Friday, January 19, 2007


The Effects Of A Bull Market

1) Delusion - May cause most investors to think that they are smarter than what they really are. A prolonged bull market may even cause some to elevate oneself to demi-god status. A normal market is like sitting for a test and answering an objective test with 4 choice answers, one of them being the correct one. A bull run is like sitting for the same test the only difference being three out of four choice answers happens to be the correct answer.

2) Coverting Temporary Events Into Annuity - All of a sudden some investors will find that they are making 5,000-20,000 a week. All at once, the investor will turn into an actuary specialist and calculate the fresh stream of income as an annuity (prolonged consistent rvenue for the longest time). This will give rise to euphoria in mind and cause the person to spend the net present value of the annuity in leveraged format.

3) Experts' Predictions - You can sift out the good experts and the merely qualified ones. When the market was at 900, they will predict a high of 1,000 over the next 12 months. When the market reaches 975, they will upgrade their 12 months forward target to 1,080. Now at 1,120 you will find them marking 1,200-1,250 as the high for 2007. That is not predictions, that is anchoring & adjust, a simplified way of decision making. A real prediction is someone who will dare to predict 1,100 when the market is at 900 and says that is reachable within 12 months. You can easily tell the better ones, don't be fooled just because they get their pictures in the papers. The essence lies in their grasp of the overall Big Picture. If their grasp is weak, they will not dare venture beyond the "safe zone" (i.e. anchor & adjust). However, if their grasp is good, they will be able to convince you with good solid arguments and pieces most of the important jigsaw together to forma coherent cause & effect storyline. You will know its good cause it will be persuasive.

8 comments:

The Mumbling Priest said...

A very timely post my friend!

Yup, it's easy to think of oneself as a master of the universe in a bull market. I keep telling myself it's not me but the big wave that's lifting the flotsam. Then again, the game's been around since the railroad boom. Everytime a bull comes along, there's bound to be a fresh set of optimistic players, who may not have seen the previous bust, to fuel the boom.

In the meantime, make hay while the sun shines :)

The Accidental Investor said...

Well said. And big thanks for prompting me on Kinsteel. After ur prompt and looking at their latest results, it was clear that Perwaja is going to do well under the experienced owners. Plus it was a good deal for both parties. Managed to get quite a bit of Kinsteel Warrants at less than 58sen, now its RM2.41 in a little more than a month.

But even at this level, I still think Kinsteel is going to do well - what with rising steel prices, 9MP and market share position with the restarted Perwaja.

Salvatore_Dali said...

I would have put a RM3.oo valuation tops for Kinsteel but certain market conditions have improved the outlook for steel over the last few weeks, so if you are still holding on, sell gradually on the up. No point waiting for RM5.00 as the inherent market dangers could wipe out the 300% gains you are holding onto.

The Accidental Investor said...

Dali,

Actually sold half the warrants at 2.65 (top for the morning session - hence causing resistance) for a nice piece of biz (+348% gain). If the rest of the warrants drop to zero, I am still holding on to close to 150% net profit. Not too shabby.

Kinsteel is a story that is as yet unfolding. Analysts put it at a target price of 4x FY07 earnings at RM2.40. But I am not convinced. Already the last Q results with one month of Perwaja contribution was sensational -even though all Perwaja mills were not fully operational yet. I also believe that the analysts are wrong on the target EPS and it should be higher.

And I don't think we should be valuing a market share leader at 4X earnings especially in an environment of rising steel demand and prices.

Valuing is at a reasonable 8X PE for a market share leader (assuming EPS targets are correct) would actually lead to a valuation close to the RM5.00 you mentioned.

This will be interesting.

The Mumbling Priest said...

Disregarding the recognition of -ve GW, I'm rather curious about Kinsteel's Q3 performance. Operating margin for Q3 is 30% compared to 11.4% for the 9mths (incl Q3). Sales actually dipped 2.8% from Q2 (see note B2. But operating expenses dropped like a brick - to yield the 30% operating margin.Notice that Q3's operating margin is 70m vs 89m for the cum 9 mths

My question is how does assimilation of Perwaja for just one month have such a wonderful effect on operating expenses? Don't get me wrong - I think there's still upside - but I'm very curious.

The Accidental Investor said...

IMHO, the Opex stated in their accounts definitely includes Cost of goods sold. Being "integrated" now, they have access to cheaper feedstocks from the Perwaja mills and no longer have to cost their supplies at market rate. It would be interesting when true economies of scale or further operating efficiencies kick in.

The Mumbling Priest said...

Thanks AI, that sounds pretty reasonable. Except that the 30% operating margin is the average for the 3 mths to end-Sept. And the acqn was completed 7 Sept.

Is it therefore reasonable to say that Kinsteel has moved to a whole new super duper level from Sept 7th?

Up to June 06, its operating margins were only 3.5%. FY05's was 5.7%. Now, assuming monthly sales were even thru out Q3, that would mean an operating margin of 83% for Sept alone? If sustainable, it deserves a very much higher PE

uhh that's (83+3.5+3.5)/3 mths

If there were no sales in Jul & Aug, yeah 30% is believable.

Time to call in sifu Dali. I must be missing something here.

The Accidental Investor said...

Priest. It would be unrealistic to just look at the margins for its pre-acquisition business. We have no idea what margins that the mills from Perwaja steel gives. Also, could this be a one-off where there was old inventory (steel feed-stock does not go bad)priced at low prices?

Read in the Edge today that Hwang-DBS now gives a target price of RM4.30 for Kinsteel.