Making Profitable InvestmentsWHAT DOES YOUR CHECK-LIST LOOK LIKE?When evaluating a company, there are so many factors that are beyond our control. We however, through empirical research, do know what INCREASES THE PROBABILITY of us making profitable investment decisions.What is important is that we FOCUS ON WHAT WE CAN CONTROL in our research and analysis.http://www.eurosharelab.com/newsletter-archive/293-what-does-your-check-list-look-likehttp://myinvestingnotes.blogspot.com/2010/03/what-does-your-check-list-look-like.htmlAs part of my evaluation process, I work through the following check-list:YesNo?RemarksMark 'x' in the appropriate column1Operating cash flow higher than earnings per share2Free Cash Flow/Share higher than dividends paid3Debt to equity below 35%4Debt less than book value5LT debt less than 2 times working capital6Pre-tax margins higher than 15%7FCF Margin higher than 10%8Current asset ratio greater than 1.59Quick ratio greater than 110Growth in EPS11Management shareholding (>10%)12Altman Z Score > 313Substantial Dilution?14Flow ratio (Good < 1.25, Bad >3)15Management incentives?16Are the salaries too high?17Bargaining power of suppliers?18Is there heavy insider buying?19Is there heavy insider selling?20Net share buybacks?21Is it a low risk business?22Is there high uncertainty?23Is it in my circle of competence?24Is it a good business?25Do I like the management? (Operators, capital allocators, integrity)26Is the stock screaming cheap?27How capital intensive is the business?28High Profitability29High Return on Capital30Enormous moat31Profitable reinvestment32Future growth33Strong cash flow34Are you agreeable with what has management done with the cash?Where is Free Cash Flow invested?35a) Share Buybacks36b) Dividends37c) Reinvested38ROE ( > 15%)39ROCE40Incremental BV growthAdd the number of 'x' in each column

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To Sell or to HoldB. WHY ARE YOU CONSIDERING A SALE?http://myinvestingnotes.blogspot.com/2008/12/investment-philosophy-strategy-and.htmlhttp://myinvestingnotes.blogspot.com/2009/01/anxiety-of-selling.htmlCOMPANY ACOMPANY BREASONS/CONSIDERATIONSNot so good reasonsTo "lock in a profit."WARNING: Trading results in higher taxes and commissions, and lower returns.Concentrate on cutting losses instead of "protecting your gains"Stock has reached predetermined limit.WARNING: Prices don't move in linear, consistent fashion, but in spurts.Remember that price growth follows profits, eventually.Determine if a stock is languishing for a reason.Company is subject of temporary bad news.WARNING: Avoid knee-jerk reactions, though market may respond negatively.Re-evaluate to determine possible LONG-TERM IMPACT of news.Company has missed earnings estimates by small amount.WARNING: Focus on long term, not short-term results.Re-evaluate to determine if there is a FUNDAMENTAL SHIFT underway at the company.An analyst has downgraded the stock.WARNING: Analysts have short-term, not long-term objectives.May have lowered rating to protect realized gains, NOT DUE TO LONG-TERM POTENTIAL.Good reasonsTo raise cashConsider it an opportunity to PRUNE UNDERPERFORMERS.If you don't have any underperformers, then consider tax impact of selling.To raise cash for club withdrawal.Consider it an opportunity to PRUNE UNDERPERFORMERS.Don't sell highly appreciated stock, transfer shares to departing member instead.The stock is possibly overvalued.Relative Value using forward PE is greater than 150%.Stock in SELL ZONE on SSG.Projected total return LESS THAN long-term returns on bonds.To take a capital loss.Sell stocks at loss in taxable accounts to offset any gains.Part of YEAR-END PORTFOLIO REVIEW.After offsetting losses, can use $3,000 of capital gains to offset ordinary income.Evaluate for repurchase after 30 days (to avoid wash sale rule).To upgrade quality or expected return of portfolio.Determine round trip cost, amount to invest in new stock after taxes and commissions.Use Toolkit Challenger or Stock Analyst Cost of Switching tool to evaluate.Use NAIC Challenge Tree to evaluate.Because fundamentals have changed.See how to evaluate changing fundamentals below.EVALUATING CHANGING FUNDAMENTALSREASONS/CONSIDERATIONSEPS or revenue growth is slowing or falling.Company may be entering a new stage of slower growth or stagnation.If considering additional purchase, use caution. The worse a company performs, the better a value it may appear on the SSG.Quarterly pre-tax profits are falling.Use PERT graph to evaluate PTPThree quarters of consecutive declining PTP are a danger sign.Five consecutive declining quarters are usually a definitive sign to sell.Cash flow is diverging from net income.If free cash flow is falling