Added a section on the right panel on useful sites that can help in analysing stocks. Do take a look.
I particularly like reuters. Create an account and set up your own dashboard. Create a watchlist of all the companies that you are interested in so that you can track their news easily.
Tuesday, October 27, 2009
Monday, October 19, 2009
What you need to know about Price Earning Ratio
The concept of Price Earning (PE) ratio should be pretty well-known by now. PE Ratio is the no. of times you are paying for every $1 that the company earns. For example, if Apple earns $10 per share, and the stock price is trading at $100, then the PE is simply 100/10 = 10. So you will be paying $10 for every $1 that Apply earns if you buy the stock now. From another perspective, it will take Apple 10 years to earn what you paid for the stock.
However, PE ratio, if not analyzed in the right context, will end up as a misleading number, and simply, just a number.
2 key scenario drives PE ratio.
I need a higher return NOW
why do i need a higher return now?
1) Inflation is going up. I need a higher return to offset the inflation loss in the value of $.
2) Tax is going up. Again, I need a higher return.
3) Risk of the company is high. High risk = high return expected.
In the above situations, I will only be willing to pay a lower PE, so that I will increase my chance of realising a higher return (think buy low sell high).
I can make do with a higher return in FUTURE
Again, why?
1) Return on Equity (ROE) of the company is high. Thus every $ re-invested by the company in terms of capital expenditure (thus lowering the earnings) should reap higher earnings in future.
2) Growth of the company is high. Again, I will be hoping for higher earnings in future.
In such situations, I will be willing to pay a higher PE now, so that I may get to enjoy higher earnings in future (think buy high sell higher).
Summary
Inflation up, PE should be lower
Tax up, PE should be lower
Risk up, PE should be lower
ROE up, PE can be higher
Growth up, PE can be higher
However, PE ratio, if not analyzed in the right context, will end up as a misleading number, and simply, just a number.
2 key scenario drives PE ratio.
I need a higher return NOW
why do i need a higher return now?
1) Inflation is going up. I need a higher return to offset the inflation loss in the value of $.
2) Tax is going up. Again, I need a higher return.
3) Risk of the company is high. High risk = high return expected.
In the above situations, I will only be willing to pay a lower PE, so that I will increase my chance of realising a higher return (think buy low sell high).
I can make do with a higher return in FUTURE
Again, why?
1) Return on Equity (ROE) of the company is high. Thus every $ re-invested by the company in terms of capital expenditure (thus lowering the earnings) should reap higher earnings in future.
2) Growth of the company is high. Again, I will be hoping for higher earnings in future.
In such situations, I will be willing to pay a higher PE now, so that I may get to enjoy higher earnings in future (think buy high sell higher).
Summary
Inflation up, PE should be lower
Tax up, PE should be lower
Risk up, PE should be lower
ROE up, PE can be higher
Growth up, PE can be higher
Monday, October 12, 2009
US banks continue to fail
From business times today.
No. of banks failed -
2009 to-date: 100
2008: 25
2003-2007: 10
When banks fail, other banks took over their accounts and customers. However, many a times the banks that took over will exercise greater caution towards the failed banks' customers, either refusing further credits, or make the loans more expensive.
This in turn, will result in a credit seize that we just experienced a few months back.
We can only hope that the credit seize had not been significant. Else, we will see more companies failing, and unemployment rate increasing. Not good at all.
No. of banks failed -
2009 to-date: 100
2008: 25
2003-2007: 10
When banks fail, other banks took over their accounts and customers. However, many a times the banks that took over will exercise greater caution towards the failed banks' customers, either refusing further credits, or make the loans more expensive.
This in turn, will result in a credit seize that we just experienced a few months back.
We can only hope that the credit seize had not been significant. Else, we will see more companies failing, and unemployment rate increasing. Not good at all.
Monday, October 5, 2009
Leverage & Degree of Thinking
If we can understand how much leverage a market has, we will have a better understanding of how the market will move given a pricing momentum.
A market could be leveraged in many ways - margin accounts, warrants, options, futures, CDOs, derivatives, etc. The more a market has of such vehicles, the more leveraged it is.
