continuing : how to select stock 2/2
To help you better grasp the concept of the unorthodox criterion of stock selection by the professionals; let’s look at the following graphic illustration. We mentioned it earlier. It’s the [Stock Market’s Food Chain].”
STOCK MARKET FOOD CHAIN
WHAT HAPPENS ALONG THE CHAIN? A TOP DOWN PERSPECTIVE:
• At L1:
o Before any price sensitive news reaches the public, the stock is usually quiet. The public companies are ‘manufacturers of stories’. They produce earnings related information.
• At L2:
o Market operators think: “This Company should have some good stories to tell, let’s check it out.” Few days later: “Good! We are not wrong at all. Now here’s the story line. Get the guys to start accumulating, but make sure you keep it discreet. Understand?” And they start buying into the stocks ‘wholesale’ for mark up later.
• At L3:
o Next, the market operators will approach some friendly fundmanagers to participate. [If a fund agrees to buy and the public learn of it, it makes the story more convincing since the professionals are buying it; the affiliation marketing trick]. At this point, the fundmanagers will ask professionally: “What’s the story line?” Days later, a private phone call: “Let's meet at the usual place.” Minutes later at the lounge, the fundmanager said: “we’ll take a block from you and the open market.” They got it at a price higher than the market operator’s average at L2; distributor’s price. And again, they wait to sell stocks along with the story later.
• At L4:
o By the time the story reaches L4, where the brokers, analysts, dealers, press are, they say: “Hey! Did you hear the news about that company? You don’t want to miss the action do you?” But the intrinsic question of [What’s the story line?] lost its link from here. No one asks because none knows the secret we told you.
• At L5:
o At the final price stage, where the retail players and novices are busy with actions, no one asks about the story because the story is now told to the world. Now, the story is up for sale now. “Our story sounds great? We know. How about paying thi$$$$ to for a piece of the action? But we can't guarantee the story works as well for you as it had for us. You can try. And look, everybody is trying; you don’t want to miss the fun.” Everyone gets very convinced by the active price action. And more importantly, it looks obvious. “Let's buy!”
“Guys, thank you for your sharing. But how do you suppose I can get all those insiders’ information? I can't even get close to their cars, not to mention those snobbish bosses of the listed companies. I know nuts about market operators. Where do you expect me to find these aliens and ghostly people? And I know no funds. The only fund I know is called ‘Not-So-Fun’. And that’s how I am feeling now. I am destined to be at the end of the food chain forever. There goes my dream. I guess I’ll have to work at the aquarium for the rest of my life. Thanks guys, and I guess I need to be back working. Sigh!” Rex turned around with his head, jaw, tail, shoulders, eyes, ears all down and he dragged himself back to the shop.
“Hey Rex! Come back here, we are not done yet. We’ve got a plan for you.”
“Forget it StockRats. If you are thinking of turning me into a spy and hide me somewhere so that I can eavesdrop on their conversations, your brains must be too small. Look how huge I am!”
“Rex. We certainly will not ask you to do such a silly thing. That’s going to get you a $50,000 fine or three times the profit you make or losses you have avoided from the insider information; whichever higher. But you still can be a mighty StockRex and you will be soon enough if you are willing to learn and work a little harder on the stuffs we’re going to share with you.”
“Are you serious? $50,000 fine for eavesdropping? You must be kidding me. Besides, I am not a relative of any of directors or employee. I only have a friend working in that company. How can I be an insider?”
“Rex, I think you are confused but it’s a good question you’ve asked. The definition of insider’s trading cannot be interpreted literally from the word. There’s certainly nothing wrong being an insider. And there’s also nothing wrong with the possession of price-sensitive information. Whether you are guilty of insider’s trading doesn’t depend on your relationship per se, but the use of these ‘classified’ information. Even if you are not related, but you have taken advantage of information that is not available to the members of public, you are deem to have committed an unfair deed in the eyes of the law. You will have to prove that you have not obtained the information from an insider and the information is not classified as ‘exclusive’, and you’ve not used the information.”
“Phew! I didn’t know that. So what do we do? ” said Rex sticking out his tongue.
Sensitivity...
“Do you know why blue chips are the preferred among the funds and long term investors?”
“Now you’ve asked the right person. You mean you don’t know? But worry not StockRats. Though I sell fishes at the aquarium, I am not selfish at all. I’ll teach you. They have good earnings track records, good managements, good staff, good dividends and sometimes bonus, good accounts and financials, good business plans and strategies, good products and services, good ideas and innovations, good customers; you’ll hear more good news than bad from them. In fact, the only bad news that comes from them is that their earnings is less than expected, but nonetheless, they are still very profitable.”
“Exactly Rex. Blue chips are great story-tellers. In fact, they have established a good track record at doing that. They keep bringing good news to the market and their stockholders. Hypothetically, if each good story makes you 5cents on the stock, how much will you make from a stock that gives you a series of ten stories?”
“Hmmm...That’s a cool 50 cents! If I had 100 shares, I will make $50/-, if I had 1,000 shares, I will make $500/-, and if I had 10,000 shares, that’s $5,000/-!”
The point made is that you need to sit on a good stock to ride the future of its good news. There’s no passive speculator but passive investors. Time is of the essential ingredient for things to happen and reach the market’s ears.
Some examples of stories are classified into the following:
• Earnings performance(quarterly)
• Expansion plans to capture bigger market share ( occasional)
• Dividends or bonus payout (at least twice yearly)
• Asset realisations through disposal ( occasional)
• Winning awards (occasional)
• Increased sales or winning contracts (frequent)
• Selected to represent index (rare)
• Winning litigations issues (rare)
• New product or service innovations ( occasional)
• Well received product or service launch ( occasional)
• Attracted strategic investors ( rare)
Strange strategies:
1. Buy good story teller when they are cheap. They will have stories to tell in time to come.
2. Buy penny stocks and hope that they come up with one big turnaround story
what a top industry fund-manager once told us about his stock selection philosophy:
The truth is that only some 10% is worth your time.
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