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Chapter 7: Leng Yan Formula

• Investigation on American investment experts had shown that each investor use different strategies.
• In fact none of them are the same, but all of them still successfully achieved profit for their organization.
• However, one common thing among the expert’s strategy are their simplicity, nothing too complicated and very common.
• However, most commoners still failed while following the expert’s strategies.
• The reason being that the strategies are simple but hard to execute.
• The execution difficulty is due to the human weakness.
• Even the author had been seeking for the “shortcut” towards wealth, but to no avail.
• However, from author’s experience he had formulated his way of investment.
• Leng Yan Formula:

  Contrary (反向) + Growth (成长) + Time (时间) = Wealth (财富)

• Ordinary looking, useful but hard to execute as well.

7.1 Contrary (反向) –> Buy at Low Price

• Contrary means things that are the opposite of common way.
• Usually require clear mind, as during hype, people are easily influenced towards incorrect decision.
• Contrarion sell their stocks during bull market and buy their stock during bear market.
• Due to their peculiar decisions, they are less accepted among commoners.
• It is helpful to stay away from the stock market, and create a buffer zone for your investment.
• Although termed contrarian, their decision do not neccessarily be opposite all the time.
• E.g.: In 1997 Market Crash, commoners are busy selling their stocks while contrarian are quietly collecting the low priced stock.
• In 3rd quarter of 1998 the government decided to fix the exchange rate of 1 USD to RM 3.80, controlling currency exchange.
• The situation improved, market experienced rebound, people are buying and holding their stocks, the same go for the contraians.
• From the example, it is obvious that contrarian are the pioneer/leader of the stock market.
• They are the first few people in that wave, while other following their footsteps.
• Only the few people among the crowd will have clearer view of the market while the followers are blinded by the crowd, thus blindly following the crowd in most cases.
• Bear in mind that contrarian has their fair share of risk.
• Being the pioneer, the forward path are unfamiliar, posing huge risks.
• During market crash, its hard to pinpoint the minimum stock price.
• To be safe, contrarian are patient in making moves.
• In bear market, the fall of stock price will cause huge damage, requiring time for recovery.
• The recovery time if short, 1 - 2 months, if long, numerous months. Allowing sufficient time for making the right move.
• “Buy low sell high” is the only way of success, while contrarian is the way of achieving the “buy low” condition.

7.2 Growth (成长)

• Growth could be indicated by increase in turnover, profit and shareholder fund.
• Best to refer more than 5 years of company perfomance to determine growth trend.
• Every cost are appreciating annually due to inflation, with constant turnover, the profit of the company will drop eventually.
• To expand business, money is needed, that is why profit is important.
• Otherwise, right issues or loan are required for the expansion.

7.3 Time (时间) –> Owning Stock for Long Time

• Time in this context menas investing for long term.
• Time is the good friend of good stock, but bad friend for bad stock.
• In stock market bull and bear market occurs in alternate manner.
• Usually, bearish market last shorter than bull market.
• As stock price rise slowly, but plummet rapidly.
• As contrarion we must be patient and wait for the best selling time.
• The reason most commoners are unable to make huge profit out of stock market is they profit little but lose much.
• Investors must be ambitious, take it slow and stead while remember to 保本.
• Thus long term investment is the better way of achieving desired wealth.

7.4 The Contrarian Way of Choosing Company

7.4.1 The Loser’s Game (哀兵之战

• Commoners have to face various changing challanges in stock investment, making their chances of winning low.
• Thus, in this war, we need to first focus on surviving (no loss), before working towards victory (profit).
• Contrarian is one of the way in this loser’s game.
• Contrarian does not only apply in stock market, it could also be applied in company selection.

7.4.2 Avoiding Popular Stock

• The first step in contrarian method is avoiding popular stock.
• Place your focus on those unpopular ones in your search for stocks with growth potential.
• Most popular stocks had been well analyzed making all existed value non-existent.
• Reading stock analyst’s review is a shortcut towards stock understanding.

