Sorry for missing the last weekly article because I was too busy with the preparation of Feb 2014 class (4-day course) which requires my full focus and attention. Similar to the previous classes, I try to impart 17 years of my investing experience within 4 days, could be overwhelming for some students, especially when they went through the Day1 evening class till 10:45pm, then Day2 class from 8am+ to 8pm+ without giving in to tiredness.
I am very touched to see their strong spirit of learning, willing to sacrifice the next few days to complete the homework assigned (the knowledge can only be retained and become yours with own practice). One of the tasks is stock screening (what to buy) to identify stocks which could potentially give 50-200% return in future, applying the Ein55 % Optimism method. Other than NOL ($1) and China SSEC ETF (2000 points) with low optimism which I shared in the earlier articles, they have learned to apply and spot many other good investing opportunities.
One of the cases studied by the students is SMRT. Based on the preliminary FTP (FA + TA +PA) Analysis: Technical Analysis, TA (see chart below), trend in the last few years has been bearish (shorter moving average (MA) is below longer MA; parabolic SAR as resistance), partly due to weak Fundamental Analysis, FA (eg. higher cost of MRT repair, declining earning per share (EPS) and higher price-earning ratio (PE)) and negative Personal Analysis, PA (eg. cases of MRT breakdown, losing public confidence). Logically, most people would think SMRT is bearish, therefore not a good buy now.
For trend followers (traders / investors), they may apply MA, eg. when 50 day (about 2 months) MA is above 200 day (about 9 months) MA to enter in year 2012 (around $1.70/share, after prices came down from the peak of $2.30/share with about 30% discount) but then quickly cut loss when the signal changed to sell in a few months, dropping another 30% of the price till now (nearly $1/share). Most people would stay away from SMRT as they would not know how low it may go down further (eg. another 30%), probably below $1 as the historical low was around $0.50 in year 2003 during SARS crisis. Likely they would wait for the mega trend to reverse, eg. 50 day MA is above 200 day MA, before considering SMRT again. Some may not consider SMRT at all.
If one applies conventional support and resistance TA method, price of $1 is only a secondary support (similar to years 2005-2006) and $0.50 is the mega support, so the longer-term buying signal may not there yet using this strategy. Following Ein55 % Optimism principle, current price (nearly $1) of SMRT is just below 0% Optimism, implying a very good opportunity to buy low and sell high in future. For investor with holding power of a few years, buying at this price will have very high probability of >50% gain. Knowing what to buy does not mean one has to buy immediately (when to buy). There are several strategies available for timing of buy and sell, as well as how much to buy and sell.
For counter-trend method, now is a good timing (buying around $1) but one has to prepare to endure a possible period of short winter time (price may come down further but potential of “falling knife” is limited due to low optimism), while SMRT improves on its FA (eg. better EPS in 2014 compared with 2013), this will help to attract longer-term investors, then supported by speculation of short-term traders when there is a V-shape rebound in near future, especially when STI is moving upward. If one could not afford to lose money, even for a short period of time, then follow the trend to buy is recommended, however, a premium of >20% higher stock price may be required to confirm its longer-term trend reversal. Trend follower seems safer but the entry could be at its mid-term high and one with weak holding power may not able to hold through 10% price correction later due to market volatility, either will cut loss or make little profit. A combination of counter-trend and follow-trend method is possible, one may use shorter pair of MA (eg. 20/50 days MA using mid-term trading method) to buy SMRT now, minimizing the short-term downtrend risk, enable buying at relatively low point. The selling will be considered after >75% Optimism in future.
The % Optimism method will have much higher chances of success when combining with detailed FTP (FA + TA + PA) Analysis, considering both the individual stock and mega stock market and economy trends (sector, country, region, world). The holding power with knowledge of mega trend will minimize its long-term risk. Knowing what to buy is useful but the next step will be when and how much to buy and the ultimate results depend on when and how much to sell. Many investors know what stocks to buy (eg. blue chips with strong FA, hearing from stock tips shared by analysts) but still could lose money easily due to lack of personalized investing strategy.
Control of greed and fear is critical to maximizing the profit >50% (not only to gain / lose a few %), this can be guided by % Optimism of individual stock and also the mega market (eg. STI or major regional indices).