while net income is stable or rising, company may be "PROPPING UP" profits.Other fundamentals are deteriorating.Accounts receivable rising faster than sales.Inventories rising faster than sales.There has been an uncertain change of management.Dynamic company leader retires, replacement has questionable qualifications.Senior executives leave en masse.Those responsible for past success are no longer with the company.Company faces direct or indirect competition.Competitors threaten to affect the company's long-term prosperity.Companies with very high profit margins are often susceptible to increased, cutthroat competition.Company faces uncertain product cycle.Company is too dependent on single product.No new products in pipeline (such as pharmaceutical companies).Company has uncontrolled raw material costs.Can harm profit margins.If company doesn't hedge, they may have no option but to pay higher prices for necessary materials.Company is the victim of fraud or "accounting irregularities."If the books are being cooked, investors will be last to know.No way for investors to know if management is lying, or auditors are covering up.GET OUT FAST, these are not quality companies.Company's debt rating has been lowered.Can often be an EARLY WARNING sign of greater problems in the future.FINAL CONSIDERATIONSDon't hesitate to sell in retirement accounts where taxes aren't an issue.Don't automatically buy because a stock falls in price; re-evaluate as if NEW.If you won't purchase additional shares of a fallen stock, why would you continue to hold it?Don't "wait to get your money back" from the stock - it doesn't know you own it.Don't be paralyzed by uncertainty.Don't be an ostrich with your head in the sand - FACE UP TO THE PROBLEM.Remember NAIC's Rule of Five.Use Challenge Tree to CONTINUALLY UPGRADE your portfolio.THINK "REPLACE," NOT "REMOVE."

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Hold vs Sell Decision20 QUESTIONS TO FOCUS THE HOLD VERSUS SELL DECISIONThe list of questions summarize in short form the points to help investors create a SELLING STRATEGY.http://myinvestingnotes.blogspot.com/2010/06/20-questions-to-focus-hold-versus-sell.htmlThe questions have proved useful for two reasons: they deal with a relatively unfamiliar facet of the investment process (i.e., SELLING STOCKS) and they help brokers focus investor thinking in ways that encourage rational decisions and (not incidentally) sometimes FREE UP LAZY FUNDS FOR RE-USE.The use of this questionnaire is not guaranteed to be a cure-all. Nor does its use automatically make every position profitable. It does help to (1) IMPOSE CLOSURE ON SITUATIONS THAT ARE NOT WORKING AS EXPECTED, (2) to generate urgency by IMPOSING THE TIME VALUE OF MONEY and (3) by serving as a reminder that a decision to hold should be an ACTIVE AND REASONED ACT OF THE MIND, not a lazy default. A decision to hold should be every bit as active as a decision to sell, short of the need to pick up the telephone and dial the broker's number.Investors are encouraged to photocopy these pages and to keep copies in three places: in the OFFICE, where broker conversations tend to take place; at HOME, where market studying and decision making tends to take place; and in a BROKER'S OFFICE so that he will spend time thinking about these issues and will help the investor back onto the path should he stray from logic.TO BE SUCCESSFUL, AN INVESTMENT MUST NOT ONLY BE BOUGHT RIGHT, IT MUST BE SOLD RIGHT. Until the sale occurs, the outcome is only a temporary paper result; a handsome profit can still melt away unless it is actually closed out. This questionnaire should be used as a reminder, guide and prompting tool to sharpen decision-making skills and sale executions.STOCKABCAT THE TIME OF PURCHASEWRITTEN RESPONSES1. Date stock bought?2. Price paid? (For reference, what was the Market Index on that date?3. Price target?4. Target date to sell the stock? (Calculate projected return in percent/year from numbers 1,2,3,and 4.)5. Specific expectation of what would make the stock go up?REVIEWING THE POSITION AT A LATER DATEWRITTEN RESPONSES6. Currently more, less or equally excited and sure about the company versus when stock was bought?7. Has the story expected in number 5 played out yet? If no, is there still a concrete chance the story will play? If yes, did the stock go up at all on the news? If yes, did the stock reach the objective in number 3?8. What is the price now? (Compare with number 2 and number 3; not number 6.)9. What is expected to happen fundamentally now? (Compare to number 5.) If discussed originally with friends, relatives or colleagues, would the stock be discussed enthusiastically now and be purchased today?10. Due to