According to a report, the Strait Times Index (STI) fared the worst in South East Asia last year, declining 14.3% of its value. As a result, many Singapore investors and investment bloggers suffered heavy losses in their stock investments. Although not technically a bear market, investors should be aware of the risks in stock investing and equip themselves the knowledge on how to value a stock before surrendering their hard-earned money to the market. Fundamentally at the point of buying the stock, the investor must not be making losses. Easier said than done, but it can be achieved. In this article, lets delve into how to avoid making losses in SGX stocks.
Generally there are two ways to measure the value of a stock. The first is using the Price/Earning (P/E) method, which actually divides the price per stock by the earning of the company in that year. Essentially, this simple metric uses the earning performance of a stock to determine if a stock is over or under value. So if the earning, which is a denominator, decreases, the P/E will increase. Personally I find this method highly inaccurate as past performances would not guarantee future performances and furthermore, prices can be very subjective to everyone. What is deemed as expensive by one may not be so to another.
Another method to value a stock is by using the Net Current Asset Value Per Share (NCAVPS), advocated by value investor guru, Benjamin Graham. Like Graham, I believe in value investing and that we should not overpay for a stock. To do so, investors should focus on the asset health instead of the earning performance. Thus, the formula for NCAVPS is (Current Assets – Total Liabilities) / Total Outstanding Shares. NCAVPS is fairly easy to determine if you know how to read the annual reports. I will use the following listed company, Food Empire as an example, using the company latest quarterly annual report in Oct 2015:
Current Asset: USD 122,567,000
Total Liabilities: USD 86,100,000
Total Outstanding Shares: 532, 740, 999
Based on the above, the NCAVPS is USD0.068. However, the stock is currently trading at S$0.210 in the SGX. So even if you factor in the exchange rate, the stock is overvalued by about 100% according to Graham’s method. Henceforth, I will personally avoid investing in this penny F&B stock. Just one market corrections and all your investment capital would be wiped out.
Notwithstanding this, it is important to note that Graham’s method is to measure a company’s value at liquidation state, so it can be quite onerous and stringent. Using his method, you would find that many SGX stocks are considered overvalued. But I still prefer Graham’s method because as an engineer by profession, I have learnt to determine the safety buffer in my job. So by translating this approach to investment, I think it gives me more sense of security knowing that the downside risks are mitigated.
The way I see it is that many investors in Singapore based their investments purely on gut feeling or brokers’ recommendations. This is not desirable because if you don’t have an understanding of the business you invested in, then you have no business investing in them. In most cases, you would end up paying expensive learning fees to the stock market.
To reduce the risks involved in stock investments, always make sure that your portfolio is diversified and consists of different asset classes like gold and silver bullion, which tend to move in opposite directions to the stock market. In this way, your losses will be limited during stock market corrections.
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SG Wealth Builder