Subject: IC940607: Stock Picking Thoughts - by Jianping Zheng

From: "Gray Zhu, 800-289-2498, 212-279-6700" <[email-masked]>
Date: Wed, 8 Jun 1994 00:08:02 -0400 (EDT)

==================    IC940607: Investment Club  ======================

Some Thoughts about Stock-picking and Investment
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>From: [email-masked]
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   (be sure to read the Disclaimer in the end if you have not read)

>From: [email-masked]

Some Thoughts about Stock-picking and Investment
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In the last  two issues Gray talked  a bit  about stock-picking. The timing
of his talking may just be accurate as the markets seem to enter the period
when  only  good  stock-picker will win,  while poor  stock-picker may lose 
very heavily.

Here are a few points I know about this specific issue, and some points a
beginner investor must consider.

1. The first thing is not to lose money, rather than how much to win
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It is enticing to read all the statements like "in the long run, shares
offer far more decent return than any other investment". Although this has
been proved in the most general cases according to historical data, you
have to bear in mind that most advertisements are trying to exaggerate 
the return part while hide carefully the great potential risks. Chopping
history in a different way, you may well-underperform and even lose.

What is more, even if the stock market performs well, you may still lose
because your stock-picking method always leeds you to the doghouse (where
dogs --- bad stocks --- is in store).

The best investment is certainly to have a method which wins each time, 
unfortunately no such method exists and probably there will never be.
The more practical way is to reduce losses to minimum, which you may do.

One way to keep you from over-exposed is to set a limit loss price each
time you enter, and strictly followed the rule. Once you know that the
share (or the general market) behaves not as you expected, exit with a
small loss. You may win back the money with other successful investment 
later. 

This method has been successfully used by many great investors. They won
because they knew that they are humble compared with the market. They knew
they could be wrong, and when they were wrong, cut the loss before it was
too late, and ask why it was wrong afterwards.

Don't let your ego win. Stay in a loser may wipe you out. There are not less
examples that share prices halved. The extreme one went from $100 a share
to $1 a share, before the inside information says something wrong with the 
company.

2. Do you own home work
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Gray said a little about reading the analysts reports and find the shares
that are recommended by all of the reports. While this could be the first
step to do a rough selection, which saves your time, you have to work 
much harder afterwards. After all, it is your money and nobody will care
too much if you lose.

It is more important to understand why the reports recommend the share 
rather than simply they said it is good. If the report is not backed by 
concrete data, it worths absolutely nothing. You should also read the 
company's quarterly and annual reports, verify the data and read the details
about how these data are obtained. You may find why different people 
quote data in different ways and whether the reports are biased.

Also, different reports serve different customers. Some expect you to sit
in with a 5 to 10 years time horizon. If you can't wait that long, it's
not for you.

3. Is Market Efficient or Inefficient?
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My understanding is that market is efficient, in the sense that all the 
known news and things quite certain to happen (together with their risk)
has been discounted in the share price. That is why "buy at rumor", because
the speculation may bring handsome return when the risk is removed; and
"sell in news", because the price has topped already.

When you know a share is to pay dividend, to split, or to have some big 
move, everybody else knows. The price has been discounted. Therefore never
buy shares just because these. Buy shares because they are fundamentally 
sound, and technically up (you may have your own method that works).

On the other hand, I will say market is inefficient. People view big 
pictures in different ways. They have great arguments about whether China
will be bigger or collapse, for example. And people interpret data in 
different ways. Once you find you own way that works for you, you'll 
consistently beat the market, as already demonstrated by many market 
wizards.

4. Some details: PE, etc.
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How to look for good companies. Technical data are helpful. PE is widely
used as one of the indicators, but it may just mislead you. There is 
always a reason behind the company with low PE, sometimes a very bad
one (remember market is efficient). Never judge a company undervalued just
because of its low PE.

Growth rate is another indicator. Unfortunately you can only estimate how
much it would be and the risk is that it may never be achieved. PE and
growth rate in combination may give you a hint of whether the company is 
overvalued. If you found a company with high PE and low growth rate, walk 
away quickly no matter how many reports and experts say it is hot.

Some of the other fundamental indicators can be read from a company's
balance sheet and cashflow statement. Gray may talk about these later so I
try to cut it here.

5. Find you own method
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There is no general method that fits everyone. You should find yours.
Though, you may find lots of great book to read. If you feel these are
boring, safely, put your money in the banks.

Happy investing, and good luck.

Jianping from Oxford