Invest Like Koon Yew Yin - Learn How A Philanthropist Amasses A Huge Fortune From Investments in Malaysia Stock Market PDF

INVEST LIKE
KOON YEW YIN
LEARN HOW A PHILANTHROPIST AMASSES

A HUGE FORTUNE FROM INVESTMENTS
IN MALAYSIA STOCK MARKET
by KYY INVESTOR
Chapter 1:
Malaysian Companies
are Not the Same
Malaysian Companies are Not the Same
1.1 Long-term Value Investing (or Buy-and-Hold Strategy) Does Not Work in
Malaysia Stock Market
According to Koon, since the publication of his Rm 50 million donation to the

Penang State Government to build student hostels to help the students of
Universiti Sains Malaysia (USM), especially those from poor families, whilst
some people wrote to ask him for financial help, a lot of people wanted to know
how he managed to make so much money from the stock market to make the
donation, to give out scholarship to underprivileged students, and to help poor
students. In other words, they wanted to know his secret formula.
Well, his investing journey actually began in 1983 after he had his heart bypass
surgery in London. Whilst recuperating in Harley Street Hospital, he read from
the newspaper that the Hong Kong stock market crashed because the then
British Prime Minister, Margret Thatcher, failed to secure the extension of
British rule of Hong Kong. The British had a 99 years lease of Hong Kong and a
part of Kowloon. The lease was about to expire, and China would soon take
back Hong Kong.
Koon recalled many Hong Kong investors were afraid of the arrival of the
Government of China. So they sold their holdings as quickly as possible, which
resulted in the stock market crashed. Everything was on cheap sale. The Hang
Seng Index (HSI) went below 1000, and HSBC was selling below HK$10 per
share. At that time, he was not so good at picking stocks. He did not even know
how to invest for long term, or short term, or timing the market. He just bought
stocks that went down the most in terms of percentage using his business sense.
You can say that he started this business blindly. As soon as China agreed to
offer 50 years extension of capitalist system, the Hong Kong stock market
rebounded, and he sold all the shares he bought initially with more than 200%
profit. With all the proceeds, he bought HSBC, and other better-known shares.
After about two years, he made so much money that he could afford 46% of
Kaiser Stocks and Shares Limited, a stock broking company in Hong Kong,
which gave him margin finance, and helped him made more profit.
After the short experience in Hong Kong, he decided to retire as the Managing
Director of Mudajaya, and relinquished his roles in other organisations to focus
on his investments. He always asks himself “Why should I work so hard when it
is so easy to make money from the stock market? Moreover, all my profit is tax
free, and I don’t have any management problem. I do not need to deal with
people, which I find most difficult.”
After his retirement, he had more free time to read, and learn about investing.
He began learning the investment philosophies of Warren Buffet, Peter Lynch,
Benjamin Graham, and others. But, most of the books preach long-term value
investing. They encourage investors to buy good, and profitable companies on
the cheap, and hold them for long term. No doubt the results of those gurus are
astounding, and their investing philosophies are solid. But Koon failed to
emulate their results even though he had adhered to their advice, and followed
their methods closely for several years.
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When Koon analysed the root cause of his average return, he found out that the
problem lies not with the approaches of those gurus, but with the characteristics
of Malaysian companies/stocks. Whilst the buy-and-hold strategy works in US
stock markets, it failed Koon (and may also fail us) in Malaysia, as most of the
public listed companies in Malaysia do not meet the investing criteria of these
gurus. The main reason is that Malaysian companies are not the same.
1.2 Why Are Malaysian Companies Not the Same
I know some of you, especially those long-term value investors who have
invested in US markets for several years, may not agree with Koon’s study. But
if you think the same winning formula use by those Gurus can be used in
Malaysia stock market, think again. Well, let me explain to you why the buy-
and-hold strategy may also fail you in Malaysia.
1.2.1 Most of the companies do not have durable competitive advantage
Unlike US companies, most of the companies in Malaysia do not have

a durable competitive advantage, which Warren Buffett calls economic
moat. Whilst some Malaysian companies have the ability to earn
lucrative profit, and show increasing earnings for a short period of time,
very few if any have the ability to earn exceptional profits for a long
period of time. The main reason is that the rivalry from new entrants,
and existing competitors will eat into their market shares gradually,
which results in their profit margins, and earnings shrink.
If you have no idea of what a sustainable competitive advantage is, the

best way to begin with is by asking yourself if a company has the
following traits:
Strong network and strong relationship with clients
Strong market position and large market share
High degree of pricing power
High barrier to entry
Strong brand identity
High switching cost
Favourable regulatory protection
Patent protection
Cost advantage through process or efficiency improvement
High bargain power with suppliers
Unlike Starbucks, Pepsico, and 3M, most Malaysian companies do not

have the strong global brand identity. Without that kind of brand
identity, customers are not willing pay more for their products. Hence,
they lack the pricing power, and are unable to increase their profit
margins, and earnings continuously. Even if they managed to attract a
lot of customers at the beginning, and charge a high premium when
they first launch a new product onto the market, the longevity of the
benefit will be challenged when more and more cheaper, but similar
type of products introduced by their competitors.
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Unlike the products offered by Google, Boeing, and Intel, most of the
products offered by Malaysian companies do not have strong patent
protection. Due to their lack of creativity and innovation, competitors
can produce the same kinds of products to compete with them, head-to-
head, without spending a dime on research and development, or having
much trouble of replicating the same type of products, and need not to
even worry about any legal actions will be taken against them for
exploiting the technologies.
Unlike Autodesk, Microsoft, and TransDigm, most of the public

companies in Malaysia do not have the ability to retain their customers
through the benefit of high switching costs. The costs may not
necessary be measured by the amount of capital spent on the products,
it can also be measured by the time, effort, risk, and training need to be
spent, and borne by customers to adapt to a new system, or product. If
the service providers, or product manufacturers are unable to protect
the sustainability of their businesses through the switching expenses,
the latter can change providers, or manufacturers any time they want.
Now, do you see the main difference between Malaysian companies,

and the US companies referred to by those famous investment gurus?
Without having a durable competitive advantage (to protect it from

invaders), a company’s earnings and earnings growth are not
sustainable, no matter how beautiful its story is. When competition
begins to get stiffer, its earnings will be dwindling. If we buy a stock
based on its current value, and hold the stock for long-term, the value
of our money may be decimated eventually.
Thus, when we invest in a company with no economic moat for long

term, even if we manage to buy the stock at a huge discount, our
investment may still wind up with a loss.
Even if we have found a stock with a competitive advantage, we should

never buy and hold it for long-term. In his book called Trade like a
Stock Market Wizard, Mark Minervini said “There is no such thing as
a safe stock. No stock can be held forever. Many so called investment-
grade companies today will face new challenges, deteriorating
business conditions, or regulatory changes that can materially affect
their future earnings potential.”
1.2.2 The performance of most Malaysian companies is cyclical in

nature
Based on Koon’s observation, no matter how good the business of a

Malaysian company is, its performance will not go up in a straight line
forever. There will be some ups and downs along the way. At some
point the company will have a difficult time, be it during economic
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crisis, industry downturn, or when the company management makes

some bad decisions and investments.
During its industry downturn, especially right after the peak of its cycle,
the supply of its products will outpace the demands of its products, as
all of the industry players take loan to expand their capacities at an
exceedingly fast rate. The supply glut issue will result in the
companies’ performance begin to go downhill. Some highly leveraged
companies with a few quarters of abysmal performance would go into
liquidation if their balance sheets are not strong enough to weather the
downturn.
As an investor, Koon does not like to buy a stock when its company is
in financial trouble, no matter how cheap its share price is, because its
share price will go down continuously, and the pain of holding the
loser is excruciating. Even if the company has the ability to survive the
disaster, it may take a very long time to get the business back to its past
glory, and some investors may not even have a chance to see light at
the end of the tunnel.
As an investor, we are unable access to insider information, and,

needless to say, we have no idea if or when the company’s
performance will turn the corner. The best thing we can do is to get out
after the top of the cycle is formed before the shit hits the fan, and get
back in near the bottom of the cycle when it starts to deliver result
again before its share price takes off. If we practice long-term value
investing by holding on to the stock without monitoring its business
performance continuously, a lot of money-making opportunities would
be slipping through our fingers.
Also, do not buy a stock because it is cheap, especially when its

share price is on a downtrend. According to Francisco García
Paramés, “many of these cheap stocks are to be found in
challenging sectors or subject to major competitiveness
challenges, and in the long term can remain eternal duds. Time is
not on our side with such stocks, since the returns on capital are
low and the potential upside is slow to materialise and uncertain.
The balance sheet isn’t everything.” The best way is to avoid this
type of stocks, and buy them only when the situation begins to
improve, and their earnings growth gains traction.
1.2.3 Political influence also plays an important role in the performance

of some Malaysian companies
Unlike US companies, some Malaysian companies have strong ties

with political parties. The unprecedented change of regime in Malaysia
on 09 May 2018, and the plunge of some stocks’ prices on 14 May
2018 have demonstrated that politics do have a strong influence on the
performance of some businesses, and earning potential, and share price
movement of some public companies in Malaysia. Those companies
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that have strong political ties with Barisan Nasional government were
pummelled mercilessly when the market opened on 14 May 2018, as
investors ditched the stocks for some other stocks due to their gloomy
earnings prospect. The share prices of these stocks took a nosedive
when the opening bell rang, and continued to be sold down over the
next few of days. If anyone owned any of the stocks until early May
2018 and refused to sell them, he or she could only witness their share
prices plunge continuously.
In addition, the decisions of politicians or lawmakers may have an

indirect impact on the performance of a stock. For instance, any change
of plans such as subsidies, tax benefits, and resources allocated by the
government may affect certain groups of companies. If you hold any
stocks in the industry, where the tax benefits given by the government
has been reduced, you too should reduce your position in the stock, as
its net profit, and share price will drop subsequently.
Further, the decision of the government (or Bank Negara Malaysia) to

change interest rate may also affect the profitability of a company. In
general, high interest rate will affect a business negatively. Unless the
growth rate of its earnings is higher than the cost of borrowing, a
company is less willing to take loan to expand its business when the
interest rate is on the rise, as the amount of interest needs to be paid is
higher. This will deter companies from taking more loans, and will
result in a lower growth rate. In addition, a highly leveraged company
might also face the risk of liquidation if they are unable to service the
loan. As an investor, we have no obligation to hold a stock for long-
term. The best way to avoid the problem is to dispose the respective
stock as fast as possible when monetary policy is revised.
1.2.4 Some of the companies are run by crooks
Even if you believe that a stock is very cheap, you should not buy and
hold it for long term. You need to pay attention to its profit growth
prospect, the actions of its management, and the main shareholders, its
share price movement, the company’s development, and its business
performance continuously. When the situation has turned sour, you
should run for cover.
Based on Koon’s observation, many of the public companies in

Malaysia are owned by the family members, relatives or close friends
of their founders, co-founders or the top management teams. They are,
essentially, the controlling shareholders of the companies. They grow
their wealth either through share price appreciation and dividend
payments, or by profiting from share price difference by buying their
stocks at low prices and selling them at high prices.
Whilst some companies, such as Lii Hen, V.S. Industry, Supermax,

Gamuda, Padini, Top Glove, Kuala Lumpur Kepong, Public Bank and
etc., are happy to share their profits with shareholders when their trees
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bear fruits, not all public companies are so generous. In fact, some of
the companies are run by crooks. They are lack of integrity, and are not
trustworthy. They get paid (in forms of salary, bonus, and allowances)
before the shareholders. They make money at the expense of their
shareholders by trading their own stocks with insider information.
In addition, they, together with their cronies, trade against minority

shareholders. Just like a casino, they are essentially the house.
Compared to US public companies, in general, Malaysian companies
have a lower transparency in terms of corporate information, and
financial disclosure. When the businesses begin to make increasing
profits, the management will hide some of the profits. When the
companies receive some lucrative contracts, they will hide the progress.
At the same time, they will use tools such as private placement, and
employee share option scheme (ESOS) to help their cronies, and
relatives accumulate more shares at lower prices. Once they have
bought enough, their cronies will then push the share prices up, they
will create bullish sentiment with the use of some splendid news, or
polished financial report announcements, and subsequently sell their
shares to minority shareholders at inflated prices.
When the business stops growing, they will begin to distribute their
shares to uninformed shareholders. When the business begins to
deteriorate, they will give misleading information to shareholders, and
sell their stake aggressively. If the value of the company is higher than
their market capitalisation, when the market turns bad, they will take
the companies private through selective capital reduction, or takeover
offers when the share prices are at depressed levels. That is how they
make themselves wealthier. At the same time, it leaves the buy-and-
hold long-term value investors on the losing side of the game.
Also, instead of benefitting their shareholders, some of the owners list

their companies with the intention of making quick bucks. Whilst some
CEO of initial public offering (IPO) companies may argue that the
reason of doing so is to raise capital to expand their business, it may
not always be the case. Based on the study outcome of Jay Ritter, a
professor of the University of Florida, the overall stock performance of
IPO companies is 3% lower than the return of similar companies after
five years. Francisco García Paramés explained that “there is a simple
reason for this: there are clear asymmetries in the information
available to the seller and what we know as purchasers. The seller has
been involved with the company for years and abruptly decides to sell
at a time and price of their choosing. The transaction is so one-sided
that there can only be one winner.”
Further, when the companies are small and growing, they preserve the
cash (retained earnings) for expansion. When the companies do well,
they milk the cash cow at the expense of the minority shareholders.
That is why many of them refuse to pay dividends even though the
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companies make money every year. Investors get no chance to enjoy

their share of the pie when businesses bear fruits.
When you invest your hard-earned money in this type of companies,

you really need to keep your eyes open, always. Do not buy an
undervalued stock, and hold it blindly for long term, just because some
famous investment gurus advise people to do so.
1.2.5 The future of most Malaysian stocks is fraught with many

uncertainties
If you understand the nature of most Malaysian stocks, you will not be
holding them for too long. The chance is that investors tend to lose
money for holding the stocks for long term, as the future of these
companies are full with uncertainties. Also, compared to mature
markets, the stocks market of Malaysia is more volatile in nature.
The share price of a stock is more stable, and could grow steadily for
decades if the company has an ability grow its revenue and profits
continuously, and pay growing dividends. The traits can be found
easily in those established US companies such as Coca-Cola, General
Dynamics, VF Corporation, Walmart and AT&T, which have
economic moat, the ability to grow their earnings continuously, and can
afford to pay increasing dividends. But, this is not the case in Malaysia.
Unlike those U.S. companies, most Malaysian companies do not have
stable earnings, let alone having a progressive dividend policy.
The main reason of this problem is that most of the companies behind
Malaysian stocks are young firms. These young companies, which are
still in their infancy stage, cannot afford to distribute their profits as
dividends to investors, as the retained earnings need to be reinvested
into the business for upgrade and expansion purposes. Unfortunately,
no immediate return can be expected when the money is reinvested to
venture into upstream or downstream business, to acquire other
companies, and for other expansion purposes.
Bear in mind that expansion does not guarantee profitability. Bigger

factory does not equate to higher revenue. Higher revenue does not
necessary translate to higher profits. Sometimes, the price paid for
acquiring a new system or another company is so high that it could
increase the level of risk. Also, expansion can lead to
counterproductive effect, as it requires large amount of capital and
result in higher operating cost, and it makes the situation worse when
the demand of their products begins to decline. Moreover, a bigger
team may not be as efficient as a small team. A more sophisticated
machine may not necessarily produce less errors. Higher capital
expenditure may not necessarily generate higher cash flow. At some
point the company will face a bottleneck. And it takes a very long time
to achieve a stable footing. In other words, there are a lot of
uncertainties during the growth phase.
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Of course, during this stage, managements may paint a bright future

about their companies, make an irrational prediction of their company
size, take loan to expand their office, and capacity aggressively, but
they are unable to give you a guarantee of their future earnings, and
dividend payments. Even if there is a positive sign of growth, good
things will not last forever, earnings will not grow forever, companies
will not do well forever, and their stocks will not outperform the
market forever.
If we want to invest in this type of companies, the only way we can

make more money is by monitoring the companies’ progress closely
and having a good understanding of human emotions, as the share price
movement of this type of stocks is mainly driven by the earning
prospect of the companies, and the emotions of investors – greed and
fear.
When people are optimistic about the future of a stock, they will buy it
aggressively. Share price can shoot through the root during the early
stage of an event development such as the invention of an innovative
product, signing of a lucrative contract, discovery of a new drug or
finding of a giant oil deposit, as enormous amount of money are poured
into the respective stock instantaneously. Also, when the company
performs well, the share price of a stock will be on an uptrend. The
market can be filled with a lot of investment crazes that offer
tremendous upside gain due to hype. But the excitement wanes when
everyone who intended to pile into the stock has done so, and smart
money managers have begun to pile out. If you do not take your money
off table when its share price is near the peak of an uptrend, someone
else will. When a company fails to deliver expected results, reports
decreasing earnings, or shows a series of abysmal performance, its
value will then begin to evaporate, and risk-averse investors will trim
their positions, or dispose their stake aggressively, then you would be
witnessing your holding falls in value like a stone if you refuse to sell
the stock.
1.3 How to make money in Malaysia Stock Market then?
Warren Buffett said that “The key to successful investing is to determine if a

company has durable competitive advantage. Companies with durable
competitive advantage consistently deliver outstanding results for investors.”
But, most of the companies in Malaysia do not have the sustainable competitive
advantage.
Benjamin Graham advocated to purchasing “Securities at prices less than their

intrinsic value as determined by careful analysis with particular emphasis on
the purchase of securities at less than their liquidating value.” But, based on
Koon study, this type of companies cannot provide us a satisfactory return in
Malaysia. For example, there are many property stocks selling at prices far
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below their net tangible assets (NTA), or liquidating values in Malaysia

currently. If we buy them today, our return would be very low, as there are too
many empty houses in every city of Malaysia, and there is no guarantee that we
will see light at the end of the tunnel.
Geraldine Weiss stressed that “each stock must be studies and evaluated
according to its own unique profile of dividend yield, one that has been
established over several investment cycles.” But, many of the stocks listed on
Bursa Malaysia are inconsistent in paying their dividends, if not unable to pay
dividends. If you insist on investing based on the dividend yield profile of a
company, many good opportunities would be slipping through your fingers.
Now, the question is if most of the public companies in Malaysia do not meet
the selection criteria of these investment gurus, does it mean that we should
stash our cash under the mattress? Of course NO! That’s the worst approach in
money management.
If the long-term investing approach preach by those gurus are not applicable in
Malaysia stock market, what should we do then?
Well, after many years of hard work, Koon eventually managed to pull all the
resources he has gathered, including the basic accounting principles, wisdom of
some investment gurus, chart patterns, and his prior experience in business
world, to develop a method that enables him to make money from Malaysian
stock market. The method emphasises on searching for stocks with high
earnings growth potential, which have delivered two quarters of increased
earnings. Then he will buy them when they are still cheap, and their share prices
are about to rise, or have gained momentum. Doing so does not only improve
the chance of making money, but it also shortens the time needed for the market
to recognise the values of the stocks.
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Chapter Summary
Buy-and-hold and long-term value investing method may not provide you a
satisfactory return for investing in Malaysia stock market.
The reason why the buy-and-hold strategy may fail you is that Malaysian
companies are not the same with those in the U.S.
Why Malaysian companies are not the same
Most of them do not have durable competitive advantage
Their performance is cyclical in nature
Political influence also plays an important role in their performance
Some of the companies are run by crooks
The future of these companies is fraught with many uncertainties
The best way to make money in Malaysia stock market is by searching for
stocks with high earnings growth potential, which have delivered two
quarters of increased earnings, and buying them when their share prices are
about to rise, or have gained momentum, and sell them when they fail to
meet your investment criteria.
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Chapter 2:
Basic Knowledge of
Fundamental Analysis
Basic Knowledge of Fundamental Analysis
“We have observed that the money managers who have achieved long term market
beating results in this business, Walter Schloss, Warren Buffett, Bill Ruane and Rick
Cunniff, Mario Gabelli and John Neff, all have an investment philosophy based on
their definition of value. Our booklet, ‘What has worked in investing’, shows that both
in the US and internationally, basic fundamental value criteria produce better than
market returns over long periods of time.”
Christopher Browne
Fundamental analysis is a subject studying the underlying business of a company

based on the quantitative and qualitative analyses of the company’s business
performance, financial health, operating environments, capability of its management
and its intrinsic value. The main objective of the analysis is to ascertain if the
company is a suitable investment target and if it is worth our investment.
To Koon, fundamental analysis is a foundation of stock investing. Buying a stock

without understanding the business of the stock is akin to gambling without reading
our cards. How can we play the game with conviction if we do not look at the cards,
know the odds, and deploy a suitable strategy?
A share of stock usually represents a fraction of ownership in a business. According

to Peter Lynch, there is a company or business behind every stock. The stock is not a
piece of lottery ticket. When we buy a stock, we become the owners of the company.
Just like every business owner, we also have the right to share in the company’s
profits through dividend payments, and the distribution of its bonus shares if it makes
money. When the company grows, we will profit from the investment through capital
gains when we sell the stock. Therefore, fundamental analysis is an important work to
every serious investor.
Before performing fundamental analysis, we must be able to read financial reports

and annual reports, to analyse the financial health of the firm, to understand what
business the company is doing, and to study the business performance of the company.
If one does not know what the company is making and who its clients are, cannot read
its financial reports, and has no interest to learn about the business, he or she should
not risk his or her hard-earned money in the stock. Koon always says, the stock
market is a dangerous place for gamblers, and it really is a jungle out there. If we
enter the jungle too often we will meet a tiger.
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2.1 Introduction to Quarterly Financial Statement and Annual Report
“I always start off my research by reading companies’ annual reports and then
the footnotes to their numbers. I need to be satisfied about the integrity of the
numbers and the honesty of the accounting before I look further. If there is a
number that is incomprehensible, I throw the report into the wastebasket and
move on. If you look at Enron’s footnotes in the 1990s, they were just
incomprehensible. If investors had read those footnotes carefully, I don’t think
anyone would have invested in Enron stock.”
Jean-Marie Eveillard
Quarterly financial statements are statements comprise of income statement,

balance sheet, cash flow statement, statement of changes in equity and other
supporting information released by a public listed company once every three
months to satisfy the listing requirements of Bursa Malaysia. The main
objective of issuing the statements is to disclose financial performance and
important financial information of the company to shareholders and the public.
This information enables potential investors make an informed judgement,
whether the stock is worth their money, and enable the existing investors to
decide if they should add, hold or sell the stock.
Annual report, on the other hand, is a document published by a public listed

company every year to report the activities of the company in the past financial
year. Unlike quarterly financial statements, the structure of annual report is
more exhaustive. In addition to disclosing financial information, it also
encompasses chairman’s statement, top thirty shareholders list, the
remuneration of the management, business prospect and etc.
2.1.1 Why You Should Read Quarterly Financial Statements and Annual
Reports?
Although reading financial statements and annual reports can be time

consuming, these reports provide us valuable information about a
company’s financial condition, and operation. In addition, they give us an
insight into the business of the company, which includes, but is not
limited to, its business type and structure, the industry in which it operates,
the products it offers, who its clients are, its geographic market area,
current developments, and etc. Sometimes, the management may also
touch on their previous strategy, and discuss how it helped building on the
company’s success in the reports. Moreover, they disclose the short-term
and long-term strategic plans and direction of the company. Indirectly
they help us figure out where the company is, and the direction where it is
heading. As required by the reporting rules, the management have to
discuss about the current performance of the company, including
significant changes in the last financial year and the future business
prospect of the company. Some companies may also provide facts,
including the risks, and uncertainties of the business such as legal
liabilities, and lawsuits they get involved in, and the projects they are
bidding for in this financial year. All this information will help us make an
informed judgement about our investment in the company.
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2.1.2 Understanding Quarterly Financial Statement and Annual Report
As mentioned earlier, every annual report comprises of financial

statements, chairman’s statement, business and financial review provided
by the management, top thirty shareholders list and remuneration of the
management.
• Financial statements are four reports in a set; consist of income

statement, balance sheet, statement of changes in equity, and cash
flow statement. They record the financial information, financial
activities, and financial strength, or financial health of the company.
Whilst the statement of changes in equity is also included in the
financial statement set, we must pay more attention to the three
main statements, viz. income statement, balance sheet, and cash
flow statement. Further detail of the three statements will be covered
in section 2.1.2.1, section 2.1.2.2 and section 2.1.2.3 of this chapter.
• The chairman’s statement is an overview provided by the CEO of a

company, in brief, about the company’s current business
performance, operating environment and culture, business prospect,
direction, and financial strength, and the significant changes and
developments in the company’s operation, the changes in the board
of directors’ composition, and the amount of dividends declared in
the financial year. Do not underestimate the importance of this
summary, as it contains some essential information related to the
profitability, condition, future and viability of the business. If you
notice any negative tones or words used by the CEO to describe the
company’s financial health, you should pay a careful attention to the
long-term profitability, and survivability of the business.
• Business and financial review summarises the business performance

of the company, and its recent developments. Further, the
explanation of the management on the changes in the company
revenue, and profit trends in the last financial year can also be found
in this section. Occasionally the management may use some visual
aids such as graphs, charts, diagrams, and pictures to illustrate to
shareholders the information of the company’s evolution. We must
read them in conjunction with the financial statements to get a better
picture of the business performance.
• The top thirty shareholders list is a summary that illustrates the

ownership structure of the company to the public. From the list, we
can tell if the company ownership is dominated by local institutional
funds, foreign funds, foreign companies, retail investors,
superinvestors, employees or insiders. Also, we can tell from the
structure if the business operating and dividend policies are
influenced by any of the major shareholders. For instance, most of
the foreign-owned companies listed in Malaysia such as Carlsberg
Brewery Malaysia Berhad, Heineken Malaysia Berhad, Nestle (M)
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Berhad, Digi.com Berhad and Panasonic Manufacturing Malaysia

Berhad pay high and increasing dividends to their shareholders.
• The remuneration of the board of directors reported in the annual

report is a disclosure of the salary packages received by the top
management, and the directors of the company. According to some
research studies, the business performance of a company is
inversely correlated with management’s remuneration. This
situation can be explained from the psychological point of view that
the management without stakes in the company, or those who work
for salary is less motivated to ensure the success of a company, and
the value of the stock.
2.1.2.1 Income Statement
• An income statement (refer to Figure 2.1), also known as a profit

and loss statement, reports how a company performs in the financial
year or quarter. The report usually begins with the revenue or sales
of the business within the reporting period. Sometimes it is called
top line, as the revenue is the first figure appears in an income
statement. The value of revenue alone renders not much of
importance to a stock, unless the figure is compared with its profits,
its revenue data over the past five or ten years, or the revenues of its
competitors. Growing revenue generally implies that the company is
either expanding its business lines or increasing the prices of its
products. Sometimes it also reveals that the company has captured
more market shares or has grabbed some market share from its
competitors. Therefore, we should do some comparisons when
reading a financial statement to get a better picture of the story.
• The next item we have to pay attention to is its gross profit, which is
the profit netted out with after taking the cost of goods sold (or cost
of sales) into account. The cost of goods sold is the total costs of
producing the products which include, but are not limited to, raw
material costs, utility bills, machinery maintenance costs, wages and
etc. If we compare the gross profit with revenue, we will get gross
profit margin. Decreasing gross margin signifies increasing raw
material prices, wages and maintenance costs. In addition, it shows
that the management is unable to control the cost of sales.
Gross profit = Revenue – Cost of goods sold
Gross profit margin = (Gross profit / Revenue) × 100%
• The second profit comes after gross profit is known as profit before
tax (PBT). It is the profit obtained by subtracting operating expenses
(such as depreciation and amortisation, and selling, general and
administrative expenses), interest expenses, and other expenses from
and adding other incomes to the gross profit. Depreciation refers to
reduction in tangible asset value (i.e. car, furniture, machinery
Page | 5
values), whereas amortisation refers to the reduction in intangible

asset value (i.e. patent, goodwill, copyrights). If we compare the
profit before tax with revenue, we will get pre-tax profit margin.
Decreasing margin signifies increasing operating cost, and steep
falling of asset value. In addition, it shows that the management is
unable to lower costs.
Whilst high profit before income tax is appealing, it should be noted

that the profit is sometimes contributed by one-time-gains (or non-
recurring gains) from the disposal of assets and/or other non-
operating-related transactions. The gain will usually lead to a spike
in profit. When we analyse a company, we must take note of the
item.
Profit before tax

= Gross profit – Selling, general and administrative expenses –
Depreciation and amortisation expenses – Interest expenses +
Other incomes
Pre-tax profit margin = (Profit before tax / Revenue) × 100%
• The last profit is called net profit, which is also known as the bottom
line, or profit net of tax. It is obtained by subtracting income tax
from the profit before income tax. High net profit is although
pleasing, we should not look at the figure alone. It does not tell us a
complete story until we do some comparisons with the profits of the
company in the past five or ten years, the profits of its competitors,
and with its own revenue. An increased profit is an indicator of
business growth, which will normally lift its share price up. If the
net profit is higher than those of its competitors, it implies that the
management is very competitive.
Net profit = Profit before income tax - Income tax
• Earnings-per-share (EPS) is the value obtained by dividing the net

profit by the number of outstanding shares. The higher the earnings
per share of a stock, the higher its profitability is. Earnings-per-
share is generally used together with price-to-earnings ratio to
ascertain if the stock is undervalued or overvalued.
Earnings per share = Net profit / Outstanding shares
• Remark: negative profits indicate that the business suffers losses.

We should try to avoid companies with financial losses, as no one
can guarantee when the businesses will become profitable. It is
easier for well-managed companies to continue performing than for
bad companies to turn around. Even if the companies are good
companies, do not rush in to buy the stocks too early. When the
companies report negative profits, their stock prices will continue to
fall. Nobody can tell how low the prices can go. The best time to
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buy the stocks is when the businesses return to profit, and when
their profits are growing again, or if you can be very sure that the
company will make more profits next year than this year.
Figure 2.1: Income Statement of Latitude Tree Holdings Berhad for the Financial
Year Ended 2013
Source: Bursa Malaysia
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2.1.2.2 Balance Sheet
• Balance sheet (refer to Figure 2.2A and Figure 2.2B), also known as
the statement of financial position, is a statement showing the
ending balances of a company’s assets, liabilities and shareholders’
equity. It can be divided into two main sections. In general, current
assets and non-current assets constitute the first section. Current
liabilities, non-current liabilities and shareholders’ equity, on the
other hand, constitute the second section. The sum of components in
the first section must be equal to that in the second section.
Total assets = Total liabilities + Shareholders’ equity
Total assets = Current assets + Non-current assets
Total liabilities = Current liabilities + Non-current liabilities
• Current assets are the assets that can be converted to cash within
twelve months, which generally comprise of inventories, trade
receivables, cash and cash equivalents, short-term investments,
amounts due from associates, prepaid expenses, bank deposits, tax
recoverable and etc.
• Non-current assets are the assets that are mostly not intended for
sale, and cannot be converted to cash easily within twelve months,
which include property, plant, and equipment, associate companies,
or investment in subsidiaries, intangible assets, long-term
investments, and etc. Intangible assets are non-physical assets but
are valuable to the business, which include goodwill, brand
recognition, franchises, patents, trademarks, copyrights, and other
intellectual properties.
• Current liabilities are the liabilities that must be paid within twelve
months; which encompass trade payables, accrued expenses, short-
term borrowings, tax payable, and other current liabilities.
• Non-current liabilities are the liabilities that will only due after
twelve months, which include long-term borrowings, deferred tax
liabilities, and bonds.
• Shareholders’ equity generally consists of share capital, preferred

shares, treasury stock, reserves, and retained earnings. Note that
treasury shares are the shares repurchased from the open market
when the management feel that their stock is undervalued. It usually
appears as a negative number in the section.
• Remark: Book value-per-share (BVPS or BV) can be obtained by

dividing shareholders’ equity by the number of outstanding shares.
Whilst analysts always use it as a reference, please note that it is of
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no use in valuing a business. No matter how high the book value of

a stock is, if its profits do not grow or have no growth potential, its
share price will not rise.
Book value per share = Shareholders’ equity / Outstanding shares
Figure 2.2A: Balance Sheet of Latitude Tree Holdings Berhad for the Financial Year
Ended 2013 (Part 1)
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Figure 2.2B: Balance Sheet of Latitude Tree Holdings Berhad for the Financial Year
Ended 2013 (Part 2)
Page | 10
2.1.2.3 Cash Flow Statement
• Even though sales are recognised in the income statement, more

often than not payments are not immediately made when goods
change hands, or are shipped. As investors, we should study the
cash flow statement to find out if the company has a sustainable
cash flow, and if it has the ability to expand its business, and to pay
dividends to investors.
• The statement of cash flows (refer to Figure 2.3A and Figure 2.3B)
summarises how money is spent and brought into the company by
its management. The report can be divided into three main sections,
namely cash flow from operating activities, cash flow from
investing activities, and cash flow from financing activities. Note
that negative cash flow indicates that the company spends more
money than it generates. If the company spends more than it brings
in, its cash balance at the end of the year will be decreased.
Cash at the end of the year

= Cash at the beginning of the year + Cash flow from operating
activities + Cash flow from investing activities + Cash flow from
financing activities
• Cash flow from operating activities records money spent on and

received from the operation. Positive cash flow shows that the
operation generates cash. By and large, it is better to have positive
cash flows than negative cash flows. Nevertheless, we should not
avoid some companies blindly simply because they have low, or
negative cash flow from operating activities. High growth
companies usually have low, or negative cash flow from operating
activities as they increase their inventory, and extend credit to their
customers when they get more sales.
In general, profit before tax, decrease in inventories, decrease in

accounts receivable, decrease in prepaid expenses, decrease in other
current assets, increase in accounts payable, increase in accrued
expenses, increase in unearned revenue, depreciation and
amortisation contribute positively to cash flow from operating
activities.
Cash flow from operating activities

= Profit before tax + Decrease in inventories + Decrease in
receivables + Increase in payables + Depreciation + Amortisation
• Cash flow from investing activities records the money received from
the disposal of assets or investments and money spent on the
acquisition of plant, property, and equipment.
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In general, capital expenditures, long-term investments, and cash

outflow from investing activities contribute negatively to the cash
flow from investing activities.
Whilst conservative investors avoid companies with a sudden surge

in capital expenditure, spending money to acquire property, plant,
and equipment may not necessarily be a bad sign. When a company
expands its business operation, having a high capital expenditure in
a particular year is inevitable. If we shun the company blindly
without ascertaining if the investment is an excellent one, we will
probably kick ourselves later for missing out on the golden
opportunity.
Cash flow from investing activities

= Cash received from asset disposal – Capital expenditures – Long-
term investments
• Cash flow from financing activities records the amount of money

received from and repaid to lenders, money received from the
issuance of stocks, money used for stock repurchased and money
paid to investors as dividends.
In general, repayment of debt, the repurchase of shares, and

dividends paid contribute negatively to the cash flow from financing
activities, as they are outflows of cash.
Cash flow from financing activities

= Debt issued + Issuance of stocks – Repayments of Debt –
Dividend paid – Share buyback
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Figure 2.3A: Cash Flow Statement of Latitude Tree Holdings Berhad for the Financial
Year Ended 2013 (Part 1)
Page | 13
Figure 2.3B: Cash Flow Statement of Latitude Tree Holdings Berhad for the Financial
Year Ended 2013 (Part 2)
Page | 14
2.2 Assessing the Financial Health and Performance of a Business
“The important thing to remember is that purchasing the common stock of

bankrupt companies is rarely a profitable investment strategy.”
Joel Greenblatt
Whilst having the ability to read financial statements is important, it is not

enough to ascertain if the financial health of a company is in good shape, if the
business is performing well and if the company is worth our investment, we
need to gather more information and to perform a thorough analysis through
calculation and comparison so as to make an informed judgement.
Just like a human’s wellbeing, a business will not be thriving if its finance is in
chaos. Likewise, our chance of winning a bet would be very slim if we invest in
a company in deep financial trouble or a company with no earning growth
potential. Avoiding this type of companies will help protecting our hard-earned
money, and will smoothen our path to achieving financial freedom.
Below are some useful metrics, which we can use to determine if the financial
health of a company is in a favourable condition, and if the business is
performing well prior to making judgement.
2.2.1 Profitability
As we know, profit is the lifeline of every business. The operation of a

company is not sustainable if the business has no ability to generate
profits. We should therefore look for companies with positive earnings,
and with bright profit growth prospects, and avoid stocks with massive
financial losses.
2.2.1.1 Net Profit Margin
Net profit margin (NPM) is an important indicator of a company’s

financial health. It measures the amount of net profit a company
earns from every ringgit of its sales or revenue. The higher its net
profit margin, the more profitable the business is.
Whilst high net profit margin business is more appealing to

investors, it should be noted that not all types of business share the
same range of net profit margin. In fact, it varies from industry to
industry. Thus, we should compare the net profit margins of
companies with that of the industry average.
In general, companies that provide legal advice, machinery and

equipment rental, accounting, tax and payroll services, specialised
design, real-estate, management consulting and medical services
enjoy higher net profit margins than electronics and appliance stores,
wholesalers, petrol stations, trading and manufacturing companies.
Net profit margin = Net profit / Sales
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2.2.1.2 Profit Growth
According to Koon’s study, high profit growth (earnings growth or

EPS growth) is the most important trait of a winning-stock. A
company with deteriorating profits does not only suffer business
setbacks, and sluggish growth, it may also force the management to
cut its dividends. As a result, the share price of the stock will
descend. To protect our capital, we must make sure that the
company can earn more profits next year than this year, and
increasing profits years after next year before placing our wager. In
other words, we must make sure that the company has a good profit
growth prospect.
There are two types of profit growth rate. The first type is called
year-over-year profit growth rate, or profit growth rate (YoY),
which measures the growth rate of profits from one year to another.
This type of profit growth is important in moving short-term stock
price. The second type, on the other hand, is called the compound
annual growth rate of profit, or profit growth rate (N-year CAGR),
which measures the constant growth rate of profits over a specific
number of years. The latter is important in increasing long-term
shareholders’ value.
Profit growth rate (YoY)

= [(Profit in Year 1 / Profit in Year 0) – 1] × 100%
Profit growth rate (N-year CAGR)

= {[(Profit in Year N / Profit in Year 0) 1/N ] – 1} × 100%
Remark: when we notice a surge in the recent profit growth rate, we

must find out if it is attributed by any non-recurring incomes (i.e.
one-time gains from the disposal of property or assets, or from
currency exchange gain).
2.2.1.3 Return on Equity
Return on equity (ROE) measures the amount of profit a business

produces from the shareholders’ equity. The higher the return, the
more efficient the management is in utilising shareholders’
investment. Companies with sustainable competitive advantage
usually enjoy high return on equity.
Some gurus particularly fond of businesses with high return on

equity, as profits generated from the business can be reinvested to
fund its growth without having the need to inject more capitals. The
compounding effect also allows a high return on equity business to
grow much faster than its peers.
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Note that not all industries share the same range of return on equity,
as some businesses require only little assets, whilst others require
large infrastructure investment. Therefore, we need to compare the
return on equity of the company with that of the industry average to
get a better picture on how it fares against its competitors. Also, we
must look at the trend of the company’s return on equity over the
past ten years. Down-trending return on equity may point to the
inability of the management to sustain its past performance.
Return on equity = Net profit / Shareholders’ equity
2.2.2 Solvency
Loan is an important source of finance for a business. It does not only

help the company meet the financial need of the business operation, it is
also useful for funding the company’s growth, and for increasing the
wealth of its owners, as it does not dilute the stakes of the existing
shareholders. Therefore, Koon always says, being investors, we should
not be disheartened when a company takes loan to do more business.
However, debt is a double-edged sword. Taking an excessive amount of

loan to support the growth of a business, especially buying unproductive
assets, will put the company in a vulnerable position. Therefore, we must
monitor the type of business assets acquired and the debt level of the
company to ensure the solvency of the business so it can meet its long-
term financial obligations.
Below are two useful metrics, namely Debt-to-EBITDA ratio and Debt-to-
equity ratio, which we can use to assess the solvency level of the business.
2.2.2.1 Debt-to-EBITDA Ratio
Debt-to-EBITDA ratio is one of the most important metrics used to

determine the ability of a company to service its debt. The higher
the ratio, the longer the company needs to pay off its debt. Whilst
some investors prefer to look for companies with the debt-to-
EBITDA ratio lesser than three, it should be noted that some
businesses are more capital intensive than other businesses. Peer-to-
peer comparison is therefore a better approach to ascertaining the
solvency of a firm.
Debt-to-EBITDA ratio = Debt / EBITDA
EBITDA
= Net Profit + Interest + Taxes + Depreciation and Amortisation
2.2.2.2 Debt-to-Equity Ratio
Debt-to-equity ratio (D/E) measures the debt of a business relative

to its shareholders’ equity. Similarly, capital-intensive businesses
Page | 17
tend to have higher debt-to-equity ratios than other businesses.

