How to Pick Stocks

In one of my previous posts, I wrote about the investment strategy of Peter Lynch, an American fund manager. Some of you are probably interested in it, and want to learn more.

I recently bought the stocks of Padini, an apparel maker. I made the purchase based on the guidelines given by Lynch. Now I will tell you how I came up with this decision:

• In the past few years, Padini’s revenue has been growing at about 9% annually, and profit has been growing at more than 20% annually.
• P/E ratio was about 9.5, which wasn’t too expensive. (According to Lynch, if the profit growth doubles the P/E ratio, the stock is a bargain.)
• The company has more cash than debt.
• PADINI is not a hot stock. (Hot stocks tend to be riskier.)
• We buy clothes even when economy is bad.

Of course, I am not an investment guru; I may be wrong. The picture is not all rosy. For one, Padini’s brands are relatively weak. Uniqlo, the Japan-based apparel maker, has a much stronger brand. Then again, Uniqlo may not pose a serious threat. Clothes sold by Uniqlo are often too warm for Malaysian climate.

Note:

P/E ratio is short for Price/Earning ratio. We compute P/E ratio by dividing the stock price with earning per share.

My Hong Kong Trip (VI)

Recycling in Hong King

Recycle bins are common sight in Hong Kong. Here are some…

In Ocean Park…

In Hong Kong Convention & Exhibition Center, Wanchai…

Foreigners in Hong Kong

Before visiting Hong Kong, I already knew that there were many Filipino workers in the Chinese territory. It turned out that there were plenty of Indonesians too.

While Filipinos congregate in Central on Sunday, Indonesians do so in Causeway Bay, not far from my hotel. I later learned that Thais meet at Tsim Sha Tsui.

Indonesians in Causeway Bay…

Hong Kong Girls

I didn’t see many pretty girls in Hong Kong. Which came as a surprise, given that the SAR was an affluent and trendy city.

Occasionally I came across pretty girls. But chances were, they were Mandarin speakers…

No Clear Sky

As an avid photographer, I like to take landscape photos with blue sky. Unfortunately, during my 8-day trip to Hong Kong, the sky was almost always shrouded in haze. The wind had blown the polluted air from Mainland China to the SAR.

Colonial Era Place Names

Unlike Malaysian Government who wasted no time to rename most of the streets after independence, Hong Kong still retains many of the colonial era place names. We came across such names like Jordan, Nathan Rd, Wellington St, Shelter St...

I suspect Hongkongese miss the days when they were ruled by the Brits, especially when the two SAR chiefs, Tung Chee Hwa and Donald Tsang, disappoint them.

One Up on KLSE

I am learning to invest in stock market, and I have just finished reading this book:

One Up on Wall Street, by Peter Lynch

Lynch is a former fund manager. He shares many similarities with Warren Buffet – both of them are long term investors who ignore short-term market fluctuation; both of them invest in companies, not in the market.

However, Lynch differs from Buffet in some other ways. Buffet likes to invest in companies with durable competitive advantages. Such companies would have very good track record; they would have been profitable for many years. The problem is: stocks of such companies won’t come cheap.

Lynch, on the other hand, groups companies into 6 categories – slow growers, stalwarts, fast growers, cyclicals, turnarounds, and asset plays. He has devised a strategy for each of these categories.

Lynch likens a potential fast grower to Harrison Ford. The Hollywood superstar was a carpenter before he joined the cast of Star Wars. A stalwart, on the other hand, is like a lawyer. A lawyer’s wagers, while high, don’t come close to Ford’s income.

In his book, Lynch guides on how to pick a winner, when to buy, when to sell etc…

After reading my post up to here, some of you are probably getting excited, and want to get a copy of this book. Those who have read this book may want to resign from your job and become a full-time investor. But let’s be realistic, can you become a millionaire by investing in stocks?

Let’s say your initial capital is RM10,000, and you invest in just one security. (Few people put all their eggs in one basket!) Within five years, the price of this stock rises by 10-fold. Your investment now values at RM100,000 – not bad at all! Even so, you’re still just a 0.1 millionaire.

I have invested in a few stocks, but I still can’t retire, yet…