overnight Policy
Rate (OPR) by 75 basis points which resulted in banks reducing their money
market interest rates as well.

For example in a private firm, 3% rate is reduced to 2% and 2.4% is reduced to 1.5%

Its time to take your money out and increase your Chinese New Year gambling money .... just kidding ...