During industry boom, or when catalysts kick in, highly-leveraged
companies will enjoy higher earnings than their conservative peers.
Conversely, the stocks’ prices may take a hit when the companies
suffer huge losses during an industry recession. Therefore, we must
sell the stocks as soon as they report losses or when the industry
bust begins.
Debt-to-equity ratio = Debt / Equity
2.2.3 Liquidity
Meeting the short-term financial obligations of a business is equally

important to, if not more important than, meeting its long-term financial
obligations. Failure to cover the short-term liabilities will risk the business
going into a distressed state. One of the indicators we can use to judge the
ability of the company in meeting its obligations is its liquidity. Liquidity
measures the amount of liquid assets, such as cash and cash equivalent,
accounts receivable and marketable securities, which can be converted to
cash rather quickly and easily. Low liquidity will usually result in
financial health deterioration to a company.
Two of the financial ratios investors usually use to assess the liquidity of a
company are current ratio, and quick ratio.
2.2.3.1 Current Ratio
Current ratio, also known as working capital ratio, measures the

proportion of current assets in relation to the liabilities of the
business. Current assets are the assets that can be converted into
cash in a year. Current liabilities, on the other hand, are the debts
that must be repaid in a year. The higher the current ratio, the higher
the ability of a company is in serving its short-term financial
obligations. Nonetheless, the value should not be too high.
Unreasonably high current ratio signifies the inability of the
company in managing its cash, or working capital efficiently.
Further, it is wasteful, as some inventories may become obsolete, or
the quality of the stocks may be deteriorating, or the management
may be too lax in collecting back the money owed to the company.
Whilst some finance books suggest using 2 to 1 as the rule of thumb,

it should be noted that not all industries share the same value of
ideal current ratio. The value varies from industry to industry. We
should, in this case, compare the company’s current ratio to the
industry average ratio to find out how it fares against its competitors.
Current ratio = Current assets / Current liabilities
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2.2.3.2 Quick Ratio
Quick ratio is also known as an acid-test ratio. Just like current ratio,
quick ratio measures the ability of a company to meet its short-term
financial liabilities. However, inventories are omitted in quick ratio
calculation, as inventory could not be readily converted into cash.
Even though the general rule of thumb for quick ratio is 1 to 1, we

should also compare the company’s quick ratio with that of the
industry average to find out how it fares, as not all industries share
the same value of ideal quick ratio.
Quick ratio = (Current assets – Inventories) / Current liabilities
2.2.4 Activity Ratios
Activity ratios are the metrics used to ascertain the effectiveness of a

management in converting their resources such as assets, receivables, and
inventories into cash or sales. Three of the most commonly used activity
ratios are total asset turnover, accounts receivable turnover, and inventory
turnover ratios.
2.2.4.1 Total Asset Turnover Ratio
Total asset turnover measures the amount of revenue a company

generates in relation to its total assets. It indicates the efficiency of a
management in deploying assets to produce sales. The higher the
turnover, the better the management is compared to their
competitors in asset management.
Total asset turnover ratio = Sales / Average total assets
2.2.4.2 Inventory Turnover Ratio
Inventory turnover measures how fast inventory is sold. In addition,

it indicates how long cash is being tied up to inventory asset.
The higher the turnover, the higher the number of times inventory is
sold in a year, the higher the efficiency of a company is in managing
its resources. However, unreasonably high turnover is not good for a
company as it implies insufficient inventory, which may result in a
loss in business.
Low inventory turnover, on the other hand, may suggest that the
company is overstocking, suffering from obsolescence or deficiency
in the finished goods. Nonetheless, a sudden drop in the turnover is
not always bad. At times a company may increase its inventory if
the management anticipates market shortages or rapidly rising prices
of certain goods. As investors, we should read the comments of the
management provided in the financial reports in conjunction with
Page | 19
the inventory turnover ratio to get a better picture of the situation. At

the same time, we should compare the figure with the turnovers of
its peers.
Inventory turnover ratio = Sales / Average inventory
or
Inventory turnover ratio = Cost of goods sold / Average inventory
Remark: to find out the number of days cash is tied up to inventory

asset, or the number of days inventory is in stock; simply divide 365
by the calculated inventory turnover.
2.2.4.3 Receivables Turnover Ratio
Receivables turnover measures the number of times receivables are

collected in a year. The higher the turnover, the more efficient the
management is. On the other hand, low receivables turnover points
to the problem that the management has some difficulties in
collecting the credit it extends to customers in time. In addition, it
may suggest that the company has a loose credit policy or a massive
amount of bad debt.
Notwithstanding that, it should be noted that not all industries share

the same average receivable turnover ratio. Some companies such as
construction, consumer discretionary, and basic material, and
manufacturing companies tend to have higher receivables turnovers
than the others (i.e. large retailers, consumer, casino and gaming,
and transportation companies) due to their business natures.
Therefore, we should, as investors, compare the company’s
receivable turnover with the average turnover of the industry.
Receivables turnover ratio

= Net credit sales / Average accounts receivable
Remark: to find out the number of days a firm’s credit is collected;

simply divide 365 by the calculated receivable turnover.
2.2.5 Cash Flow
Cash flow is an important element of a business. It shows the amount of

cash flowing into and out of a business. Very often a company goes
bankrupt due to its inability to pay liabilities, not because the business is
not profitable. Therefore, positive cash flow is not only important for
dividend payment, and for future business expansion; it also ensures the
solvency of a business. Note that cash flow does not take non-cash items
(i.e. credit sales and payables) into account, as cash is not involved in the
transactions.
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2.2.5.1 Free Cash Flow
Free cash flow measures the amount of cash generated by a business

from its operation after netting out capital expenditures. Free cash
flow is an important indicator to ascertain if a company has an
ability to pay dividends and the amount of dividends it can afford to
distribute to its shareholders. In addition, it shows the ability of a
company to weather hard times, especially during the industry
recession, and to fund its business expansion internally.
Companies consistently produce positive, or high free cash flow is

normally called cash cow. In other words, to find a cash cow, we
should pay attention to the free cash flow of companies when we are
searching for high quality investment.
Free cash flow = Operating cash flow – Capital expenditures
2.2.5.2 Operating Cash Flow-to-Sales Ratio
Operating cash flow-to-sales ratio measures the amount of cash

produced by a business from its sales. The higher the ratio, the better
the management is in managing its cash flow. That being said, not
all companies have the same range of ratio. In fact, the range varies
widely from industry to industry. Being investors, we should
compare the latest operating cash flow-to-sales ratio with those of its
peers and with its historical performance over the past few years to
make an informed judgement.
Operating cash flow to sales ratio = Operating cash flow / Sales
2.3 Do Not Forget the Details of Financial and Annual Reports and Company
Announcements
“The best advice I ever got was on an airplane. It was in my early days on Wall
Street. I was flying to Chicago, and I sat next to an older guy. Anyway, I
remember him as being an old guy, which means he may have been 40. He told
me to read everything. If you get interested in a company and you read the
annual report, he said, you will have done more than 98% of the people on Wall
Street. And if you read the footnotes in the annual report you will have done
more than 100% of the people on Wall Street. I realized right away that if I just
literally read a company's annual report and the notes -- or better yet, two or
three years of reports -- that I would know much more than others. Professional
investors used to sort of be dazzled. Everyone seemed to think I was smart. I
later realized that I had to do more than just that. I learned that I had to read
the annual reports of those I am investing in and their competitors' annual
reports, the trade journals, and everything that I could get my hands on. But I
realized that most people don't bother even doing the basic homework. And if I
did even more, I'd be so far ahead that I'd probably be able to find successful
investments.”
Jim Rogers
Page | 21
One of the reasons why most retail investors lose money in the stock market is
that they are reluctant to read the announcements, financial statements, and
annual reports of the stocks in which they have interests. Most of them buy and
sell stocks based on rumours. As a result, they lose their hard-earned money for
punting on news with low reliability. Even if they are willing to read the
financial statements, most of them do not have the patience to read the entire
reports, and all announcements. Skimming through the documents does not only
hinder investors capturing the essence of the reports, and companies’ progress,
many of the hidden gems will also be missing out.
Like it or not, keeping track of companies’ business developments is a duty of

every investor. We would miss out on many golden opportunities if we do not
keep track of their developments. The detailed information of the developments
can always be found in the announcements, explanatory notes, and footnotes of
their reports. Moreover, the resources can be freely accessed by investors from
any part of Malaysia through the website of Bursa Malaysia and they are always
free.
Below are some important details, which we can obtain from the reports, and
announcements if we are willing to spend time going through the documents.
2.3.1 Prospect of the Business or Company
Every management team is required to provide their view on the

performance and outlook of their business periodically -- quarterly and
yearly. This statement does not only contain some information about the
current operation of the firm, it also provides investors an insight into the
business and reveals how the business will perform in the near future.
Negative tone projected by the management usually points to a

deteriorating business outlook. Similarly, when the management focus
more on industry development than the company’s earnings prospect, or
when they paint a challenging business environment, it reveals that the
business prospect of the firm will be gloomy in the near future. We should
avoid this type of companies until their fundamentals and business
outlooks show some improvement.
Positive comments and optimistic opinions provided by the management,

on the other hand, reveal that the business outlook is improving, or the
business is growing. However, it should be noted that not all positive
comments are good news. Sometimes the management may paint a false
picture of the reality to protect the reputation of the company even if the
business performance has sunk into the red. As investors, we should take
the comments, and explanation of the management with a pinch of salt
when reading their reports.
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2.3.2 Latest Development
Latest developments of a business, such as the invention of a new product,

the discovery of a new oil well, winning a concession contract, or award
for infrastructure development, receiving a casino operating license,
mergers and acquisitions, the formation of a joint venture for a new
project, and the incorporation of a new subsidiary for new business
opportunities, must all be reported in annual reports, and quarterly
financial statements, and be announced on Bursa Malaysia website.
Every piece of information provides us an opportunity to buy a potential

winning horse before the race starts if we know how to interpret the
information when the share price is just about to rise. If you are willing to
do some homework, to find out the new developments, the additional
revenues and profits contributed by the projects or awards, you would find
yourselves surrounded by plenty of gold.
2.3.3 Segmental Business Performance
Many of the listed companies in Malaysia are either diversified companies,

or vertically integrated companies. A diversified company is a firm
involves in multiple businesses, whilst a vertically integrated company is
a firm providing several different services along the supply chain. Under
the requirements of Financial Reporting Standards in Malaysia, the
revenues, costs and profits of these businesses (if the segmental assets,
revenue or profit is 10% or above) must be disclosed separately in the
segmental reporting section.
By scrutinising the section, we can tell how the firm’s profits are derived,
the type of products the firm sells, the geographical market of the firm,
and the impact of the strategy the management have implemented. Also,
we will be able to identify the high-performing businesses within the firm,
and to make a better prediction on the revenues and profits for the next
few quarters.
2.3.4 Number of Shares Owned by the Management Team and the Thirty
Largest Shareholders
Studies show that the managerial ownership of a firm is directly correlated

with the value of a firm. When the management possess high stakes in the
company, naturally they will align their interest with that of the other
shareholders, thus a better team performance, and a higher firm value. In
addition, the ownership level of the management reveals their confidence
in the company. When we read an annual report, we should not ignore the
number of shares owned by the top executive in the company, as the data
tells us more than just a number.
Similarly, the number of shares owned by the thirty largest shareholders

should not be overlooked as it tells us the maximum percentage of shares
left floating in the market currently. The lesser number of shares
Page | 23
circulating in the market, the faster the share price soars when the
business performs better in future. Further, we would be rewarded
handsomely if we spot any super investors or gurus owning the stock, and
if we buy it below its intrinsic value.
2.3.5 Other Details of the Annual Reports
2.3.5.1 Risks and Uncertainties
In some annual reports, risks and uncertainties are also provided by

the management so that investors can take them into consideration
in their analysis and valuation, and can prepare for the worst, or take
immediate actions if, unfortunately, any mishap occurs to the firm.
Pay no heed to the possibility of this calamity, you will find yourself
in a panic state if the firm’s operation is suspended or comes to a
halt abruptly one day.
2.3.5.2 Auditor’s Reports
Auditor’s opinion on the company’s financial statements is

important that the report reveals the conformity of the information
presented by the management with GAAP or FRS, and its fairness.
Four types of opinion usually provided by auditors are unqualified
opinion, qualified opinion, adverse opinion and disclaimer of
opinion reports. Out of the four opinions, unqualified opinion is the
best opinion, and is the most commonly issued opinion. The
remaining three types of opinion are undesirable opinions, which
show that the statements, either, do not comply with GAAP or FRS,
or are lack of fairness, violate accounting principles, or cannot be
audited impartially. We should be careful when studying the
business performance of the company with these three types of
opinion. Also, if the company changes auditors, we should take the
numbers with a grain of salt.
2.3.6 Other Important Announcements You Should Not Miss Out
2.3.6.1 Bonus, Warrant and Treasury Shares Distribution

Announcement
Koon will be delighted whenever the companies he has stake in

distributing bonus, warrant, and bonus shares to their shareholders.
According to him, the issuance of warrants and bonus, and the
distribution of treasury shares are amongst the powerful catalysts
that can lift the price of a stock up. Distributing warrants or treasury
shares to shareholders is like giving ‘Ang Pow’ to all shareholders.
Naturally the price of the stock will rise after the announcement of
the news. Distributing bonus shares to shareholders, on the other
hand, reveals that the company is in good financial health. The news
will have positive effects on the share price, as investors’ confidence
in the company will be greatly elevated. In addition, the issuance of
Page | 24
bonus shares and convertible warrants will increase the liquidity of

the stock.
2.3.6.2 Dividend Announcement
The declaration of dividends too has a great impact on the share

price of a stock, as it increases the wealth of its investors. Further, it
indicates the success of the business and helps growing the
confidence of investors. As the confidence of investors boosted, the
demand and share price of the stock will follow along. If we pay
attention to this type of announcements and dividend distribution
pattern, our chance of missing out on winning stocks in Bursa
Malaysia would be very slim.
2.3.6.3 Share Buyback Announcement
Share repurchase indicates that a stock is cheap, and the company

possesses plenty of cash. These two factors will attract the attentions
of many investors who are constantly looking for undervalued
stocks and will elevate the share price of the stock. Investors who
always keep track of the company strategy and activities will be
benefited from the announcement.
2.4 Stock Valuation
“The price of any particular security can be pictured as something resembling a

captive balloon attached, not to the ground but to a wide line travelling through
space. That line represents "intrinsic" value. As time goes on, if a company's
earning power and true prospects improve, the line climbs higher and higher. If
these or other basic ingredients of intrinsic value get worse, the line declines
correspondingly. At any one time, the psychological influences (i.e., how the
financial community is appraising these more fundamental matters of intrinsic
value) will cause the price of the particular stock to be anywhere from well
above this line to well below it. However, while momentary mass enthusiasm or
unwarranted pessimism will cause the stock price to be far above or well below
intrinsic value, it, like our captive balloon, can never get completely away from
the line of true value and will always be pulled back toward that line sooner or
later.”
Philip Fisher
After analysing the business performance of a company and adding the stock in
our shortlist, we must perform stock valuation prior to placing an order. This is
to prevent us from paying an extortionate price for the stock. No matter how
good the company is, our investment return will be greatly reduced if we pay an
unreasonably high price for the stock. Therefore, stock valuation acts as the
second defence line to protect our lifetime savings.
That being said, it does not mean that we should use a very complex model in
our valuation work. According to Benjamin Graham, “in 44 years of Wall Street
Page | 25
experience and study I have never seen dependable calculations made about
common stock values, or related investment policies that went beyond simple
arithmetic or the most elementary algebra. Whenever calculus is brought in, or
higher algebra, you could take it as a warning signal that the operator was
trying to substitute theory for experience.” When we use a multi-variable model
with Greek symbols in your analysis, the likelihood of making mistakes will be
higher. Instead of focusing on the economic moat of a business and its
performance, we will just be concentrating on the precision of variables used for
valuation. As a result, our attention will be diverted to the wrong direction and
our investment thesis will be jeopardised. After all, stock valuation only helps
us find an approximate value of the business, gives our rational side a chance to
guard our investment and allows us to buy a stock at a price less than what it is
worth. Hence, the process should not be made too complicated.
2.4.1 Simple Valuation and Common Sense Judgement
When we plan to start a business, we will usually begin our planning work
by determining the income we can expect from the business. After that,
we will calculate the number of years it takes for us to get back the capital
we invest in the business. Similarly, when it comes to stock valuation, we
should, first of all, find out the company’s current earnings, current
earnings per share and future earnings and future earnings per share.
Using the data, we should subsequently find out how long the company
needs to earn you back the price you pay for the stock. If the duration is
too long, it is highly likely that the stock is overvalued.
2.4.1.1 Price-to-Earnings Ratio (and Forward Price-to-Earnings Ratio)
To calculate the duration, we can use price-to-earnings ratio (P/E or

PER) equation, which measures the current share price of the stock
in relation to its annual earnings per share. The higher the value, the
longer it takes for the company to earn us the amount of money we
pay for the stock.
However, you must note that price-to-earnings ratio is calculated

using the current earnings per share, which does not indicate the
direction towards where its stock price will be heading next year.
The price will rise if its earnings grow the following year. If we
avoid stocks with marginally higher P/E but with excellent profit
growth prospects, we will probably miss out on the growth stories.
In addition, professional fund managers always shun stocks with
poor current earnings even though the companies have tremendous
profit growth prospect. Since the fund managers are not interested in
these stocks, they are sold at low prices. If we use the current
earnings to calculate their P/E, we would also miss out on the
rewards.
As a businessman, Koon prefers to focus on the future earnings, and

forward price-to-earnings ratio. If it is accurately estimated, we
would be highly rewarded. Forward price-to-earnings ratio measures
Page | 26
the current stock price in relation to the expected earnings per share.
To determine the forward price-to-earnings ratio, we must be able to
make an educated guess, or prediction about the future earnings of
the business. Again, it can only be accurately predicted if we
understand the business.
In general, Koon always looks for financially healthy companies

with P/E, and forward P/E lesser than ten (P/E < 10). This will
prevent him from overpaying for the stocks, and will increase his
chance of winning the bet.
Having said that, research studies show that investors who buy only
low P/E stocks are not always ended up winning. Stock prices
seldom drop without a cause. As investors, we should figure it out
why the price, and P/E of the stock are so low. If we pay attention to
the company’s announcements, and read its financial statements,
and annual report closely, we should be able to find out the reason.
If, indeed, the share price falls without a valid reason, the demand
for its products is high and the company’s earnings are on an
uptrend, then we should not be afraid to buy the stock.
Price-to-earnings ratio = Share price / Earnings-per-share
Forward price-to-earnings ratio

= Share price / Forecasted earnings-per-share
2.4.1.2 Dividend Yield
Another approach to determine the duration we need to get back the

money we invest in a stock is by examining the stock’s dividend
yield (D/Y), which measures the percentage of dividend we can
expect from our investment. The higher the yield, the shorter it takes
for us to get back the money we invest in the stock.
High dividend yield stocks are appealing to passive investors, and

are always in high demand. Therefore, the prices of high dividend
stocks are not cheap. If you can find a stock with a dividend yield
higher than 7%, with high earnings predictability, and its earnings
are on an uptrend, you should consider adding the stock in your
portfolio.
Note that not all high dividend stock investments will be your
winning bets. Since dividend yield is calculated based on the
dividends paid last year, the yield tends to go up when the stock
price falls during industry downturn. Being investors, we should
find out if the dividend payment is sustainable by looking at the
current earnings, earning potential, and cash flow of the firm. The
yield will fall, and its price may drop further if the company is
unable to maintain its dividend payment.
Page | 27
Stocks that pay very little or no dividend may not necessarily be a

bad investment. Young companies usually do not pay dividend to
shareholders, as they need to preserve the cash for business
expansion. If we avoid high growth companies with profitable, and
promising businesses that pay no dividend to shareholders without
finding out the reason of doing so, a lot of golden opportunities will
be slipping through our fingers.
Dividend yield = Dividend per share / Share price
2.4.2 Relative Valuation
After calculating the price-to-earnings ratio, we can re-value the stock

again using relative valuation. The objective of this valuation is to find out
if the stock is fairly priced compared to its competitors with comparable
assets in the same industry. In relative valuation, it is assumed that the
market is efficient on all stocks in the same industry except the stock to be
analysed. In other words, the market is right on average but is wrong on
an individual stock.
2.4.2.1 Methodology of Performing Relative Valuation
i. To perform relative valuation, first of all, we need to select a

multiple that we would like to use for comparison. The most
commonly used multiples for relative valuation are price-to-
earnings ratio (P/E), enterprise value-to-earnings before
interest, tax, depreciation and amortisation ratio
(EV/EBITDA), enterprise value-to-earnings before interest
and taxes ratio (EV/EBIT), price-to-book ratio (P/B), price-to-
sales ratio (P/S) and etc. Since we have learned how to
calculate the P/E of a stock earlier on, let’s use P/E for relative
valuation.
ii. Subsequently, we need to list down the stock we are valuing,
and its peers on a piece of paper.
iii. Calculate the P/E of each stock.
iv. Calculate the average P/E of the stocks.
Remark: the stock we are valuing currently, and the stocks
with negative P/E should not be included in the average P/E
calculation.
v. Multiply the average P/E by the earnings-per-share (EPS) of
the stock we are valuing to find out the value of the stock.
vi. If the stock’s market price is lower than its value, it is
undervalued. The higher stock price (compared to its value),
conversely, implies that the stock is overvalued.
2.4.2.2 Use the Method Wisely
As much as the method helps ascertaining if a stock is undervalued

or overvalued against its peers, it cannot tell us if the stock market,
Page | 28
in general, is undervalued or overvalued. Moreover, it does not

indicate if the industry is entering a recession.
Take Plenitude Berhad, a property stock listed on the Main Board,

as an example, it looked undervalued at the end of 2014 when the
property market was taking a turn for the worse. Its P/E was below
10, and lower than the industry average. As the property market
rolling down the hill, so was the share price of Plenitude Berhad. If
anyone bought the stock at the end of 2014, and if he or she held
onto it until 2019, his or her portfolio performance would be
adversely affected by its price dip.
As investors, prior to placing our wager, we must study the business

of the company, analyse the financial health of the company, and
only safeguard our investment with stock valuation. Ask ourselves if
the business can make more profits next year than this year, and
make increasing profits years after next year. If the answer is “no”,
we should move on to the next stock.
Page | 29
2.5 Example: Latitude Tree Holding Bhd.
“You must thoroughly analyze a company, and the soundness of its underlying
businesses, before you buy its stock; you must deliberately protect yourself
against serious losses.”
Benjamin Graham
Latitude Tree Holdings Berhad is one of the multi-bagger stocks in which Koon
previously invested, and it constituted a substantial chunk of his portfolio in
2013, 2014 and 2015. When he initially shared his investment thesis on Latitude
with people, it was not well received, as they did not understand the business of
the company, and did not bother to know about its financial performance. Most
of them took punts on either stock market rock stars, or stocks in hot sectors.
After two years, it was proved that Latitude was a better investment. Its stock
price soared alongside the increasing profits, and stronger business performance.
It still makes people wondering how Latitude provided such a spectacular return
to its shareholders.
In this section, let us study why Latitude was a good investment in 2013, 2014,
and 2015, and how Koon assessed Latitude. I hope this simple, yet practical
method will help you discover multi-baggers stocks in Bursa Malaysia in future,
and help us achieve financial freedom sooner after learning about it.
2.5.1 Understanding the Business of Latitude Tree Holding Bhd.
Latitude is one of the largest publicly traded furniture manufacturers in

Malaysia by revenue. Despite its position in the industry, the company
was not closely followed by any analysts in 2013. The market
capitalisation of Latitude was only about 156 million in November 2013.
The company principally involved in wooden and rubber-wood furniture

production. Being an integrated furniture manufacturer, the company has
more control over the value chain, production expenses and transaction
costs, and is able to offer a wide range of furniture products to clients at
very low prices. As furniture order grows, the management increase their
investment in the automated system and advanced technology machinery
to reduce their long-term manufacturing costs.
In addition, it has a research and development team, comprises of

professional designers, technicians and developers, designing furniture to
cater for the tastes of different markets, to increase the range of innovative,
and attractive products, and to adapt to the fast-changing customer needs.
This investment gives the company an opportunity to distinguish itself
from its competitors.
The group operates mainly in Southeast Asia such as Vietnam, Malaysia,

and Thailand. In total, the company owns seven factories with the
manufacturing area of 7.8 million square feet. Most of its products are
exported overseas to the United States, Europe, Canada, Australia, and
Page | 30
Middle East countries. The United States, being the largest market of
Latitude, accounted for 92% of its revenue in 2013.
Remark: one of the advices of Koon is to look for businesses that we can
understand because we have to be able to make an educated guess about
their future earnings. The more complex a business is, the more uncertain
our projections will be. Moreover, it is harder for an incompetent
management to make big mistake to affect the bottom line of a simple
business.
2.5.2 Assessing the Financial Performance of Latitude Tree Holding Bhd.
Having a good understanding of the business, and its outlook is not

enough, we must also analyse the financial health of the company, and
buy it below its fair price. To judge the financial status of Latitude, we
need to study the profitability, solvency, liquidity, and activity ratio of its
business.
• Profitability
First of all, we must make sure that the business made more profits
this year than last year, and will earn more profits next few years
than this year before placing our bet.

= [(Net profit in 2013 / Net profit in 2012) – 1] × 100%
= [(Rm 32,046,000 / Rm 14,753,000) – 1] × 100%
= 117.22%
Profit growth rate (4-yr CAGR)

= {[(Net profit in 2013 / Net profit in 2009) 1/4 ] – 1} × 100%
= [(Rm 32,046,000 / Rm 13,213,000) 1/4 ] – 1 × 100%
= 24.79%
It can be clearly seen from the calculation above that the net profit
of Latitude in 2013 had increased by 117.22% from Rm 14.753
million to Rm 32.046 million. The figure was higher than that of its
4-year CAGR profit growth rate, 24.79%, and that of the industry
average, 26.62%. The surge was an early indicator showing that the
company’s net profit had started to grow rapidly in 2013, and had
grown faster than the profit growth of its competitors.
Net profit margin (NPM)

= Net profit / Sales
= (Rm 32,045,000 / Rm 493,687,000) × 100%
= 6.49%
Page | 31
In addition, its net profit margin showed an improvement from

2.85% in 2012 to 6.49% in 2013, which was higher than that of the
industry average, 5.66% in 2013. This implied that the business’s
profitability was improving, and was better than that of its peers.
Return on equity
= Net profit attributable to shareholders / Shareholders’ equity
= (Rm 24,366,000 / Rm 232,061,000) × 100%
= 10.50%
Further, its return on equity demonstrated an improvement from

industry average, 8.19% in 2013. This figure suggested that the
management is efficient in utilising the available resources to
generate profits for the company despite the growing shareholders’
equity, and decreasing debt level.
According to Koon, when he delved further into the business detail,

and the financial reports of Latitude, he noticed a few near-term
catalysts that would contribute positively to its bottom line, and
would stimulate its revenue and earnings growth despite operating
in a challenging economic environment. Some of the main catalysts
include
• higher orders,
• increased production capacity in Vietnam,
• higher production output,
• improved productivity,
• lower material costs,
• lower tax rate, attributed to the tax incentive provided by the
government of Vietnam
• strengthening of USD against MYR (refer to Figure 2.4),
• decrease in finance costs,
• upward revision of its selling prices for some products.
Figure 2.4: USD-MYR Currency Exchange Rate Chart from 2012 to 2017
Page | 32
Source: Yahoo Finance
Koon started buying Latitude after performing some analysis at the

price of Rm 1.60, at the end of 2013. His judgement on the profit
growth of Latitude was proved right when its net profit continued to
increase in 2014 and 2015 (refer to Figure 2.5). In addition, its
return on equity continued to show positive growth (refer to Figure
2.6) and so as its share price (refer to Figure 2.7). He added more
shares to his winning position as the share price, and earnings of
Latitude continued to go up. After holding the stock for about three
years, he started to sell it at Rm 8.00 when the company reported
reduced earnings in 2016.
Net Profit and Net Profit Margin of Latitude
90,000,000 12.00%
11.02%
80,000,000
9.88% 10.00%
70,000,000 9.46%
Net profit margin (%)

Net profit (Rm)
60,000,000 8.00%
7.20%
50,000,000 6.49% Net profit
6.00%
40,000,000 Net profit margin
30,000,000 3.94% 4.00%

3.33%
20,000,000 2.85%
2.00%
10,000,000
0 0.00%
2009 2010 2011 2012 2013 2014 2015 2016
Year
Figure 2.5: Net Profit and Net Profit Margin of Latitude from 2009 to 2016
Return on Equity and Shareholders' Equity of Latitude
600,000,000 20.00%
18.00%
500,000,000
Shareholders' equity (Rm)
16.00%
Return on Equity (%)
14.00%
400,000,000
12.00%
Shareholders' Equity
300,000,000 10.00%
Return on Equity
8.00%
200,000,000
6.00%
4.00%
100,000,000
2.00%
0 0.00%
2009 2010 2011 2012 2013 2014 2015 2016
Year
Figure 2.6: Return on Equity and Shareholders’ Equity of Latitude from 2009 to 2016
Page | 33
Figure 2.7: Stock Price Chart of Latitude from 2012 to 2017

Source: Yahoo Finance
Reminder: betting your money on a profitable stock with growing

profits, and good profit growth prospect will give you a higher
chance of winning the game than on a money-losing business. The
latter is more likely to continue suffering setbacks, so as its share
price. You must avoid the company, unless you can be sure that its
business has turned the corner, and will be profitable next year.
• Solvency
Subsequently, we have to ascertain the solvency of the company to

ensure that the company has the ability to meet its long-term
financial commitments. It can be done by analysing the debt-to-
EBITDA ratio, and debt-to-equity ratios of the firm.
Debt-to-EBITDA ratio
= Debt / EBITDA
= Rm 98,533,000 / Rm 56,894,000
= 1.73
Debt-to-Equity ratio
= Debt / Shareholders’ Equity
= Rm 98,533,000 / Rm 232,061,000
= 0.42
The debt-to-EBITDA ratio, and debt-to-equity ratio of Latitude in

