52-Week Low Formula

Just finish this book. Not so bad, not so good neither. 

It examines the 5 formula filters behind selecting the outstanding companies and great investment opportunities that are being overlooked, resulting in bigger gains, reduced risk and faster recovery following economic downturns 

The 52-Week Low formula is not about finding cheap stocks that can be turned for a quick buck. It's a system, a process that takes the guesswork out of investing and removes the influence of human behaviours. 

The author uses 5 filters to select stocks 

Filter 1: Durable Competitive Advantage

The first screening is to select companies with durable competitive advantage, as these companies are difficult to compete with by their nature and positioning. It gives the companies tha ability to adjust to a changing world, fend off upstart competition and insulate themselves from competitors. 

Filter 2: Free Cash Flow Yield

Free cash flow yield is described as Free cash flow / Enterprise Value. 

Free cash flow yield couples the health of the company with its valuation. The free cash flow yield multiple over the 10-year Treasury bond is known as the margin of safety. Investors need to set a minimum free cash flow yield multiple as we do not want to earn slightly more, we need to earn a lot more in cash over the what the bond provides, given the risks inherent in investing in common stocks. 

Filter 3: Return on Invested Capital 

The return on invested capital must be higher than its cost of capital consistently as the cost of capital is what investors in the company demand on their investment. Good companies use their money to make more money. It's just that simple. It is a hallmark of a good leadership and management. 

Filter 4: Long term debt to free cash flow ratio

This ratio describes how many years the respective company need to pay off its debts using the excess cash generated from its operation. It's hard for a company to go out of business if it has very little to no long term debt. There will be downside protection that business with high quality balance sheets provide to their shareholders during uncertain times. Furthermore, they are able to go out on the hunt and buy its competitors to enhance it market share growth. 

Filter 5: The 52-week low

When you come to this filter, you probably filter out 95 percent of the listed companies. Then wait for the company trades at or near its current 52-week low. 

Sounds easy? I don't think so. 

When a company is trading at or near its 52-week low, I think there is something bad happen around the company or the economic and market as a whole is having deep crash. So, do you have some of the elements required to make a buy call even though the company fulfilled those criterion? 

You need to be discipline. Review your investment periodically. The hardest thing to do in investing is to walk away from a winner or sell a company at a loss if it fails one of the filters. 

You need to free from fears. We all have biases and fears. It's extremely difficult to make decision when the people around you are buying the best, hot stocks or having valuation against yours. Investing wisely is not about keeping up with the latest trends, it's like acknowledging your fear and anxiety and overcome them.

Be courage. Stepping away from the known into the unknown is hard. It takes a lot of courage to think differently 

Winning System: 21 Costly Common Mistakes Most Investors Make

In the "How to Make Money in Stocks" book, William J.O'Neil also spare one chapter and point out the importance of learning from our mistakes. 

"Build up your weaknesses until they become your strong points"

The reason people either lose money or achieve mediocre results in the stock market is they simply make too many mistakes. Below are the key mistakes investors need to avoid to get better investment results. 

1) Stubbornly holding onto your losses when they are very small and reasonable. 

2) Buying on the way down in price, thus ensuring miserable result. 

3) Averaging down in price rather than averaging up when buying. 

4) Not learning to use charts and being afraid to buy stocks that are going into new high ground off sound bases. 

5) Never getting out of the starting gate properly because of poor selection criteria and not knowing exactly what to look for in a successful company. Overly concentrate in highly speculative or lower quality securities

6) Not having specific general market rules to tell when a correction in the market is beginning or when a market decline is most likely over and a new uptrend is confirmed. 

7) Not following your buy and sell rules, causing you to make a increased number of mistakes. 

8) Concentrating your effort on what to buy and once the buy decision is made, not understanding when or under what conditions the stock must be sold. 

9) Failing to understand the importance of buying high quality companies with good institutional sponsorship and the importance of learning how to use charts to significantly improve selection and timing. 

10) Buying more shares of low priced stocks rather than fewer shares of higher priced stocks. 

11) Buying on tips, rumors, split announcements and other news events.

12) Selecting second rate stocks because of dividends or low price/earnings ratio. 

