Mixing Up Investing and Trading

I started investing in stocks back in June 2009 once I turned 21. It has been around three years and I have learnt lots from this experience. Putting my knowledge into practice is a better teacher than merely reading books on investing.

My investing mentality was grained by the theories of Warren Buffett, Benjamin Graham, Peter Lynch and the likes. They have always espoused that investors should see stock prices not merely as numbers but should understand that there is  a business behind these prices. Theories like this have been stuck with me but lately, I found that they were getting diluted due to a trader’s mentality.

I think it started back in August 2011 and was reignited last month. Markets were coming down but the businesses I was monitoring did not come down to the price point where I would be comfortable investing in for the long-term. Since I could not take opportunity of the price drops of my favourite companies, I thought of trading by buying other companies that came down in price a lot like Capitaland. So, at least by buying Capitaland, I could make some money when it recovers. This trading mentality caused dilution of the investing theories I had read over the years. Scarily, I began to see stocks as merely numbers moving up and down and not businesses. What made it worst was that this traders mentality made me have a short-term view of the stock market! I wanted to make quick bucks. Businesses take time to flourish and decisions made by the management will take time to come to fruition. This fundamental knowledge of investing was getting thrown out of the window.

I realised that I had to separate the investing arena and the trading arena and not mix up the theories. Investors have a longer term outlook and see a business behind the stock price. Traders have a shorter term outlook and just buy and sell based on the prices. Having a traders mentality on stocks meant for the long-term will only hurt returns as one would sell when the price goes down and buy when the price goes up. Instead of buying low, selling high, one can end up buying high, selling low.

This post serves as a reflection for me. Some of you investors might have been in the same situation as me. Share with me your thoughts in the “Comments” section. Cheers!

Lessons Learnt – Sinotel

I recently was looking into Sinotel after my cousin asked me for my opinion on it. Sinotel provide wireless telecommunication applications and solutions in China. Their major customers include China Mobile, China Telecom and China Unicom.

I was kind of impressed by the various contract wins awarded by the major telcos in the past few days but realised from a forumer in Valuebuddies.com (thanks MW!) that one must look beyond the contract wins and scrutinize the fundamentals of the company (i.e. the financial statements).

I noticed that their cash flow from operations has been decreasing for the past few years. Their latest Q3FY10 results were released on 9th Nov. Having scrutinized it, I realised a major flaw in this business/industry. Even though they posted a net profit increase of 19.2%, their account receivables has ballooned to high levels and currently stands at RMB532 million. Their revenue for 9MFY10 is only RMB521 million. This means that even though they book revenues in their P&L statements, they have yet to receive these payments from the telcos. The telcos take a long time to pay the companies like Sinotel. Thus, their account receivables turnover days is also on the high side. The business is also capital-intensive with lots of capex involved. Thus, for 9MFY10, Sinotel had negative free cash flow. This was the case for 9MFY09 as well (for 9MFY09, the cash flow from operations was negative to begin with).

Even though Sinotel has higher ROE and net margins than its peers listed in HK, Sinotel is not a good stock from its business perspective due to poor cash flow. It has reiterated in me the fact that positive and increasing cash flow is the most important thing for a company to prosper.

Goodbye Dapai!

I’ve just realised that I’ve made a few mistakes by investing in Dapai. Thus, I have fully divested my shares in Dapai. I have only held on to Dapai for around 2 weeks and luckily, I have realised my mistake early.

Reasons for divestment

1) Company did a share placement in May 2010 even with lots of cash in hand and negligible debt. It raised money and diluted shareholders holdings without the need to.

2) Company has been postponing opening of 500 new stores and I’m not comfortable with this.

3) Net profit margins, ROE, ROA have been decreasing throughout the 3 years. Maybe I was blinded by various rosy pictures painted by the company.

Lessons learnt

Even with all the “negatives” of the company, I went on to invest in the company. I broke a major rule in value investing – “When in doubt, never invest!”.

Also, I almost broke Warren Buffett’s main rule – “Rule No.1: Never lose money; Rule No.2: Never forget Rule No.1”. I almost lost money on Dapai. Luckily, I managed to sell it off at a slight profit after deducting commissions. How to make sure one doesn’t lose money? By researching on the company thoroughly and when there are “negatives” in the company, investigate why is that so. I guess I was plain lazy at times to research thoroughly on Dapai and still went on to invest in this company. I was afraid of “missing the boat” as Dapai was very undervalued at time of purchase. It just hit the support level after profit warning was released and I went in to invest (at least, I’m not fearful to invest when stocks plunge. Haha!). One of my mentors told me once, “To me, losing opportunity is better than losing money” and that’s a tenant to invest by. I would rather lose opportunity (not getting in at a cheaper price) when researching Dapai then invest in it and lose money in the end.

In value investing, being disciplined is very critical. I wasn’t disciplined enough to research thoroughly. All the criteria (eg profit margins, ROE, balance sheet, cash flow, etc) must be perfect/near perfect and then only, valuations and MOS will make sense. When the analysis is skewed, no amount of valuations and MOS will transform the company into a good buy. Warren Buffett’s quote “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” comes to mind.

In the future, I’m going to research thoroughly on a company before even putting a single cent in the company like how I did for Kingsmen, Super, TMC and HLS. A thorough research and understanding the company inside out (at least to the best of my abilities) before putting money on the company is another “margin of safety” for me. I’ll also try to not look at the price of the company while researching it, so that my research and thoughts will not be not skewed/biased. This blog makes me accountable for my actions and without such a blog, I feel that it will be hard to take my investment skills to the next level. I also strive to give a good analysis on companies as some of my readers rely on my posts for their own research (note that doing your own thorough research is paramount before ploughing money into any company).

Future course of action on Dapai

I will KIV this company and see if things improve. I would closely scrutinize the profit margins, ROE, whether management is keeping its word on opening of new stores and dual listing and whether building of new luggage factory takes off. There is possibility that I would re-invest in this company when things turn out better.

P.S. You might think I’m being hard on myself, all these are not warranted for and that Dapai is still a great company. Please note that this post is purely my own thoughts and Dapai might still be a good investment to many. This post does not serve as a sell recommendation to any of the shareholders of Dapai. This post serves merely as a personal reflection.