7.4.3 Stock Review Has Limitations

• While reading stock review, we must be aware of these limitations:
  1. The audience of such stock reviews are usually investment groups, recommending stocks for business.
     • Such groups usually recommend stocks with active trading volumes.
     • Inactive good quality stocks are usually not invluded, which is a good opportunity for common contrarian.
  2. Do not forget that stock analysts have tendencies to follow the crowd as well.
  3. Most stock analyst will wait for actual data of good performance before making recommendation, causing potential late buy-in point.
• Due to the above limitations, commoners who read stock review must reconsider while making selection, do not blindly follow the recommednations.
• Author recommend in contrarian way, where we start from unpopular stocks, as they are usually being neglected and are highly undervalued.
• Especially during bearish market, their price will drop to unbelievable price.
• Most commoners will aim for the best performeres, which is the most secure, but not cheap with limited return.

7.4.4 One Step Further

• We could usually observe sudden rise in stock price, but with no observable reason.
• Only after the annoucement on the performance that showed excellent improvement that we realized that insider had reveal information, causing it be to too late.
• The best way to survive in such situation is to take one step further than the majority, using contrarian method.
• We have ot be deligent in our stock studies, understanding the progress of the business.
• Especially those that are usually not performing remarkably, study deeply in their information and if any sign of improvement, try to pinpoint potential industries that might benefit from it, and study further on that.
• The evaluation should be done from the perspective of doing business.
  • Is the product competitive?
  • Is the management reliable?
  • Is the financial performance solid (殷 yi1n 实)?
• If such stock was neglected, its a good opportunity.
• Once the company performance improved, the stock price of related industry will improve as well.
• But the performance of the industry requires time to reflect the trend, thus it is best to conduct long term investment (1 - 3 years).
• At the point of buying in, the company might be turning around their situation, which requires time for the dat to represent.
• Thus, relying solely on conventional metrics (PER, DY, and NTA), will lose you the opportunity of buying at low point.
• So, we must be flexible and also include the future profit and growth potebtial in consideration.

7.4.5 Make the Move When Loss is Turning to Profit

• It is very hard to pinpoint when is the best buying price of a plummeting stock.
• Buying in too early, high risk, unsure if the company could survive the fall.
• Thus, the best timing would be the time when the first profitting quarter report had been announced.
• Such contrarian strategy is suitable for industry with periodic stock pricing cycle.
• Care have to be taken to ensure that the stock is capable of increasing profit, as many company never stand back after fall.

7.4.6 The One Critical Hit

• A good stock that experienced one-timed unexpected impact have high chance of rebounding back to normal stock price.
• One example would be the LCTITAN in previous chapter.
• To achieve this, regular study of stock is neccessary.

7.5 The Contrarian Way of Choosing Industry

7.5.1 In Line With The Industry Boom

• During stock selection, besides individual stocks, we could make use of the industry boom to gain more profit.
• The reason being that the performance of a stock is partially affected by the industry besides its own performance.
• The ideal play is to buy in when the boom had just started, while most people are still unaware of the timing.
• Most people only realized this after the boom had been fully developed. –> too late
• Remeber 保本至上

7.5.2 Pay Attendtion to Industry Cycle

• Most industry are cyclic, spanning from few months to few years.
• One thing in common is that they will never be boom or recessing all the time.
• When one industry is booming, the industry gained huge profit, expansion of production began, resulting in overproduction.
• Reducing the profit, causing loss and drop in share price.
• If investors could detect insights of the booming or recession, and understand that no matter how bad the industry is, they will rebound one day, they could make use of it to make profit.
• If you are only following the majority, you might be able to gain profit, but the amount is negligible that any mistkae would cost huge loss.
• E.g.: Financial stocks is closely related to the economy.
• During economy recession, bad debts increase, profit decreses, share price decreases.
• Contrarian should seize the chance in collecting and buying in.
• Hold the stocks till economy recovers, and reap the profit.
• Raw material industry (palm oil industry) is an example of cyclic industry.
• Property industry is an example fo cyclic industry as well, as accomodation is a necessity.
• Construction (steel and cement industry) are cyclic too.
• The booming of industry could be observed through consistent study of different industry.

7.5.3 Best to Invest Long Term

• Contrarian must invest in long term.
• As the booming of industries takes time, a lot of patience is needed to reap remarkable profit.

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Reference

[1] 冷眼, 30年股票投资心得. 马来西亚: 辉煌世纪, 2018.