2013 were at 1.73 and 0.42, respectively, and were still on down
trend (refer to Figure 2.8). Although the figures were slightly higher
than those of the industry averages, 1.42 and 0.17, respectively, they
were controlled at acceptable levels. If we shun stocks with higher
debt-to-EBITDA, and debt-to-equity blindly without trying to
understand their reasons of taking loans, we will probably miss out
on this type of glowing gems.
Page | 34
Debt to EBITDA Ratio and Debt to Equity Ratio of Latitude
3.33
3.50
3.00 2.68 2.65
2.50 2.18
Ratio (times)
2.00 1.73
Debt to EBITDA Ratio
Debt to Equity Ratio
1.50
0.93
0.81
1.00 0.63 0.70 0.69
0.58
0.49 0.42
0.50 0.28 0.22 0.17
0.00
2009 2010 2011 2012 2013 2014 2015 2016
Year
Figure 2.8: Debt-to-EBITDA Ratio and Debt-to-Equity Ratio of Latitude
• Liquidity
Also, we must not forget to assess the company’s ability to pay its
short-term obligations. It can be done by determining the current
ratio and quick ratio of the stock.
Current ratio
= Current assets / Current liabilities
= Rm 228,528,000 / Rm 160,081,000
= 1.43
Quick ratio
= (Current assets – Inventories) / Current liabilities
= (Rm 228,528,000 – Rm 89,653,000) / Rm 160,081,000
= 0.87
As can be seen in Figure 2.10, the current ratio and quick ratio of
Latitude were lower than those of the industry averages. The current
ratio and quick ratio of Latitude in 2013 were at 1.43 and 0.87,
respectively. The current ratio and quick ratio of the industry
averages, on the other hand, were at 1.83 and 1.20, respectively. As
the management continued to pay back its debts, and continued to
build up its cash level, the current ratio and quick ratio of Latitude
improved significantly (refer to Figure 2.9), which reached the
levels of 2.62 and 1.78, respectively, in 2016.
Page | 35
Current Ratio and Quick Ratio of Latitude
3.00
2.62
2.50
2.03
2.00 1.78
Ratio (times)
1.63
1.43 Current Ratio
1.28 1.33
1.50
1.14 1.09 1.14 Quick Ratio
1.05
0.81 0.87
1.00
0.67 0.66
0.58
0.50
0.00
2009 2010 2011 2012 2013 2014 2015 2016
Year
Figure 2.9: Current Ratio and Quick Ratio of Latitude from 2009 to 2016
• Activity Ratio
To prevent investing in a poorly-managed company (of which the

management cannot utilise their resources effectively), we have to
compare the total asset turnover ratio, inventory turnover ratio, and
receivable turnover ratio of the company with those of its peers.
Total asset turnover ratio

= Sales / Average total assets
= Rm 493,687,000 / Rm 450,386,000
= 1.10
Inventory turnover ratio

= Sales / Average inventory
= Rm 493,687,000 / Rm 89,653,000
= 5.51 (66 days of inventory on hand)

= Rm 493,687,000 / Rm 33,530,000
= 14.72 (25 days of credit)
In comparison, the asset turnover ratio of Latitude in 2013 was

similar to that of the industry average, 1.10. This figure implied that
the company was as efficient as its competitors in utilising their
assets to generate sales.
However, its inventory turnover ratio, 5.51, was slightly lower than
that of the industry average, 6.10. Given the increasing orders in
2013, it was sensible that the management kept more inventories so
they could fill the new orders quickly once they received them, and
to prevent shortage of stock due to unforeseen circumstances.
Page | 36
Moreover, sixty six days of inventory on hand signified that the

inventory moved fairly quickly. Therefore, it did not worry Koon
much about the inventory level.
Compared to its peers, its receivables turnover ratio, 14.72, was far
higher than that of the industry average, 6.92. This was a good sign
showing that the management were efficient in collecting its credit.
• Cash Flow
Just like managing our personal finances, we must make sure that
the company can continue its operation without running out of cash.
Therefore, we must analyse the free cash flow and operating cash
flow to sales ratio of the firm.
Free cash flow

= Operating cash flow – Capital expenditures
= Rm 52,879,000 – Rm 5,285,000
= Rm 47,594,000
Operating cash flow to sales ratio

= Operating cash flow / Sales
= Rm 52,879,000 / Rm 493,687,000
= 0.11
The free cash flow of Latitude, Rm 47,594,000, was in surplus in

2013, and was higher than its net profit, Rm 32,046,000, and was
also higher than the dividend paid to shareholders, Rm 6,124,000.
This was a positive sign showing that the company was in a healthy
financial state. After paying dividend to shareholders, the company
could still fund its business expansion, using the cash generated
from operation, without taking more loans.
In addition, the operating cash flow to sales ratio of Latitude, 0.11,

was higher than that of the industry average, 0.08. This indicated
that the management was more capable than their competitors in
turning sales into cash in their day-to-day operation.
Page | 37
Industry
Description 2009 2010 2011 2012 2013
Average (in 2013)
Revenue (Rm) 397,378,000 506,866,000 500,664,000 517,863,000 493,687,000 163,715,000
Net profit (Rm) 13,213,000 36,483,000 19,741,000 14,753,000 32,046,000 9,259,000
Net profit attributable to shareholders (Rm) 14,009,000 27,730,000 12,471,000 9,840,000 24,366,000 8,958,000
Adjusted earnings per share (Rm) 0.1441 0.2853 0.1283 0.1012 0.2507 0.1041
Net profit margin (%) 3.33% 7.20% 3.94% 2.85% 6.49% 5.66%
Profit growth (year over year, %) 0.00% 176.11% -45.89% -25.27% 117.22% 26.62%
Return on equity (%) 7.89% 14.45% 6.36% 4.69% 10.50% 8.19%
Debt-to-EBITDA ratio (times) 3.33 2.18 2.68 2.65 1.73 1.42
Debt-to-equity ratio (times) 0.63 0.70 0.58 0.49 0.42 0.17
Current ratio (times) 1.14 1.28 1.09 1.14 1.43 1.83
Quick ratio (times) 0.67 0.81 0.58 0.66 0.87 1.20
Total asset turnover ratio (times) 1.09 1.17 1.22 1.25 1.10 1.12
Inventory turnover ratio (times) 6.65 6.61 5.91 6.80 5.51 6.10
Receivables turnover ratio (times) 12.82 13.56 14.16 12.46 14.72 6.92
Free cash flow (Rm) 37,467,000 8,781,000 -11,990,000 22,938,000 47,594,000 9,194,000
Operating cash flow to sales ratio (times) 0.11 0.08 0.05 0.07 0.11 0.08
Adjusted dividend per share (Rm) 0.0387 0.0667 0.0200 0.0300 0.0630 0.0275
Price to earnings ratio (P/E) 6.40 9.31
Dividend yield (%) 3.94 2.84
Figure 2.10: Summary of Latitude Tree Holdings Berhad’s Financial Performance
Page | 38
2.5.3 Valuing the Business of Latitude Tree Holding Bhd.
To avoid paying too much for sellers, and avoid overpaying for what the
business is worth, Koon always makes sure that the Price-to-Earnings
ratio or forward Price-to-Earnings ratio of his stock does not exceed 10,
and does not exceed that of the industry average.
Price-to-Earnings ratio
= Share price / Earnings-per-share
= Rm 1.60 / Rm 0.25
= 6.40
Forward Price-to-Earnings ratio

= Share price / Estimated earnings-per-share
= Rm 1.60 / Rm 0.50
= 3.20
Predicted share price of Latitude in 2015

= Industry average P/E ratio × Predicted earnings-per-share
= 9.31 × Rm 0.50
= Rm 4.65
The Price-to-Earnings ratio and forward Price-to-Earnings ratio of the

stock were only about 6.40 and 3.20, respectively, when Koon started to
accumulate the shares of Latitude at the end of 2013. Both ratios were
lower than 10, and were below the industry average P/E -- 9.31. Based on
prediction, its stock price could go up to Rm 4.65 when Mr. Market re-
valued it using the industry average P/E the following year. It was proved
right as the share price went up to Rm 4.65 in early 2015, and the price
continued its dash towards the level of Rm 8.00 at the end of 2015. Had
anyone followed Koon to buy it at Rm 1.60 and sold it at Rm 8.00, he or
she would have earned about 400% gain, equivalent to 124% per year, in
the investment!
Page | 39
Chapter Summary
Fundamental analysis is about finding the intrinsic value of a company
What do we need to excel in fundamental analysis
Interest to understand the business of a stock
Rudimentary accounting and finance knowledge
Effort to study financial statements, annual reports, and

announcements of a company
The three main financial statements we should read
Income statement: gross profit, pre-tax profit, and net profit
Balance sheet: assets, liabilities, and equity
Cash flow statement: cash flow from operating activities, cash flow
from investing activities, and cash flow from financing activities
How to analyse the value of a company
Step 1: know its business
What kind of products it offers?
Who the customers are?
How its profits are derived?
Step 2: assess the financial health of the company
i. Profitability:
Profit growth rate, net profit margin, return on equity
ii. Solvency:
Debt-to-EBITDA ratio, and debt-to-equity ratio
iii. Liquidity:
Current ratio, and quick ratio
iv. Activity ratio:

Asset turnover ratio, inventory turnover ratio, and receivables
turnover ratio
Page | 40
Chapter Summary (Continued)
v. Cash flow:
Free cash flow, and operating cash flow to sales ratio
Step 3: value the stock
Using Price-to-Earnings ratio, and forward Price-to-Earnings

ratio
Using dividend yield
Using relative valuation
Do not ignore the details of financial and annual reports, and important
announcements
Prospect of the business
Latest development
Segmental business performance
Number of shares owned by the management, and major shareholders
Other nitty-gritty of annual reports: risk and uncertainties, and

auditor’s reports
Essential announcements: warrants, bonus and treasury shares

distribution, dividend, and share buyback announcements
Before buying a stock, we must make sure that
The company makes increasing profits
The company is financially stable
Its share price is below what the business is worth
Page | 41
Chapter 4:
The Biggest Behavioural
Pitfalls in Investing
The Biggest Behavioural Pitfalls in Investing
4.1 Part 1: The Biggest Behavioural Problems
“The most useful and practical part of psychology—which I personally think

can be taught to any intelligent person in a week—is ungodly important. And
nobody taught it to me by the way. I had to learn it later in life, one piece at a
time. And it was fairly laborious. It's so elementary though that, when it was all
over, I felt like a fool. And yeah, I'd been educated at Caltech and the Harvard
Law School and so forth. So very eminent places miseducated people like you
and me. The elementary part of psychology—the psychology of misjudgment, as
I call it—is a terribly important thing to learn. There are about 20 little
principles. And they interact, so it gets slightly complicated. But the guts of it is
unbelievably important. Terribly smart people make totally bonkers mistakes by
failing to pay heed to it.”
Charlie Munger
The followers of Efficient Market Hypothesis (EMH) believe that the market is
always efficient, and stocks always trade at their fair value. According to this
group of investors, any changes in the fundamentals of a stock will immediately
be reflected in the price of the stock, thus making it impossible for investors to
outperform the market. However, based on Koon’s study, this is not always the
case. If the market is indisputably efficient, as advocated by the professors of
EMH, there would be no chance for those successful investors like him to
exploit any arbitrage opportunities, gain in price difference from stock
investments, and beat the market in the long run. In actual fact, the majority of
his wealth is amassed through the acquisition of substantial stakes in
undervalued companies with massive profit growth potential, and the disposal
of those overvalued ones with no or low profit growth potential in visibility.
It should be noted that irrationality, delusional optimism, cognitive illusions and

other human emotions have been largely overlooked when people assume that
the market is efficient. In fact, the volatility of the stock market is, very often,
driven by the irrational psychological factors. It is human’s uncontrollable
emotions, biases, fallacies and false perceptions that result in the deviation of a
stock’s price from its real business value. And the market is mainly driven by
greed and panicked by fear. Or put simply, the movement of stock price is very
often dictated by human emotions.
Of course, the changes of facts, and fundamentals of a stock do play an

important role in the movement of its price. But, without stock market
participants bidding it up or selling it down, the price will always stay flat. For
those investors who think that fundamental, and technical analyses (FA/TA) are
the only knowledge needed to survive in the stock market, think again. Investing
psychology is one of the subjects least studied by most investors, but extremely
important in investing. It is also the area where the largest chunk of gains can be
obtained from stock investments if we understand human psychology well.
Stumble into the biases and mental pitfalls; on the other hand, will cost us a
hefty loss in our investments. That is why Koon always advises us to spend
more time on studying human psychology.
Page | 2
Below are some common behavioural biases investors always fall prey to in
investing.
4.1.1 Allow Emotions to Take Over Rational Thinking
“Eighty percent of the market is psychology. Investors whose actions

are dominated by their emotions are most likely to get into trouble.”
George Goodman (pseudonym Adam Smith)
People always allow their emotions to take over rational thinking and
seldom use logical system to process information especially when they
are in emotionally unstable state. This situation is commonly seen
when people are in fear during bear attacks. When they are bombarded
with noise, and mentally overloaded as price plunges, the risk level
they perceive will be raised, and their faith is wavering, even though
the facts remain unchanged. Their Amygdalae (according to the study
of neuroscientists at the California Institute of Technology, Amygdala
– two almond-shaped clusters of tissue located in the centre of the brain
– is a part of the human’s limbic system that supports the functions
such as behaviour, long-term memory and emotional processing) will
induce fear, thus causing them to be conservative, and ignore bargains.
They will either avoid the stocks completely (even if the investments
are clearly high probability bets), or dump whatever they hold until the
feeling of fear subsides. The latter is akin to throwing the baby out with
the bath water, and in this situation, value is completely ignored. The
over-reaction of hitting the panic button at every Sen/Ringgit drop, and
disposing all their holdings at dirt cheap prices is the reason why
people always buy dear and sell cheap. And this problem is commonly
suffered by people who trade very often.
On the contrary, people become irrational buyers when they are in

greed, having the fear of missing out (FOMO), or in an extremely
happy mood. They have a tendency to take higher risks, buy
aggressively, and chase after hot stocks when they are in euphoria. This
is more apparent when the market is on the rise, and when stock market
pundits are painting a rosy picture of an industry. At the same time, the
dopamine level in the nucleus accumbens of investors will be rising. It
will subsequently induce reward-motivated behaviour, lead to euphoria,
and result in people take a high-risk bet, and ignore danger, as the
irrational impulses get in the way, and they become more optimistic
about the future of the stocks. Over-optimism is one of the worst
cognitive biases people always commit to in bull market. This type of
optimism is a spontaneous one, and always results in share price shoots
to the moon, as investors continuously bid up the share price. As you
may recall, the moment before the Asian Financial Crisis in 1997, the
market was filled up with over-optimism, and the KLCI shot up to
1270. Within 18 months, KLCI fell 76% when the bubble burst. The
Asian Financial Crisis was an important historical event showing that
market bubble was caused by psychological problems, and people
overly reacted to both good and bad news. As I am writing this, many
Page | 3
steel stocks have been making new historic highs every week. Koon
told me that the people he meets everywhere as well as the people he
exchanges opinions with in forums are optimistic about steel-related
companies’ future. When he advised people to be cautious, as the
oversupply of property in every city of Malaysia will affect the
earnings of some steel manufacturers, a few stubborn commenters even
asked him to shut up. According to him, this is a clear sign of allowing
greed to take over rational thinking. When the companies report
decreasing earnings later, their prices will definitely plummet, and this
group of investors is vulnerable to a loss due to the oversupply problem.
“Everyone has the brainpower to make money in stocks. Not everyone

has the stomach. If you are susceptible to selling everything in a panic,
you ought to avoid stocks and mutual funds altogether.”
Peter Lynch
4.1.2 Hate Facts, but Like Stories
“Too many people buy stories or trends - they don't buy businesses.”
Donald Yacktman
The human brain is hard-wired to understand stories better than data.

Thus, people tend to favour stories more than facts. According to
Jennifer Aaker, a professor at Stanford’s Graduate School of Business,
“a story is a journey that moves a listener, and when the listener goes
on that journey he or she feels different and the result is persuasion
and sometimes action.” That’s why stories have a powerful ability to
affect human emotions.
However, in investing, allowing stories to influence our judgement

may not necessarily be good for us. Many of the sensational stories
created by the media are for viewership, and have no “nutritional”
value to our investments. Unlike facts, which cannot be created or
manipulated easily, stories, on the other hand, can be twisted to meet
the objectives of manipulators. For example, some analysts would
write a fantastic story about a firm, and capitalise on human greed to
dupe gullible investors into buying the stock, even though the company
does not have a good earnings growth potential, and many of its
projects are low profit margin work, so that the analysts and their
associates could take advantage of the market force to bid up the stock
price to their price target level, and get to sell the stock at an attractive
price.
In addition, analysts and media understand that common investors are

easily falling prey to framing effect, a cognitive bias in which the
outcome of people’s decisions is influenced through the way a situation
is presented. That’s why they will write a beautiful tale of a business
with framing effect embedded in the story to bamboozle naïve readers
into buying the stock they or their clients intend to exit positions. For
example, even if a company has started to suffer some financial losses
Page | 4
this quarter, and face some oversupply problem, the media may frame
the situation positively by just highlighting the positive development of
the company. They would frame it in a way that “despite the tough
operating environment and uncertainty, Company XYZ managed to
sustain its profitability for the current financial year, and the
management is endeavouring to continue improving their operating
efficiency. We envisage the future outlook of the business to be
positive.” Any intelligent readers who assess the company’s profit
growth potential from a business perspective, and study its financial
reports should notice that the recent quarter’s financial loss has been
muted, and been replaced with annual earnings in the statement.
Further, they should be aware that oversupply is a serious issue. In this
case, clearly, the analyst or media is telling a story with some hidden
agendas. If anyone gives the story the benefit of the doubt, he or she
would be suffering a loss in the investment when the price drops.
In addition, we should take note of some groups of stocks with inherent

beautiful stories. The groups of stocks I refer to include, but are not
limited to, large capitalisation stocks (with a hope to thrive
continuously), rapidly expanding companies (with a straight line
extrapolation of earnings forecast), IPOs (with a hope that the
companies can take a quantum leap in its earnings), ACE market stocks
(with a hope that they will be transferred to the Main Board), high-tech
stocks (with potential to get higher earnings multiple), and other
thematic stocks (with the likelihood of their prices being pushed up).
These groups of stocks are always found with many beautiful stories
created to trick ignorant investors into buying them up. That is why
people tend to love stocks that generally have good stories and to shun
undervalued stocks with profit growth potential. Most of the blue chip
stocks are relatively expensive currently, and tend to produce lower
returns than value stocks, as the irrational Mr. Market has bid them up
to an astronomical level without bothering about the risk and reward of
the investments. Lo and behold, as I am writing this, Nestle is shooting
through the roof and is selling at Rm 150, or P/E multiple of 57.3X.
Koon told me that he is concerned about the over-bullish and
overvalued problem of Nestle stock when he saw a lot of jubilant
investors rejoicing and congratulating one another in forums everyday.
They do not seem to know what the number signifies and the danger of
bidding a stock up to an overvalued level. It actually implies that if the
company were to pay out all its earnings to its shareholders every year,
it will take the shareholders 57.3 years to recover the cost of buying the
stock. If you buy a share of Nestle today, you can only expect an
earnings yield of 1.75%. That is why hot stocks with beautiful stories
always underperform promising value stocks.
“The fallacy is associated with our vulnerability to over-interpretation

and our predilection for compact stories over raw truths. It severely
distorts our mental representation of the world.”
Nassim Taleb.
Page | 5
4.1.3 Herd Behaviour and Follow Others Blindly
“Frequently the crowd is mistaken because they are not acting on the
basis of any superior information but are reacting, themselves, to the
principle of social proof.”
Robert Cialdini
Animals have a natural tendency to flock together as a group for

security purposes and other self-interests. And just like animals,
humans also like to live in a group and act in the same way. People feel
insecure when they are going in the opposite direction that the crowd is
moving. In the study of Amygdala, Gregory Berns, a neuroeconomist
of Emory University School of Medicine, also discovered that “social
isolation activates some of the same areas in the brain that are
triggered by physical pain”. In other words, following the crowd
generally makes people feel emotionally safe, and avoid the feeling of
pain.
In investing, humans also always exhibit herd behaviour. The reason

why most investors always follow the crowd is that most of them do
not have an independent point of view. They prefer to follow tips given
by other people such as their close friends, relatives, stock brokers,
investment bank analysts, columnists, and the so-called market
“experts”. In addition, they have the fear of missing out. They will
rather be wrong than missing out on an opportunity to win together
with their friends. They always believe that if everyone is buying the
same stock, other people must know something that they don’t. That is
why market participants always chase after hot stocks blindly in a
group. Even if some of them may sometimes go against the crowd, they
are unable to stay firmly on the ground when facing peer pressure.
They do not know how to handle the social pain and stress when being
criticized by their friends. In the end, they succumb to the pressure.
As much as following the crowd makes investors feel safe, the herd
behaviour will not help them make money in investing. It is impossible
for us to achieve an exceptional result by following the crowd. Most of
investing ideas shared by the group members are inferior in quality.
Even if the investing idea that we follow is a terrific one, we can only
expect an average outcome since the prize has to be shared by so many
winners. Further, studies show that investors who follow the crowd
buying in euphoria (usually when the market is at its peak), and selling
in panic (usually when the market is at its trough) always end up with a
disastrous investment outcome.
Also, we should be wary of any investment professionals who claim to

have an ability to predict short-term stock price movements. If we buy
or sell on their advice, we are literally trading blindly. Bear in mind
that these professionals do not know the market movement more than
anyone. They do not a crystal ball either. In fact, most of them
underperform the market index – KLCI – more often than not. History
Page | 6
has demonstrated again and again that most economists too failed to
foresee crisis arriving when the market was still in euphoria.
4.1.4 Impatience
“Successful investing takes time, discipline and patience. No matter

how great the talent or effort, some things just take time: You can’t
produce a baby in one month by getting nine women pregnant.”
Warren Buffett
According to Koon’s study, most of the stock market participants are

short-term traders who simply take a punt with short-term orientation,
and without having an edge. They usually invest with a very short time
frame – a day or a week. Many of them do not have the patience to
wait for at least a year for their investments to grow in value. They get
in and out; back in and back out of the market frequently when there is
news or rumours about a company. Even if the stocks they hold are
high growth stocks, when their investments show too little gain they
would immediately cash out without waiting for the growth being
reflected in the share prices.
Most of them do not aware that the cost of trading in and out actively is
so expensive that it could reduce their investment return substantially if
they do not control their behaviour. In addition, they have to pay a
higher price for a stock since they are not willing to wait for the right
time to buy it. Likewise, they will miss the opportunity to win big since
they sell their stock too soon before the price reaches its peak. If you
are a patient investor, and can empathise with market participants, you
would get it at a fire sale price and sell it near its peak. Patience is the
key to successful investing, but not many people realise it. That is why
Charlie Munger always says “the big money is not in the buying or the
selling, but in the waiting.”
4.1.5 Hesitate to Seize Opportunity
“You have to have the courage of your convictions. That’s what you
are getting paid for. This is the time when I really earn my money.”
Bruce Berkowitz
We always see people blame god (or fate) for not giving them any
opportunity to make money, and to prosper. But, in actual fact, we
always see people hesitate to seize opportunities when they are given
chances to buy good stocks at fair prices. They have a proclivity to
procrastinate when opportunities arise. When the stocks in their watch
list meet their selection criteria, instead of scooping up the incredible
bargains immediately, they hesitate and procrastinate. They waste time
pondering over the companies’ survivability, thinking if they should
still buy the stocks, and calculating how much money they should
allocate for the investments, and so on and so forth. Also, sometimes
they will wait for the companies to show a few consecutive quarters of
Page | 7
earning growth before they are prepared to buy the stocks. Eventually,
when other investors gobble up the shares, the value quickly vanishes
into the thin air, and the opportunities are gone. That’s why Buffett said
in 2008 that “if you wait for the robins, spring will be over.”
Another reason why people fail to grab opportunities is that they fall
prey to anchoring bias. Investors always anchor their decisions to
outdated analyses, all-time low, or all-time high, and their previous
buying or selling price of a stock. For example, if a stock’s 52-week
low is Rm 0.50/share, most conservative investors would not be willing
to buy the stock at Rm 0.70/share, even though the business is worth
Rm 1.00/share (apparently undervalued), and it has a tremendous profit
growth potential. They would still fix their target buying price at Rm
0.50/share – the price they had missed out last time. Likewise, people
are very likely to buy a stock when it touches its 52-week low – Rm
0.50/share, even though its earnings have been decreasing, the value
has dropped to Rm 0.20/share, and there is no reason whatsoever to
buy the stock, which may put a dent in their portfolio. Another
interesting finding that I discovered is that if people sold a fast-growing
company at Rm 1.00/share a few years ago, it is very unlikely that they
will buy back the stock at Rm 2.00/share even though the stock is
undervalued.
Also, people are averse to loss, and hesitate to pull trigger after losing
money in an investment. According to Kahneman and Tversky, “the
pain of losing is psychologically about twice as powerful as the
pleasure of gaining.” Their self-defence mechanism will kick-in when
dealing with the same stocks they have suffered some losses before,
even though the stocks have a great upside potential. For example, after
losing money in a stock a couple of years ago, some investors will
hesitate to buy back the stock, even though the fundamentals of the
business have improved, and the company has reported increasing
earnings. Koon recalled that when he bought Eversendai in 2017, many
of his friends advised him not to touch the stock, as some of them lost
money in the investment a few years ago. They have got a phobia to
invest in the company, and would ignore the profit growth potential of
the stock even though the fundamentals of the business had shown
some signs of improvement.
In addition, people tend to avoid buying stocks immediately after

seeing blood in the streets, or experiencing huge losses in the bear
market, even though the prices are dirt cheap. The recency bias results
in people overestimate the probability of event happens in the recent
past (that the recent market crash has rendered a sharp rise in
bankruptcy rate), and give lesser weight to the event that happens in a
distant past (that the last bull run rewarded many contrarian investors
generously). To be an intelligent investor, we should be aware of the
bias, make our judgements based on facts, focus on the long-term
objectives of our investments, pay attention to the companies’ profit
growth potential, and look at the long-term trend of the stock markets,
Page | 8
not the short-term movement of stock price. Statistics show that stocks
are relatively cheap every time after the market crash. The worst is
always behind us when the markets bottom out. And the best time for
bargain hunting and accumulating fast-growing stocks is when they
turn the corner, or when there is blood in the streets. If we hesitate for a
minute, our rewards will be gone in no time.
4.1.6 Refuse to Cut Loss
“Letting losses run is the most serious mistake made by most

investors.”
William O’Neil
Another behavioural bias people always stumble upon is their refusal to

cut loss when they discover that they have made some mistakes in their
original analysis work, or when the situation has changed, and the
reason to hold a stock is no longer valid. The reason why investors
refuse to sell the losers is due to disposition effect (“the tendency of
investors to sell shares whose price has increased, while keeping assets
that have dropped in value.” Source: Wikipedia). Further, they do not
want to feel shame, and to get the pain for booking a loss. Therefore,
they tend to hold on to their losers for a very long period of time, and
sell the winners very fast. They believe that as long as they do not
realise their loss, the paper loss is not considered a loss, and they will
not miss the chance to win back when the tide turns. The worst is that
some of them have a tendency to take a greater risk after devoting so
much time, energy and money in the investments and are still suffering
some losses. They will add to their losing position by buying more of
the down-trending stocks at lower prices. This fallacy is called sunk
cost fallacy.
Also, investors always forget that share price seldom declines

continuously for no reason. Price fall related to fundamental business
problems such as oversupply issue, and increasing operating costs will
linger a very long time, and very often may continue to depress the
stock price until the issues cease to have a significant influence on its
earnings. When a business’s highly profitable go-go days are gone, it
will take a very long time for the stock to regain its former glory. The
best thing we can do is to dispose the stock as soon as possible before
its price collapses (so that our investment will not be affected by the
decreasing revenues, and the earnings disappointment), and then use
the proceeds to buy stocks with better earnings growth potential (to
avoid falling trap into the bias of loss aversion). Holding on to the
losers will only deteriorate our portfolio performance, and make us feel
more depressed.
Page | 9
4.1.7 Invest with Wishful Thinking
“Never act upon wishful thinking. Act without checking the facts, and
chances are that you will be swept away along with the mob.”
Jim Rogers
Just like gamblers, some investors also have a tendency to invest with
wishful thinking. Many of them do not invest with realistic
expectations and focus on facts; rather this group of investors lives on
wishful thinking. They follow their friends falling for the popular
myths that everyone believes. Moreover, they pay high prices for non-
performing assets, and wish that the stock prices will go higher, and
expect other fools to buy the trashes from them generously. They
should know that this type of situation is untenable, and the trend is
subject to reversal when the market wakes up one day to realise that the
stocks are unworthy of their money. Another scenario is that they buy
some good stocks at attractive prices, and then set their expected return
unrealistically high, and they wish that the market will reward them
generously for the investments. Whilst the market may sometimes be
irrational in their willingness to pay for the good assets, very often
having a disappointment for investing with unrealistically high
expectations is evitable.
Further, the investors who take a greater risk after suffering some
losses always invest with wishful thinking. They will buy more shares
with a greater sum of money after losing money in a stock in the hope
that they can win back the money they have lost in the previous
investment. As they increase the sum of their investment, they are
actually taking revenge after getting clobbered by their failed
investment, let their anger influence their judgement, and wish that the
stocks, which have reached new lows, will rebound. That is why they
buy even more shares, and up the ante as the price keeps falling. And
they wish that the rebound will occur soon. They are definitely
unprepared for the any unforeseen circumstances. If the stock price
falls lower, they will definitely be in financial trouble if they buy using
margin finance. Bear in mind that what goes up must come down, but
what comes down may not necessarily go up. Making judgements
based on a false notion, and without having evidence to support our
hypotheses is a dangerous move. Stocks seldom fall to their historic
lows for no reason. The companies are either suffering from financial
distressed, or facing oversupply problem. Never expect a troubled
company to pull a rabbit out of its hat, unless there is sufficient
evidence showing that the problem has been addressed with business
expansion, and earnings growth in the pipeline. In investing, there is no
magic dust to bail us out for our mistakes. Do not take a greater risk
after a loss. If you insist on doubling your stake in your failed bet when
the stock price falls, you must make sure that you know the root cause
of your failure, and that the odds are now stacked in your favour prior
to committing more capital to the investment.
Page | 10
4.1.8 Value Stocks in Possession Unrealistically High
“……people are more likely to keep what they start with than to trade”
Richard Thaler
People have a tendency to value things in their possession higher than

the prices quoted in the markets, and higher than the things they have
not yet own just because they own the things. This bias is called
endowment effect. Again, this shows that people do not always look at
the facts, and live in their dream. They are inclined to value their own
properties higher than their market prices. For example, if a house is
for sale at Rm 100,000, and the market value of the property is also Rm
100,000, the potential buyer will probably find it pricey before buying
the property. But, after purchasing the house, he or she will think
otherwise. He or she will claim that the property is undervalued and
can easily fetch over Rm 150,000 or more.
To prove this bias, Daniel Kahneman, Jack Knetsch, and Richard

Thaler conducted an experiment by distributing mugs to half of their
students, and ask the students to sell the mugs to the other half of the
group who did not have the mugs. They found out that those students
with mugs had a tendency to overvalue their possession, and placed a
higher selling price for their mugs than the price offered by another
group of students due to the mere ownership effect called “endowment
effect”. In another experiment, Kahneman and his colleagues
distributed mugs to half of their students and chocolate to the other half
of the group, each with the same value. The students are then asked to
trade with their possession. In the end, they found out that only a small
group of students were willing to part with their original possession.
This divestiture aversion behaviour is also commonly seen in investing.

People always fall in love with the stocks in their portfolio, assets they
inherit, or something they are familiar and comfortable with, and are
inclined to believe that the stocks they possess are worth more than
their market values, regardless of their real values, and have a tendency
to remain at the status quo. Therefore, they refuse to sell the stocks in
their possession then use the proceeds to buy other stocks with better
profit growth potential, even though the reason to keep the original
stocks in their portfolio is no longer valid. For example, if an investor
bought stock A last year at Rm 1.00/share, he or she expected the stock
to rise to Rm 2.00/share in a year, but so unfortunate that the business
faces some headwind, the EPS of the stock fails to increase, and the
stock price hovers at Rm 1.50/share level for a year. At the same time,
stock B, an undervalued stock selling at Rm 1.50/share, seems to be a
better investment for the investor. Do you think the investor is willing
to sell stock A for stock B? The most probable answer to the question
is “NO”. Behavioural bias theory tells us that it is very unlikely that the
investor will sell stock A before their expected value is reached, so that
he or she could use the proceeds to buy stock B. As he or she sticks
Page | 11
with his or her original possession, he or she will eventually miss out
on a good investment opportunity.
4.1.9 Overconfidence
“Overconfidence is a powerful force.”

Richard Thaler
People also have a tendency to overestimate their own ability,

efficiency, intelligence, and knowledge level. Most of them believe that
their investing skills, knowledge, and strategies are superior to other
market participants. Whilst having confidence is important to our
personal success, overconfidence on the other hand may hurt our
investment performance, and may be detrimental to our continuous
learning. Overconfident investors always believe that they are better
than other people in stock picking. Therefore, they are not prepared for
what may go wrong with their investments, and will not be prepared
for any unforeseen circumstances that may stack against them. For
example, if an investor believes that a company has a bright future, or
that he or she has found an investment which will provide him or her
an exceptional return, he or she then bets big on the stock without
identifying the possible threats that may jeopardise the business, or
listening to the critical comments of people in the opposite camp, he or
she is prone to a shock when the stock price and earnings take a hit,
and he or she may be unable to get out safely.
In addition, people have a tendency to feel overconfident and wager

aggressively after winning a few small bets. It is very normal that after
a few consecutive of winning games, we will take it for granted that the
odds will still be in our favour in the next few investments, and we will
be getting very greedy in the pursuit of more rewards. But staying in
the game with an exaggerated swagger is a deadly mistake. Again,
shock always occurs when we fail to foresee what may go wrong with
our investments, and we are susceptible to a huge financial loss if we
insist on moving ahead in foggy situations with overconfidence before
the vision gets clearer.
Whilst both genders generally exhibit the same trait, studies show that
overconfident is more prominent in men than in women. Male hormone
always leads men to be more confident, and to make high-risk gambles.
In comparison, men trade more frequently (and often excessively) than
women, and men suffer lower returns with higher trading costs. They
always believe that the investing decisions they make are right, even
though sometimes they may not know what exactly are they doing, and
may not be aware of the presence of some blind spots and the
consequences of their decisions. Women, on the other hand, are more
likely to acknowledge their ignorance if they do not know anything
about a company, and are more risk-averse in making any investing
decisions.
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4.1.10 Reject Opposite View
“We were also well aware of the dangers of what social psychologists
call confirmatory bias, in other words the tendency to collect all the
information that agrees with your position and to ignore the
information that doesn't. Behavioural theory teaches that the best
antidote to this bias is to listen to the opposite side of the case and then
dispassionately to identify the logical flaws in the argument.”
Barton Biggs
In investing, people do not like negative comments about their stocks,

and always search for reasons and information to confirm their
investment decisions. This type of bias is known as confirmatory bias
(or confirmation bias). According to studies, investors are twice more
likely to look for information and interpret ambiguous evidence in a
biased way to support their decisions rather than to look for flaws in
their original hypotheses. At the same time, they ignore the impact of
contradictory facts on stock price. For example, in 2014, when OPEC
(Organization of the Petroleum Exporting Countries) ramped up their
production of oil to 30 million barrel per day, and was in a price war
with the shale oil producers of the United States, the price of oil started
plummeting, people who were optimistic about growing global oil
demand were not only refuse to sell their oil and gas related holdings,
and ignore the fact of increasing crude oil inventory and the impact of
supply glut, they kept finding reasons such as depleting oil reserves and
surging demand of oil from China, India, and emerging countries due
to GDP growth to shore up their arguments. In the end, those investors
who refused to listen to the opposite view, and clung on to their
beloved oil and gas stocks eventually suffered huge losses when the
prices of their oil and gas stocks tanked, as the price of crude oil
plunged to the level below USD30 per barrel in 2016.
When like-minded investors get together in a group, they have a

tendency to form a stereotype view. They will reject those opposite
opinions, alternative views, and disconfirming information, and ignore
warnings. They then strive for unanimity. To achieve their goal, they
also impose pressure on and angry with the dissidents or people in the
opposite camp. They distort facts and information to justify their
hypotheses and decisions. At the same time, this group of people will
use mind guard to prevent their group members from accepting any
opposite opinions. Independent thinking is lost when everyone is
indoctrinated into believing the distorted stories and trusting the
philosophy which may be composed of false notions, and unable to
think for themselves, as they are afraid to be criticised by the group
members. The groupthink or group polarisation, whilst seems to help
the members to stay confident, is actually a curse in disguise, which
very often does more harm than good to investors, and will lead to
over-optimism and overconfidence.
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“For if we are uncritical we shall always find what we want: we shall

look for, and find, confirmation, and we shall look away from, and not
see, whatever might be dangerous to our pet theories.”
Karl Popper
4.1.11 Overly Focus on Short-term Performance
“When an investor focuses on short-term investments, he or she is

observing the variability of the portfolio, not the returns - in short,
being fooled by randomness.”
Nassim Nicholas Taleb
Our market is mainly dominated by short-term oriented investors who

concentrate too much on short-term price fluctuations and noise,
always aim for quick profits, and exit a stock position after holding the
counter for a few days, regardless of its earnings growth prospects.
They will rush in to buy a stock when there is a rumour about the
company, and feel the urge to sell it when the holding starts showing
some gain. They call themselves serious investors, but their average
holding period is less than a week. They prefer speculative stocks with
higher volatility to stocks with good long-term earnings prospects.
They are unable to see the long-term earnings potential of a company.
In investing, we call this a problem of short-sightedness or Myopia.
This group of overambitious market participants also devotes too much

effort to predict the short-term price movements of a stock, and ignore
the underlying business and its profit growth potential. They think they
have the ability to predict the market and to beat the market short-term,
but their portfolios always end up underperforming the market
averages, if not with a abysmal loss. Again, this shows that people
always overestimate their own abilities, and underestimate all the
competitors – including those sophisticated investors who are not only
knowledgeable and experienced in investing, but can access to the
latest news within seconds, are able to predict the short-term earnings
quite well and outmanoeuvre the market.
In order to increase the winning probability of their short-term bets,

sometimes they are willing to pay lofty service fees to investment
consultants for hot-stock tips and investment advice. However, those
tips are mostly inaccurate ones, and the returns of their products always
underperform the market. Even if those products are magnificent ones,
after deducting the consultation fees, brokerage commissions, and other
transaction costs, only a paltry gain is left over. In the end, they still get
beaten by the market. Keep in mind that these investment consultants
do not have a crystal ball too. Just like you and me, they do not have
the “supernatural ability” to accurately predict the short-term stock
price movement either.
That said, it is not hard to beat the market in the long-haul game. As
those active investors, such as professional money managers, day
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traders and other short-term oriented market participants (who

constitute a greater proportion of the market) are overly focused on the
short-term performance of a stock, the long-term earnings prospect of
the company has been largely overlooked. This is the area where smart
contrarian investors with fortitude and patience can outperform the
market, and be handsomely rewarded if they only concentrate on
investing in undervalued companies with bright earnings growth
prospects.
4.1.12 Refuse to Admit Mistakes
“There’s obviously a balance to maintain between confidence and

humility. You have to be humble enough to recognise when you’re
wrong. I’m willing to look silly.”
Bill Ackman
Would you admit your mistake when you do something wrong? In

most cases, people are just unwilling to admit their blunders. There
could be many reasons why people refuse to admit them, but the most
obvious one is due to egoism. In general, big ego hinders self-
assessment, affects visibility, and ruin investing performance. People
with the self-importance problem always seek glory, crave for credit
and compliments, boast achievements, and are unwilling to recognise
their weaknesses. In addition, they have too much pride to accept the
advice of other people. Even if they make bad decisions, they would
give all sorts of justifications for their errors. In the end, this group of
people always sticks to the wrong hypotheses, flawed philosophies, and
the poor perceptions of their investments. They are predisposed to
repeat the same old mistakes again and again.
In investing, it is easier to make mistakes than to make perfect “moves”.

