The Very Importance
of Margin of Safety
There is a famous rule in investing that is rule number one : Never lose
money and rule number two: always remember rule number one.
Unfortunately it is almost impossible not to ever experience losses in
stock market unless one is not a human and something else or have a time
machine that can go travel back to time or ahead. Or perhaps unless one never
invest in stock market at all.
I have my share of experiencing real cash losses in some stocks in my
lifetime too. It is never an easy feeling when one cuts losses in a bad
investment. The feeling of "hati sakit" is one you know I know.
So one needs to avoid losing money in the stock market as much as
possible. If one cannot accept losing money, one should totally stay out from
investing and put all his money in Fixed Deposits. At least he can sleep well
peacefully every night. Ironically I have a close relative who does that and
nothing else when it comes to money matters. He is so conservative and cautious
is his approach that he doesn't trust investment at all even though he knew
about my interest in investing.
So what kind of strategies should be applied if one wishes to minimise
his losses? I do not think there is a standard strategy for this. Rather I
believed
many of us would have their own definitions of entering the market based
on their version of margin of safety.
Here are two I like to share which again are my own and not necessary
suitable or applicable to anyone. But if it works for me, then it is fine.
Buying at near 52-week low or a few years low
Strangely while this sounds easy to understand, it is also difficult to
apply because there are always detractors who will advise against this by
saying : don't catch a falling knife. But if one waits till the falling knife
has landed, then one waits forever unless that particular stock drops to as low
as 5 sen or less which is most probably unlikely for most stocks.
As long as that particular stocks continues with its usual profiting
business (better still paying some decent dividends usually), buying it near
its 52-week low is actually quiet a low risk buy. The stock might still go down
to another new 52-week low after one enters, but then again one has already
secured a big margin of safety compared to all those who bought above the
52-week low.
If one remembered when oil price was skidding to new lows in late 2014,
many stocks were skidding to new 52-week lows. I bought three stocks over a
period of three months : Century Logistics Holdings Berhad, Supermax Corporation Berhad and Thong Guan Industries
Bhd.
Supermax and Thong Guan were trading at new 52-week lows. But what happened
today is Thong Guan has more than doubled its share price to above RM4 (and
still standing there) while Supermax went to touch a high of RM3.54 in early
January 2016 (I admitted I was lucky enough to sell off at RM3.52, no reasons
for selling other than to take profits sometimes). Supermax today is trading
just above RM2.
As for Century Logistics, it was not exactly trading near its 52-week
high, rather I liked for its superior dividends of 5% plus which should support
its share price.
Buying when it has fallen substantially from its peak price but not
52-week low
There are times too when we notice a particular stock has been going up
higher and higher by the days due to some good news like a recent announced
quarterly results. It sounds too tempting if one does not jump in before the
price goes even higher.
Normally in this type of case, I feel I might have missed the early boat
and now if to buy must pay a higher price. Unless this particular stock's
fundamental and future predicted earnings can convince me deep enough, I do not
mind entering even at that stage. I had done that before and has been richly
rewarded too on numerous occasions. But of course if one is to practise
patience and caution, one can always wait for its price to peak at certain
stage and allow profit-taking to step in. Then there were be a price retreating
period where one must set a target to enter.
A few recent examples were Chin Well Holdings Berhad (which had gone to
touch a high of RM2.34 on Jan 7, 2016) which I was interested, but I set a
target of RM1.70 if it ever retreated and it did).
Cycle & Carriage Bintang Bhd (CCB) which soared to nearly
RM3.93 on Jan 11, 2016) when it was shared by a few famous bloggers which
caught my attention. I waited for it to retreat and my price below RM3.40 which
it did.
Another was BP Plastics Holding Berhad (which soared to a high of RM2.02 on Jan 15,
2016). It was a stock I had kept for many many years and sold off at RM1.92
early this year for a more than 100%
profit. I was hoping it would retreat back to a more realistic comfortable
level price which was below RM1.60. And it just did when the market became
negative for most export oriented stocks later.
So having patience and setting target price for stocks which had surged
to new high (but stocks which should be good to keep for longer terms) when
there is a retreat can be cost saving and also one has some reasonable big
margin of safety in it.
Finally Focus Lumber Berhad which reported a disappointing set of result for
Quarter One 2016 (but still a profitable result) saw a massive selling spree
which saw its share price spiralling all the way down from a peak of RM3.09 in
January to as low as RM1.68 recently. That is a very big retreat of more than
45% which must be one of the most shocking drops for its long term shareholders
(including yours truly).
It is currently trading around RM1.70 plus which seems to be its more or
less stabilising point where it seems not many are eager to sell any lower or
not many are eager to pay more. Note that its 52-week low is RM1.27.
Mind you, Focus Lumber is a good fundamental stock that is cash rich and
its dividends has been quite generous when it is able to earn more. So should
one enters Focus Lumber now knowing at this stage, the margin of safety is such
a massive one of 45%?
It depends on your guts, but I knew a guy has recently bought 3,000
shares of Focus Lumber of July 22, 2016 at RM1.77. If you really care to know
who he is, check the latest Kassim's Basket of Defensive Stocks. Dare to follow
him again?
Yes, you read it correctly.
I have bought more shares of Focus Lumber
on July 22, 2016 at RM1.77 which is significantly selling at a massive
45% off from its peak price of RM3.09 in January 2016. The margin of safety is
even more now.