13) Wanting to make a quick and easy buck. 

14) Buying old names you're familiar with

15) Not being able to recognize and follow good information and advice. 

16) Cashing in small, easy-to-take profits while holding the losers. 

17) Worrying way too much about taxes and commissions. 

18) Speculating too heavily in options or futures because you see them as a way to get rich quick. 

19) Rarely transacting "at the market", preferring instead to put price limits on buy and sell orders. 

20) Not being able to make up your mind when a decision needs to be made. 

21) Not looking at stocks objectively. 

It takes time and a little effort to get it right, but in the end, it's worth every minute you spend on it. 

You can learn to invest with knowledge and confidence to protect your money and at the same time find and properly handle highly successful companies. 

*Abstracted from the book, "How to make money in stocks" by William J.O'Neil.  

Winning System: Cup with Handle Pattern

According to William O'Neil, every individual investor need to study and benefit from stock charts. It's not enough to buy a stock simply because it has good fundamental characteristic, like strong earnings and sales. A stock's chart must always be checked to determine whether the stock is in a proper position to buy. 

He analyzed the greatest winning stocks of the past and discovered that there were a number of successful price patterns and consolidation structures that repeated themselves over and over again. History repeats itself because human nature doesn't change neither does the law of supply and demand. 

One of the most important and recommended chart pattern by William O'Neil is the Cup with Handle pattern. 

Some of the key points highlight by William O’Neil regarding this chart pattern in his book are as below

Cup patterns can last from 7 to 56 weeks.

The usual correction from the absolute peak to the low point (depth) varies from 15-33%

A strong price pattern of any type should always have a clear & definite price uptrend prior to the beginning of its base pattern

 At least 30% increase in price in the prior uptrend, together with improving relative strength and a very substantial increase in trading volume at some points in the prior uptrend.

Bottom part of the cup should be rounded and give the appearance of a “U” instead of a narrow “V”.

Stocks that come straight off the bottom into new highs off cups can be more risky because they had no pullbacks.

Formation of the handle area generally takes more than 1 or 2 weeks and has a downward price drift, volume may dry up noticeably near the lows in the handle’s price pullback phase.

Although cups without handles have a somewhat higher failure rate, many stocks can advance successfully without forming a handle

The handle should also be above the stock’s 10-week moving average price line. Else, the failure rate is high.

A price drop in a proper handle should be contained within 8% to 12% of its peak.

There should also be at least some tight area in the price patterns of the stock under accumulation. (Tightness is defined as small price variations from high to low for the week, with several consecutive weeks’ prices closing unchanged or the previous week’s close on a weekly chart.

When the stock charge through an upside buy point from the handle (pivot point), the day’s volume should increase at least 40-50% above normal

The pivot buy point in the handle area occur at 5-10% below the prior peak. 


So, get it? 
Look through some charts and learn. Let's see whether you can spot the next cup with handle or not

Above post is abstracted from the book "How to make money in stocks" by William O'Neil. 

Winning System: CAN SLIM Part II

I was posting about the CAN SLIM method in my earlier post and the last alphabet "M" of the CAN SLIM is quite important. 

M = Market Direction. 

Learn to determine the overall market direction by accurately interpreting the daily market indexes' price and volume movements and the action of individual market leaders. 

This can determine whether you win big or lose. You need to stay in gear with the market. It doesn't pay to be out of phase with the market. 

A) To detect a market top, keep a close eye on the daily index.

- Heavy volume without further price progress up, price index is either flat or down. (Distribution)

- Spread from the average’s daily high to its daily low may little wider than on previous day.

- The general market will always turn down 2-4 weeks later after 4-5 specific distribution days over a period of 4-5 weeks.

- A lot of trading but no real price progress.

- Laggards can’t lead the market higher. This is simply a matter of weak leadership trying to command the market. If the best ones can’t lead, the worst certainly aren’t going to do so for very long. 

B) To spot the bottom of the stock market

- A rally attempt begins when a major market average closes higher after a decline that happen either earlier in the day or during the previous session. This trading day considered as Day 1.