That is why we make so many mistakes every year. From a psychology
perspective, these failures will cause emotional pains and kill our self-
esteem. But from a learning perspective, these mistakes (be it
misjudgements, misinterpret data, misestimate earnings, or mistimed
shots) make us grow and stronger. In other words, if we are willing to
accept the embarrassment, take responsibility for our incompetence,
and correct the misconceptions, our investing skills will improve
significantly. Unfortunately, many stubborn investors are simply
unwilling to admit their fallibility, so as to avoid feeling shame. Keep
in mind that people who are reluctant to control their emotions and
refuse to admit their mistakes seldom learn, and hardly will they see
much improvement in their investment performance.
4.1.13 Poor Self-Awareness
“The first thing you have to know is yourself. A man who knows himself
can step outside himself and watch his own reactions like an observer.”
George Goodman (pseudonym Adam Smith)
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Very often the failure of people in investing has been stem from not
having a good understanding of themselves. How can anyone formulate
a viable investing plan, rule and strategy for himself or herself if he or
she does not even know his or her own personality, strengths and
weaknesses? We always hear people call themselves long-term
investors, but they behave like short-term traders. They trade so
frequent that their portfolio turnover ratio is very often greater than one,
and the transaction costs will eat into their lifetime savings. Some of
the people wanted to follow those über-investors like Koon, Glenn
Greenberg, Charlie Munger and etc. to put all their eggs in only a few
baskets and watch the baskets closely, but they do not have the
stomach for concentrated investing. They do not have the discipline to
perform due diligence, to devote effort for soul searching, unable to
demonstrate the abhorrence of action, and cannot hold stocks for long-
term. After building a substantial position in a stock, they feel uneasy,
are unable to sleep well, and intend to exit their position as soon as
possible. As they dispose their holdings hastily when the stocks are
declining in price (or selling below their buying prices), their portfolios
will suffer a loss.
Also, having a poor understanding of oneself is the reason why people

cannot see their own bias – blind spot. They always think they are less
subjective to some cognitive biases than the other market participants,
but in actual fact they are also the victims of the biases. For instance,
people always overestimate own ability and underestimate the other
people’s talents, and they claim that they can control their emotions
better than other market participants. But they eventually turn into
panic sellers when the market crashes and join the crowd buying
aggressively when stocks are selling like hot cakes.
Poor self-awareness is also one of the factors leading to self-attribution

bias. People often give credit to their own skills, talents, and
knowledge for their success, but they blame others’ mistakes, market
conditions, environment, government policy, price volatility, bad luck,
and other factors for the poor outcomes. They must understand that
other than disavowing responsibility and avoiding feeling shame, the
externalisation – blaming others for causing their loss – will not benefit
them for their own growth. To be a better investor, one should identify
his or her own strengths, and recognise his or her weaknesses, and
learn continuously to improve his or her investing skills and
philosophies.
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4.2 Part 2: Solutions to Addressing the Mental Pitfalls
“It is crucially important not to let psychological factors interfere with

economic rationality in investment decision making”
Bill Ackman
Having discussed about how stumbling into behavioural pitfalls can lead us
astray, we can deduce that investing is more to do with the art – of dealing with
human emotions and behaviours – and less to do with the science. Our emotions
such as greed, fear, joy, pride, exuberance, frustration, impatience, and anxiety
can be great obstacles to our success in investing. Our swing of mood, irrational
thoughts, biases, fallacies, illogical decisions, illusions, paradoxes, and self-
defence mechanisms can affect the outcomes of our investments. The
combination of the above-mentioned pitfalls is a perfect recipe for the
devastating outcome.
Although having the fundamental value investing and technical analysis

knowledge is important, mastering the art of managing our emotions,
behaviours, and consciousness is the key to successful investing. Koon always
says, the stock market is really a jungle out there. We would be mauled by
“tigers” if we are not equipped with the necessary investing tools to survive.
Our survival in investing requires far more than analytical skills. We need to
have the right temperament, mentality, habit, thinking, and plan to succeed in
the market. The market always swings from one end to the other. In the long run,
if we stick to our guns, understand human behavioural biases, avoid falling into
the psychological pitfalls, follow some of the solutions discussed below, and
managed to elude those unnecessary blunders discussed earlier, we should be
able to do well with our investments.
“It is far safer to project a continuation of the psychological reactions of

investors than it is to project the visibility of the companies themselves”
David Dreman
“The psychologist far more than the economist may be of help in deciding when
to buy”
Philip Fisher
4.2.1 Learn to Understand Yourself
"To know thyself is the beginning of wisdom."

Socrates
People always ask Koon how he achieves such a spectacular

performance in his investments and if he has any supernatural abilities
to accurately predict the movements of stock price. Well, like many
other investors, he does not possess any crystal ball to foretell the
future, and is unable to cast magic spell like Harry Potter. However, he
does share a few important traits with other master investors that
enable them to outperform the markets. One of the traits is self-
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awareness. From my observation, all successful investors have high

self-awareness.
Having high self-awareness, in this case, is referred to knowing our

personalities, strengths, competency zones, limits, vulnerabilities,
objectives, self-interests, and motivations. This is an essential step to
achieving unbeaten performance. By developing a deep appreciation of
ourselves, we are able to formulate suitable investing strategies and
rules that fit our characteristics and investing styles, enable us to
navigate our way through the up and down cycles of our investing
journeys, make us undeterred by temporary failures, and enhance the
ability to overcome our behavioural biases. That’s why Bernard Baruch
said “only as you know yourself can your brain serve you as a sharp
and efficient tool. Know your own failings, passions, and prejudices so
you can separate them from what you see.”
There are many ways we can do to get to know ourselves better. One of
the methods to understand our persona is by taking Myers–Briggs Type
Indicator (MBTI) test. The test is specifically designed to identify our
preferences, attitudes, and psychological functions (extraversion,
sensing, thinking, judgment, introversion, intuition, feeling, perception
and etc.), and help defining our temperament (sanguine: enthusiastic,
active, and social; choleric: independent, decisive, goal oriented;
melancholic: analytical, detail oriented, deep thinker and feeler; and
phlegmatic: relaxed, peaceful, quiet) Source: Wikipedia. In general,
extroverted investors, with thrill-seeking gene and opportunity-oriented
strategies, like Peter Lynch, Robert Arnott and Mark Mobius, do
exceptionally well in bull markets. On the other hand, introverts like
Warren Buffett, Jeremy Grantham, Charles Schwab, and Bill Miller,
who are mostly contrarian, passive, thorough, careful, risk-averse, calm
and patient investors and enjoy in solitude, do better in bear markets.
Another approach to understanding ourselves better is by performing

self-assessment through the continuous experimentation and reflection
of our philosophies and strategies. The reflection on our philosophies
and strategies helps us identify our strengths and weaknesses. For
example, when we reflect on our decisions and actions in our
investments, it indirectly reveals to us our tolerance limit, mental
power, circle of competence, competency level, comfort zone, and etc.
We will be wiser investors as we reduce our blind spots, and make
better decisions. Moreover, it allows us to determine our boundaries so
that we will not go outside our zones of competence, and are able to
minimise risk to an acceptable level.
4.2.2 Stick to Your Investing Rules
“Sacrifice money rather than principle.”

Mayer Amschel Rothschild
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“If you took our top fifteen decisions out, we’d have a pretty average
record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck
to your principles and when opportunities came along, you pounced on
them with vigor.”
Charlie Munger
Having a good understanding of ourselves is a vital step to improving

our investing performance, but it does not provide us any guidelines on
how the stock selection should be made to meet our objectives, and to
achieve our missions. Unfortunately, there is no “one-size-fits-all” rule
for everyone to score a home run in the market. Therefore, just like
Koon, we need to have a set of our own investing principles or rules,
which is developed based on our risk tolerance limits, personal traits,
strategies as well as our areas of competence, as a guideline to pick the
right stocks for our portfolios, and we must adhere strictly to the rules.
Study shows that unemotional investors who stick to their own golden
rules and game plans always walk-away with magnificent and
covetable returns. Moreover, sticking to our rules allows us to sense
danger early so that we do not put our capital at risk. Our investing
rules indirectly provide us a strong defence system, in which the rules
usually dictate the conditions and criteria each stock must meet before
it qualifies a place in our portfolios, such as the potential of business
expansion, future earnings’ trajectory, enterprise value and earnings
multiples, profit margins, cash flow trend, financial heath, and
management’s integrity, so that we can be sure of the odds are not
stacked against us.
Further, following our own rules can help addressing terminal paralysis
– a syndrome of inability to pull trigger when an opportunity arises –
and to prevent us from falling into the trap of representation bias – a
tendency to judge the probability of an event or a hypothesis based on
the resemblance of the event or hypothesis to the commonsense data
and past memory. For example, in the case of representation bias,
turnaround companies are often stereotyped as doomed-to-failure
businesses. Their potential to revive and thrive is often overlooked by
the market and is regarded as an impossible thing. However, that is an
area where enormous return could be expected if the turnaround
company that we invested in does exceptionally well. Therefore,
sticking to our rules is very important to investing success. Had Koon
not stuck to his golden rule, and had he allowed his vision be clouded
by the cognitive bias, he would have missed out on many good
opportunities.
Another example of representative bias is that people always associate

blue chip companies with winning stocks. They blindly believe that
this type of companies will do well forever and buying dear does not
matter. Long-term investors who bought British American Tobacco
Berhad (BAT, which is regarded as a blue-chip stock) around Rm 75
per share in 2014 definitely have their fingers badly burned. As of now,
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early 2020, the share price of BAT is only Rm 12 per share. In

retrospect, investors should have avoided the stock at all costs, had
they studied the earnings growth potential of BAT in 2014. The
rampant and escalating illicit cigarette trade had started eating into the
market share of BAT in 2014, and would have a profound impact on its
earnings. It was not difficult to fathom the decreasing price trend of
BAT if we had analysed its sales and earnings from a business
perspective. By sticking to his golden rule – only buy undervalued
good stocks with high profit growth potential – Koon managed to spot
many opportunities and dangers early, and avoid the predilection for
stocks with beautiful stories such as BAT and other cognitive biases.
“It remained true that sound investment principles produced generally

sound results.”
Benjamin Graham
4.2.3 Deliberation and Hard-work
“The only way to gain an edge is through long and hard work."
Li Lu
Despite our frequent stumbles on the above-mentioned biases such as

overreaction, over-optimism, and framing effect, study shows that our
investment performance could be improved greatly if we have done
adequate preparation before any “war”. For instance, to avoid getting
caught up in a buying frenzy, we can spend some time to search for our
targets early when we are in a rational state, so that we will not rush to
buy a stock in the irrational modes of thought just because all market
participants and pundits shout ‘buy’. Things we can do include, but are
not limited to, reading annual reports and financial statements,
performing a comparison study, and visiting companies.
After studying the business of a company, if the company is found to

have a bright earnings prospect, we should put the target in a list called
“wish list” or “watch list”. By doing so, we have screened out all the
stocks that do not meet our selection criteria. We then monitor the price
of the stocks in our watch list daily. Remember, we only have to
monitor them daily, not hourly, so that we have more time to search for
other good deals, and for other matters (i.e. our day-job and family
matters). When it comes to buying, we only buy the stocks in our
watch list, not any speculative counters or hot stocks.
After buying the stocks, we then review their performance regularly.

The reason why we perform the review is to avoid getting trapped in a
crowded theatre when everyone yells fire in panic state later. When the
tide and facts change, we change our perceptions, price targets, and
decisions immediately to adapt to the new situations, so that we do not
steadfast to the old ideas, which have become obsolete, and to avoid
falling into the trap of anchoring bias. That’s why Lord Keynes said
“When the facts change, I change my mind, what do you do sir?” If we
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always stay abreast of a company’s development and progress, we

would not be missing out on any buying or selling opportunities, and
should be able to seize the opportunities to “move every piece” ahead
of the market. In essence, we make hay whilst the sun shines.
Most importantly, never follow any tips from our friends, analysts’
reports or news blindly. We should maintain our intellectual
independence, and rely on our research work. Our friends are more
likely to be wrong than right. Study shows that about 90% people lose
money in the stock market. Our friends may not be willing to come to
our rescue when we are “stranded” in the depressed counter later for
listening to their tips. Analysts, on the other hand, always report
something good to support their own interests. Do not fall victim to
their traps. Additionally, their forecasts are seldom right. Be more
sceptical and take the reports with a pinch of salt. Some of them have
very little or no skin in the game. They are paid to write for the
companies or syndicates. Moreover, some of the tips given by opinion
makers and market pundits are inaccurate ones. They may be hyping
the stocks that they intend to sell soon. Whilst the news reported by
media may not be outdated ones, the positive factors may have already
been priced into the stocks when we buy them. Smart traders will exit
their positions once the news is released. Keep in mind that market
participants always buy the rumours and sell the news. Therefore, we
should be wary when we are dealing with the type of stocks, especially
those in a rigged market, that have gone up substantially before any
good news are released.
To avoid making any dubious moves, we should reduce the level of

risks to an acceptable level before plunking down our hard-earned
money for any companies we have never run before. The important
thing is don’t bury our head in the sand. Uncertainty is always there.
We should embrace it, not ignore it. Before buying them, try to
understand as much as we possibly can about the businesses, including
the future of their industries, their capacity for business expansion,
profit margins and profit growth potential. The uncertainty stems from
missing information can be reduced by devoting more time to conduct
research (to search for the missing piece of the puzzle). Noisy
information can be eliminated by filtering the unreliable and non-
related information. Conflicting information can be addressed by
finding the discrepancies between the two types of information and
making an informed judgement. We should also learn to handle the
internal conflict in our mind, and keep focusing on facts. In the worst
case, if we cannot handle any of the uncertainties, especially when the
uncertainty level is exceptionally high, stake is high and reward is low,
we should just give it a miss.
Study shows that our emotional intelligence can also be improved if we

put in more effort to manage it, and to understand the behaviours of the
market. In order to avoid selling a stock in panic with the crowd when
everyone is terrified after a big drop, we can always prepare for any
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unforeseen circumstances before the reversal occurs. For instance, we

can perform pre-mortem before executing a trade to find out what
could cause a decline in the price of the stock, anticipate the respond of
other market participants, and learn from the simulated experience how
to react to a bad situation. This will prevent us from risking our own
money, prepare us better for any unforeseen developments, and allow
us to control our emotions well. The second benefit is that when we
devote more time to empathise with other market participants, we will
know their objectives and feelings. Our stock market is made up of
trading and investing participants. We will be able to anticipate their
next move, deploy our plan, and respond to the conditions better if we
understand their behaviours.
4.2.4 Maintain the Discipline
“You must have the patience and conviction to stick with what is, by
definition, an unpopular bet.”
Whitney Tilson
In order to avoid being swayed by other’s errors or ill-intentions, and to

achieve satisfactory performance in investing, it is important that we
maintain our discipline in investing. Once we have established our
investing rules, and devised our investing plans, we should follow our
own systems closely, not the crowd. For example, we should use the
investing strategy that suits us the most, not the complex financial
models, and strategy used by some fund managers. Instead of buying
hot-stocks of the month, we should only buy the stocks the meet our
selection criteria.
People will feel nervous when their holdings plummet in price, or get
greedy when their holdings are in winning positions. They always
overreact to noise. When their friends shout “buy the stock before it
shoots up”, they have a tendency to go big into the stock. Instead of
following our friends, we should keep a level head when the market is
in the state of panic or jubilation. Study showed that level headed
investors always make wiser investment decisions than people who are
less emotionally intelligent. Also, price volatility is a part of the
investing game. If we can ignore price fluctuation and the noise, keep
our sanity, and be prudent when making important decisions, we will
do well in our investments.
People also always fail to pull trigger on their investing ideas, as they
spend too much time thinking about the company’s future when
opportunity arises. Likewise, they will be hesitating to sell their
holdings or cut loss when the fundamentals of the business have
changed, as they gamble on with a hope that their losses will be
recovered when the share prices rebound. To prevent procrastination,
we should buy immediately when a stock meets our criteria and sell
immediately when its fundamentals have changed. We should not hold
on the losers when their business fundamentals have changed. For
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example, when companies report decreasing revenues or sustained

losses due to supply glut issue, we should sell our stocks immediately.
Limit our loss will ensure that we stay out of the companies. Bear in
mind that the first loss is the easiest loss. We need a 100% gain to
recover a 50% loss if we do not follow our cut-loss rule when the
market slices it.
In addition, we should maintain our discipline – to be patient if we

have nothing to buy or to sell. Very often successful investors get paid
for doing nothing. This is one of the best strategies in investing. Charlie
Munger calls it “sit-on-your-ass investing”. On the contrary, if we trade
too frequently, our wealth will be dwindled by the commissions
charged by our brokerage house for our in-and-out activities. If you
feel bored, instead of getting in and out, you can use the time to search
for more targets and prepare some dry powder for the subsequent round
of bargain hunting.
4.2.5 Concentrate on the Facts
“You need to probe a whole raft of numbers and facts, searching for
confirmation or contradiction.”
John Neff
To avoid falling trap into the common behavioural biases,

superinvestors usually pay more heed to the facts of a stock, not the
beauty of its story. They look for stocks selling substantially lower than
their business value. They look at the earnings growth potentials,
current earnings, earnings trend, dividend yield and cash flow of a
company, so that they can make an informed judgement, and exploit
the emotions of Mr. Market.
If we follow the principle of those superinvestors of focusing on the

numbers, use logical thinking coupled with business sense to analyse
opportunities, and buy stocks with tremendous profit growth potential
and with low downside risk, we are less likely to be penalised when the
stocks are not performing for a couple of quarters, as the pessimism has
already been priced in. In addition, our hard-work will be paid off
when the companies report increasing profits as the positive earnings
surprise will help lifting the share price. Further, if we make
judgements based on the facts, it is not difficult for us to spot bubble in
a stock.
Even if we do not have strong financial acumen to accurately assess the

value of a business, the least what we should do is to have an unbiased
perception of the market, stick to the facts, and avoid following the
irrational behaviours of the others. And most importantly, we should
ignore the estimates based on straight line extrapolation, and take those
research reports published in online forums with a grain of salt. Some
of the reports are written with ill-intention to hoodwink us into buying
the stocks at inflated prices from syndicates when in fact the companies
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have been found with rats infested in the engines. Whether or not we
find the reports sensible, we should perform our own due diligence
before buying into the stocks. In many cases, the morsels left may not
be worth our money.
“What I try to do is focus on the facts of today.”

Bruce Berkowitz
4.2.6 Tap into Your Powerful Intuition
“Intuition is more than just a hunch. It resembles a hidden

supercomputer in the mind that you’re not even aware is there. It can
help you do the right thing at the right time if you give it a chance. In
fact, over time your own trading experience will help develop your
intuition so that major pitfalls can be avoided.”
Michael Steinhardt
Intuition is a powerful tool that provides us a cue accessing to the vast

amount of information stored in our memory and to protect us from
dangers. Unfortunately, intuition is very often ignored by maladjustive
investors, and is always deemed as a noise that impedes their valuation
of companies by this group of investors. A good decision-making
process should not be depended solely on the deliberative mode of
thought or reflective mind; intuition also should be made use of in
order to achieve a better performance in investing.
In investing, you certainly do not want to have your lifetime savings

stuck in a stock that has been hard hit by the industry downturn, or with
a serious oversupply problem, even though it has a very low debt level,
high net working capital, and a healthy balance sheet. When we
analyse the company’s business and financial health, our deliberative
thought could only tell us that the balance sheet is clean, and that the
company is less likely to get into financial distressed problems, but it
does not tell us anything more than that. It is our intuition, which
formed through years of learning and experience, can help us judge if it
is a value trap, and can tell us that we need to hold the stock for many
years, if not decades, for us to see the light at the end of the tunnel. For
instance, currently there are many property stocks selling below their
NTA (net tangible assets value) due to the oversupply of properties in
every town and city in Malaysia. Yes, it is safe to buy some of them as
their balance sheets are clean. But Koon is not buying any of them.
According to him, his intuition tells him that their prices will remain
depressed for many years until the property market turns the corner. If
he makes his judgement solely based on fundamental or technical
analysis, most likely he will get trapped in the stocks for many years.
In an interview at the University of California, Berkeley, Daniel

Kahneman told his host and audiences that intuition is also critical to
the careers of many people, including firemen and nurses. He further
shared the findings of his research partner, Gary Klein, that “a fireman
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on the roof suddenly yelling to his company, “let’s get out of here,”
just before the house explodes, and then it turns out he wasn’t aware of
when he was doing it, but his feet were warm and that was the cue that
triggered the sense that something very dangerous was going on just
underneath them.” According to Professor Kahneman, even
experienced statisticians use intuition and heuristics to solve problems
generally, instead of the complex mathematical models they have
mastered.
Similarly, in investing, most of the successful investors do not buy

stocks based on the discounted cash flow of the stocks. What they
normally use is a set of heuristics called the rule of thumb or criteria
(some simple calculation) coupled with intuition to judge if a stock will
make a profitable investment at a particular time. Based on Charlie
Munger’s observation, “Warren (Buffett) often talks about these
discounted cash flows, but I’ve never seen him do one. If it isn’t
perfectly obvious that it’s going to work out well if you do the
calculation, then he tends to go on to the next idea.” Intuition comes
from our recognition of patterns such as trends, similarities and
differences. It is built through years of hard-work, focus and experience.
On the other hand, Wikipedia defines heuristics as simple, efficient
rules which people often use to form judgments and make decisions.
These information and rules form a mental map, which seasoned
investors always use to match with the current development, and make
the best decisions. That is why superinvestors can make judgements
fairly quickly, and invest with conviction without having their
performance being compromised.
Superinvestors like Michael Steinhardt, Bernard Baruch, and George

Soros, always rely on their instincts (some call them “animal instincts”)
for important investing decisions. One of the ways how they tap into
their intuitions is by monitoring their body response. Acute back pain,
rapid heartbeat with anxiety, throbbing headache, or nausea with
disgust is perceived as a signal of impending peril by some of them.
The signals are stored as somatic markers (feelings associated with
emotions) in probably their ventromedial prefrontal cortex. The signal
is usually triggered in their brains when they went through something
unpleasant they had experienced in the past or they encountered
something in stark contrast to their objectives. That is how their
nervous system responds to their emotions – by triggering an acute
pain to the physiological system, as both of which are inextricably
connected. The claim is attested by the findings of a group of
psychologists of the University of Virginia that “when we feel
heartache, we are experiencing a blend of emotional stress and the
stress-induced sensations in our chest—muscle tightness, increased
heart rate, abnormal stomach activity and shortness of breath.”
That said, relying solely on our intuitions can lead to some cognitive
biases in some situations. For example, an investor who relies heavily
on his or her intuition, refuses to pay heed to counterfactual analyses
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and contradictory views (which will mar his or her hypotheses), and
insists that his or her intuition indicates that the same patterns will be
repeated again are highly susceptible to overconfidence bias, which
may result in a mediocre performance. Therefore, we should avoid
making judgements purely based on gut instinct, or purely use
heuristics as a solution to our problems (as heuristics can sometimes
turn into harmful biases). We should guard it with logical thinking as
well as with adequate research and analysis. Experience can only help
us to a certain extent; it cannot solve all of our problems. The most
important thing is to avoid extrapolating unrelated experience to our
decision-making process. It will result in pareidolia.
Also, despite the fact that the combination of intuitions and heuristics
works well under general circumstances and help investors make sound
decisions, new investors are not encouraged to follow their intuitions.
Their experience in this field is too little to help them make good
decisions. It takes effort and years of experimentation and experience
to form the database in their minds and reliable intuitions. Therefore,
new investors are usually advised to perform due diligence – by
conducting sufficient research and analysis – prior to placing their
wagers on stocks, and should continue doing so until a massive wealth
of experience and expertise in this area are accumulated to enable the
reliable intuitions be formed.
4.2.7 Close the Empathy Gap
“Successful investing is anticipating the anticipations of others”

John Maynard Keynes
Merely knowing how to read charts and financial statements, or to

value companies is not enough. We need to have a good grasp of the
market participants’ “heartbeat”. Even if you have an MBA or a PhD in
finance, you can only use your finance knowledge to a certain extent,
to estimate the intrinsic value of a company as guidance, and to look
for the ballpark figures of a company’s earnings, not the precise
numbers, let alone the exact price of a stock. In investing, we need to
know that apart from the value of a business, greed, fear and other
psychological factors have also been largely embedded in its stock
price. This is the area where the largest chunk of gain can be expected,
but it is basically ignored by market participants. Keep in mind that
stock price is dictated by human’s “animal spirits”. If the spirits are
low, fear and pessimism levels are high, and confidence levels
plummet, it’s highly likely that the stock price will fall. This is more
evident in turbulent markets.
To have a good grasp of the market participants’ emotions, we need to

have a combination of good cognitive empathy and emotional empathy.
Being good at cognitive empathy means we are able to put ourselves in
someone else’s shoe, experience what they are going through, and see
problems from their perspective without necessarily feeling their joys
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or pains. Being good at emotional empathy, on the other hands, means

we can feel the emotions of other people so that we understand the
feelings and reactions of them but without having ourselves
overwhelmed by their emotions. By being good at both, we are able to
simulate the same problems people encounter and the same emotions
they have, know what they are thinking, understand their states of mind,
and anticipate the responses of the crowd in the market when reading
their comments and analysing the trade volume and chart pattern of a
stock.
Having the ability to close the empathy gap is also helpful in

interpreting data stated in financial reports, knowing the direction of a
company based their corporate strategy, getting more hints on the
hidden agenda of management’s actions, and having an appreciation
how the market perceives the strategy of the company. For example,
when a company proposes a private placement, it probably signifies
that the company is raising funds to expand its business, repay loans or
for other purposes. Upon reading the announcement, the market will
naturally sell it down at a loss without investigating the objective
further, as it is deemed diluting the existing shareholders’ interests. To
be good investors, we must be able to control our emotions, gather all
relevant information, read between the lines in the proposal to get a
hint, and perform a thorough analysis of the proposal before arriving at
the final conclusion. If you find out that the private placement is
beneficial to both the company and the existing shareholders, and you
are in a resourceful state of mind (calmed, centred, confident), you
should be able to exploit social awareness to your advantage for the
emotional blunders committed by other people. Moreover, the ability to
close the empathy gap enables us to find out if a management team is
running the company only to set themselves up for life without creating
value for shareholders. It also allows us to get rid of a troubled stock
after going through its reports and analysing the management’s actions,
so that we are not there when the shit hits the fan.
4.2.8 Maintain Humility
“You keep an open mind, keep trying to learn, stay humble and keep
trying to learn from your mistakes and other people's mistakes.”
Ken Shubin Stein
“I would recommend being humble. Be open-minded, and do not be

conceited.”
Sir John Templeton
People always fall prey to self-serving bias. They ascribe their success
to their own talents and hard-work, and point the finger at external
factors for their failures. For example, some of the managers always
push blames to their subordinates for their teams’ poor performance in
order to avoid accountability. This type of cognitive bias is not just
commonly seen in the workplace, but it is also typically observed in the
Page | 27
field of investing. It is a sad but true fact that all of us are imperfect.
Nonetheless, people simply refuse to own up to committing their
blunders, when they have erred in their decisions, due in part to their
big ego and embarrassed perception.
To be a better investor, all of us must be willing to recognise our

limitations and weaknesses and continue to learn. As we are not
infallible, we should look for flaws in our hypotheses, and spend time
to think what can go wrong with our hypotheses. To prevent being
overconfident, we must be more open minded, always listen to second
opinions or opposite views, and seek for constructive feedbacks and
advice before making any judgements. If we have a tendency to make
investment decision from a more emotional perspective, we should
identify the biases and fallacies we always stumble upon, and correct
them immediately.
Whilst all these efforts seem to humble us, they actually prevent us
from repeating the same slipups, and pave the way for us to be
successful in investing. Further, humility, which encourages us to avoid
distorting facts, and evidences to conform to our views, or justify our
errors, and make inference and judgements based on facts, indirectly
make us a rational investor. Also, it prevents our decisions, and
investments to be ravaged by our ego, harmful emotions, and other
psychological biases. For example, I noticed that people often refuse to
admit their slipups and feel embarrassed to buy back the stocks they
have sold by mistake earlier, even though the growth of the companies
is still intact. In addition, status quo bias also prevents them from
buying back what they have sold earlier. If they can see their cognitive
bias, are willing to admit their mistakes, and buy the stocks back
immediately, they should be able to capitalise on the opportunity, and
make a heck a lot of money out of it.
“We think humility is essential, especially concerning the ability to

know the future. Before we act on a forecast, we ask if there's good
reason to think we're more right than the consensus view already
embodied in prices. As to macro projections, we never assume we're
superior.”
Howard Marks
4.2.9 Keep an Investment Journal
“I’ve come to believe a personal investment diary is a step in the right

direction in coping with these pressures, in getting to know yourself
and improving your investment behavior.”
Barton Biggs
Some of you must be wondering why investors are advised to keep a

journal (or diary) of their investing activities, even though investing
has got nothing in connection with quality management, and yet it is a
non-productive task. Sure, keeping a record of our investing activities
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does not produce any direct positive return to our investments. But
human is sometimes forgetful and vulnerable to mood swings. Our
fluctuation of mood involuntarily changes the way we perceive the
market, and has an influence on our trades. For example, when our
investments produce some paper gains, we tend to become happy, and
allow the emotion to overcome our rationality. Hence, we tend to take a
higher risk, and buy a lot more shares than our original plan when their
prices go up. Do not forget that our mood is contagious. The crowd
will also be elated, and buy even more shares when the price shoots
through the roof. When the price takes a nosedive later we regret our
decisions. If we do not keep a journal of our investing activities, where
do we get the recollection of how the blunders were made when we
want to review our past decisions in future?
In our journal, we can jot down our investment ideas, research findings,
buying and selling prices for each stock, cut loss points, reasons of
buying or selling the stocks, emotional expressions or feelings, and
physical responses when we buy them. It should be noted that the
journal should not be served reporting functions or be used to vent our
frustration. If managed wisely, a good journal does not only allow us to
review our decisions, know our states of mind, spot patterns, examine
our competency, reflect on our mistakes, and prevent us falling into the
same snares in the future, it also helps us discover ourselves through
the “psychological mirror” and connect us to our inner world, including
our wisdom, and objectives in life, and enhance our learning. By
understanding ourselves better, we can refine our investing rules, and
formulate a suitable strategy, and form a comprehensive checklist that
could guide us better in our investing journey.
“Keep an investment diary and re-read it from time to time but

particularly at moments when there is tremendous exuberance and also
panic. We are in a very emotional business, and any wisdom we can
extract from our own experience is very valuable.”
Barton Biggs
4.2.10 Build Your Mental Strength
“Have the courage of your knowledge and experience. If you have

formed a conclusion from the facts and if you know your judgement is
sound, act on it – even though others may hesitate or differ.”
Benjamin Graham
By now I am sure you know the importance of having good investing

principles. But not everyone has the ability to stick to their golden rules.
People always find themselves having difficulty resist to the temptation
of following the crowd to buy hot stocks when the market is in great
excitement. Unless you intend to jump off the cliff with other
lemmings, you should impose self-control in investing. We must stop
the gambling behaviour. It is akin to playing Russian roulette. We
would get “killed” in investing if we do not control our involuntary
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behaviour. The important thing is to avoid falling prey to hot-hand

fallacy. In investing, winning the first and second bets does not
guarantee further success in the next attempt. We would ruin our
financial life if we place our wagers without ensuring that the odds are
in our favour.
When the market takes a nosedive, we must use our mental power to
control our emotions, remain upbeat and stay calm even after suffering
some losses. Stick to our investing rules and keep improving them. Our
rules are the only weapon that can help us accumulate wealth in
investing. Paying attention to the fluctuation of stock prices will not
make us rich. Of course, we still need to have the courage to pull
trigger when opportunity arises. The ability to execute a trade timely
with conviction is essential to successful investing.
In addition, we must resist to trade when we are in emotionally

unstable mood – be it thrilled, regret, angry or depressed. For example,
in a rising market, we may be elated when our holdings are in a
profitable position, and we will have an inclination to buy more shares
regardless of their value. The influence of our emotions, which always
hinders our investing success, will be put in check if we learn how to
handle them well. Have a nap when we feel tired and take a deep
breath when our brain is starved of oxygen or when we feel stressed.
We would have difficulty to make rational investing decisions if our
brains are overloaded. If we learn to tap our body’s self-healing
mechanisms to help us stay clear headed before we make any important
investing decisions, the likelihood of making high risk investments will
be greatly reduced.
Whilst people are generally financially prudent when handling their

hard-earned money, they have a tendency to spend extravagantly with
the dividends and capital gains they earn from the stock market. No
matter how good our performance is, the mental accounting pitfall
would render the snowball effect futile if we do not control our mental
properly by keeping the dividends and gains. Thus, we should not
spend the dividends and gains that we earn in stock investments, unless
we trade for a living. Keep the proceeds for the next bargain, so as to
let the snowball effect creates its astonishment.
Last but not least, we must keep learning, reviewing our past
investments and focus on improvement. Read more investing-related
books when we are free. Benjamin Franklin once said “an investment
in knowledge pays the best interest.” By continuing to learn, we
understand ourselves better. We will discover more of our weaknesses.
Additionally, it expands the arena and façade areas of our Johari
windows, and reduces our mental blind spots. Keep in mind that our
learning does not end when we leave college. According to John J.
Ratey, a clinical associate professor of psychiatry at Harvard Medical
School, “The human brain’s amazing plasticity enables it to
continually rewire and learn – not just through academic study, but
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through experience, thought, action and emotion.” And “genes and

environment interact to continually change the brain from the time we
conceived until the moment we die. And we, the owners – to the extent
that our genes allow it – can actively shape the way our brains develop
throughout the course of our lives.” And with the determination to
continue learning, and the perseverance for continuous improvement,
we also can be as successful as Koon one day!
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Chapter Summary
The Biggest Behavioural Problems:
Allow emotions to take over rational thinking
Hate facts, but like stories
Herd behaviour and follow others blindly
Impatience
Hesitate to seize opportunity
Refuse to cut loss
Invest with wishful thinking
Value stocks in possession unrealistically high
Overconfidence
Reject opposite view
Overly focus on short-term performance
Refuse to admit mistakes
Poor self-awareness
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Solutions to Addressing the Mental Pitfalls
Learn to understand yourself
Stick to your investing rules
Deliberation and hard-work
Maintain the discipline
Concentrate on the facts
Tap into your powerful intuition
Close the empathy gap
Maintain humility
Keep an investment journal
Build your mental strength
Page | 33
Chapter 3:
Basic Concepts of
Technical Analysis
Basic Concepts of Technical Analysis
3.1 What is Technical Analysis and Why You Should Learn About It?
“For me, technical analysis is like a thermometer. Fundamentalists who say

they are not going to pay any attention to the charts are like a doctor who says
he’s not going to take a patient’s temperature.”
Bruce Kovner
Technical analysis is another popular evaluation system used by traders

extensively in stock trading. Unlike fundamental value investors, who value a
stock based on the business performance, financial health, and cash flow
condition of the company, market technicians and technical analysts usually rely
only on share price data, price movement, and trading volume of the stock to
find their best entry and exit prices. They do not care who the new CEO is, how
many new products are launched this year, and how much profits the company
earned over the past few years.
“I always laugh at people who say "I've never met a rich technician" I love that!
It’s such an arrogant, nonsensical response. I used fundamentals for 9 years
and got rich as a technician.”
Martin Schwartz
In the previous chapter, we have learnt the importance of fundamental analysis.

