Tuesday, July 27, 2010

The Lioness

Recently I had put the ebook Aesop's fables into my hand phone to read during those little bits of time like waiting for buses and mrt. Since the stories are pretty short (most are around one paragraph) and full of meaning, I can spend the time reading a few stories at one go and reflect on them as I travel (I can't read while travelling on buses...makes me giddy).

Here's one that is striking to me. It's called the Lioness. Here goes:

A Controversy prevailed among the beasts of the field as to which of the animals deserved the most credit for producing the greatest number of whelps at a birth. They rushed clamorously into the presence of the Lioness and demanded of her the settlement of the dispute.

"And you," they said, "how many sons have you at a birth?" 

The Lioness laughed at them, and said: "Why! I have only one; but that one is altogether a thoroughbred Lion."

The value is in the worth, not in the number.

One good one is sometimes better than many lousy ones

It's particularly striking to me because it reminded me of the past folly that I've made when I'm a newbie in the market. I used to associate more with better value. Since I have limited capital, I would want to buy as many shares are possible with my capital - that would mean the shares I bought almost always pennies. The underlying thought process is very simplistic - why buy 1-2 lots of blue chips whereas you can buy 10-20 lots of pennies.

I did not see the worth of the stocks in its intrinsic value. Hence when I was introduced to the concept of value investing, I was suitably intrigued by it. It was easy to understand but I didn't think of it that way. It took several more losses in penny counters  before I was convinced that pennies are just not suitable for my liking. I prefer the relative stability of blue chips these days and am wary of anything less than 50 cts in price.

Of course, pennies appreciate much faster when it's their turn to dance. The flipside is that they depreciate much much faster too. It's a peace of mind choosing blue chips as you can really put in a large chunk of your capital and sleep soundly. However, among the pennies, I really hate the ass-chips. Personal feud....No more of such nonsense for me, haha!


Jeremy said...

Dear LP,
My thoughts on pennies and blue chips as follows. These terms "pennies" and "blue chips" by itself do not mean anything as the price of a stock traded depends on the total outstanding number of shares. A blue chip that does stock split many times can decrease it's traded stock price even below $1 per share. Does that make it a penny? By definition of stock price alone below $1 per share, yes. However, the intrinsic value and market capitalisation of the company has not changed, just only the liquidity and price per share of it's shares has increased. So, I may not think it is considered as a penny just on it's price per share alone.

I personally think the terms "pennies" or "blue chips" can be used to judge a company based on the consistency, excellent quality and large size of it's business, assests, earnings, cashflows and also management quality. A stock trading at below $1 per share may be considered a quality company if it has all excellent qualities as mentioned above. This I will beg to be different from others by actually ascribing my use of the term "blue chip" to refer even to such low price per share companies which are exceptionally good displaying qualities similar to a real "blue chip" company.

Similarly, a company traded at above $1 per share as we know, may not be considered as "blue chips" at all if it's high stock price does not justify it's real business quality and size of assests.

So, price per share is a misleading consideration for whether a stock is "pennies" or "blue chips". I never consider a company's investment worth based on whether it's price per share is higher than $1 or lower than $1. If a company is really good and it's traded stock price below it's estimated intrinsic value per share, it is good to buy no matter whether it is a high cost venture (traded at above $1 per share) or low cost venture (traded at below $1 per share).

Even if one has a low capital, one should not be constrained by the number of lots invested in any one company. If a company is a good one, even holding a few lots can give better returns than holding many lots of a low priced but lousy company. However, this being said, low priced penny stocks do attract many as it can result in high capital growth. But, please consider carefully whether the rise in stock price of any stocks not just pennies, is due to it's investment value or just plain speculative sentiments that can come fast and fizzle out fast getting one caught unwary.

Sorry for my long-winded sharing again.


Jeremy said...

Sorry, admentments to my earlier post in first paragraph:
"However, the intrinsic value and market capitalisation of the company has not changed, just only the liquidity and price per share of it's shares has increased."

The above should read
"However, the true business value and market capitalisation of the company has not changed, just only the liquidity has increased and price per share of it's shares has decreased."

Jeremy :-)

la papillion said...

Hi Jeremy,

Always so fast in response, haha :)

I do not treat blue chips based on price at all. It's a hazy definition with the following factors included (but not exhaustive)

1. Inclusion in sti components
2. Market share in respective industry
3. Govt linked or big MNC
4. Monopolistic business

The definition of penny being $1 and below is just a guideline, I think.

BTW, any examples for a blue chip company that split until the price went below $1 per share? I couldn't think of any. I only like blue cheaps ;)

Createwealth8888 said...

Birth by the numbers.

If the survival rate is low then you go for numbers.

Octopus laid a few hundred thousands of eggs and she will die after the eggs are hatched. Out of these few hundred thousand baby octopus only 1-2 will become mother to the next generation.

So the rate of survival will determine the number required and the same theory can be applied to your portfolio management.

I need 20-25 counters in my portfolio to ensure survial from bear raid and to ride the bull in the merry-go-round