number 9, what price is expected now? (Compare to number 3.)11. When is the price in number 10 projected? (Compare to number 4.) Projected annualised percent return from numbers 8, 10 and 11?12. What is the downside price risk from current prices if nothing happens? If the story or concept in number 5 or number 9 proves false?13. Is the risk/reward balance favourable from current prices? (Compare number 10 and number 12 with current price.)14. Where is the Market Index now? (Compare with Market Index level in number 2.) Is the relative performance of the stock surprising?15. Have there been negative surprises from the company or its industry since purchase?16. Since purchase, has there been a near decision to sell, only to hold on for a little more? Was a mental or actual stop-loss point set, and then reduced or removed as the stock weakened?ANALYSING WHETHER TO HOLD OR SELL NOWWRITTEN RESPONSES17. Why, specifically, should the stock be held now?18. With current knowledge, should this stock be purchased right now at today's price?19. Have significantly better opportunities been identified for purchase right now?20. Does the answer to number 17 square with answers to numbers 3, 18 and 19?INSTRUCTIONS ON HOW TO USE THE CHECKLIST ABOVEWritten responses to these questions are recommended for two reasons: the discipline of thinking through the exercises in detail and the creation of an archival notebook record that can be used for later reference, comparison and learning.Number a sheet from 1 to 20, put a blank for the stock's name on the top and photocopy this answer grid for future use.Start by filling out the sheet at the time of purchase by answering numbers 1 - 5 immediately when the buy order is made. Then there is no need to search back for data for number 1 and number 2 and, most significantly, there is no fudging of responses to numbers 3,4, and 5.Later, answer numbers 9, 10 and 11 with numbers 3, 4 and 5 covered up; no copying or the exercise is useless! The quality of investment decisions is enhanced by the rigor of responding to this process.Note that there is a built in bias toward making the respondent feel a bit defensive about holding a stock. This creates a presumption in favour of selling when things have not gone as planned. If a holding is not working, it needs to be fixed.For starters if it is no longer the time period indicated by number 4 or if the stock actually has traded at or above the answer to number 3, something has gone wrong with the plan or the execution. If there are differences between the answers to numbers 3, 4 and 5 and numbers 9, 10 and 11, study them again.And a positive answer to number 15 or to either part of number 16 indicates less decisiveness or consistency in dealing with this situation. Either greed arose when things went well or denial arose when things turned sour. It is only human to shift ground (rationalize) in an effort to be tolerant of the stock's performance (one's own judgement) or of less-than-perfect strategy and execution. Learn from past executions and make a special effort to avoid falling into this pattern again.The key question is number 18. If this question cannot be answered in the affirmative with total honesty and enthusiastic conviction (use the sub-part of number 9 as an acid test), sell. If the investor would not buy today, why should others be expected to do so? If other investors are not expected to be buyers, lower prices are forecast by implication.How soon or how often this exercise should be conducted for each stock held is a reasonable question. It is advisable to create a tickler file in which to place each sheet for review 90 days from the buy date (or at the date noted in number 4, if that is sooner). If the review results in a hold decision, file the page for re-review at the date in number 11.The use of this questionnaire is not guaranteed to be a cure-all. Nor does its use automatically make every position profitable. It does help to impose closure on situations that are not working out as expected, to generate urgency by imposing the time value fo money and by serving as a reminder that a decision to hold should be an active and reasoned act of the mind, not a lazy default. A decision to hold should be every bit as active as a decision to sell, short of the need to pick up the telephone and dial the broker's number.To be successful, an investment must not only be bought right, it must be sold right. Until the sale occurs, the outcome is only a temporary paper result; a handsome profit can still melt away unless it is actually closed out. This questionnaire should be used as a reminder, guide and prompting tool to sharpen decision-making skills and sale executions.