But, according to Koon, to be successful in investing, it is not enough to be
good in fundamental analysis; we also need to master the concepts of technical
analysis. A lot of good buying and selling opportunities would be slipping
through our fingers if we focus solely on the financial statements of companies
and ignore their price movements. Very often the share price of a stock would
have gone up substantially before any good news, or changes of fundamentals
are announced by the public listed company, as the insiders of the company
have disseminated the news to their relatives, or good friends prior to the
announcements. Do not get me wrong, I am not saying that the Securities
Commission officers are sleeping on the job. In fact, the Securities Commission
has done their best to ensure the fairness of the trading system and to keep
insiders from getting any unfair advantages by profiting from the information
unavailable to the general public. But, good news and bad news somehow still
leaked out generally, and it happens almost everyday. For example, the relatives,
and close friends of insiders would have received the latest good news when a
major contract is signed, and would have started buying the stock aggressively,
and bided up its share price before the good news is announced. They would
then distribute the shares at high prices when the news is released by the
company. As a result, only a small number of people who have excess to the
insider news managed to make money from the company’s progress whilst the
general public does not gain any financial benefits, if not loses money, for
investing based on the formal announcements, or change in fundamentals. This
is the reason why the old adage “buy the rumour and sell the news” is still so
popular in Malaysia today. If we rely only on published financial reports to
make our investment decisions, we might be late to a party when good news is
announced, and be unable to run for cover when bad news is released.
Page | 2
Also, a picture is worth a thousand words. A lot of information can be obtained

from a chart if we know how to interpret it. For example, a steep downtrend line
is a good indicator showing that a substantial shareholder has been disposing his,
or her shares in the open market aggressively. If we are grasping at straws when
our stock is on the way down, or rushing in to catch the falling knife without
analysing its chart pattern, we would only have ourselves hurt by the plunging
share price. In addition, it could mean that the fundamentals of the company
have changed. Bear in mind that smart money managers, and substantial
shareholders do not exit their positions in a stock easily unless the share price
has gone far above its value, or the company’s business has gone downhill, or it
is suffering a heavy blow. By learning how to read charts, you do not have to
wait for announcements in Bursa Malaysia again to learn that substantial
shareholders have exited their positions, or something bad has happened to a
company. In fact, your newly acquired analytical skill would have alerted you,
and have you bailed out once the rout begins.
“Since the market tends to go in the opposite direction of what the majority of
people think, I would say 95% of all these people you hear on TV shows are
giving you their personal opinion. And personal opinions are almost always
worthless … facts and markets are far more reliable.”
William O'Neil
Remember, human can tell lie, but charts do not lie. Also, people’s opinions
have very little value. Charts, on the other hand, show the amount of money
investors put on the table for their willingness to wager on the future of the
companies. Hence the change of price trend of a stock tells a better, and often a
more reliable, story about the change of the fundamentals, and future of a
company. We do not have to listen to anyone’s comments, including those from
market pundits, or analysts to make our final decisions. Personal opinions, and
comments are worthless. Just look at the trading records, or chart patterns. The
stock market is always ahead of the real economy. Any developments to the
economy will be first reflected on price charts before the effect is felt by the
general public. In addition, smart money managers, usually those experienced
analysts who are fairly accurate in their forecasts, would have invested heavily
into some high growth companies, and therefore the price would have gone up
in tandem with their business activities before the growth is reflected in their
cash flow, and income statements. Likewise, the same group of money
managers would have closed out their positions when they smell something
wrong before it is reflected in the financial statements of the company.
Technical indicators, in this case, would have given us some early warning
signals about the shift of sentiment before the impact is felt by the general
public, and would enable us to take action earlier than the crowd.
“Everything’s tested in historical markets. The past is a pretty good predictor of

the future. It’s not perfect. But human beings drive markets, and human beings
don’t change their stripes overnight. So to the extent that one can understand
the past, there’s a good likelihood you’ll have some insight into the future.”
James Simons
Page | 3
It is also noteworthy that not only is the change of a company’s fundamentals

factored in the movement of a stock price, human emotions such as greed, and
fear, hope, influence of politics, and the future development of a company too
have been embedded in the movement of its share price. In other words, when
we buy a stock, we do not just buy the business, we also pay for market’s
expectations for the stock, and the discounted future cash flow the company is
expected to generate in the coming years. Regardless of how undervalued a
stock is, if we buy a stock too early when market is still in panic selling mood,
we would only see its price continues falling like a rock. Similarly, no matter
how expensive a stock is, it can continue to rise if the market is in euphoria. If
we sell it too early, we would only kick ourselves later for taking the profit too
soon. These human emotions, and behaviours are usually reflected on price
charts, and usually go in patterns. To avoid the problems of buying too early,
and selling too soon, we can use charts to identify the best entry and exit points
in order to maximise our profits.
That said, we should not rely solely on technical analysis in stock picking, and
investing. It neither provides us a guarantee of 100% accuracy nor ensures us
any profitable trades. Technical analysis can only be used as a guideline to
determine a good entry or exit point. We must use it in conjunction with other
techniques, and strategies to help us find the best stocks with profit growth
potential at the best price so that we can build, and exit our position without
leaving too much money on the table.
In this chapter, we will look at some basic and useful technical analysis tools,
and indicators, which can be used to determine good entry and exit prices of a
stock, and to study its price strength.
3.2 Type of Chart
The types of chart commonly used by investors and traders in technical analysis
can be divided into three main types, namely Line Chart, OHLC Bar Chart, and
Candlestick Chart.
Line Chart
Line chart is the simplest form amongst the charts used by investors. It consists
of many single data points, which are connected in series to form a continuous
line, or a chart. This type of charts is commonly used by Malaysian investors to
study the price pattern of stocks, and the charts can be obtained from Bursa
Malaysia. The main advantage of the charts is that they are easy to read
compared to some other forms of charts. However, line charts are not very
informative. Other than providing closing prices, they do not tell us how volatile
the share price movement is in a particular trading session. Also, a lot of
important information such as the highest and lowest prices of the trading
session, trading range, and price gaps are not included in the charts.
Below is a sample line chart of V.S. Industry Berhad share price from January
2014 to July 2014. The y-axis indicates its share price, whereas the x-axis shows
Page | 4
the trading period. The chart is also overlaid with trade volume information (at
the bottom of the chart).
Figure 3.2.1: Line Chart of V.S. Industry Berhad, from Jan 2014 to Jul 2014
Source: TradingView (www.tradingview.com)
OHLC Bar Chart

OHLC (opening-high-low-close) bar chart is another form of chart, commonly
used in the past. Every bar contains a vertical line indicating the lowest and
highest prices for the trading day or week (depending of the time or period that
you choose). The horizontal line on the left-hand side of the vertical line depicts
the opening price, whilst the horizontal line on the right indicates the closing
price for the trading day or week. Although this type of charts is more
informative than line chart, it still lacks visibility compared to candlestick charts.
Therefore, it takes more effort to interpret a trendline, to track and identify price
patterns, to spot price gaps, and to distinguish between positive and negative
trading sessions.
Figure 3.2.2: OHLC Bars for Positive and Negative Trading Sessions
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Below is a sample OHLC bar chart of V.S. Industry Berhad share price from
January 2014 to July 2014. The y-axis indicates its share price, whereas the x-
axis shows the trading period. The chart is also overlaid with trade volume
information (at the bottom of the chart).
Figure 3.2.3: Bar Chart of V.S. Industry Berhad, from Jan 2014 to Jul 2014
Candlestick Chart
As the name implies, candlestick charts comprise of candlesticks with various
lengths, to form a chart. Some candlesticks have got thin line(s) above or/and
below the real bodies, which are known as upper wick (or upper shadow) and
lower wick (or lower shadow), respectively. Compared to the two chart types
discussed above, candlestick chart is a more popular type of chart nowadays.
The size and colourful nature of the candlesticks enables users to spot price
patterns, and early reversal signals rather quick, and to make analysis easier.
From the chart we can tell if the share price is generally on uptrend, downtrend,
or going sideways. Also, we can tell whether the current trend is likely to
resume, or reverse in the near future. In addition, candlestick charts are more
informative compared to line charts. Every candlestick contains the information
of open, close, highest and lowest prices for a particular trading session. Further,
we can get the trading price range info (difference between lowest and highest
prices) from the candlestick.
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A black (or red) candlestick indicates a negative trading session/day, whereby

the closing price is lower than the opening price. It reveals that the bears, or
selling pressure dominated the trading session.
Figure 3.2.4: Bearish Candle
A white (or green) candlestick, on the other hand, shows a positive trading
session/day. The closing price of a positive trading session is higher than the
opening price. It indicates that the bulls or buying pressure dominated the
trading session.
Figure 3.2.5: Bullish Candle
Below is a sample candlestick chart of V.S. Industry Berhad share price from
January 2014 to July 2014. The y-axis indicates its share price, whereas the x-
axis shows the trading period. The chart is also overlaid with trade volume
information (at the bottom of the chart).
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Figure 3.2.6: Candlestick Chart of V.S. Industry Berhad, from Jan 2014 to Jul
2014
Other Common Features of the Charts

When reading a chart, be it a line chart, an OHLC chart, or a candlestick chart,
there are two other important parts we should also pay attention to, namely trade
volume, and price scale. Trading volume information can be usually found at
the bottom of a chart, whereby each volume bar indicates the trade volume in a
particular session. We will discuss the importance of trade volume pattern in the
later part of this chapter. The type of price scale used, whether it is a linear scale
or a logarithmic scale, on the other hand, can be told from the y-axis of the chart.
Linear price scale enables us to measure the length, or height of a trend easily,
whereas log scale allows us to see a trendline, price movements, and patterns
more clearly.
3.3 Candlestick Chart Indicators
“I believe the very best money is made at the market turns. Everyone says you
get killed trying to pick tops and bottoms and you make all your money by
playing the trend in the middle. Well for twelve years I have been missing the
meat in the middle but I have made a lot of money at tops and bottoms.”
Paul Tudor Jones
Candlestick chart indicators are usually used as a guideline for short-term

trading, through which traders profit from the difference by buying a stock
when its indicators point to a short-term strength, and by selling it once the
indicators signal a short-term technical weakness. Without further ado, let us
have a look at the candlestick chart indicators commonly used by short-term
traders and investors below.
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Bearish Candlestick Patterns:
3.3.1 Bearish Engulfing Candlestick

A Bearish Engulfing Candlestick has got a long black- (or red-) coloured real
body candlestick that eclipses the shorter white- (or green-) coloured body
candlestick of the previous trading session. The candlestick may contain an
upper wick and/or a lower wick. The candlestick pattern portends that the
existing uptrend is likely to come to an end soon, and will be followed by a
reversal if it appears at the peak of an uptrend, or near the resistance level. It
reveals that selling pressure is currently dominating the trading session, and
sellers are in control of the stock’s price movement. Even though the opening
price of today session is higher than that of the previous session, the bears strike
with their powerful paws, and push the price down. The share price is likely to
fall following the formation of bearish engulfing pattern. Short-term traders will
usually run for the hills when the pattern appears. If we do not want to hold the
stock any longer, we can dispose our stock when the next candlestick closes
below the low of the Bearish Engulfing Candlestick.
Figure 3.3.1.1: Bearish Engulfing
Figure 3.3.1.2: Bearish Engulfing Candlestick, Prestariang Berhad, on 13 Jan

2016 (Zoom-In View)
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Figure 3.3.1.3: Bearish Engulfing Candlestick, Prestariang Berhad, from Jan

2012 to Oct 2018 (Zoom-Out View)
3.3.2 Bearish Harami

Also, Bearish Harami is a chart pattern signalling that the existing uptrend has
almost come to an end and reversal may be happening soon. It consists of a
long positive candlestick followed by a shorter negative candlestick with a
smaller real body, whereby the real body of the former is so long that could
contain the latter. On the second trading day, those sellers who intend to lock in
their profits rush to sell when the bell rings, which results in the share price
gapped down initially, and then closes below the opening price on the second
trading day, but above the opening price of the first trading day. If we intend to
exit our position, we can prepare to sell our shares when the pattern is formed
near the peak, or the resistance level, as the share price is likely to move
downward after this. Then start selling our shares when the next candlestick
closes below the low of the Bearish Harami.
Figure 3.3.2.1: Bearish Harami
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Figure 3.3.2.2: Bearish Harami, Ucrest Berhad, on 23 Jan 2018 (Zoom-In View)
Figure 3.3.2.3: Bearish Harami, Ucrest Berhad, from Sep 2017 to Nov 2018
(Zoom-Out View)
3.3.3 Bearish Doji

Any Doji (be it a common Doji or Doji Star, a Long Wick Doji, or a Gravestone
Doji) formed at the peak of an uptrend is called Bearish Doji. It usually signals
that the existing uptrend is likely to end soon. Just like any other Doji, the
candlestick has either no real body or a very short real body. The closing price
of the candlestick is very similar with its opening price on the particular trading
day or session. Neither sellers nor buyers win the battle. In an uptrend market,
especially if the stock is at the peak, or near the resistance level, when buying
pressure is balanced by equal magnitude of selling pressure, price would stop
climbing, and reversal is likely to occur soon. The longer the upper wick, the
stronger the bearish signal is. If you do not plan to hold the stock for long-term,
you may start selling it as soon as the next candle closes below the Doji.
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Figure 3.3.3.1: Type of Bearish Doji
Figure 3.3.3.2: Gravestone Doji, BP Plastic Holding Berhad, on 15 Jan 2016

(Zoom-In View)
Figure 3.3.3.3: Gravestone Doji, BP Plastic Holding Berhad, From Jul 2015 to
Oct 2017 (Zoom-Out View)
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3.3.4 Shooting Star

When a shooting star appears during a bull run near the peak of an uptrend, it is
a warning sign that the sentiment has turned bearish. It is formed due to great
selling pressure forces the share price of an advancing stock closes near its
opening price. As a result, a candlestick with a long upper wick (at least twice
of the length of the candlestick body) is usually seen near the resistance level, or
at the peak of an upward price trend. The real body can be a white- or black-
coloured body. The longer the upper wick, the stronger the bearish signal is.
Traders will generally sell their shares when the next candle closes below the
low of the Shooting Star. If you believe that the stock is overvalued, and plan to
sell the stock, you may get ready to close out your position as soon as the
candlestick appears at the peak of the price trend.
Figure 3.3.4.1: Shooting Star
Figure 3.3.4.2: Shooting Star, George Kent Berhad, on 02 Mar 2018 (Zoom-In
View)
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Figure 3.3.4.3: Shooting Star, George Kent, from May 2017 to Nov 2018
(Zoom-Out View)
3.3.5 Hanging Man

Hanging Man is another bearish reversal signal indicating that the existing
uptrend is coming to an end soon. It is usually formed near the resistance level,
or at the peak of an uptrend, as smart money have begun to close their positions
in the morning, and the share price is bided up later by some uninformed
speculators, or unwise “bargain hunter” who see the sell-off as an opportunity
buy the stock on the cheap. As a result, a long lower wick is seen below the
candlestick body. The real body can be a white- or black-coloured body. If you
plan to close out your position in the stock when it reaches its peak, you can do
so as soon as the next candlestick closes below the low of the Hanging Man
Candlestick body.
Figure 3.3.5.1: Hanging Man Candlesticks
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Figure 3.3.5.2: Hanging Man, AMMB Holding Berhad, on 14 Aug 2013

(Zoom-In View)
Figure 3.3.5.3: Hanging Man, AMMB Holding Berhad, from Aug 2012 to Jan
2016 (Zoom-Out View)
3.3.6 Tweezer Top

Tweezer Top pattern is also usually seen at the peak, or near the resistance level.
It is signalling that the existing uptrend has almost come to an end. The pattern
consists of a pair of two different coloured candlesticks, a white- (green-)
coloured candlestick followed by a black- (red-) coloured candlestick, with the
same high, as the second candlestick fails to make a new high due to strong
selling pressure, or resistance at the previous high, where bears fight strongly to
push the price downward. As a result, the share price retreats when it hits the
previous high. If the stock is no longer meeting our investing criteria, selling it
when the subsequent candlestick closes below the low of Tweezer Top
candlesticks may be a good idea to maximising our gain.
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Figure 3.3.6.1: Tweezer Top
Figure 3.3.6.2: Tweezer Top, Jaya Tiasa Berhad, on 22 Nov 2016 (Zoom-In
View)
Figure 3.3.6.3: Tweezer Top, Jaya Tiasa Berhad, from Jul 2016 to May 2018
(Zoom-Out View)
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Bullish Candlestick Patterns:
3.3.7 Bullish Engulfing Candlestick

Every Bullish Engulfing Candlestick pattern has got a long white- (green-)
coloured real body candlestick that eclipses the real body of a shorter black-
(red-) coloured candlestick of the previous trading session. The candlestick
pattern portends that the existing downtrend is likely to come to an end soon,
and it will be followed by a reversal if it appears at the trough of a downtrend
line, or near the support level. It reveals that buying pressure is currently
dominating the trading session, and buyers are in control of the stock’s price
movement. Share price is likely to rise following the formation of the bullish
engulfing pattern. If you plan to build your position in an undervalued stock, or
add to your position in a growth stock, this is probably a good window for you
to buy it on the cheap before the share price trends upward. You may buy it
when the next candlestick closes above the high of the Bullish Engulfing
Candlestick.
Figure 3.3.7.1: Bullish Engulfing
Figure 3.3.7.2: Bullish Engulfing Candlestick, Petronas Chemicals Group

Berhad, on 25 Aug 2015 (Zoom-In View)
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Figure 3.3.7.3: Bullish Engulfing Candlestick, Petronas Chemicals Group

Berhad, from Jul 2015 to Jul 2018 (Zoom-Out View)
3.3.8 Bullish Harami

A Bullish Harami is a bullish chart pattern, when appears at the bottom of a
chart, signalling that the existing downtrend has almost come to an end, and
reversal may be happening soon. It consists of a long negative candlestick
followed by a shorter positive candlestick with a smaller real body, whereby the
real body of the former is so long that can contain the latter. On the second
trading day, buyers, who intend to buy on the cheap, rush to buy when the
opening bell rings, which results in the share price gapped up, and closes above
the opening price of the second trading day, but below the opening price of the
first trading day. The signal is stronger if the second candlestick closes above
the midpoint of the first candlestick. If you are on the sideline, and waiting to
buy the stock, you may get ready to jump on the bandwagon, when the Bullish
Harami pattern appears near the support level, or at the valley of a downtrend
chart. You may buy it when the next candlestick closes above the high of the
bullish candlestick.
Figure 3.3.8.1: Bullish Harami
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Figure 3.3.8.2: Bullish Harami, Malaysia Airports Holdings Berhad, on 28 Aug

2015 (Zoom-In View)
Figure 3.3.8.3: Bullish Harami, Malaysia Airports Holdings Berhad, from Oct
2014 to Nov 2017 (Zoom-Out View)
3.3.9 Bullish Doji

Doji formed at the trough of a downtrend chart is known as Bullish Doji (be it a
common Doji or Doji Star, a Long Wick Doji or a Dragonfly Doji). Just like any
other Doji, the candlestick has either no real body, or a very short real body. The
closing price of the stock on a particular trading day is very close to its opening
price. It reveals that neither sellers nor buyers win the battle. In a downtrend,
when selling pressure is balanced by an equal magnitude of buying pressure in a
particular trading day near the support level, the share price would stop falling
and reversal is likely to occur soon, as the bulls fight vigorously to push the
price back up. If we plan to trade the stock for short-term or buy it on the cheap,
we can get ready to accumulate it as soon as the Doji appears on the chart. We
should buy it when the next candlestick closes above the Doji candlestick. Note
that whilst Doji generally signals an impending reversal, sometimes it (Doji Star,
or Long Legged Doji) may signal a continuation of the existing pattern.
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Figure 3.3.9.1: Bullish Doji
Figure 3.3.9.2: Dragonfly Doji, OCK Group Berhad, on 26 Aug 2015 (Zoom-In
View)
Figure 3.3.9.3: Dragonfly Doji, OCK Group Berhad, from Jun 2015 to May
2017 (Zoom-Out View)
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3.3.10 Hammer
Hammer candlestick pattern is usually found near the support level, or at the
trough of a declining price trend, as the initial selling pressure is subsequently
met with a great buying pressure. After the bears drag the share price to the
lowest point the bulls fight back strongly, which eventually forces the share
price closes near the opening price. As a result, a long lower wick, at least twice
the length of the candlestick body, is seen below the candlestick body. The real
body can be a white- or black-coloured body. The longer the wick, the stronger
the bullish signal. If you plan to buy on the cheap, a close above the top of
hammer’s real body the next trading session is probably a good entry point
during a short-term correction, or at the bottom of a chart.
Figure 3.3.10.1: Hammers
Figure 3.3.10.2: Hammer, Tenaga Nasional Berhad, on 26 Sep 2011 (Zoom-In

View)
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Figure 3.3.10.3: Hammer, Tenaga Nasional Berhad, from Apr 2011 to Jul 2014
(Zoom-Out View)
3.3.11 Tweezer Bottom

A Tweezer Bottom pattern appears at the valley of a chart, or near the support
level is an indicator signalling that the existing downtrend has almost come to
an end. The pattern consists of a pair of different coloured candlesticks, a black-
(red-) coloured candlestick followed by a white- (green-) coloured candlestick,
with the same low. The second candlestick fails to make a new low due to
strong buying pressure, or support at the lowest level, where bulls fight strongly
to push the price upward. As a result, the share price rebounds when it hits the
previous low. If you intend to buy a stock for a short-term trade, or to build a
position in the stock, scooping some shares when the subsequent candlestick
closes above the high of Tweezer Bottom candlesticks can be a wise move.
Figure 3.3.11.1: Tweezer Bottom
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Figure 3.3.11.2: Tweezer Bottom, MISC Berhad, on 05 Dec 2012 (Zoom-In

View)
Figure 3.3.11.3: Tweezer Bottom, MISC Berhad, from Jul 2011 to Jan 2016
(Zoom-Out View)
What we have studied so far are just some commonly seen candlesticks. There
are many more types of bullish and bearish candlestick pattern, such as dark
cloud cover, rising sun, evening star, evening doji star, falling window, morning
star, morning doji star, three black crows, three white soldiers, bearish 3-method,
bullish 3-method, three inside down, three inside up, piercing pattern, and etc. if
you are interested to know about these candlesticks, you may learn about them
from Japanese candlestick patterns’ books.
Note: whilst most of the bearish reversal patterns do have a bearish candlestick,
or a few bearish candlesticks formed at the peak, we should not be terrified by
the negative candlesticks, as not of them signify the peaking of a long-term
uptrend. Likewise, we should not start buying a stock simply because a bullish
candlestick appears at the bottom of a chart, as it does not give us any guarantee
Page | 23
that a long-term uptrend will begin soon. We need to study them in conjunction
with other technical indicators in our analysis to make an informed judgement.
3.4 Support and Resistance
A support line is the level where investors and traders will buy aggressively,
which prevents the share price declines further temporarily. Conversely, a
resistance line is the level where people will sell like there is no tomorrow when
share price hits a particular point, which prevents the share price rises
continuously.
One of the reasons why support and resistance are formed is due to presence of
cognitive biases. For example, a trader who intends to build a position in a stock
but refuses to buy it at Rm1.00/share initially, would change his or her mind
later to buy it at Rm1.00/share if it descends to that level again after watching
the share price rose to Rm1.10, due to anchoring bias. As a result, strong
support is formed at Rm1.00 level as the trader together with other buyers who
missed the previous buying opportunity will join the buying spree when the
share price declines to Rm1.00, preventing it from falling further and causing
the share price held up steadily at Rm1.00 for a while.
Likewise, a trader who plans to exit his or her position, but reluctant to sell at
Rm2.00/share initially, will then grab the offer when the share price return to
Rm2.00/share level after the stock trades below Rm2.00/share for an extended
period of time. As a result, the resistance level is formed, at Rm2.00 price zone,
as the trader together with other sellers who missed the previous selling
opportunity will sell when its price ascends to Rm2.00, preventing it from rising
further and causing the share price to fluctuate around Rm2.00 for a while.
In this section, we will just focus on the concept of support and resistance. Other
cognitive biases will be discussed in greater detail in the latter chapter called
“The Biggest Behavioural Pitfalls in Investing”.
How to Draw a Support Line

To begin with, we need to identify the lowest points of the candlestick bodies at
two valleys, and then we connect them in a straight line (refer to Figure 3.4.1).
The straight line can be a horizontal line, or an inclined line with negative
gradient or positive slope. The straight line, when extrapolated, can be used as a
support line to determine a good buying point, where the share price is less
likely to decline further in the near future. The higher frequency the support line
is touched by the share prices, the greater significance the support is.
How to Draw a Resistance Line

Likewise, to draw a resistance line, we need to identify the highest points of the
candlestick bodies at two peaks, and then we connect them in a straight line
(refer to Figure 3.4.1). Similarly, the straight line can be a horizontal line, a
linear line with positive slope or an inclined line with negative gradient. The
straight line, when extrapolated, will serve as a resistance line, with which we
can find a good selling point, where the share price is less likely to rise further
Page | 24
in the near future. The higher frequency the resistance line is touched by the
share prices, the greater significance the resistance is.
Figure 3.4.1: Support and Resistance Lines, IJM Corporation Berhad

The Importance of Support and Resistance Lines

Finding the support and resistance lines is an important task to many traders, as
the lines enable them to determine the trend so that they won’t play on the
wrong side of the game. For example, countertrend traders will use the levels as
guidelines to find the best entry and exit points, and to place their orders – buy
and sell orders – when share prices bounce off the support and resistance levels,
respectively. Trend-following traders, on the other hand, will use them as a
guideline to find the best selling price when the support is broken down, or to
find the best buying price when price breaks out through the resistance at
unusually high volume transactions. Also, they use the lines as a guideline to
determine their stop loss points, in case if the market goes against them, and to
determine the exit point, so that they won’t be trapped in a sideways market.
“In a bull market it is better to always work on the bull side; in a bear market,
on the bear side.”
Charles Dow
When the economy is booming, or in a bull market, stocks tend to perform well,
as demand is greater than supply; the resistance of the stocks is generally weak,
and their support is very strong. Therefore, most stocks tend to show a series of
higher lows and higher highs (refer to Figure 3.4.3). These signs indicate that
the trend is generally up. Conversely, during a correction, or a bear market, the
support of a stock’s price is generally weak, and its resistance is very strong.
Therefore, the respective stock will be displaying a series of lower highs and
lower lows (refer to Figure 3.4.2). This is an indicator of a downtrend market.
By mastering the concept, we will be able to capture the best buying opportunity
after the market capitulates, and when an upside breakout occurs. Also, it allows
us to exit our position when the downside breakout occurs. We are able to
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change our direction when reversal occurs if we pay enough attention to the
signals given by the indicators.
Figure 3.4.2: Lower highs and lower lows pattern
Figure 3.4.3: Higher lows and higher highs pattern
If you have missed out an opportunity to buy a stock when a breakout occurs
earlier on, do not be disheartened. Usually when an upside breakout occurs with
a strong volume, the old resistance line would immediately become a new
support line. You may wait for a pullback near the new support level, as people
Page | 26
who intend to cash in their profits after the breakout would sell it down for you
to buy at the new support level. Likewise, you do not have to be nervous if you
have missed out an opportunity to sell your shares when a downside breakout
occurred earlier on. Usually when a downside breakout occurs, the old support
line will become a new resistance line. You may sell your stock near the
resistance level, as unwise “bargain hunters” would buy it and push the share
price up to the resistance region.
3.5 The Importance of Trading Volume
Trading volume is the number of shares traded every minute, day or month,
depending on the period that you choose. For instance, in a daily price chart,
each bar shown in the bar chart below share price indicates the number of shares
bought and sold in a specific day.
To beginners, other than showing them the number of shares change hand in a
particular trading day, trading volume has no other functions. In actual fact, the
importance of trading volume extended beyond the main function of indicating
the activity level of a stock.
For example, the volume data can be used to confirm the validity of a breakout.
As we know, trade volume is generated due to the buy sell activities of traders.
These activities are induced mainly by human emotions such as greed and fear,
which may cause market participants to push the share price up aggressively,
and sell down a stock in panic, respectively. If the accompanying trading
volume is low, the breakout is more likely to be a whipsaw, as interested buyers
are not aggressive enough in pushing the price upward. When the interest falters,
the breakout fails. Therefore, shrewd traders always use trading volume as a tool
to confirm a trend breakout. They would not commit their money if the volume
is too low, as the breakout could be a false one. Whilst a high volume breakout
is an ideal case, we should not discount the breakout if the trade volume is flat.
Sometimes the trade volume only picks up a few days after the breakout. Also,
we could not expect to have a high volume breakout for a stock if the trade
volume of its industry or the general market is light.
In addition, trading volume shows the significance of a trend. An upward share

price movement is more sustainable if the accompanying volume is increasing
continuously, as more and more buyers with great enthusiasm join the bull camp.
On the other hand, an upward share price movement with a declining trade
volume trend is less likely to be sustainable, as buyers are becoming less willing
to bid up the share price, or are showing lack of interest. This phenomenon is
known as price-volume divergence, which is a leading momentum indicator
showing that trend reversal is imminent. We can get ready to dispose our shares
if we no longer want to hold the stock after the first sign of exhaustion move
appears.
Also, learning how to read volume chart allows us avoid illiquid stocks. Many
of the stocks listed on Bursa Malaysia are illiquid stocks. These stocks cannot
be easily sold in the open market due to lack of buyers or interest in the stocks.
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According to Koon, selling a stock with low trading volume is a difficult task. It
would take us weeks, if not months, to exit our position in the stock completely,
and very often with a loss, if we hold any illiquid stock.
3.6 Moving Average
Moving Average (MA) is one of the most useful tools in technical analysis that
we should not disregard. In the past, market technicians have to calculate
moving average data manually in order to draw MA lines, which is a tedious job.
Thanks to the invention of computer software and smart phone apps, we can
now access to the MA line chart at our fingertips, which has made analysis
easier for all investors. Moving average can be divided into three main types,
namely simple moving average (SMA), exponential moving average (EMA),
and weighted moving average (WMA).
Simple moving average (SMA) indicates the average price of a stock within a
specific period of time. For example, if we select 5-day SMA for a stock, our
charting software will take the sum of the stock’s closing prices over the past 5
days and divide the figure by 5. Whilst most of the computer programmes have
this tool or function built into their charting system, which allows users to plot
the SMA line within seconds, we may also calculate it ourselves using the SMA
formula below.
P + P2 + ...... + P5
5-day SMA = 1
5
Just like SMA, Weighted Moving Average (WMA) also shows the average
price of a stock over a period of time, but it applies more weight to the recent
data and less weight on distant past data. Since WMA gives more weight to the
recent share prices, it responds faster to the change in the share price and it is
more sensitive to share price movement than SMA. Below is the formula of 5-
day WMA.
 5  4  3  2  1
5-day WMA =  P5   +  P4   +  P3   +  P2   +  P1  
 15   15   15   15   15 
Similar to WMA, Exponential Moving Average (EMA) also put more weight to
the recent past data. But it uses a more complex formula. In order to calculate
EMA, first of all, we need to calculate the SMA for the initial EMA.
Subsequently, we calculate the multiplier using the following formula
2
Multiplier = , where N is the period used.
N +1
Next, we determine the latest EMA using the following formula,
EMA = Closing Price – EMA (previous day) × Multiplier + EMA (previous day)
Note that the longer the period of time we select, the slower the moving average
responds to the change in share price. Conversely, the shorter the period of time
we select, the faster the moving average responds to the change in share price.
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Some of you must be wondering now which period of time is the best indicator
you should use to keep track of share price movement. Well, actually there is no
exact answer to the question. But as a rule of thumb, if you are a short-term
trader, you may want to consider using 5-day, 10-day, 20-day, 30-day moving
averages. If you are a long-term investor, I would suggest that you consider
using 50-, 100-, 150- and 200-day moving averages. Also, you may combine
four lines together, and then use the long-term MA lines crossover to devise
your strategy, and the short-term MA lines crossover to develop your buy and
sell tactics. This guideline is just a simple strategy for beginners to help them hit
the ground running, and is by no mean the only approach to increasing your
chance of making a profitable trade or investment. You may experiment with
some other moving averages, and with different time periods to find the set of
MA lines that is more suitable for you.
In general, medium- and long-term investors will buy a stock when its 50-day
moving average (DMA) line crosses up through the 200-DMA line, which is
also known as golden cross. They will exit their positions when the 50-day
moving average line of a stock crosses down through the 200-day moving
average line, which is known as death cross. Let us take Figure 3.6.1 as an
example; golden cross, and death cross formed in Jan 2017, and Nov 2017,
respectively. Had anyone bought Eversendai at Rm 0.610 when the golden cross
appeared, and sold it at Rm 0.885 when the death cross formed, he or she would
have made 45% gain out of the investment.
Figure 3.6.1: Moving Average Crossover, Eversendai Berhad