A higher leveraged market will have higher degree of thinking. Degree of thinking can simply be explained as how many iteration that you think the rest of the world will behave. Eg. If you think that the world will sell a particular stock at $10, you may want to sell at $9 to avoid getting caught in the selling frenzy. However, if you think that many people will come to this same conclusion, you may decide to sell at $8. Again, if you think that quite a number of people will come to this conclusion and sell at $8, you will probably sell at $7. The more cycles you think (and thus arrived at an ever smaller $ value), the higher the degree of thinking.
A sophisticated and matured market has a higher degree of thinking. Conversely, a developing or young market will likely have a lower degree of thinking.
Leverage, together with degree of thinking, could be the major explanation why the seemingly irrational behaviour that we had observed during this financial crissis, is actually rational.
When the prices started to come down, those leveraged players (eg margin players) would be pressured to sell (eg. margin call). Thus they will start selling to ease the pressure. Observers who see this selling, will predict that more margins will be triggered as the price comes down and thus conclude that more selling will be on the way, and they too, start selling. Thus selling begets selling and that is what we get in this financial crissis.
So what results in the reversal? Again, leverage (actually the lack of) and degree of thinking. As players become less leveraged, they will be more willing to take risk and even take up some leverage again. And as people started to think that the market will bottom, at say STI 800, the degree of thinking effect comes into play. Some will be willing to enter at a higher level, say 1000. Others coming to this conclusion (that people will be willing to enter at 1000), will start entering at 1200. And there you have it. Simple?
The tough part is getting a feel of how much leverage and degree of thinking is in the market...
A market could be leveraged in many ways - margin accounts, warrants, options, futures, CDOs, derivatives, etc. The more a market has of such vehicles, the more leveraged it is.
A higher leveraged market will have higher degree of thinking. Degree of thinking can simply be explained as how many iteration that you think the rest of the world will behave. Eg. If you think that the world will sell a particular stock at $10, you may want to sell at $9 to avoid getting caught in the selling frenzy. However, if you think that many people will come to this same conclusion, you may decide to sell at $8. Again, if you think that quite a number of people will come to this conclusion and sell at $8, you will probably sell at $7. The more cycles you think (and thus arrived at an ever smaller $ value), the higher the degree of thinking.
A sophisticated and matured market has a higher degree of thinking. Conversely, a developing or young market will likely have a lower degree of thinking.
Leverage, together with degree of thinking, could be the major explanation why the seemingly irrational behaviour that we had observed during this financial crissis, is actually rational.
When the prices started to come down, those leveraged players (eg margin players) would be pressured to sell (eg. margin call). Thus they will start selling to ease the pressure. Observers who see this selling, will predict that more margins will be triggered as the price comes down and thus conclude that more selling will be on the way, and they too, start selling. Thus selling begets selling and that is what we get in this financial crissis.
So what results in the reversal? Again, leverage (actually the lack of) and degree of thinking. As players become less leveraged, they will be more willing to take risk and even take up some leverage again. And as people started to think that the market will bottom, at say STI 800, the degree of thinking effect comes into play. Some will be willing to enter at a higher level, say 1000. Others coming to this conclusion (that people will be willing to enter at 1000), will start entering at 1200. And there you have it. Simple?
The tough part is getting a feel of how much leverage and degree of thinking is in the market...
Saturday, October 3, 2009
Demand and Supply
Just attended a talk recently and was given this concept which I find interesting:
- Stocks behaving like luxury goods.
On top is a normal goods demand and supply curve.
On the bottom, I had drawn in the luxury goods demand curve. Recap economics 101, a luxury goods has higher demands at higher price, and when prices come down, people perceived it to be of lower-class and stop buying them, thus reducing demand.
- Stocks behaving like luxury goods.
On top is a normal goods demand and supply curve.
On the bottom, I had drawn in the luxury goods demand curve. Recap economics 101, a luxury goods has higher demands at higher price, and when prices come down, people perceived it to be of lower-class and stop buying them, thus reducing demand.
Think about stocks like Wilmar. How fitting this luxury concept on such stocks. Most blue chips have this behaviour too.
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