- Example: Down 3% in the morning but recovers later and closes higher, or down 2% and rebounds the next day

- Look for “follow through” with a booming gain on heavier volume than the day before, usually occur between 4^th – 7^th day of Day 1.

- Example: index up more than 1.5% gain and volume is higher than average daily volume recorded previously.

- Eliminate sudden spike of certain index stocks that create false follow through.

- Then, begin buying high-quality stocks with strong sales and earnings. 

C) Initial bounce back is feeble

- Index advance in price on the third, fourth and fifth rally day but on volume that is lower than that of the day before. 

- Average makes little net upward price progress compared with its progress the day before.

- Market average recovers less than half of the initial drop from its former absolute intraday high

- When you see these weak rallies and failures, further selling is advisable. 

Above post is abstracted from the book "How to make money in stocks" by William O'Neil. 

Winning System: CAN SLIM part I

I just finish read the book, How to Make Money in Stocks (4th Edition) by Willim J.O'Neil.

He created a winning system in good or bad times, namely CAN SLIM system. The system combines fundamental and technical part to screen companies & buy it at the right time. Each letter in the CAN SLIM systems stands for one of the seven basic fundamentals of selecting outstanding stocks. 

The system helps to identify companies with strong fundamentals - large sales and earnings increases resulting from unique new products or services and then buy their stocks when they emerge from properly formed price consolidation periods. 

C = Current Quarterly Earnings per Share. 

Quarterly earnings per share must be up at least 18-20% or more - the higher, the better. They should also be accelerating at some point in recent quarters. Quarterly sales should also be accelerating or up 25%. 

Compare EPS to the same quarter a year earlier, not to the prior quarter to avoid any distortion resulting from seasonality. 

Omit a company's one time extraordinary gains. 

A = Annual Earnings Increases. 

There must be significant (>25%) growth in each of the last three years and a return of equity (ROE) of >17%. If return on equity is too low, pre-tax profit margin must be strong

For turnaround stocks, look for annual growth rate of at least 5%-10%, two straight quarters of sharp earnings recovery. 

N = New Products, New Management, New Highs. 

Look for new products or services, new management, or significant new changes in industry conditions that able to drive the company move forward. 

S = Supply and Demand 

Shares outstanding plus big volume demand. Any size capitalization is acceptable in today's new economy as long as a company fits all other CAN SLIM rules. Look for big volume increases when a stock begins to move out of its basing area. 

Select companies with low outstanding number of shares. Easier to push up price since the supply is low. 

Choose entrepreneurial management rather than caretaker. 

L = Leader or Laggard. 

Buy market leaders and avoid laggards. Choose among the best two/three stocks in the respective field or industry.

Avoid sympathy stock. It refers to a laggard stock that traded cheaper to leader stock will not enjoy the valuation given to the leader stock. 

Always, without exception, limit your losses to 8% of your cost, given that you bought your stocks precisely off sound base. (Consolidation area)

I = Institutional Sponsorship. 

Buy stocks with increasing sponsorship and at least one or two mutual fund owners with top-notch recent performance records. 

It takes large source of demand (Institutional investors) to push up the price. 

Avoid over-owned by institutions as it's probably too late to climb upwards. 

M = Market Direction. 
I will have another post for this as this section is quite long


The system is different from the conventional fundamental approach. 

The philosophy of the system is to buy the stocks when they're on the way up in price, not on the way down. And when you buy more, you do it only after the stock has risen from your purchase price, not after it has fallen below it. 

Buy stocks when they're nearer to their highs for the year, not when they've sunk so low that they look cheap. 

Pay less attention to a company's book value, dividends and PE ratio. Focus more on important proven factors such as profit growth, price and volume action and whether the company is the number one profit leader in its field with a superior product. 

Lastly, you also have to acquaint yourself with charts to buy the stocks at the right time after it came out from the consolidation phase. 

Above post is abstracted from the book "How to make money in stocks". I find it quite interesting on the system but I think the figure need to be adjusted a bit in order to suit KLSE counters as I don't think the annual EPS growth must be at least 25% for 3 consecutive years. Furthermore, the company must be the leader of the industry. All this while, I always think of the growth of the market leaders are quite low or stagnant. Need to further study a bit.