The reason why market technicians buy a stock when a golden cross forms is
that smart investors would have built a large position in the stock near the base,
and continue to buy when a company’s business grow, thus causes the share
price to rise. Bear in mind that a growing company with good performance is
more likely to continue thriving. Take a manufacturing firm as an example,
when its industry starts booming, the company is likely to get more and more
contracts, and is able to expand its capacity due to rising demand. When its
earnings grow in corresponding to the growing orders, so does its share price.
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On the other hand, selling a stock when a death cross signal is triggered is also
important that it will protect our capital and profit. An overvalued stock will
experience a price drop until it reaches its value zone. Also, a company with
some serious problems, such as having a financial difficulty, or facing
oversupply problem, is more likely to continue showing dreadful performance.
When the correction, and problem begins, well-informed and smart investors
will start disposing their shares, which will result in the 50-DMA line crosses
down through the 200-DMA line. That is a good window for shareholders who
still hold on to the stock to escape.
“Big money is made in the stock market by being on the right side of the major
moves. The idea is to get in harmony with the market. It’s suicidal to fight
trends. They have a higher probability of continuing than not.”
Martin Zweig
The trend is our friend, do not bet against it. A stock will continue to be in
downtrend until the trend is broken, that is when its share price is either going
sideways or heading upward. In other words, a trend will continue in its original
direction until something forces it to change its direction. For example, the
business of a poorly managed company will continue to deteriorate until a
competent management team steps in to turn the business around. Investors who
refuse to heed to the signal is more likely to see their stock plunging
continuously.
In general, the trend line of 200-DMA usually reflects the underlying business
and financial health of a company; whilst the trend line of 50-DMA reflects
some new developments in the company. Moving averages with shorter time
frames mostly reflect market expectations on the company, and the occurrence
of random event which may lead to a change of the company’s business.
Also, MA lines can be used as support and resistance lines. In a bull market, 50-
DMA and 200-DMA lines can be used as support lines. Share price crosses
below the MA lines may be signalling some weakness, or indicating that the
trend has changed. Let us use the chart below (Figure 3.6.2) as an example; the
uptrend of KESM was still intact until its SMA50 (50-day SMA or 50-DMA)
and SMA200 (200-day SMA or 200-DMA) support lines are breached. Had
anyone paid enough attention to its MA lines, they would have made some good
money out of the trend. In a bear market, however, 50-DMA and 200-DMA
lines are used as resistance lines. Share price crosses above the MA lines may
be indicating that the trend has changed. That said, the MA lines cannot be used
as a sole indicator to judge if a trend has reversed. We should also use it in
conjunction with a few other tools such as chart patterns, and momentum
indicators to confirm the trend.
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Figure 3.6.2: SMAs of KESM Industries Berhad (as support lines)

3.7 Common Chart Patterns
“To be a good trader, you need to trade with your eyes open, recognize real
trends and turns, and not waste time or energy on regrets and wishful thinking.”
Alexander Elder
In general, stock price moves in trend. That’s why common patterns can be
spotted easily in stock charts. But not many people pay attention to the patterns.
Most gamblers, and fundamental analysts do not look for chart patterns to trade.
If we are willing to devote some effort to learn how to read chart patterns, and
spend time to interpret them we would have a better grasp of mass psychology,
and would have the odds stacked in our favour. For instance, we can initiate a
position when the breakout of a pattern occurs, and then set a stop loss point (in
order to get us out in case if the market goes against our bet) and close the
position out when trend has reversed. Without further ado, let us have a look at
the common chart patterns we should not miss.
Bearish Chart Patterns:
3.7.1 Double Tops

A Double Tops pattern is a bearish reversal of an uptrend. It gives a warning
signal to people that the existing bullish trend is likely to come to an end soon.
It demonstrates strong resistance at the peak, mostly at the top of a price chart.
The pattern has got two peaks separated apart by a shallow valley, where the
lowest point of which serves as a support or neckline level. The pattern is
formed when the share price of a stock is unable to penetrate the first peak, or
resistance level, as sellers who missed the previous selling opportunity or people
who could not exit their positions completely at the first top would sell
aggressively near the resistance level again, thus forming the second peak. As
the selling momentum continues, the stock price heads lower and lower. The
pattern is confirmed when the neckline is broken down (a close below the
neckline). If you plan to exit to your position in a stock, a break down (often
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accompanied by a high volume) like this pattern is a good selling window. Once
the neckline is broken, the previous support level will become a new resistance
level, as sellers who missed the previous selling opportunity will rush in to sell
it when share price approaches the level again in the near future.
Figure 3.7.1.1: Double Tops
Figure 3.7.1.2: Double Tops, Prolexus Berhad, from to Feb 2015 to Sep 2016
3.7.2 Head-and-Shoulders Top

A Head-and-Shoulders Top pattern is another potential bearish reversal of an
uptrend, indicating the possible end of a bullish trend. After the formation of the
first shoulder or left shoulder, a pullback occurs, as those well-informed
investors start to dispose their shares. The share price will then find its new
support at the neckline level. It subsequently advances to a new high level. At
the peak, the selling pressure is so great that it causes the share price to move
downward again. When it approaches the neckline level, those uninformed
buyers who missed the previous buying opportunity will go in to buy during the
final round of rally before the price tumbles. At the peak of the right shoulder,
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the share price meets its resistance and the price retraces, thus forming the right
shoulder. The head-and-shoulders top pattern is confirmed when the neckline (a
line drawn across the left and right armpits) or support is broken down with a
close below the line. The volume at the breakdown point is usually quite high. If
you intend to exit your position in the stock, a close below the downside
breakout (breakdown) point is a good selling window for you to get out of your
position.
Figure 3.7.2.1: Head-and-Shoulders Top
Figure 3.7.2.2: Head-and-Shoulders Top, Coastal Contract Berhad, from Jun

2014 to Oct 2014
3.7.3 Descending Triangle

A Descending Triangle is a right-angled triangle pattern showing the
continuation of the previous downtrend, or a trend reversal when share price
breaks out downward after a period of sideways consolidation. The share price
is making a series of lower highs, thus forming a descending resistance line.
Every time when share price approaches the support level, it is unable to go
lower, as buyers who wait at the sideline will buy aggressively, thus forming a
level support line. After entering the zone, the market will trade range bound (in
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descending order) until breakout occurs. Volume is usually quite high at the
downside breakout point, where selling pressure is pretty strong.
Remark: whilst the price usually breaks out downward, it may sometimes go in
opposite direction. If the share price breaks out upward (above the descending
resistance line), it then signals the start of a bullish trend. As traders and
investors, we must always pay attention to the direction where the breakout
occurs prior to making our trade decision.
Figure 3.7.3.1: Descending Triangle
Figure 3.7.3.2: Descending Triangle, Aeon Berhad, from Jan 2018 to Dec 2018
3.7.4 Ascending/Rising Wedge

A Rising Wedge is a short-term bearish reversal pattern that sloped upward,
with contracting price range, and the price movement of share is usually
bounded by the converging ascending support and resistance lines, signalling
the beginning of a bearish trend. From the chart below, we can see that as the
share price increases, its growth rate dwindles. It will cease producing higher
highs and higher lows when downside breakout occurs. Trade volume would
usually pick up at the breakdown point. If you intend to exit your position in the
stock, this is probably a good window for you to sell your shares at a high price.
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Figure 3.7.4.1: Ascending/Rising Wedge
Figure 3.7.4.2: Ascending/Rising Wedge, IOI Corporation Berhad, from Jul

2017 to Nov 2018
3.7.5 Bearish Symmetrical Triangle

A downtrend will begin when the support (or lower ascending trendline) of a
Symmetrical Triangle is broken. The price movement is usually bounded by the
converging upper descending, and lower ascending trendlines. The trade volume
before the breakout is generally low. A close below the lower ascending
trendline with a high volume confirms the pattern. If you intend to exit your
position in the stock, this is a good window for you to sell your shares. Note that
if the share price breaks out upward (above the upper descending resistance
line), it then signals the start of a bullish trend. Again, you must pay attention to
the direction where the breakout occurs to make an informed judgement.
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Figure 3.7.5.1: Bearish Symmetrical Triangle
Figure 3.7.5.2: Bearish Symmetrical Triangle, A-Rank Berhad, from Sep 2016
to May 2018
Bullish Chart Patterns
3.7.6 Bullish Symmetrical Triangle

An uptrend will begin when the resistance (upper descending trendline) of a
Symmetrical Triangle is broken. The price movement of the stock is bounded by
upper descending, and lower ascending trendlines. The volume before the
breakout is usually low. A close above the upper descending trendline (usually
with high volume) confirms the pattern. This type of trend is commonly seen in
the charts of uptrend stocks. It gives the stocks a chance to take some breathers
before they continue the ‘marathon’. If you have missed the boat earlier, but still
want board it, the sideways trade gives you an opportunity to catch it when the
breakout happens. That said, you should not act hastily. It is advisable that you
wait patiently at the sideline until the breakout occurs whenever you see this
type of chart pattern. Buying before the breakout occurs is a blind bet, do not
ever try it. For traders who have no plan to hold the stock for long term, after
buying it, you may use the height of its base as a guideline to set your price
target, where you may exit your position when the price target is reached.
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Figure 3.7.6.1: Bullish Symmetrical Triangle
Figure 3.7.6.2: Bullish Symmetrical Triangle, Magni-Tech Industries Berhad,

from May 2015 to Jul 2017
3.7.7 Double Bottoms

A Double Bottoms pattern is a bullish reversal of a downtrend indicating that
the existing bearish trend has come to an end. The stock has got strong buying
force near the support level, mostly at the bottom of a price chart. The first
bottom is formed when its share price bounces up once it reaches the support
level. As it bounces up, selling pressure will rise, and it causes the price to stop
advancing near the resistance. After hitting the resistance or neckline, a pullback
will occur. When it approaches the support level again, buyers who missed the
first bottom will rush in to buy near the support level, thus causing the share
price to go up, and forming the second bottom. Even if you are tempting to buy
at the second bottom, do not do it. It may be a trap, and your purchase might
turn into a losing trade if the share price is descending further and the support is
broken down. Wait for the breakout at the neckline level with high volume to
confirm the trend. Once the neckline is broken, the previous resistance level will
turn into a new support level, as people who missed the previous buying
opportunities will rush in to buy it when the share price approaches the level
again. For traders who have no plan to hold the stock for long term, after buying
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it, you may use the range as a guideline to set your price target, where you may
exit your position when your price target is reached.
Figure 3.7.7.1: Double Bottoms
Figure 3.7.7.2: Double Bottoms, British American Tobacco Berhad, from Feb
2018 to Jul 2018
3.7.8 Inverse Head-and-Shoulders

An Inverse Head-and-Shoulders pattern is a bullish reversal of a downtrend
indicating the end of a bearish trend. The downtrend ends with the formation of
head followed by right shoulder when bulls bid the price up continuously until
the neckline level second time. After encountering strong resistance at the
neckline level, the share price retraces to the nearest support level, a level pretty
close to the level of the first shoulder (left shoulder), where late buyers who
missed the buying opportunity would rush in to buy. As buying pressure grows,
price advances. A breakout occurs when share price closes above the neckline,
with an unusually high volume. As soon as the neckline (a line drawn across the
left and right armpits) is broken with a close above the line, the inverse head-
and-shoulders pattern is confirmed. If you plan to long the stock but have not
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found a window to get in, the breakout actually provides you a good opportunity
to buy it at a very low risk. After buying the stock, if you do not intend to hold it
for long-term, you may use the height between head and neckline as a guideline
to estimate how high the share price can reach, and use it to plan for your exit.
Figure 3.7.8.1: Inverse Head-and-Shoulders
Figure 3.7.8.2: Inverse Head-and-Shoulders, Axiata Group Berhad, from Oct

2008 to Feb 2010
3.7.9 Ascending Triangle

Ascending Triangle is a right-angled triangle pattern showing the continuation
of the previous uptrend when share price breaks out upward after a period of
sideways consolidation. The share price is making a series of higher lows, thus
forming a rising support line. Every time when share price approaches the
resistance it is unable to climb higher and will be pulled back, as sellers who
wait at the sideline will sell aggressively, thus forming a flat resistance line. The
market, after entering the zone, will trade range bound (in ascending manner)
until breakout occurs. Volume is usually quite high at the breakout point, where
buying pressure is strong. This type of trends is also commonly seen in the
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charts of uptrend stocks. It gives the stocks chances to take some breathers
before they continue the ‘marathon’. If you have missed the boat earlier on, but
still want board it, this is an opportunity for you to catch it when the breakout
happens. That said, you should not act hastily. It is advisable that you wait
patiently at the sideline until the breakout occurs when you see this type of chart
pattern. If you have sold your shares by mistake earlier on, you may buy back
the shares to take advantage of the bullish momentum. If you plan to add to your
position, the breakout also provides you an opportunity to buy more at a lower
risk level. For traders who have no plan to hold the stock for long term, you
may use the height of its base as a guideline to set your price target, where you
can exit your position when the price is reached.
Remark: whilst the price usually breaks out upward, it may sometimes go in
opposite direction. If the share price breaks down or breaks out downward
(below the rising support line), it then signals the start of a bearish trend.
Figure 3.7.9.1: Ascending Triangle
Figure 3.7.9.2: Ascending Triangle, Apex Healthcare Berhad, from Jun 2016 to
Aug 2018, from Jan 2017 to Jul 2017
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3.7.10 Descending/Falling Wedge

A Falling Wedge pattern is a bullish reversal pattern that sloped downward,
with contracting price range, signalling the beginning of a bullish trend. From
the chart below we can see that as the share price falls, its declining rate
dwindles. It will cease producing more lowers lows when breakout occurs.
Trade volume usually picks up at the breakout point after a period of
consolidation. This is a good time to build a position in our favourite stock, to
add more shares to our existing position or to buy back the shares we have sold
earlier on.
Figure 3.7.10.1: Descending/Falling Wedge
Figure 3.7.10.2: Descending/Falling Wedge, Lion Industries Corporation

Berhad, from Jul 2016 to Mar 2017
3.7.11 Cup-with-Handle
A Cup-with-Handle pattern is a bullish pattern signalling the continuation of the
previous bullish trend after a period of share price consolidation, as selling
pressure dissipates, and buying pressure regains its lost ground. A close above
the breakout point (and old high) confirms the pattern. Volume tends to be high
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at the breakout point, as there is more enthusiasm from eager buyers than
pessimism from disheartened sellers. It usually happens due to some new
developments, positive news announcements, or a change in market sentiment.
You may start building a position in the stock, add to your profitable position,
or even buy back the shares you have sold earlier on when the breakout happens.
Remark: breakdown may occur within a short period of time after the breakout
if the cup with handle formation is an improper base. Therefore, we should also
pay attention to the formation of the cup.
Figure 3.7.11.1: Cup-with-handle
Figure 3.7.11.1: Cup-with-handle, Malaysia Steel Works Berhad, from Jan 2016
to Nov 2016
3.8 Commonly Used Momentum Indicators
People will turn greedy when the share price of a stock keeps rising to an
irresistible level. Likewise, investors will feel anxious, and become panic when
the share price sinks like a stone. Of all the indicators we have learnt so far,
none of them could give us a guarantee that the emotions of market participants
have changed. Therefore, we need another set of indicators to confirm the
signals of change in human emotions.
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Below are some useful leading and lagging momentum indicators that can help
us get a better grasp of mass psychology, and increase our probability of finding
the next uptrend stock near the inflection point, or buying an uptrend stock near
the turning point of a minor correction before the share price surging upward
again, by assessing the change in human emotions when people turn greedy.
3.8.1 Moving Average Convergence and Divergence (MACD)

Moving Average Convergence and Divergence (MACD) is a momentum
indicator showing the strength of a price movement by subtracting 26-period
EMA from 12-period EMA. The MACD line is above the base line when the12-
period EMA is above the 26-period EMA. The line is subsequently compared
with a 9-day EMA line, called signal line, to determine a good buying point
when the MACD line crosses above the signal line (a bullish signal) and to find
a good selling point when the MACD line crosses below the signal line (a
bearish signal). A histogram is usually used to display the difference, whereby a
positive bar indicates that the MACD line is above the signal line, whereas a
negative bar indicates that the MACD line is below the signal line.
Let’s use Figure 3.8.1.1 as an example for discussion. If you had bought
Mycron Steel when its MACD line (light blue) is above the base line and
crosses above the signal line (orange) at Rm 0.590/share, and sold it when its
MACD line (light blue) crosses below the signal line (orange) at Rm
0.895/share, you would have made 51% profit out of the trade.
Figure 3.8.1.1: MACD-Signal Line Crossover, Mycron Steel Berhad, from Aug
2016 to Oct 2016
Another function of MACD line is to find out if the trend is about to reverse, by
spotting the divergence between MACD line and share price movement. For
example, even if the share price shows higher highs, when the MACD line
forms lower highs, it reveals that the current price trend is unsustainable, and
reversal is likely to happen in near future. This is a bearish signal. If you intend
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to exit your position, you may get ready to dispose your shares when a bearish
candlestick appears subsequently.
Let us use the previous example, Mycron Steel, for discussion. We can see from
Figure 3.8.1.2 that its MACD had formed a lower high (from late Sep 2016 to
early Nov 2016) even though its share price kept showing higher highs. The
divergence was a warning sign indicating that the prevailing uptrend was
unsustainable. Had any of its investors paid an attention to the signal, they
would have exited their position in the end of Oct 2016 without leaving much
money on the table.
Figure 3.8.1.2: Price-MACD Divergence, Mycron Steel Berhad, from Sep 2016
to Dec 2016
3.8.2 Relative Strength Index (RSI)

Relative Strength Index (RSI) is a momentum indicator showing that a stock is
oversold or overbought. The standard period normally used by traders is 14 (or
14 days). A stock is said to be oversold when its RSI is below the level of 30,
and overbought when its RSI is above the level of 70. That said, we should not
buy a stock once the RSI of the stock crosses below the oversold line. The share
price of an oversold stock can keep going lower despite staying in the oversold
region (below RSI 30) for an extended period of time. It is advisable that you
pay a close attention to its share price movement when it enters the oversold
territory, and begin to buy it only when its RSI crosses above the oversold line.
When the oversold line is crossed up, the share price is likely to climb higher.
Likewise, we should not sell a stock immediately if the RSI of the stock has
crossed above the overbought line. The price of an overbought stock could keep
rising even if it remains in the overbought region (above RSI 70) for a long
period of time. If you really want to take the profit off the table, sell it only
when its RSI crosses below the overbought line. When the overbought line is
crossed down, its share price is likely to fall lower.
Let us take a look at the chart of CIMB share price (Figure 3.8.2.1) below. The
RSI of CIMB crossed below the oversold line in mid-Jan 2016, but its share
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price kept falling until late Jan 2016. The price only ceased falling when RSI
crosses above the oversold line (RSI 30) in late Jan 2016. The RSI then moved
upward until it crossed above the overbought line and subsequently crossed
below the line in mid Mar 2016. Had anyone bought it at Rm 3.94/share when
the RSI line crossed above the oversold line, and sold it at Rm 4.75/share when
the RSI line crossed below the overbought line, he or she would have made
about 20% profit within two months. Not too shabby though.
Figure 3.8.2.1: Price-RSI crossover, CIMB Group Holdings Berhad, from Oct
2015 to May 2016
Similarly, the divergence concept can be applied when using RSI indicator. The
trend is about to reverse when the divergence between RSI and share price
movements occurs. For example, even though the share price of a stock shows
lower lows when it is on a downtrend, if its RSI shows higher lows, it reveals
that the current price trend is unsustainable, and reversal is likely to happen in
near future. That is a bullish signal. If we plan to build a position, we may get
some dry powder ready, and buy it when a bullish candlestick appears.
Let us use the same example, CIMB Group Berhad, for discussion. From the
chart below (Figure 3.8.2.2), we can see that even though the share price of
CIMB kept falling from Jun 2015 to Jan 2016, its RSI had ceased making more
lower lows. That was an early sign of trend reversal. Had any investor paid a
close attention to the indicator in Jan 2016, he or she would have made some
money out of the reversal.
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Figure 3.8.2.2: Price-RSI Divergence, CIMB Group Berhad, from Mar 2015 to
Jan 2017
3.8.3 Rate of Change (ROC)

Rate of Change (ROC) is another momentum indicator used to determine the
rate of change in share price over a period of time. Below is the formula of ROC
 current. price 
ROC =  − 1  100
 previous. price 
The share price of stock with a positive or high momentum (bullish signal) will
be rising and the stock is likely to outperform the market. A stock with a
negative or low momentum (bearish signal), on the other hand, will be falling
and the stock will probably underperform the market. Note, however, that ROC
has no upside limit. Unlike RSI, the value of ROC can surge to a very high level,
depending on the movement of the share price.
The example below (Figure 3.8.3.1) shows that the share price of Dialog Group
increased about 22% when its ROC was having a positive momentum from 17
Dec 2014 to 22 Dec 2014.
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Figure 3.8.3.1: ROC-Baseline Crossover, Dialog Group Berhad, from Nov 2014
to Feb 2015
The divergence concept can also be applied here when using ROC indicator.
The trend is about to reverse when divergence between ROC and share price
movements occurs. For example, even though the share price of a stock shows
lower lows when it is on a downtrend, if the ROC shows higher lows, it reveals
that reversal is likely to happen in near future. That said; do not take it for
granted, especially when the share price of a stock starts advancing. When the
price starts to advance, ROC will be surging to a very high level, the subsequent
advance may probably not be able to produce a higher ROC. If you sell the
stock after getting a lower but positive ROC, you may be kicking yourself later
for selling it too early, when the share price continues to advance again. You
should use the indicator in conjunction with other indicators to make an
informed judgement.
Let us use the same example, Dialog Group Berhad, for analysis. The surge of
its share price was actually not an accident. In fact, before the surge, its ROC
had made a couple of higher lows from 9 Dec 2014 to 16 Dec 2014 even though
its share price went downhill. That was a sign of impending trend reversal.
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Figure 3.8.3.2: Price-ROC Divergence, Dialog Group Berhad, from Oct 2014 to
Feb 2015
3.8.4 Accumulation and Distribution (A/C)

Accumulation and Distribution (A/C) is another commonly used momentum
indicator we should not ignore. As the name implies, it generally indicates if
investors are accumulating the shares of a stock aggressively or in a net
distribution mood. A positive gradient indicates that the stock is having high
demand, as investors are accumulating it. Conversely, a negative slope indicates
that the stock has greater supply than demand, as investors are distributing it.
The higher the volume the steeper the slope is.
Figure 3.8.4.1: Price-A/C Relationship, Favelle Favco Berhad, from Oct 2013 to
Apr 2014
Figure 3.8.4.1 above shows that the share price of Favelle Favco Berhad was on
an uptrend when its A/C indicator showed a positive gradient, as investors had
been accumulating it from the end of 2013 to mid-Feb 2014.
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Whilst A/C indicator support and confirm share price movement most of the
time, divergence does occasionally occur. When it happens, we need to pay a
close attention to the share price movement and confirm the signal using other
momentum indicators. More often than not when share price climbs higher, but
A/C indicator is on a downtrend, then the share price is likely to fall later.
Likewise, even when share price continues to fall lower, but the momentum
indicator is on an uptrend, then the share price is likely to rise later. Remember,
the divergence, when occurs, always tells a different story even if share prices
continue to move higher or lower.
Figure 3.8.4.2: Price-A/C Divergence, Favelle Favco Berhad, from Nov 2013 to
Oct 2014
Let us use the same example, Favelle Favco Berhad, for discussion again. We
can see from Figure 3.8.4.2 that after its A/C reading peaked in mid-Feb 2014,
the indicator had begun to fall even though its share price was still making
higher highs. That was an early warning showing that the uptrend was not
sustainable.
3.9 Final Note
What we have discussed earlier in this chapter are just some basic tools in
technical analysis every serious investor should know. Actually there are many
other tools, such as ADX Line, Chaikin Money Flow (CMF), Force Index,
Money Flow Index (MFI), On Balance Volume (OBV), Stochastic Oscillator
and etc., can be used to determine the momentum of share price movement. If
you are interested to learn more about these indicators, you may learn them
from technical analysis books. But, mind you, just because you are using more
tools in your analysis does not mean that you will be getting better results.
When it comes to investing, more is not always better. It all depends on your
skill level, and competency in using those tools. In fact, good chartists or
successful technicians only use a few simple tools they are good at to study
trends and analyse share price movement, and trade with conviction when a
reliable signal (or a confluence of several signals) is spotted. Most importantly,
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you need to know which type of investor you are. Are you a scalper, a day
trader, a swing trader, or a long-term investor? Choose a set of tools that is
suitable for you.
Again, we cannot stress enough the importance of volume in all the above-
mentioned trends. Never underestimate the importance of trading volume, and
the volume of buy and sell queue orders. A valid breakout is usually
accompanied by a high trade volume. Without having an unusually high volume
to support a share price movement, the breakout might be a whipsaw, or a false
signal, as people are not buying in greed. The trend is not sustainable and it
might reverse soon due to the lack of momentum.
“I believe that good investors are successful not because of their IQ, but
because they have an investing discipline.”
Stanley Druckenmiller
“After spending many years in Wall Street and after making and losing millions
of dollars I want to tell you this: It never was my thinking that made big money
for me. It was always my sitting.”
Jesse Livermore
As Koon advised, no matter how knowledgeable we are in technical analysis,

we need to develop good discipline in trading and investing. We need to be
patient whilst waiting for a pattern to be developed to build a position in a stock,
and whilst waiting for a signal to close out our position. If the trend of a share
price is unclear, we should just ignore the stock, and look for another better one,
or wait until a clear trend emerges. Once a signal is received, we must not
hesitate to pull the trigger. Buy or sell immediately when the buying/selling
signal of our systems is triggered.
“Don’t be a hero. Don’t have an ego. Always question yourself and your ability.
Don’t ever feel that you are very good. The second you do, you are dead… my
guiding philosophy is playing great defence. If you make a good trade, don’t
think it is because you have some uncanny foresight. Always maintain your
sense of confidence, but keep it in check.”
Paul Tudor Jones II
Another important advice from Koon is not to let our ego affect our judgements
and decisions. If we realise that the trend has gone against us, just cut loss, and
move on. Do not be a kamikaze investor in the stock market. “There are old
soldiers and there are bold soldiers, but there are no old, bold soldiers.” Cut
loss will protect most of our capital so that we can live to fight another day.
“Actually, the best traders have no ego.”

Jack D. Schwager
Last but not least, technical analysis is not a perfect tool. Just like fundamental
analysis, it too has its own flaws. How can we invest our hard-earned money in
a stock based its share price movement alone without even knowing who is
running the company, and if the future of the company is bright? If we want to
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be able to sleep well at night whilst leaving our money to work for us in the
stock market, we also need to tap into the power of our experience, business
sense, and intuition in the judgment making process before deciding to invest in
a company.
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Chapter Summary
Unlike fundamental analysis, technical analysis requires only share price

data, and trade volume to find good entry and exit prices.
Technical analysis enables investors to capture investing opportunities, ride

when new trends emerge, exit their positions early when reversal occurs, and
increase overall returns.
The three main types of charts commonly used in technical analysis are Line
Chart, OHLC Chart, and Candlestick Chart.
Candlestick patterns can be divided into two types

Short-term bearish indicators: Bearish Engulfing Candlestick, Bearish
Harami, Bearish Doji Star, Shooting Star, Hanging Man, and Tweezer
Top, and etc.
Short-term bullish indicators: Bullish Engulfing Candlestick, Bullish
Harami, Bullish Doji Star, Hammer, and Tweezer Bottom, and etc.
A support line is the level where traders will come in to buy aggressively,
which prevents the share price declining further temporarily. Conversely, a
resistance line is the level where people will sell like no tomorrow when
share price hits a particular point, which prevents the share price rising
continuously.
Smart traders also use support and resistance determine the validity of a
trend so that they won’t play on the wrong side of the game.
Trading volume does not only indicate number of shares change hand over a
period of time, it also can be used to confirm the validity of a breakout, and
the significance of a trend. Further, it allows traders to avoid illiquid stocks.
There are three main types of Moving Average

Simple Moving Average (SMA)
Weighted Moving Average (WMA)
Exponential Moving Average (EMA)
Short-term traders and long-term investors also use fast- and slow-moving
MA lines crossover to find good buying and selling points and use the line
as a support or resistance line to determine whether a trend has changed.
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Chart patterns can be divided into two main groups, namely

Bearish chart patterns: Double Tops, Head-and-Shoulders Top,
Descending Triangle, Rising Wedge, and Bearish Symmetrical
Triangle.
Bullish chart patterns: Double Bottoms, Inverse Head-and-Shoulders,
Ascending Triangle, Falling Wedge, Bullish Symmetrical Triangle,
and Cup-with-Handle.
A few main types of momentum indicators you should know are

Moving Average Convergence and Divergence (MACD)
Relative Strength Index (RSI)
Rate of Change (ROC)
Accumulation and Distribution (A/C)
When using momentum indictors, do not just focus on signal line crossover,
we should also pay attention to the direction of share price movement and
the indicator’s trendline. When the divergence ensues, it always tells a
different story even if share price continues to move higher or lower.
Just because you are using more tools in your analysis does not mean that
you will be getting better results. When it comes to investing, more is not
always better. It depends on your skill and competency levels in using those
tools. In fact, good chartists or successful technicians only use a few simple
tools they are good at to study patterns and analyse share price movement.
No matter how knowledgeable we are in technical analysis, we need to

develop good discipline in trading and investing.
Most importantly, do not to let your ego affect your judgments and
decisions. If you realise that the trend has gone against you, just cut loss and
move on. Cut loss will protect most of your capital so that you can live to
fight another day.
Just like fundamental analysis, technical analysis is not a perfect tool. You
also need to tap into the power of your experience, business sense, and
instinct in the judgment making process.
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Chapter 5:
Seven Traits of Superinvestors
How to be a Superinvestor:
“Investment success does not require glamour stocks or bull markets. Judgment and
fortitude were our prerequisites. Judgment singles out opportunities, fortitude enables
you to live with them while the rest of the world scrambles in another direction.”
John Neff
People are keen to know how Koon attains such a spectacular performance, and how
he makes so much money in the markets. They must be thinking that he got the level
of mastery in investing because of his inborn talent. As far I know, the wealth Koon
has amassed so far is mostly from the effort he puts in to learn and earn from his
businesses and investments. Albert Einstein once said “genius is one percent talent
and ninety-nine percent hard work.” Of course, it is good to have an aptitude for
investment, but we still need to devote a lot effort to nurture the investing talent
within ourselves before we can become a good investor. No one is born a
superinvestor. It takes knowledge, skills, correct actions, patience, and experience,
and lots of trainings to be a superinvestor. These are the main ingredients that we need
to excel in investment. Even those well-known superinvestors took years, if not
decades, to acquire, practice, and refine their knowledge, learn from their mistakes,
form their investing philosophies, and learn to control their emotions before they
achieved their current status and results.
For example, during market crash in 1961-1962, Carl Icahn lost all the money he
earned since his Army days. But he later on said that, “going broke was good, because
I grew so much from it and realized that I had to learn more than anybody else about
something.” By acquiring the right recipe, and working hard, he staged a series of
striking rebounds after the crash, and he eventually became one of the most successful
investors in the world. With a $16.6 billion net worth under his belt, he was ranked
number 55 in Forbes 2017 Billionaires List.
Similarly, the Great Depression and stock market crash in 1929 nearly wiped John
Maynard Keynes out financially. But he got back stronger in the game after the crisis,
and after refining his philosophy by switching from top-down investing method
(macro strategy, which is relying on the predictions of economic performance to
choose stocks in the industries that generate the highest returns) to bottom-up value
investing approach (which is selecting stocks based their intrinsic values, dividend
yield rates, cash flow, future earnings, and business prospects). His innovative style,
recognition of mass psychology, and animal spirits play in the market, and long-term
investing method enabled the funds he managed, including the endowment fund of
King’s College, Cambridge, the fund of the National Mutual Fund Society, the fund
of the Provincial Insurance Company, and the personal funds of his friend, family and
himself, grew exceptionally well, and outperformed market indexes almost every year
thereafter, except 1938 and 1942.
By now some of you must be thinking that one has to be very skilful at predicting the
next market crash (or boom) to be a successful investor. Far from it – none of the
superinvestors, at least not that I heard of, have the ability to predict short-term
market movement. The competitive advantage they possess over ordinary people is
their positive learning attitude, high mental strength, solid financial knowledge, and
high self-awareness. Therefore, to be a superinvestor, we do not need to master the
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skills of predicting the next market crash, or short-term market movement. What we
need is to mimic the traits, habits and behaviours of superinvestors, and follow the
advice given by Koon, based on his years of observation, and his personal experience,
below. Once we have appreciated, embraced them, and have them ingrained in our
DNA, nothing can stop us multiplying our wealth; only the sky is the limit.
“Rather than guessing where the market or the economy may be headed, here is a
little rhyme to help you remember a better way to decide when to buy stocks:
When stocks can be found at cheap prices,
the time is ripe to buy.
When appropriate values cannot be found,
the market is too high.”
Charles Brandes
5.1 Trait 1: Ability to Buy Stocks Whilst Others are Panicking and Sell Stocks
Whilst Others are Euphoric. Be an Intelligent Contrarian Investor
“The market is a pendulum that forever swings between unsustainable optimism

(which makes stocks too expensive) and unjustified pessimism (which makes
them too cheap). The intelligent investor is a realist who sells to optimists and
buys from pessimists.”
Benjamin Graham
“The time to get greedy is when everybody’s running for the hills with fear.
That’s usually a great time to get the greed going.”
Bruce Berkowitz
There is a famous axiom in the investment world that the market is driven by
two factors: greed and fear. When the economy improves, people become
bullish about the market. The greed in people will boost their confidence level,
stimulate their risk-seeking behaviour, encourage them to chase the winners,
and result in poor decision making. As they assume that the stocks are on the
fast track to profit growth, and are fixated to short term gains, they are more
than willing to pay enormous premium for the growth, which results in the
prices of the stocks being bid up to an overvalued level. Unfortunately, over the
long run, the business performance of most growth stocks in Malaysia tends to
revert to the mean, as their profit margins eroded when more and more
unforeseen competitions arrive to share the piece of pie. Ignorant investors who
bid up the stocks to astronomical levels at later-stage are then vulnerable to
huge financial loss.
During bear attack, when stock prices take a nosedive, the innate fear of losing
in human will be triggered. The self-defence mechanism then kicks in
immediately. People will suddenly become risk averse. In addition, the
exaggerated bad news cast over the media will result in stress and overloading
of brain’s capacity. When the emotions are combined with the herding mental
shortcut (belief of following other people selling is safer than doing it
differently), it leads to panic selling, as the depressed investors unwittingly
allow their emotions to overcome rational thinking in the decision-making
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process. This is the reason why the speed of share price falling is much faster
than that of rising, and the portfolios of people who sell in panic during
financial crisis are always severely damaged.
Superinvestors, on the other hand, understand that the market cycle and the
mood of market participants resemble the movement of the pendulum swinging
back and forth to the extremes of its arc. By staying the course and staying sane,
they are able to see a wider market view clearly, and able to avoid those dire
mental pitfalls. During market crash, when everyone is in a panic state, they
remain unemotional, cool and calm. They know that no matter how gloomy the
weather is, when the dark cloud overcasting the sky disappears, the earth will be
brightly lit again. They know that the market can experience many boom and
bust cycles, but it will not collapse. And no matter how severe the damage
caused by the financial turmoil, given some time, good companies will
eventually return to their glory day again. Therefore, superinvestors are able to
seize the opportunity to buy aggressively with conviction when stock prices
plunge. When the crowd is in a euphoric state, the superinvestors are happy to
sell their stocks at higher prices, even if they could not sell them at the peaks,
and they then spend the lonely time sitting on their cash to wait for another
perfect time to swing their bat again. Instead of following the crowd, stories,
fads or hypes, they follow their selection criteria, investment philosophies, focus
on risk management, and stay level-headed.
That said, it does not mean that superinvestors will buy all kinds of undervalued
stocks. In any depressed markets, good bargains can be found effortlessly. If
they split their money evenly to buy all the undervalued stocks in the market,
not much of fund can be allocated for the truly good stocks with high growth
potential. Instead of buying all the undervalued stocks, superinvestors buy them
selectively. They pick only one or just a handful of remarkable stocks that meet
their selection criteria, and buy them as much as they possibly can. For example,
they look for high-probability events, and they only buy those undervalued
stocks that they understand the businesses well, companies with trustworthy
management, and businesses with strong competitive advantage, and most
importantly stocks with tremendous profit growth potential in large quantities.
By being intelligent contrarian investors, they can be sure of their winning
possibility even before the deals are executed.
5.2 Trait 2: A Great Investor is One Who is Obsessive about Playing the Game
and Wanting to Win. These People Do Not Just Enjoy Investing; They Live
It
“We wake up every morning and go to sleep each night thinking about stocks.
When you are as focused and obsessed as we are, you develop certain tenets
about investing.”
Mario Gabelli
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“Very few people had the tenacity I had. I’m a very competitive guy. Passionate
or obsessive, whatever you want to call it. And it’s in my nature that whatever I
do, I try to be the best.”
Carl Icahn
According to studies, most people do not enjoy investing even though they trade
stocks. If you ask any of the people you meet in stock brokerage house what
motivates them to buy or sell stocks, I am very sure the answer -- and the only
answer -- you will get is “to make some money”. Neither they have a set of
rules to guide them in investing nor do they have any clearly-defined
methodologies to buy or to sell stocks. They trade stocks with gambling-like
emotion. They buy on news. Most of them do not know that before any good
news is released; the price of a stock has gone up substantially. That is probably
the worst time to buy stock. The worst thing is that some of them even refuse to
cut loss when the stock falls and they realise that they have made mistakes.
They hope that the price of their holding will rebound, so that they get to sell it
at their breakeven price. By the time when they decide to sell the stock, as they
have frustratingly held the underperforming stock for a long period of time, the
stock price is probably at its lowest level. All in all, they are not making money
from stock trading, but are funding their trading with their lifetime saving or
with the money earned from their day jobs. How can we expect someone who
keeps losing money in stock trading to enjoy playing the game?
Unlike ordinary investors, superinvestors are obsessive about playing the

investing game, and wanting to win, or to be the best. In addition, these people
do not just enjoy investing; they live it. They are so fascinated with the game
that they can work extremely hard, and are willing to spend most of their time to
studying the businesses of each company, so that they can find more good
stocks to buy. If the joy of finding a girlfriend is in the pursuit, to them the joy
of investing is finding another good share to buy. That is why they devote so
much effort to analysing the businesses of each company.
To superinvestors, investing is also like operating a company. They have their

own mission and vision for investing in the stock market. They have a mental
picture of what their investments will become in three to five years. They have
their own roadmaps, together with which they use their investing philosophy,
method, strategy and intuition to guide them to the glory in their investing
journey.
Superinvestors enjoy what they are doing. They know their circle of competence,
and they know how to increase their odds of winning in the game. They are loss
averse, and always do their best to reduce the risk, or to protect their capital.
Therefore, they only invest in companies they can understand the businesses
well, and companies with profit growth potential so that they get to enjoy the
snowball effect of wealth accumulation. Further, they never stop learning about
investing. They spend most of their time reading and acquiring knowledge.
They keep refining their philosophies, skills, methods, and strategies. They
perform post-mortem on all their trades, so that they can improve their results,
and become better investors. Moreover, they constantly study their failures, be it
in analysis, or in decision making process. Because of their passion and
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commitment to investing success, their performance gets better year by year.

