Buffett fan devises system to find good buys

When most of his peers were busy studying, full-time national serviceman (NSF) Qin Jinghuang had his eye firmly on the markets.

The value investor, who sticks closely to the teachings of investment guru Warren Buffett, recalls "trading" in Secondary 3, when he was in Dunman High School under the Integrated Programme.

"I used a trade simulator on Investopedia.com to buy United States stocks with virtual cash.

"It was tremendous fun for me. I remember staying up late at night just to wait for the US stock market to open," says Mr Qin, 20.

Eager to put what he had learnt into practice, he set up his trading account in June 2014 with a five-figure sum, bought his first stock in November 2014, and grew his stock portfolio by 10 per cent within 12 months.

Since the officer started investing, he has devised a filtering system to identify stocks worth buying. "First, I look at the list of stocks trading at 52-week lows and shortlist the stocks that I have heard of.

"Next, I cross out all those that have weak fundamentals such as constant loss, high debt and troubled cash flow. The final list of stocks will be transferred to my watch list."

He adds: "When I pick stocks, it is more of a process of picking out a great business rather than picking out a promising medium of speculation. I now own only (shares in) businesses selling consumer goods, namely Spackman Entertainment Group and Del Monte Pacific."

His investment in South Korea-based film company Spackman in December turned in a profit.

His broker had recommended it as trading volume in the stock had gradually risen.

Initially, he bought a little to observe the counter. The risk was controlled since it was trading near a 52-week low.

A few days later, the stock price rose after the outstanding box office performance of its latest movie, The Priests, was released.

With an entry price of eight cents, Mr Qin earned 19 per cent in four days, selling at 9.5 cents. That marked his first profit on the stock at $1,500.

"I knew it was speculative, so I quickly did a technical analysis on the counter. The technical aspect looked good, with the moving average convergence divergence (MACD) and relative strength index all showing positive signs.

"Plotting the resistance line, Irealised that the stock was about to face a resistance at 10 cents."

He continued investing and turned that into a $7,000 gain, but some of that profit was used to cover a loss in an oil and gas counter, Pacific Radiance.

Mr Qin is aware that picking the right stock involves some good fortune in spotting the right opportunity."The key difference between a good investor and a mediocre one is that a good investor will look at the stock's potential and future... The price at which it's trading should not be a factor in your stock-picking."

Mr Qin aims to attend the Wharton School at the University of Pennsylvania, where the legendary Mr Buffett studied. Q Moneywise, what were your growing-up years like?

A I wasn't born into a nuclear family. My parents never got married and I was born in China.

My father was an ambitious businessman. He expanded his business much faster than it generated cash, and it got into cash-flow problems. The business went downhill and things did not go very well.

My mother and I left for Singapore in 2003.

My family background sounds unfortunate, but it was probably the most fortunate part of my destiny, as that made me who I am today.

Growing up in a single-parent family allowed me to think independently and rationally, because I am so used to making decisions on my own and screwing up sometimes. Having been through the thick and thin of being in a broken family toughened me up and prepared me for business and investment.

Q How did you get interested in investing?

A When I was eight or nine, I was interested in my father's business, and that paved the way for value investing, where you need to know the business.

My mum used to work in a gift shop in Singapore. Sometimes there was spare stock, and she would ask me to sell it in school.

At first it was embarrassing, but I later found joy in selling gift cards at 50 cents when they cost 10 cents each. That furthered my interest in business, the art of selling and how to get people interested in your products.

My godfather, whom we live with, planted the seeds of investing in my head. When I was 13, he started talking about value investing and the intrinsic value of stocks.

I liked the idea of buying the shares of a company at 10 cents, when the firm is really worth 50 cents. I learnt things like how to calculate the intrinsic value by projecting the earnings per share of a firm five years ahead, and discounting that to the firm's present value.

I also started to read books about Buffett and his investment philosophy.

Q What's in your portfolio?

A I own only shares of companies in Singapore. I believe that, as a beginner in stocks, I need a safe harbour to enable me to learn from all the necessary mistakes without getting burnt too badly.

Local investors are generally risk-averse, so I will not encounter ridiculous trading activities like in the mainland Chinese or Hong Kong stock markets.

Local investors are also more down to earth, so they will not buy stocks selling "hopes and dreams", which is the case for most tech stocks in the US.

This causes stocks to be generally extremely overvalued and price-earning ratios to be sky-high, making a proper valuation of these stocks difficult.

Although my stock holdings are listed locally, their core businesses are overseas - South Korea for Spackman and the US for Del Monte Pacific - and I get benefits from markets larger than Singapore.

My holdings of Spackman and Del Monte Pacific are now worth $24,000. I also own $1,500 worth of blue chips - United Overseas Bank, Keppel and Singtel - via the OCBC Blue Chip Investment Plan.

I've had a 10 per cent return on my seed money so far.

Q What's your investment strategy?

A I'm a value investor and buying stocks with good price movement but lousy fundamentals goes against my beliefs.

My approach is a balance between how the stock is at a "state of being undervalued" and having decent fundamentals.

Good fundamentals generally range from profits to a firm's cash flow. Companies that score highly in their fundamentals are usually blue chips and they are boringly stable. If you are looking at making 10 to 20 per cent from a stock in half a year, blue chips are probably not for you.

I have a list of selection criteria that may go against the teachings of traditional value.

For instance, it is okay if the company is making a loss, but a positive discrepancy between the market value of the company and your own perceived value of the company has to exist.

My stocks have been reporting a loss in the previous quarters or so, but they were justified due to reasons unrelated to the firms' management and their future capabilities to make profit.

For Spackman, it was reported that the company's latest movie The Priests would be showing in overseas markets.

That was when the company was already making profits from screenings in the domestic market. I foresee the company will report a net profit in the next quarter, but this alone is not enough.

I also read the company has signed a contract worth US$3 million (S$4.3 million) with China Central Television (CCTV). If a newly listed company with a net capitalisation of $70 million can clinch that, what does it show about its influence and market penetration? Is it still worth just $70 million?

The company was listed in 2014 with an initial public offering price of 26 cents, valuing it at $103 million.

I also consider the brand name of the firm. When I ask my friends if they know Del Monte, all of them replied it sells bananas, and I feel it's the South-east Asian equivalent of food firm Heinz.

I also have to like the product.

I watched Snowpiercer, a movie by Spackman, and it looked like a Hollywood blockbuster produced by Warner Bros.

With a shortlist of a handful of counters, I'll wait for a volume spike that signals interest in the stock and impending surge in price.

That will be my buy signal.

I also use other technical indicators such as guppy multiple moving average (GMMA) and MACD to confirm an uptrend.

Q What has been one of your biggest regrets when it comes to investing?

A I did contra trading for a while, buying and selling stocks based on gut feeling. I remember I bought Noble and Swiber last November.

I was going into the market for short-term profits. Looking back, I was just seeking the cheap thrill of "winning" money. I lost about $1,000 trading these few counters within a few days.

Q What are your immediate investment plans?

A I'm still planning to hold my current stocks for at least three to five months so when positive news comes out, I can enjoy the price rise. Six months down the road, I'll fall back on my strategy of selecting stocks and trying to find new gems.

Even if things don't go as planned, I'm already looking at oil and gas stocks like Triyards Holdings and Ezion. They are still receiving new contracts, which is one way to predict their future profits.

Q Home is now...

A A four-room flat in Dakota.

This article was first published on Jan 31, 2016.
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rachaelb@sph.com.sg