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At a GlanceExampleAt a glanceAt a glanceCompanyCompanyGenting MalaysiaDateDate03/05/10Share priceShare priceRM 2.90Issued sharesIssued shares M5906Market capMarket capRM 17128Beta (Unleveraged)Beta (Unleveraged)0.84Operating MarginOperating Margin39.27%Pretax MarginPretax Margin23.18%Return on AssetsReturn on Assets6.76%Return on EquityReturn on Equity7.63%Debt to AssetsDebt to Assets0.12Altman Z-ScoreAltman Z-Score11.11Cash & EquivalentCash & EquivalentRM 3104Regional relative valuationCompanySector Ave (Mean)Sector MedianRegional relative valuationCompanySector Ave (Mean)Sector MedianGenting MalaysiaEst. P/EEst. P/E13.6546.2621.27P/EP/E12.5169.9621.59Div. Yld (%)Div. Yld (%)2.411.50.22ROE (%)ROE (%)7.63-52.512.73P/BP/B2.064.11.46

What Money means to youSTEP 1http://myinvestingnotes.blogspot.com/2010/01/what-money-means-to-you-answer-10.htmlAnswer 10 Simple Questions below.To find out more about your investment orientation and your relationship with money.Answer as honestly as possibleThis will also help set the necessary guidelines for your investment portfolio.(Example)TIME HORIZONSCOREYOUR SCOREYOUR SCORE1How long can you afford to leave your nest egg untouched so that it can grow?Less than 5 years15 to 10 years2More than 10 years332How far are you from retirement?Already retired01 to 5 years16 to 9 years210 to 15 years33More than 15 years43What will your cash needs be over the next 5 years?Insignificant0Significant, with large cash withdrawals1Significant, but with enough inflows to cover expenses224Are there any special circumstances you have to plan for in the next 5 years, for example, your children's education, medical expenses for an operation or perhaps a new house?Yes, with a huge impact on my finances1Yes, with a manageable impact on my finances2No, I have relative financial freedom.335How dependent are you on your present income? Do you need the interest and dividends to cover your living expenses?Yes, very dependent1Yes, fairly dependent2No, not really33RISK TOLERANCE6You have just received a large sum of money. You invest it in something:safe that will earn a moderate income11with a higher income even if it means more risk2that will provide higher growth even if you have to take a higher risk37What would your reaction be if your investments suddenly lost 20% of their value?I would be very upset and my life would be a shambles1If I still earned the same monthly income, it would not matter so much2Provided it was only for the short term, I would still be OK338You have saved for a long-desired holiday. Two weeks before your departure, you lose your job. Youcancel your trip1go as planned, but do not spend as much on extras22go all out and spend all your money in a spectacular fashion3INVESTMENT OBJECTIVES9What is your primary financial goal?To keep my capital intact and maintain my lifestyle1To save for a comfortable retirement2To create more wealth and improve my lifestyle3310What are your main priorities at the moment?To enjoy what I have and take pleasure from simple things1Taking care of my family and/or myself and ensuring that there is always enough for a rainy day22Building up my career/lifestyle, having fun and growing rich.3TOTAL OF YOUR SCORE25STEP 2Your total score tells you more about yourselfLess than 10:You cannot afford to make mistakesYou have very little time left to invest and are at a stage in your life where you need a regular income and stable capital.You are probably retired or close to retirement.You have a conservative risk profile and do not want to take unnecessary risks.Between 10 and 20:You are carefully weighing up your optionsYou can afford to allow some time for your investments to increase in value, but you also need income.For you, capital growth and income generation are probably important.The closer you get to a score of 20, the bigger your need for capital growth; the closer to a score of 10, the bigger your need for a regular income from interest or dividends.You have a medium risk profile and are prepared to take moderate risks for bigger returns, but do not want major fluctuations in your financial affairs.More than 20:You want to grow bigger and betterYou have lots of time at your disposal, are probably fairly young, and would like to see your investments grow into something substantial in the longer term.A monthly income from your investments is not crucial.You do not need extra risk if there is a chance of a good reward later on.STEP 3What does all this mean?There are no right or wrong answers in the quiz.It only tells you more about who you are and how you want your money to work for you at this stage in your life.You also have to realise that you need to align your time horizons, risk tolerance and investment objectives.You might have a very short time horizon before retirement and a low risk tolerance, but you might want to see significant growth.It is important to be realistic: you have to adjust your investment objectives to fit in with your time horizon and risk tolerance level.This also means you will have to find a balance between the risk you are prepared to take and your preferred returns.Risk and reward are always at opposite ends of the scale - the higher the risk, the higher the potential return, and the lower the risk, the lower the expected return.Cash flow is another important factorKeep this in mind when you assess your personal situation.You need to have a good idea of your cash inflows and outflows and of how to do a balancing act between the two.That is why a cash-flow needs analysis is such an important part of any financial advice programme.

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