That’s why they are spectacularly wealthy.
Despite their wealth, they do not stop investing. Why? Because their main focus
is not on money, but rather on their objectives and targets, to test their
philosophies, and to leave a great legacy. They know that if they follow their
golden rules, and the path they have chosen, the monetary reward is beyond
their imagination when they reach their destination. To them, money is just a
scorecard, and a form of reward for their brilliant ideas, and magnificent
philosophies, and making tonnes of money is not their main goal. The amount
of money they need to enjoy the freedom and independence is far lesser than
what they possess. That is why Koon donates so much money to schools, and
universities, and for needy people and society. Sir John Templeton once said
“Do something where you’re performing a real service for people. It’ll be a
success. I like investment counselling. And I like helping others. It gives you
pleasure you can’t get spending thousands of dollars.” Therefore, earning
tonnes of money is not their priority in investing. If money is their main
motivator, they would have stopped investing after becoming millionaires, but
they did not stop – and will never stop.
5.3 Trait 3: A Good Investor is One with Willingness to Learn from His or Her
Past Mistakes and to Analyse Them
“To others, being wrong is a source of shame. To me, recognising my mistakes

is a source of pride. Once we realise that imperfect understanding is the human
condition, there’s no shame in being wrong, only in failing to correct our
mistakes.”
George Soros
“While most others seem to believe that mistakes are bad things, I believe
mistakes are good things because I believe that most learning comes via making
mistakes and reflecting on them.”
Ray Dalio
“Granted, we all make mistakes. The important thing about making errors in
judgement is the ability to admit those errors. If you grow into adulthood unable
to acknowledge your mistakes - in life, as well as investing - you will learn your
lessons the hard way. Only when you recognise your mistakes will you be able
to make corrections necessary to put yourself on the right path.”
Jim Rogers
Investment mistakes refer to the decisions or judgements made by investors that

result in poor returns in their investments. All these mistakes are stem from the
presence of bias -- be it representative bias, familiarity bias, misattribution bias,
disposition effect, cognitive error, or any other psychological biases. Making
mistakes is the most important part of our investing journey. Mistakes do not
kill us, but they make us stronger if we learn to avoid them.
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Superinvestors are no different from ordinary investors; they also make a lot of
mistakes in their investments, and are not afraid of making mistakes. Jean Paul
Getty once said there is nothing shameful in making mistakes once, but
repeating the same mistakes is a disgrace. Therefore, superinvestors constantly
look out for their own biases and flaws in their investing philosophies, critically
analyse their theses and decisions, ready to admit and correct their mistakes,
appraise them, and avoid them in the future, so that they do not compound them.
This is the reason why Bruce Berkowitz said “We spend a lot of time on
mistakes and asking why we make them. It’s great for the investment process.”
And at the Value Investing Congress of 2009, David Einhorn shared the practice
with people that “when something goes wrong, I like to think about the bad
decisions and learn from them so that hopefully I don’t repeat the same
mistakes”.
However, most people never learn from their past mistakes. This is apparent
during bull markets. They tend to repeat the same mistakes again and again, and
become arrogant after pocketing some profits from their recent bets. Their fear
of loss has evaporated. Their egos have grown so big that hardly any sincere
advice and invaluable opinions can get into their head until they experience
another great setback. Their inflated confidence will lead to overestimation of
ability, and underestimation of risks. As the winning streak continues, they have
the propensity to put all dangers behind them, break their own investment rules,
ditch their old philosophies again, and join the herd singing “this time is
different”. In fact, the self-serving bias is a hindrance to seeing the imminent
danger, and the reality is the history still repeats itself. Most of them will not see
the disaster coming until the moment they are about to fall off the cliff one by
one like lemmings. It is undeniable that winning big is so easy and the
temptation is so irresistible when stock price soars, but how many people
managed to pull the hand brake timely at the edge of the cliff. Before 1997 --
Asian financial crisis, money invested in any stocks, including those hot stocks
with businesses bleeding financially, could be easily turned into “gold”. But
how many people managed to walk away happily after the bubble burst?
Humility should therefore be embraced in the philosophy of every serious

investor. Superinvestors always stay humble even when they make enormous
profits, and remain upbeat when the markets perform badly. Unlike common
investors, every superinvestor understands that he or she is fallible, and always
looks out for flaws in his or her investment theses. If he or she discovers the
mistakes, he or she would admit his or her mistakes, abandon the theses, and
even sell the stocks he or she bought earlier on immediately at a loss, analyse
the mistakes, then learn some painful lessons from the mistakes, and avoid
repeating them in the future. For example, Koon has no qualms about admitting
the mistake of his investment in Jaks, indentifying the root cause, and sharing
the lesson he learned from the failure. That is the reason why Charlie Munger
likes the maxim of Jacobi -- man muss immer umkehren, which means invert,
always invert -- so much that he does not only use the concept in testing his
theses, but he also uses it in analysing his mistakes in a few different ways, and
then have the findings included in his checklist to guard himself against the
same errors and proclivities.
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Some of the superinvestors, on the other hand, like to keep a journal or a diary
of their investing records for self-reflection. They understand that human
memory is only suitable for remembering stories, but not good at recording facts.
By keeping a journal of the information of stocks he or she purchases, his or her
emotional state and mood before making decision, and how the decisions are
arrived at for the investments, he or she can reflect on his or her past mistakes,
so that he or she is not susceptible to the same mistakes. Moreover, he or she
can regulate his or her mood, and control his or her emotions, so that he or she
won’t repeat the same mistakes again in the future.
“Forgive yourself for your errors. Don’t become discouraged, and certainly
don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake
into a learning experience. Determine exactly what went wrong and how you
can avoid the same mistake in the future.”
John Templeton
5.4 Trait 4: An Inherent Sense of Risk Based on Common Sense. You Must
Have the Common Sense to Realize the Risk of Buying Any Share Which
Has Gone up A Lot and When All the Analysts are Recommending Buy.
Always Take an Analyst Report with a Pinch of Salt
“Economics and markets cycle up and down. Whichever direction they’re going
at the moment, most people come to believe that they’ll go that way forever.
This thinking is a source of great danger since it poisons the markets, sends
valuations to extremes, and ignites bubbles and panics that most investors find
hard to resist.”
Howard Marks
"It is our opinion that the consensus view finds comfort in groupthink and
therefore pays little attention, if any, to the historical accuracy of the agencies
publishing these estimates."
Arnold Van Den Berg
Very often people buy or sell shares solely based on their projections, charts or
news. For example, speculators make their purchase decisions based on the
assumption that the share prices will grow continuously without even using
some common sense to examine the risk levels of the investments. This over-
optimism problem always results in overpaying for a stock, and underestimating
valuation risk.
Similarly, some analysts perform valuation only based on the balance sheet or
using those financial models with complex formula, five-decimal-place numbers
and all sorts of Greek symbols. Some chartists, on the other hand, make buy
calls solely based on the charts with the underlying business performance and
companies’ future largely ignored. If we buy stocks in uptrend motion or stocks
with a healthy balance sheet, but with no profit growth potential, or with
oversupply problem, the money that we pour into the investment will not be
working productively for our wealth, and the likelihood of losing money is
fairly high.
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Superinvestors understand the importance of preserving capital. In addition to

using some key valuation metrics and charts, they also use some common sense,
experience and intuition when valuing a company. This is to ensure that they do
not lose money nor have any laggards sitting idly in their portfolios.
Whilst it is good to read some economic news and analyst reports to keep
ourselves abreast of world development and to get some investment ideas, we
should not accept the entire information, news, and analysts’ projections without
processing them. Be wary of the flaws in analysts’ projections and views.
Always take analysts’ reports or news with a grain of salt, and be sceptical of
the so called “experts”, especially when they express optimism about the future
of a company. we have seen many people who reacted quickly to news and
analysts’ reports ended up having their fingers burned. Making buying or selling
decisions immediately after reading news and reports is not investing, it is
called gambling. Gambling is a dangerous game, which is highly susceptible to
psychological biases.
According to studies, newspapers with exciting headlines and stories have a

better chance in capturing and retaining market share. Any reporters who have
the ability to attract more readers will have better chances of getting promoted.
Hence, all of them also have a tendency to produce exciting yet exaggerated
news. Similarly, sell-side analysts are handsomely rewarded for writing good
reports, and providing right buying recommendations, especially during
economic boom. As a result, many of them are not only bullish about the market,
but are also overly optimistic about the economy, and are overconfident at the
peak. Most of their projections and estimations are overblown figures. If you
allow your emotions to be manipulated by these mass media stories and analyst
reports without using business sense to judge them, you are literally chasing hot
stocks, and your investments will be in danger. You will one day wake up to
discover that you are also one of the patsies left without a chair when the music
stops.
5.5 Trait 5: Great Investors Have Confidence in Their Own Convictions and
Stick with Them, Even When Facing Criticism
“To succeed as a contrarian you must recognize what the crowd believes, have
concrete justification for why the majority is wrong, and have the patience and
conviction to stick with what is, by definition, an unpopular bet.”
Whitney Tilson
“Soros has taught me that when you have tremendous conviction on a trade,
you have to go for the jugular. It takes courage to be a pig. It takes courage to
ride a profit with huge leverage.”
“Because I became worried about the Japanese stock market in the late 1980s
due to its gigantic credit boom, we sold all of our Japanese stocks in mid-1988.
Some investors questioned us for pulling out from the second largest stock
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market in the world, but I said it’s better to take some money off the table than
to participate in market mania. Obviously, I was wrong and unhappy in the next
18 months because the market went up another 30 percent, but in 1990 when the
market collapsed, we owned nothing in Japan and our decision was proved
logical.”
Jean-Marie Eveillard
In late 1990s, when the whole world embraced the speedy advancement in
Information Technology, and when people believed that the revolution would
also change the doctrine of conventional investment method, and that a new
approach assessing investment based on growth model should be employed, a
minority group of people adamant that they would shun high tech stocks, and
would continuously look for undervalued stocks ditched by Mr. Market. This
group of investors is no others except value investing followers. And most of
them are superinvestors, who had millions, if not billions of dollar assets under
their management. According to Bill Ruane, one of the superinvestors Warren
Buffett mentioned in his essay called the Superinvestors of Graham-and-
Doddsville, “The recipe for delivering superior long-term performance requires
equal parts of picking the right stocks and avoiding the wrong ones. We were
not even tempted to join the recent speculative frenzy in the dot.com sector.” At
the same time, near the peak of the dot com boom, Jean-Marie Eveillard said “I
would rather lose half my shareholders than lose half my shareholders’
money,” as he believed technology stocks were overvalued, and he foresaw the
Dot Com bubble would burst soon.
Not only did the media criticise them for their old-fashioned investment style,
many of their clients also puzzled why did not they buy a single share of those
fabulous technology stocks. Their answers to the public were that they really
concerned at the high valuation of those information technology stocks, and that
they only invested in stocks they have an edge and with low risk. They insisted
that only when having informational, analytical and psychological advantages
over the crowd would they deploy their capital for the investment. Following
the crowd to chase those glittering stocks was not the game in which they would
participate. Their convictions were later proved right when the internet bubble
burst, and their funds achieved double-digit returns in the same year. Their due
diligence and convictions did not only protect them from the loss of capital, but
it ensured that the odds were in their favours before they committed their capital.
In his interview with Ronald Chan in 2012, Jean-Marie Eveillard mentioned that
“Our fund had total assets of around $6 billion in 1997, but by 2000 it was
down to $2 billion. I was unhappy, but I constantly reminded myself that I was
acting in the best long-term interests of our investors, so I had to do the right
thing. When the mania was over, investors came back and praised our
discipline. The fund [the First Eagle Global Fund] today has a size of close to
$30 billion.”
The Dot Com mania mainly stems from the emotional, cognitive errors and
psychological biases of human. Human’s greed and fear is the root cause of
bubble forming and bursting. Financial losses or economic recession is just a
by-product of the crisis, not the root cause. The similar type of nightmare will
always come back to haunt people again and again in different contexts. For
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example, the subprime crisis in 2008, and Asian financial crisis in 1998 began
with greed and ended with fear. If we stick to a sound approach, have faith in
our convictions, only buy fundamentally good stock with growing profits and
profit growth potential, maintain our belief, even in the face of peer pressure,
stay sane, and are not easily swayed by market sentiments, or any other fishy
stories, we are not only able to detect bubbles, but are also able to capitalise on
human’s psychological biases to make tonnes of money in the stock market in
the future.
5.6 Trait 6: Ability to Think Clearly
“If you stay rational yourself, the stupidity of the world helps you.”
Charlie Munger
“The power of psychological influences must never be underestimated. Greed,

fear, suspension of disbelief, conformism, envy, ego and capitulation are all
part of human nature, and their ability to compel action is profound, especially
when they’re at extremes and shared by the herd. They’ll influence others, and
the thoughtful investor will feel them as well. None of us should expect to be
immune and insulated from them. Although we feel them, we must not succumb;
rather we must recognize them for what they are and stand against them.
Reason must overcome emotion.”
Howard Marks
“You need to divorce your mind from the crowd. The herd mentality causes all
these IQ’s to become paralyzed. I don’t think investors are now acting more
intelligently, despite the intelligence. Smart doesn’t always equal rational. To
be a successful investor you must divorce yourself from the fears and greed of
the people around you, although it is almost impossible.”
Warren Buffett
Common stock is the best financial tool for rational investors to amass their
fortune over the long haul, but the worst vehicle for irrational investors to even
preserve their wealth. The discrepancy between the traits of these two types of
investors (rational and irrational investors) is that the former always stick to
their dispassionate analysis, whereas the latter allow their emotions to control
their judgement. As a result, irrational investors cannot think clearly in their
decision-making process. This behaviour is very evident during bear stampede
that this group of investors always busy despondently dispose all their holdings
whilst the clear headed superinvestors keep hunting for undervalued stocks in
the same market.
One of the reasons why people cannot think clearly, and sell stocks panicky
during market crash is that they do not know the actual worth of the businesses
when they bought the stocks. According to studies, most of the investors do not
like to read financial reports; many of them do not even bother to understand the
companies’ businesses. They buy the stocks solely based on hope that the stocks
will decuple in a few weeks. During economic crisis, when everyone rushes to
sell the stocks, and analysts also give strong sell recommendations; there is no
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reason for them not to liquidate their positions hastily, as the hope has vanished
into thin air.
Another factor why people are captive to the bias is that they use emotions in
their decision-making process. In comparison to the systematic and logical
approach, this method yields quicker results and is effortless. Instead of
performing due diligence, such as analysing the underlying business
performance, profit growth prospects, and value of the business, this system
uses some mental short-cuts based on similarity and familiarity to judge what
the market will do next. For example, when the system receives some negative
news of a stock, it will link the news to price fall, and will trigger the fear of
losing money. In such case, the most natural reaction the system will take is to
sell the stock quickly without investigating further. The massive disposal of a
stock will then lead to its price plunging. Likewise, the fear of loss also causes
people to ignore bargain. Therefore, this group of investors tends to lose their
lifetime savings in a very short cycle, and is unable to capture the rare
opportunity when the stock price running out of control. This is the reason why
Walter Schloss advised people “try not to let your emotions affect your
judgment. Fear and greed are probably the worst emotions to have in
connection with the purchase and sale of stocks.”
As Koon recalled, in 1983 when the Hong Kong stock market crashed, as China
Government gave notice to the British Government to take back the sovereignty
of Hong Kong, the Hang Seng Index went down below 1,000. The fear that the
“Chinese Communists” were going to rule Hong Kong led to the massive
disposal of shares in the market as if there were no more tomorrow. He
identified one of the undervalued stocks called HK Realty & Trust. Before the
crash, it was selling at HK$ 13.60, and during the crash it was selling at
HK$ 3.60 per share. Moreover, its audited accounts showed that its cash value
per share was HK$ 10.00. During the crash, he bought the stock as much as he
possibly could. As soon as China granted a 50-year extension of the lease, the
market rebounded and HK Realty & Trust shot up above HK$ 15.00, so as most
of the other counters. The market had a new lease of life, and every investor
quickly jumped in to buy. As his holdings went higher, he could buy more
shares on margin finance, and the rest is history. The opportunity for him to
make a mint during the crash was mainly attributed to the greed and fear in
people. Had the market been more rational responding to the news, and been
able to overcome the psychological pitfall, it would have not been possible for
Koon to earn so much to afford 46% of stake in Kaiser Stock & Shares Co Ltd.
5.7 Trait 7: Ability to Live Through Volatility without Changing Your

Investment Thought Process
“To be a very successful investor you have to be able to avoid some natural
human tendencies to follow the herd. The stock market is going down every day
your natural tendency is to want to sell. And the stock market is actually going
up every day your tendency is to want to buy. So in bubbles you probably should
be a seller. In busts you should probably be a buyer. You have to have that kind
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of a discipline, you have to have a stomach to withstand the volatility of the

stock market.”
Bill Ackman
“The value investor sees this volatility and says, “What a great opportunity.”
However, the masses generally say, “This stock is way too risky, I’ll pass.” We
are full believers in the “buy low, sell high” investment philosophy, so to us this
would be a great opportunity.”
Arnold Van Den Berg
“Successful investors tend to be unemotional, allowing the greed and fear of

others to play into their hands. By having confidence in their own analysis and
judgement, they respond to market forces not with blind emotion but with
calculated reason. Successful investors, for example, demonstrate caution in
frothy markets and steadfast conviction in panicky ones. Indeed, the very way an
investor views the market and its price fluctuations is a key factor in his or her
ultimate investment success or failure.”
Seth Klarman
Every investor wishes to receive a windfall gain from his or her stock
investment. However, the fact is, not many people can win in stock investing.
Why is it so?
One of the reasons why so many people lose money in the stock market is that
they allow their investment thought and decision making processes to be
influenced by their emotions. For instance, when a company reports a sudden
drop in profit, they will be sceptical about the company’s future, and
immediately sell the stock without probing further what drives the cost up or
causes its profit drop. The hasty decision without further thought is always the
biggest regret of investors when the stock he sold shows increasing profits in the
following quarter and next year.
Gamblers, on the other hand, would sell their original holdings to buy some hot
stocks if they heard from their neighbours or brokers that the stocks would be
doubled in three months, even though some of the original holdings they
disposed are high yield stocks with bright profit growth prospect. Coincidentally
Christopher Browne also shares the same finding with us. In his book titled The
Little Book of Value Investing, Browne stated that “Most people seek
immediate gratification in almost everything they do including investing. When
most investors buy a stock, they expect it to go up immediately. If it doesn’t, they
sell it and buy something else.” The myopia always leads to ignorance of the
underlying business, and overemphasis of short-term gain. What they are
interested in is making a quick profit. Most of them hope to become millionaires
overnight. When the hot stocks lose momentum and head south, the late comers
will be spooked by the selloff, and tend to sell immediately at a loss. Therefore,
it is hardly surprising that some people have never even won a dime in their
investments.
Superinvestors understand the importance of confidence, patience, and self-

control, which are the keys to success in stock investment. They do not change
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their investment thought easily. They do not follow the crowd buying any hot
stocks. They know what the crowd doing is wrong. This statement is further
supported by Robert Cialdini’s finding that “quite frequently the crowd is
mistaken because they are not acting on the basis of any superior information,
but are reacting, themselves, to the principle of social proof.” Superinvestors
will not stray from their principles, and golden rules. What they normally to do
are buying a handful of stocks with marvellous profit growth potential
according to their plans after performing due diligence, and then they watch the
stocks unfold their fantastical tales themselves patiently, and let their prices
increase gradually. Their investment horizon is usually two years or even longer.
And they understand that there will be some peaks and troughs along the way.
That’s why they adhere to the principle of 7Ps -- Proper Planning and
Preparation Prevents Piss Poor Performance. Regardless of market volatility,
they always stick to their investing rules, investment philosophies, and methods
even when they are facing criticism.
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Chapter Summary
Trait 1: Ability to buy stocks while others are panicking and sell stocks
while others are euphoric. Be an intelligent contrarian investor.
Trait 2: A great investor is one who is obsessive about playing the game and
wanting to win. These people do not just enjoy investing; they live it.
Trait 3: A good investor is one with willingness to learn from his or her past
mistakes and to analyse them.
Trait 4: An inherent sense of risk based on common sense. You must have
the common sense to realize the risk of buying any share which has gone up
a lot and when all the analysts are recommending buy. Always take an
analyst report with a pinch of salt.
Trait 5: Great investors have confidence in their own convictions and stick
with them, even when facing criticism.
Trait 6: Ability to think clearly.
Trait 7: Ability to live through volatility without changing your investment

thought process.
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Chapter 6:
KYY’s Golden Rule and
Complementary Guidelines
KYY’s Golden Rule and Complementary Guidelines
6.1 KYY’s Golden Rule:
“Try to find a business that you can understand, that’s not particularly
complicated, that has a successful long-term track record, makes an attractive
profit and can grow over time.”
Bill Ackman
In this chapter, we will discuss the golden rule, and complementary guidelines
developed by Koon after refining his investing philosophy for three decades.
The method has been proved profitable and sound through numerous tests in
sideways, bull and bear markets. It has helped him build massive wealth so he
can donate more and more for good causes. In addition, the method has
benefitted many of his disciples.
The method is very simple, and does not require one to have an MBA or a PhD
in finance to achieve a good result. Only the discipline to follow his golden
rules closely and complementary guidelines, and the ability to control emotions
are the quality needed to be a successful investor in Malaysia stock market.
6.1.1 Buy Stocks with Profit Growth Potential, which Have Delivered
Two Consecutive Quarters of Increasing Earnings
“Only by growing better can a company be sure of not growing worse.”

Philip Fisher
No one likes to lose money, be it in stock investment, forex trading, or

house flipping. The anguish we feel is more intense when something is
lost than the happiness we get when something of equal value is gained.
The only way to make ourselves happy is to win. However, we could
hardly win if we bet on stocks that reporting losses continuously. A
business is not worth a brass farthing if it is unable to generate profits
for its shareholders. Our wealth would be diminished if we bet on
companies with no profit growth potential.
When analysing a business, we must always make sure that the

company has tremendous profit (and revenue) growth potential, and
has delivered two consecutive quarters of increasing earnings before
placing our wager. From Koon’s study, profit growth is the most
powerful catalyst that moves the needle of a stock. A company with
terrific earnings growth potential, which has delivered two consecutive
quarters of increasing earnings, will always be the next booming stock.
The two consecutive quarters of increased profits is an indicator
showing the company is very likely on the right track of growth. His
recent investments in Supermax (which rocketed 900% from 2009 to
2010), Latitude (which soared 1300% from 2012 to 2016), V.S.
Industry (which climbed up 500% from 2014 to 2015), Poh Huat and
LiiHen (each appreciated 300% from 2014 to 2015) are some good
examples. They did not just protect his portfolio from the risk of capital
loss, but they also helped him grow his wealth substantially.
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The task of finding a company with profit growth potential may, at the
start, seem challenging for many novice investors with weak business
acumen, but if we persist in our quest for the prospect by asking
ourselves if the future profits of the business will be higher than its
recent profits and past profits, we should be able to find the answer.
The process will prompt us to search for catalysts embedded in the
business, and to identify the competitive advantages the company
possesses, and with which we will be able to make an informed
judgement, and enjoy a higher probability of success.
Catalysts that promote the profit growth of a business can be existed in

many different forms, which include, but are not limited to
• Expansion of manufacturing capacity
• Extension and expansion of product line
• Improving efficiency
• Increasing product price
• Higher sales volume
• Increasing backlog
• Higher product demand than supply
• Increasing market share
• Decrease in cost of sales
• Improving profit margins
• Favourable foreign exchange rates
• Invention of new innovative product
• Receipt of concession contract
• Receipt of award for infrastructure development
• Receipt of casino operating license
• Discovery of new oil field
• Significant change in currency value
• Tax incentives from the government
• Restructuring of business or organisation
• Transformation of business model
• Change of management
All these catalysts will generally contribute positively to the bottom

line of a business. Nevertheless, we should not take them for granted.
According to Koon, based on his experience in the construction
industry, not all contracts are profitable. Cost overruns in megaprojects
can ruin even a solid company. Further, higher sales volume sometimes
may not necessary be translated into higher profits.
Competitive advantages that indirectly help increasing profits, on the

other hand, can be found in different forms, which include, but are not
limited to
• Strong brand identity
• High switching costs
• Proprietary learning curve
• Proprietary product differences
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• Proprietary low-cost product design

• Government policy, licenses and regulatory approvals
• High capital requirements
• Economies of scale
• Cost competitive advantage
• Technical know-how
• Niche strategy
• Unique corporate structure
• Unique company culture
• Strong geographical advantage
• Impressive distribution network
• A strong company reputation
• Strong network effect
Whilst these advantages allow the company to outperform its peers, we

should not rely solely on the company’s competitive advantage. Not all
competitive advantages are created equal in terms of strength and
sustainability. Some seemingly profitable businesses might end up
losing substantial market share if the companies are unable to retain
their clients. Companies with strong management teams may also end
up losing money when they lose their magic touch.
After identifying the catalyst and/or competitive advantage, our next

job is to evaluate the predictability of the company’s future profits, and
the consistency of its profit growth. To begin with, we need to estimate
the stream of revenues the company can expect to achieve in the next
few quarters through the projects they are working on, outstanding
order book or backlogs, contract awards expected to receive, and
market demand. Subsequently, we need to determine profit margin
trend of the firm over last few quarters, and apply the figure on the
estimation of its future profits and profit growth. The effort of
ascertaining the sustainability of profit growth is so important that it
will enable us to deploy our strategies effectively. And we would be
rewarded handsomely if we perform the analysis well.
Please note that, whilst earnings trend information is a good indicator

of an improving situation, it does not provide us any guarantee that the
future earnings of the stock will be higher. Things always change, and
the only thing that does not change is change itself. Therefore, we need
to monitor its business continuously. And no matter how good the
current quarterly earnings is, compared to the quarterly earnings a year
ago, it does not provide us any assurance that the stock price will be
going up tomorrow or next week. But our wealth will grow
considerably when the market recognises its value one day.
Also, we need to take note that a surge in earnings could be due to

seasonality factor, or one-time gains from the sale of some assets.
Projecting the immediate past increasing earnings into the future, like
what financial analysts normally do, without looking at the profits from
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business perspective and sustainability viewpoint is a dangerous

technique. If we buy the stock blindly, our portfolios would wind up
badly wounded when the next quarter’s profits fall.
6.2 Complementary Guidelines:
“We don’t get into things we don’t understand. We buy very few things, but we
buy very big positions. Know what you own, own a few and buy a lot.”
Warren Buffett
“Soros has taught me that when you have tremendous conviction on a trade, you
have to go for the jugular. It takes courage to be a pig. It takes courage to ride
a profit with huge leverage.”
Buying profitable stocks with bright earnings growth prospect helps protecting
the value of our capital, buying and selling them at the right prices and at the
right times help reaching our destination faster. Therefore, the complimentary
guidelines are as important as his golden rule.
6.2.1 Only Buy the Stocks that You Can Understand Their Businesses
Buying stocks is no different to acquiring companies, except that

stocks can be purchased in a small quantity, and are liquid, tradable
securities. Just like every acquirer, we should only buy what we can
understand, and we must analyse the business of a company before
buying its shares. Buying a stock without understanding the business of
the stock is akin to throwing our money in a poker pot without reading
our cards. How could we play the game with conviction, know the odds,
and deploy a winning strategy if we do not look at the cards? Moreover,
failing to perform due diligence will risk our hard-earned money in the
bet. Our destination would be permanently out of sight if we hold a
wrong perception since the very beginning of our investment journey.
In order to get a reasonable understanding of a business, a few

important questions we should ask ourselves before committing our
hard-earned money are
• What is the company making or selling?
• How its revenue and profits are derived?
• Do the company’s sales and profits grow steadily?
• Is the profit margin of the firm well maintained or growing
progressively?
• How the market and industry work?
• How have its top line and bottom fared in comparison to its peers?
• What are the business models the organisation adopts to maximise
its sales and earnings?
• Does it have any competitive advantages?
• Who are the key management people? Are they competent managers?
• Does the management team have a proven track record of success?
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• Is the management team committed to the success of the company?

• Is the compensation level of the CEO reasonable?
• Is the management team receiving staggering paycheques whilst
delivering mediocre results?
• Do the management own substantial stakes in the company?
• Is the communication between management and shareholders clear?
• Has the company been generously rewarding its shareholders?
• Has the company repurchased its own stock from the market (at the
prices below its intrinsic value) over the past two years?
• Is the company efficient in utilising its resources?
• Does the firm have an ability to service its debt during good time
and bad time?
The answers to all these questions will tell us a lot about the company’s
future. The future of the company is likely to be bleak, and the
potential growth of the business is almost none if the negative answers
far outstrip the positive answers. With the effort devoted to
understanding each of the businesses, we stand a higher chance of
finding a fabulous investment, even though terrific companies or
outstanding management teams are hard to come by.
Please note that, whilst the businesses and the corporate structures of
most companies are easy to understand, some are pretty complicated
for common men, especially novice investors, to understand well. If
you happen to come across any company that is too hard for you to
understand its business, just give it a miss and move on to the next one.
6.2.2 Make Sure that the Companies have A Good Track Record of
Making Money
The worst investment mistake people always make is buying lousy

companies that lose money years after years. The only expectation they
can get is the share prices go lower and lower. Eventually they will be
doomed to disappointment. How can anyone get a high investment
return on a lousy company, which has already been producing abysmal
performance even before the investment was made? To protect
ourselves from being drawn into the vortex of investment black hole,
we must shun every poorly run company (with a long streak of
appalling performance) at all costs, no matter how cheap the stock is.
Only buy stocks that are exceptionally good and with profit growth
potential, not lacklustre.
According to Koon, from his years of observation on the stocks listed

in Bursa Malaysia, good companies with an excellent track record in
business will continue to thrive, even during economic recessions. The
combination of their high outstanding order-book, great business
models, competent management teams, unique products, strong
technological know-how, and excellent service provides them many
unfair advantages that always keep their competitors at bay. Owning
this type of companies does not only shield our portfolio from an
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abrupt fluctuation of the investment rate of return, it also safeguards

our money from the risk of permanent loss. Therefore, this type of
stocks is not cheap. As expected, their stock prices are also always on
uptrend in tandem with the earnings of their businesses. The best time
to collect them is when they are still flying under the radar of
investment banks or mutual funds, during bear markets, or during panic
sell-downs. If you have some money to spare, make sure that you grab
them when the opportunity presents itself.
6.2.3 The Projected P/E Must Not Exceed 10
For novice investors without financial knowledge, projected P/E ratio,

also known as projected price-to-earnings ratio, is one of the important
basic metrics we should understand in order to value a stock. Amongst
the basic metrics used by analysts to estimate the value of a stock,
Koon believes projected P/E ratio is the best one. The reason: it is easy
to use, simple, yet more practical than the other metrics such as price-
to-book value (P/B) ratio, price-to-net-net working capital ratio
(P/NNWC) ratio, price-to-sales (P/S) ratio, enterprise value-to-earnings
before interest and tax (EV/EBIT) ratio, and etc.
In investment, the value of a business should not be determined based

on the assets possessed by the firm, as some equipment, tools, goodwill,
properties, and some current assets do not contribute much to the top
line of the business. To make the matters worse, the cost of maintaining
some of the assets may be higher than the revenue and profits they
generate for the business. The maintenance expenses, coupled with
depreciation, might eat into the bottom line if the assets do not help
generating sufficient profit to offset the costs.
Further, the debt level of a company should not be overemphasised in

business valuation. The risk of an investment is not solely determined
by the debt level of the company. Many good investment opportunities
would be overlooked if we set our barrier unreasonably high.
According to Koon, when he started Mudajaya and Gamuda in 1966,
before they were listed and became IJM Corporation Bhd, he had to
borrow as much as possible to do business. If his companies’ faithful
investors had eschewed companies with debt, they would have missed
out on the opportunities to prosper with him, wouldn’t they? During his
early days as construction contractors, he had great difficulty to borrow
money because Banks would not accept bulldozers and other
construction equipment as collaterals. They considered construction
equipment unsafe, as they were movable assets. He did not have fixed
assets, like land and office buildings at that time. He even had to
mortgage his family homes to borrow more money to do business. Had
he refused to mortgage his assets, he would have no chance to witness
the businesses growing into multi-million and multi-billion ringgit
companies.
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In this section, we will go through the process of determining the

projected P/E of a stock together. Let us begin with basic P/E concept
by assuming that the current earnings-per-share (EPS) of a stock is Rm
1/share, and that we pay Rm 10 for each of the shares, the P/E would
be 10. In other words, it would take the company about 10 years to earn
us back the amount of money we have invested in the stock if its EPS
is maintained at Rm 1/share for the next ten years. The return is
estimated about 10% per year.
P/E = Price / EPS

= Rm 10 / Rm 1
= 10
Return = EPS / Price × 100%

= Rm 1 / Rm 10 × 100%
= 10%
However, for the same stock with the same amount of earnings, if we
pay Rm 20 for each of the shares, the P/E would be 20. In other words,
it would take the company 20 years to earn us back the amount of
money we have invested in the stock. The return is estimated about 5%
per year, which is far lower than that of the former.
P/E = Price / EPS

= Rm 20 / Rm 1
= 20
Return = EPS / Price × 100%

= Rm 1 / Rm 20 × 100%
= 5%
Please note that what we discussed just now was P/E concept, not
projected P/E. To calculate the projected P/E of the stock, we need an
estimated or projected EPS, instead of the recent past EPS. The recent
past EPS does not tell us what will happen to the firm in the next
twelve months or in the future. We cannot drive forward looking in the
rear view mirror, even though the rear view mirror is clearer than the
windscreen. The market does not care about the past EPS. Therefore,
we can only use the information of the recent past quarters as a
guidance. Ultimately our investment success still depends very much
on our ability to accurately forecast the future earnings of the firm, and
to find out how cheap the stock is, based on its current price. To
precisely estimate the projected P/E of a company, we must be able to
make an educated guess on its future EPS. Therefore, understanding
the business of a company plays an important role in determining the
earning power of a firm. We could not capture an opportunity timely
when it arises, if we choose to ignore the business of a company.
To be a successful investor, we should aim at buying outstanding

companies at wonderful prices. When we buy an excellent stock at a
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wonderful price, we get a lot more shares for our money, and our
wealth will grow instantly. But done at a wrong price, our investment
will sink like a stone. Each time when we overlook the value of a
company or buy an overpriced stock, our investment return will be
jeopardised. In order to achieve our goal faster, we should look for
stocks with projected P/E lower than 10. The projected P/E multiple
limit of 10 does not only help increasing our rate of investment return,
it also allows us to close out without badly hurt if the tide turns against
your original investment thesis or if your forecasted EPS gets terribly
off, and help reducing some other unforeseen risks.
6.2.4 Use Leverage to Maximise Gain
Most of the eminent investors like Carl Icahn, George Soros, Robert
Kiyosaki, Bill Gross, Stanley Druckenmiller, J. Paul Getty, used
leverage to their edge. With leverage, they created more value for the
money entrusted by their investors as well as built their own fortunes
faster.
Koon always says margin loan is a very powerful wealth-building tool

if we know how to use it to our advantage. For every additional Ringgit
that we borrow to invest in the same stock, our capital gain will be
twice higher than that using our original amount of capital when the
prices of stocks we own appreciate. The magnifying effect of margin is
very strong and clearly seen during bull markets. The subject of
leverage is not a new topic in investment and business fields. In fact, it
has been taught from way back in most of the business schools, where
MBA students have been encouraged to take loan in the businesses
they are dealing with to maximise their profits, if they are confident
that their return would be much higher than the interest rate of the bank
loan.
Whilst novice investors are not encouraged to use margin facility in the
beginning stage of stock investment, he or she should learn how to use
it through pre-mortem and subsequently review the process
continuously. Once he or she has acquired sound investment
knowledge, have gained sufficient experience to make high conviction
investments, and have the ability to devise a winning strategy, he or she
may start using leverage to his or her advantage.
If you are an experienced investor, and have an impressive track record

of successful investments in the stock market, you should augment
your capital with a margin loan to allow a bigger leap in your gain, and
to enjoy a new breakthrough in your rate of return. At the interest rate
of 4% per annum (charged by most of the investment banks in
Malaysia currently), you can easily double your capital in less than two
years from stock investment if you can achieve an annualised rate of
return above 25%..
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But mind you, leverage is a double-edge sword. It cuts both ways.

Therefore, people who have poor record in investment should not use
margin finance.
6.2.5 Do Not Borrow More than the Allowable Limit
For every Ringgit of cash that we possess, if we open a margin account

with any of the investment banks, the bank will usually allow us to
borrow another Ringgit to buy more stocks, and will subsequently use
the stocks as collateral. For example, if we have say Rm 10,000, our
investment bank will allow us to buy up to Rm 20,000 worth of shares
(some banks allow up to a maximum of Rm 25,000 worth of shares).
However, it is not advisable to buy shares up to the maximum limit. In

view of the rapid stock price fluctuation, if we buy up to the maximum
limit, a margin call would be triggered when the prices of some stocks
slide down the slope of despair. Despite having more winners in our
portfolio, our effort might still end up down the drain if the losers kill
our portfolio at a faster speed than the winners.
The most prudent way to manage the margin loan is to refrain from
buying stocks up to the allowable limit. When the companies we own
report increasing profits, their share prices and our collateral value will
follow along; this will allow us to buy more shares. If you are tempted
to buy with the increased collateral value, you may go ahead to do so,
but do not borrow more than the allowable limit.
6.2.6 Sell Some that were Previously Bought Using Margin Loan
There are two circumstances we must sell the stocks we have

previously bought using margin loan. The first situation is when the
price of a stock surges to an unreasonably high level. When a company
reports a sharp increase in profits, or when it reports some positive
news and developments, the state of euphoria amongst investors and
traders (when they rush to buy like crazy) will propel its share price
upward. Nonetheless, based on Koon’s study, no share can go up or
come down for whatever reason. After reaching the first peak, the stock
will be experiencing some consolidations when the euphoria begins to
fade. If we previously bought the stock using margin loan, it is best to
sell some of the shares, which has experienced a meteoric rise, near the
top so that we can lock in some of our profits, pay back the margin loan,
and have more fund to buy back the stock when it falls.
The second situation we should sell the stocks we have previously

bought with margin loan is when they report poor earnings. Unlike U.S.
stocks, companies in Malaysia are fairly young and unstable. Therefore,
having a sustainable growth of profits is impossible for most of the
companies. Their share prices tend to fluctuate dramatically when the
companies report reduced profits, or when the supply of their products
is more than the market demand. The moment we should start selling
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our shares is when they start reporting diminishing profits, or when the
demand for their products has shown some deterioration signs. Stock
prices will sink into red when the companies show poor performance.
If we refuse to sell the losers and keep them longer in our portfolios,
we do not just pay high amount of interest for the loan; our portfolios
would also be vulnerable to margin calls.
6.2.7 Cut Loss will Limit Your Losses
Share prices seldom drop without a cause. There are many reasons why
share prices decline. But two of the main causes, deemed important by
the market, are lower profits (or financial loss), and higher supply than
demand. The price of a stock will be losing its ground when its
earnings begin to decelerate, or if the company reports financial losses.
Similarly, the share price will take a nosedive if the industry in which
the company get involved plunges into recession out of sudden due to
supply glut problem.
As investors, we should learn to protect our capital, and do not ever

allow our emotions to take over our logical thinking. Never fall in love
with the stocks that we own. Do not ever assume that declining
businesses will turn the corner soon. We must bite the bullet, and cut
loss immediately when the tide turns against our original investment
thesis. Do not let our bias (be it disposition effect bias, anchoring bias,
or regret aversion bias), mistake, negligence, or false hope wipes off
the gains we have garnered in the past from our investments in other
stocks. When we weed out the losers early, our losses will be limited to
a very small amount, and the major portion of our capital will be
preserved and freed-up for other investment opportunities, and we live
to fight another day. Also, by cutting our losses, and letting our
winners run, we will win big when we win, and lose small when we
lose.
6.2.8 Do Not Touch Down-trending Stocks
Novice investors have been warned by Koon many a time about the
danger of buying down trending stocks or catching a falling knife, yet
many of them pay no heed to his advice. As a result, they risk their
hard-earned money to the permanent loss of capital when the company
reports losses continuously, becomes a PN17 company, or files for
bankruptcy protection. In the light of the consequences, we should
avoid down-trending stocks at all costs.
When the price of a stock starts to fall, no one knows when the price
will be bottoming out under such circumstances. Even a company, with
a strong management team, that suffers temporary setback due to
industry downturn, and that is less susceptible to bankruptcy risk will
not be spared from the same fate. It will keep trending downward, and
may fall below its underlying value to an irrational level. What is
worse, the stock may even take a very long time to bounce back to the
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previous level, and may never recover at all. If we buy the stock on the
way down, we are literally putting good money after bad, our capital
would be locked in the stock for a long period of time, and we would
suffer emotional pain when the price keeps hitting new lows.
According to John Maynard Keynes, the market can stay irrational
longer than we can stay solvent. Many good opportunities will just be
passing us by when our capital is locked in the money-losing stock.
6.2.9 Wait Patiently to Catch the Big Fish
The secret of winning big in stock investment is of no difference with

that of catching a big fish. Apart from using the right bait, it takes time
and patience for the big fish to get hooked up. Likewise, in stock
investment, we need to be patient to buy a stock below its fair price and
to sell it for the highest gain.
Buying a stock at the right price, if not the lowest price, is so important
that it provides us a margin of safety, which protects us from any
unforeseen circumstances. Selling the stock at the highest price is
equally important so we can maximise our gain, and it allows us to
achieve our goal sooner. However, both processes require us to be
patient.
Even if we managed to buy a stock at the best price, it does not mean
that we will be able to rake in the highest profit from the investment.
Koon has shown this concept to his followers many times that three
people who begin a competition by buying the same stock at the same
price can end up returning home with three different rates of return.
The first person, who shares the philosophy and strategy of traders by
watching the stock market and chart diligently and trade frequently,
realises his or her gain after the share price has gone up by 20%, and
buy it back at a higher price when the subsequent buying signal is
triggered again. The second person, who is a very well-informed
professional investor, sells his or her stock after the share price has
gone up by 100%. The third person, who is an entrepreneur and a
superinvestor, holds on to his or her existing shares and keeps buying
more shares using margin loan when the company continues to report
growing profits. He or she only closes out his or her position when the
company shows reduced earnings after riding the uptrend for years.
Amongst three investors, the first person can only expect a mediocre
return. Every time when he or she trades, he or she does not only pay
more commissions or transaction fees, he or she also fails to capitalise
on the opportunity to ride the uptrend fully when the company keeps
reporting increasing profits. The second investor, on the other hand,
can expect a better rate of return as he or she holds the stock longer
than the trader and sells it at a higher price. However, he or she refuses
to buy back the stock after selling it, even though he or she realises
later that the stock still has plenty of upside potential, as he or she
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becomes risk averse when the stock has appreciated considerably and is
reluctant to admit his or her mistake by buying back the stock at a
higher price. The third investor, who can wait patiently, will enjoy the
highest gain as he or she possesses the composure to deal with stock
price fluctuation and focuses mainly on the profit growth prospect of
the company. To amplify his or her return, he or she uses the shares as
collateral to buy more shares when the company continues to increase
its profits.
6.2.10 Control Your Emotion of Fear, Greed, Ego and Overconfidence.

Logical Thinking is the Key to Successful Investing
Investing is more of an art than a science. To be successful in investing,

we need to be able to control our emotions all the time instead of
having a PhD in economics or finance. If successful investing relies
solely on strong financial knowledge, all economists, accountants and
financial analysts would have become multimillionaires or
superinvestors. Far from it. In fact, most of the funds underperform the
index. Just like retail investors, most of the professional money
managers also sell their stocks in the name of stop loss during major
market crash. If everyone can think logically, the market would have
been efficient all the while, all the shares would have been fully valued,
and there would be no irrationally massive sell-offs during market
declines. But, that is not the case.
People tend to get nervous during bear attack. When investors are in
panic state, the news of market tumble or share price collapse will
bypass the prefrontal cortex (an area where rational thoughts are
conceived) since the forebrain section has been starved of oxygen and
nutrient due to stress and overload. It will result in the signals be sent
to medulla directly. The autonomic nervous system is subsequently
triggered, and heuristics are then used to ease the cognitive load by
disposing stocks on hand as fast as possible. This system is very
helpful when a person is in an emergency state such as during fire
breakout, explosion, earthquake and accident. The self-defence action,
however, always leads to cognitive biases and disastrous investment
outcomes. We have seen it many times that people who dumped stocks
at nonsensically low prices during bear market regretted later when the
prices of the stocks recovered, as far as panic selling is concerned. That
is why even most wonderful stocks can be purchased at bargain prices
during market crashes. If you can control your emotion you should
know when to buy, and when to sell, and you should be able to make a
heck of a lot of money at the big moments.
Another mistake investors usually make is defending the enormous ego

within them, even if they have realised that their theses are wrong.
Instead of selling the losers, they keep holding on to the stocks and
witness the share prices tumble painfully. Likewise, they resist to buy
back the winners they have disposed earlier on, anchor on the prices
they have missed and watch the stocks keep climbing past their historic
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highs. In stock investment, humility is one of the most essential traits

we should nurture within our inner self. We should strip off our armour
against feeling shame, ready to admit our mistakes, refrain from
blaming others and make a “U-turn” when we are on the opposite side
of the right path so that we can maximise our gains and minimise our
losses.
Herding mentality is another emotional dilemma we need to avoid in

stock investment. Despite the fact that herding has been practiced by
our ancestor for protection since time immemorial, it does not and will
not protect us from any loss of capital in investment. In fact, the social
pressure of conformity, the delusion of ‘professional fund managers
cannot be wrong’, and the deadly beliefs that ‘they must know
something that I don’t’ and ‘it is safer to do what others are doing than
doing it differently’ always result in investors suffer more losses as
they bet on something blindly and dump high quality stocks at
unreasonable prices when everyone sells. Do you have a feeling of déjà
vu about it? According to some research studies, most of the money
managers also follow the herd of investment professionals in their
stock picking. As a consequence, they underperform major indices
more often than not.
Confidence is an important attribute in successful stock investment.

Overconfidence, on the other hand, is a dangerous bias that will lead an
investor to the path of complete failure. Investors with overconfidence
problem usually do not accept opinions contradicting with their
personal beliefs. They believe that the values of stocks they possess are
higher than the stocks’ market prices. The bias of divestiture aversion,
also known as endowment effect, will encourage them to take a greater
risk when share prices go down. Even worse is that they up the ante by
buying more as the prices falter or plunge. Therefore, they are not well
prepared for the worst outcome if anything goes wrong. To overcome
the overconfidence problem, we must be more open minded, always
look out for blind spot, prepare for the worst if the tide turns against
our original ideas, and use cut loss strategy to protect our portfolio.
The success of all gurus in stock investment is not credited to their high
intelligence quotient or their unparalleled knowledge in investment, but,
by and large, attributed to their ability to control their emotions well
and to invest with conviction. According to Warren Buffett, investing
is not a game where the guy with the 160 IQ beats the guy with the 130
IQ. He added further that once you have ordinary intelligence, what
you need is the temperament to control the urges that get other people
into trouble in investing. Opportunities come infrequently, when it
rains gold, put out the bucket not the thimble. During bear attacks,
most of the investment gurus become fearless; when everyone is fearful.
During bull runs, they stand firmly on the rational ground when
everyone is flooded with euphoria. They are willing to go against the
crowd to buy more shares of good companies at lower prices when
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everyone disposes the shares like no tomorrow. That is why they

managed to amass enormous fortunes from stock investment.
6.2.11 You Must Own No More than Eight Stocks
Although a reasonably diversified portfolio is good for a novice

investor in reducing his or her exposure to the inherent risk of owning
just one stock, the portfolio should not be over-diversified. Keeping all
our eggs in too many baskets may not be good for us. According to
Warren Buffett, diversification is just a protection against ignorance,
and it makes very little sense for those who know what they are doing.
A balanced portfolio should contain no more than eight stocks.
There are several reasons why we should not own more than eight
stocks in your portfolio. The first reason is that the additional stocks we
add into the portfolio will not reduce the risk significantly. Moreover, it
may reduce the overall gain of our portfolio. Suppose we have a
portfolio consists of eight stocks worth Rm 10,000 with an overall gain
of 20%, we add another eight stocks worth Rm 10,000 with an average
gain of 5% into our original portfolio the following week, and our
overall gain will eventually be reduced to 12.5%.
The second reason why we should not own more than eight stocks in
our portfolio is that the more stocks that we own in our portfolio, the
lesser the amount of time and effort we can allocate to monitor the
performance of each stock or each business. If we limit the number of
stocks in our portfolio to a maximum of eight carefully selected
companies, it does not only save us more time, we can also keep track
of their progress easily. All businesses have different challenges and
obstacles at different times to overcome. If you can keep track of them,
you will know when to buy and when to sell to make more profit.
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Chapter Summary
KYY’s golden rule:
I. Buy companies or stocks with profit growth potential, which have

delivered two consecutive quarters of increasing earnings
Complementary guidelines
i. Only buy the stocks that you can understand their businesses
ii. Make sure that the companies have a good track record of making
money
iii. The projected P/E must not exceed 10
iv. Use leverage to maximise gain
v. Do not borrow more than the allowable limit
vi. Sell some that were previously bought using margin loan
vii. Cut loss will limit your losses
viii. Do not touch down-trending stocks
ix. Wait patiently to catch the big fish
x. Control your emotion of fear, greed, ego and over confidence. Logical
thinking is the key to successful investing
xi. You must own no more than eight stocks
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Chapter 7:
The Art of
Concentrated Investing
The Art of Concentrated Investing
“If you want to get rich……you have to concentrate and focus.”

Jim Rogers
7.1 Introduction to Concentrated Investing
One of the most important investment strategies we should learn from Koon is
concentrated investing, which is referred to as investing in a limited number of
securities, with odds are in our favour. If you are a follower of Koon, you would
have noticed that Koon is in the camp of concentrated investing, and he does not
like the idea of broad diversification. According to him, the only way to make
big money is by betting on either one stock or a few promising stocks, which
have shown two consecutive quarters of earnings growth and have demonstrated
revenue and profit growth potential. He does not only practice it religiously; he
preaches the concept of concentrated investing to all his followers.
You might be wondering how many stocks you must own in order to be
considered concentrated investing. According to Koon, as a rule of thumb, one
should hold no more than three stocks in three different segments if the size of
the portfolio is not too big, generally less than Rm 100,000. But, if the size of
the portfolio is larger than Rm 100,000, the investor may put the money in more
baskets in order to spread out the risk of the overall investments. That said, it is
not advisable to hold more than eight stocks in the portfolio, as Koon believes
that we may have difficulty to achieve satisfactory return, and may have a hard
time to monitor all of them. Even though as large as a few hundred million
ringgit the size of Koon’s portfolio is, he has never owned more than eight
stocks at a time. In fact, he always tries to limit his major investments to just
three stocks.
It is worth noting that Koon is not the only one who adopts the investing
concept; many shrewd and successful investors, including Jim Rogers, Mark
Minervini, Kristian Siem, George Soros, and Stanley Druckenmiller, to name a
few, also do the same. They pick only a few stocks that they have conviction in,
and make sure that the odds are skewed in their favour before they wager their
entire fund in the stocks. This is how they invest in the markets, and how they
make their fortune.
7.2 Why Concentrated Investing?
“Soros has taught me that when you have tremendous conviction on a trade, you
have to go for the jugular. It takes courage to be a pig. It takes courage to ride
a profit with huge leverage. As far as Soros is concerned, when you’re right on
something, you can’t own enough.”
For astute investors, concentrated investing is the best way to maximise gains,
and to grow wealth. Successful people have a tendency to invest fully in a few
of businesses they dedicate their lifetime effort to. This practice is very common
in world of business, where we see most of the successful businessmen or
businesswomen are very focused in their undertaking. They spend their time and
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energy on what matters the most, and have their money invested only in the
companies they founded. For example, in Malaysia, the wealth of Public Bank’s
Chairman Teh Hong Piow, Hartalega’s founder Kuan Kam Hon, and Press
Metal’s CEO Koon Poh Keong is all tied to their stakes in their own companies,
and the performance of their stocks. The reason why they do so is that they
know their own businesses much better than they know about other companies,
and that concentrating their bet in just a few companies is a better way to
growing wealth. Similarly, in investing, concentrated investing is also an
excellent approach to magnifying gains if we have good investment ideas, we
know exactly how the companies make money, and we are on the right side of
the game.
Do not be fooled by those financial consultants who advocate either building a

diversified portfolio, or buying those actively-managed diversified global funds
from them to minimise risk. The concepts simply do not hold water. Other than
enriching themselves, the ideas will not help us much in achieving our goal.
Instead of following their absurd ideas, you might be better off buying an index
fund, such as DIA (ETF tracking DJIA), SPY (ETF tracking S&P 500), or QQQ
(ETF tracking Nasdaq). Whilst Koon does not reject the notion that
diversification helps reducing systematic risk and volatility, the approach,
according to Koon, certainly will not make you rich. Also, in the preceding
chapter, we have discussed how over-diversification can ruin even the best
investment idea. Every good investment is hard to come by, and the area of our
knowledge and experience is so limited. If we use our limited available fund to
buy fifty stocks, instead of only a couple of truly great stocks that we know well,
our overall investment return will be reduced significantly.
7.3 Is Concentrated Investing a Game for Everyone?
“I have 2 views on diversification. If you are a professional and have confidence,

then I would advocate lots of concentration. For everyone else, if it’s not your
game, participate in total diversification.”
Warren Buffett
Concentrated investing is not a game for everyone. Do not get me wrong,

concentrated investing is an amazing strategy to generating extraordinary
returns, but it is definitely not a game for everyone.
Since stepping into the stock markets, we have seen countless of people going
from rags to riches within a short period of time, and have witnessed people
falling into bankruptcy in the blink of an eye. Having observed nearly all the
emotions of people in the stock markets, and having seen their reactions
following their losing trades, truth be told, we believe that the approach –
concentrated investing – may not be suitable for everyone.
Whilst the above-mentioned prominent investors seem to be good at the

concentrated investing game, it is noteworthy that not everyone has the Midas
touch. In order to acquire the superpower, these master investors have sacrificed
countless precious hours and tiring days to understand their targeted companies’
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business operation, study the competitive advantage of the businesses, analyse

the earnings growth potential of the companies, study the strengths and
weaknesses of their competitors, and value the assets of the companies. It is
undeniable that if they can do the work, other retail investors should be able to
excel at the job as well, but how many people are willing to devote so much
effort to get the job done well, and toward achieving the awe-inspiring
performance?
Investors who bet blindly might get a nasty shock if they are not mentally
prepared for any unforeseen circumstances. As they follow the advice of some
securities analysts or market pundits blindly when these so-called financial
experts pound the table on a stock, the investors may not be aware of the
presence of uncertainties and risks associated with the stock. When share price
tanks or a disaster breaks out, their confidence is shaken, and they will be
suffering from stress, anxiety, depression or/and insomnia. Consequently, their
normal everyday lives are disrupted by the mental illness. In the preceding
chapter, we have studied the finding of Kahneman and Tversky that the
magnitude of pain experienced by human when losing money is greater than
that of joy when winning the same amount of money. If one is unable to deal
with the mental stress or handle other psychological challenges, it is best to
avoid this type of investing game.
In comparison, the volatility of a portfolio with limited number of stocks is far

higher than that of a portfolio with a larger number of securities. Therefore,
investors who are unable to control their emotions will definitely have difficulty
holding onto their stocks during turbulent times or in turbulent markets.
According to Koon’s study, people who are unable to live through price
volatility will sell their stocks in fear and in panic during price correction at the
bottom when their normal brain function – logical thinking function – is shut
down, and lock in the loss.
Also, people who have a poor record of financial planning definitely should not
try their luck with this type of game. The stock market is a dangerous battlefield.
Without having a viable investing strategy, sound investing philosophy, high
emotional intelligence, and good money management skills, making the
concentrated investing attempt is akin to playing Russian roulette. There would
be no back-out, and your life savings would turn into dust if you fail. Can you
imagine how your family members would live when the life savings, which can
be used to provide comfortable life to them and to provide quality education for
your children, disappear down the rathole?
7.4 The Strategy for Successful Concentrated Investing
Concentrated investing can be destructive to our wealth if we are not prepared

to deal with the challenge wisely. Without having a viable strategy, taming our
emotions and staying disciplined, betting blindly in the stock market will only
get our financial life shot into pieces. For amateurs and beginners, it may sound
like a hopeless dream, but it is not an impossible mission either. Here’s some
good news: even if you are not an experienced investor, but if you are willing to
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put forth some effort to learn, and follow the guidelines outlined below, you are
less likely to lose money in the game. Also, the strategy enables you to hit the
ground running faster than you would otherwise.
7.4.1 Only Invest in Stocks with Promising Earning Growth Potential
First thing first, pick the stocks with bright earnings growth prospect
that have reported two consecutive quarters of increasing profits. If the
slogan for success in real estate investing is “location, location,
location”; for stock investing, it must be “earnings growth, earnings
growth, earnings growth”. Based on Koon’s observation, however,
most investors and investment professionals overly concentrate on
balance sheet, dividend yield, and technical analysis, and fail to notice
the importance of profit growth. They do not think like a businessman.
But the best way to mint money in the stock market is to invest like a
businessman in companies with high profit growth prospect. To be
really successful in investing, one must be willing to venture like an
entrepreneur, and focus on the profit growth prospect of a company.
Out of a thousand-plus counters in Bursa Malaysia, we must pick only
a few stocks that have truly tremendous profit growth potential and get
stronger sequentially each quarter.
Why company with tremendous profit growth potential?

According to Koon, amongst all the popular selection criteria, i.e. book
value, cash flow, dividend yield etc, the most powerful catalyst to
move share price is profit growth prospect. To do so, we need to be
able to see the earnings potential of a company, and must use some
business sense to estimate the earnings of the company a few years
down the road. One of the techniques is finding the factor or catalyst
that can move the earnings needle. The chance of picking a winning
stock would be higher if we could leverage on our knowledge and
experience to find a profitable company with near-term and long-term
catalysts. For example, Koon has been in construction business for
more than sixty years, and has involved in countless mega projects. He
knows how construction companies make money, and can tell if the
companies are likely to make more money next year or not.
But mind you, in the world of business and investing, any of the
outcomes is possible. Our judgments may sometimes go wrong due to
some unforeseen circumstances such as natural disasters, sabotage,
sudden reversal of governmental policies, and etc. The stock market
may crash after we have built our position, and the prices of our stocks
may fall. Nonetheless, if we invest in stocks with incredible profit
growth potential underpinned by the combination of near-term and
long-term catalysts, based on something we know best and with high
level of confidence, we are less likely to lose money. The least we will
not be stuck with something that we have never wanted to hold in our
portfolio. In addition, it will reduce the downside risk of our
investments.
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7.4.2 Invest in Truly Cheap Stocks
Concentrated investing is a double-edged sword, which does not only

increase return, but also magnifies loss if we do not invest with caution
and prudence. To reduce the risk, we must avoid all overpriced stocks.
No matter how promising the future of a company is, we are
susceptible to a loss if we buy it at an inflated price, or buy it with the
fear of missing out, as the growth element may have been priced into
the stock. During recession, economic stagnation, reduce access to
borrowing, poor wage growth, and rising unemployment will result in
companies face poor earnings growth. Additionally, negative market
sentiment will cause the share price spiralling downward, as buying
volume overwhelmed by selling volume. The double whammy would
put a big dent in our wealth, if we overpay for a stock.
To avoid investing in an overpriced stock and to prevent any

unforeseen circumstances, Koon only looks for promising stocks with
projected P/E ratio lower than 10. This type of stocks is either out of
favour, or still flying under the radar. Further, market confidence on
the stocks is at low ebb. This is the best time to go on the prowl for
them at bargain prices. They offer serious investors a great deal by
maximising returns whilst minimising risks, as either the bad sentiment
or risk has been discounted by the market, or the gems have not been
discovered by people.
Please note, however, that not all stocks with projected P/E lower than
10 are cheap stocks. Many cyclical stocks are traded at low projected
P/E multiples at the peak of their up cycles, especially when their
earnings have been rising for several quarters or years. According to
Peter Lynch, “Buying a cyclical after several years of record earnings
and when the P/E ratio has hit a low point is a proven method for
losing half your money in a short period of time.” In order to ensure
that a stock is truly cheap, we need to estimate the ballpark figures of
the company’s earnings for the next couple of quarters or years, using
some business sense, prior to estimating its projected P/E. If the
earnings growth is not sustainable, it is highly unlikely that its share
price will increase. Once we have found a bargain stock, we can begin
to invest in the stock if we believe that its growth is on the cards.
Otherwise, we should wait patiently for the right time to swing for a
home-run.
7.4.3 Stick to Your Guns
To be successful in the stock market, we have to follow our investing

rules, and be decisive to buy or to sell. Of course, it is easy to lose sight
of our objectives when market is in chaos especially during turbulence,
but if we stick to our guns like Koon, it is unlikely that we will miss
any precious opportunities. The magnitude of risk we bear is not
necessarily equivalent to that of reward we can expect from our
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investments. In fact, the latter could be far greater the former if we

know what exactly we are doing, and when our predictions are correct.
During correction, the stock market is rife with negative news and bad
sentiments. What we need is an unwavering confidence in our
investing principle. Ignore those scaremongers who often spread
frightening bad news, especially during market correction. Do not be
afraid to buy when we have found a good one. After discovering the
gem, we must monitor its progress and share price, and then buy the
stock immediately once our price target is hit. Remember, to score a
home run, we need to position ourselves right, and hit the ball hard
when the opportunity arrives.
Do not follow anybody’s recommendations or rumours blindly,

including those from your relatives or your best friends. No matter how
reliable it is they claim about the “wind” they got, if you buy it at an
inflated price, you would be left in the lurch when the share price slips,
the party ends, and the buying momentum wanes. Also, we should not
follow any stock analysts or our brokers blindly. These analysts are not
clairvoyants, and are also unworthy of our benefit of doubt. Brokers are
paid for advising us to buy and sell stocks through the brokerage fees
we pay for each transaction we make. They have no obligation to help
us make money. Even if we jump all over them when we lose money,
we will not be able to recoup our money.
“More money is lost listening to brokers than any other way. Trading
requires an intense personal involvement. You have to do your own
homework.”
Michael Marcus
7.4.4 Trade Around A Core Position
Trade around a core position is a strategy usually used in conjunction

with concentrated investing approach. Koon capitalises on this strategy
to maximise his investment returns as he has a good understanding of
human emotions and a solid grasp of the market dynamics – change in
supply and demand. It indirectly allows him to increase his position
size at low prices, and to lower his average buy price by selling a
partial of his stake in a stock at high prices, and buying more shares at
low prices.
Koon always says, “No share can continue to go down for whatever
reason and no share can keep climbing up and up indefinitely for
whatever reasons.” At some point, the stock will take a short rest prior
to resuming its trend. When the price of a stock goes up too fast within
a very short period of time and the slope is too steep, its resistance will
increase, as selling pressure builds up. When it approaches the
resistance zone, we can cash in a fraction of our profit by selling some
of our shares into strength. Then we jump right back in near the
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support zone during correction when the momentum is built up again,

by using the proceeds to buy more shares at a lower price.
The illustration below is an example of how Koon maximises his

investment return using the strategy of trade around a core position.
Scenario 1: buy-and-hold
Let’s suppose that Koon buys 10,000 units of a promising stock, DEF,
at Rm 0.50 / share with Rm 5,000 initial investment, as shown in the
table below. Koon holds the stock until it is fully valued and then sells
it at Rm 1.10 / share for Rm 11,000, which gives him just a gain of Rm
6,000 or 120%.
Scenario 2: trade around a core position

Now if he trades around a core position by purchasing 10,000 units of
the same stock, at Rm 0.50 / share as an initial outlay to build his core
position, then he sells 3,500 shares (at Point 2) around Rm 0.85 / share
for Rm 2,975, subsequently buys back 4,577 units of the stock (at Point
3) around Rm 0.65 / share with the proceeds, and in the end exit his
position at Rm 1.10 / share, he would earn Rm 7,185 or 144% profit,
an additional profit of Rm 1,185 or 24%.
Type of investment strategy Buy-and-hold Trade around a

core position
Initial batch’s buying price (Point 1) Rm 0.50 / share Rm 0.50 / share
Initial batch’s buying volume 10,000 units 10,000 units
Initial value Rm 5,000 Rm 5,000
First batch’s selling price (Point 2) Rm 0.85 / share
First batch’s selling volume 3,500 units
Second batch’s buying price (Point 3) Rm 0.65 / share
Second batch’s buying volume 4,577 units
Final batch’s selling price (Point 4) Rm 1.10 / share Rm 1.10 / share
Final batch’s selling volume 10,000 units 11,077 units
Final value Rm 11,000 Rm 12,185
Total gain Rm 6,000 Rm 7,185
Percentage of gain 120% 144%
Figure 7.4.4.1: Comparison between Buy-and-Hold and Trade around A Core Position
Strategy
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Figure 7.4.4.2: Share price of Stock DEF
Note that our success in trading around a core position lies in our
ability to interpret market participants’ emotions. For example, when
the pendulum has shifted too much in the direction of greed, we must
get ready to sell, and then prepare to buy back the shares when the
market is in fear, in order to increase gain. To do so, we can use
Turning Point Investing principle or Fibonacci Extension and
Retracement method to determine the best time to take further actions,
such as increasing our position.
7.4.5 Turning Point Investing Principle
A turning point is a point where change in price direction takes place

based on developments shaped by events, human perceptions or
emotions. The change can either be a new downtrend, a temporary
pullback, or the beginning of an uptrend.
As investors, we can build a position in a stock or even buy more

shares of a stock at the turning point when the event occurs (i.e. the
government announces a change in the regulation) which we believe is
in favour of the company in term of business or profitability growth
before/when the new uptrend starts. Likewise, we can take some profits
off the table if we sense some pessimism out of some trading activities
immediately when a downtrend starts, as the share price has probably
risen too fast or market participants’ confidence has started to wane.
We may buy back the shares again later when the uptrend resumes, as
the fear has subsided or market participants have regained confidence.
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Technical analysis is one of the tools we can use to find the turning
point of a stock. We can start buying it back when its resistance is
broken. The resistance is typically broken when bulls prevail over
bears and when their earnings have improved, as either their businesses
have expanded or the recovery of their industries has started to gain
traction. The breakout usually heralds a round of upward move. Taking
some calculated risk by buying shares at the inflection point can be a
rewarding one.
7.4.5.1 Technical Analysis (Chart Patterns and Momentum

Indicators)
The increase of long position pushes the price upward, the

liquidation of positions leads to price tumbling. The upward
and downward movements of share price form patterns on
charts. According to chartists, the patterns, like a map, could
show us the direction where the stock price is likely to be
heading to in the near future. By identifying a pattern early,
we can get a grasp of market participants’ emotions such as
greed, fear and confidence levels, and can position ourselves
for the next opportunity.
As discussed in the preceding chapter, to do so, we need to

train our eyes to identify trends and recognise chart patterns.
Finding the peaks and valleys is the first step in chart reading.
Subsequently, we need connect them together to find
resistance and support lines, and to form a chart pattern. This
is an important step we should not forget. The lines of support
and resistance act as infrared beam detectors, which give us a
signal when the trend has changed. Below are some common
chart patterns we have discussed in the previous chapter and
should pay attention to:
Chart Patterns:
a. Bearish Trend: Head-and-Shoulders Top
A head-and-shoulders top pattern is a potential bearish

reversal of an uptrend indicating that the bullish trend
has come to an end. As soon as the neckline (a line
drawn across the left and right armpits) is broken with a
close below the line, the trend is confirmed, we may
take some profits off the table by reducing our position
in the stock or get out of our position completely if we
do not intend to hold the shares any longer.
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Figure 7.4.5.1: Head-and-Shoulders Top
b. Bearish Trend: Double Tops
A double tops pattern is also a bearish reversal of an

uptrend. It gives a warning signal to people that the
existing bullish trend is likely to come to an end. A close
below the neckline confirms the pattern. If we plan to
exit to our position in the stock, a breakout to the
downside is a good selling window. If we have no plan
to sell the stock too soon, we may take some of our
money off the table once the breakdown occurs, as fear
has overcome greed.
Figure 7.4.5.2: Double Tops
c. Bearish Trend: Bearish Symmetrical Triangle
A downtrend will begin when the support (lower

ascending trendline) of a symmetrical triangle is broken
down. The price movement of share is usually bounded
by upper descending and lower ascending trendlines and
the volume before the breakout is generally low. A close
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below the lower ascending trendline confirms the pattern.

We can take some profits off the table by reducing our
position in the stock.
Figure 7.4.5.3: Bearish Symmetrical Triangle
d. Bearish Trend: Bearish Pennant and Flag
Bearish pennants and flags are the patterns indicating

the continuation of an existing downtrend if the support
line is broken down. (Note: they may sometimes
indicate the reversal of the existing downtrend if the
breakout is on the upside.) The price movement of share
in a pennant or a flag is usually bounded by its
resistance and support lines, and the volume diminishes
gradually before the breakout. We may reduce our
position in the stock when the breakout happens.
Figure 7.4.5.4: Bearish Pennant
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Figure 7.4.5.5: Bearish Flag
e. Bullish Trend: Cup-with-Handle
Cup-with-handle is a bullish pattern signalling the

continuation of the previous bullish trend after a period
of share price consolidation, as selling pressure
dissipates or buying pressure regains its lost ground. A
close above the resistance (or the old highs) at the
breakout point confirms the pattern. Volume tends to be
high at the breakout point. We may add to our profitable
position by buying back the shares we have sold earlier
or by buying more shares when the breakout happens.
Figure 7.4.5.6: Cup-with-Handle
f. Bullish Trend: Ascending Triangle
Ascending triangle is a wedge-shaped pattern showing

the continuation of the prevailing uptrend when the
share price breaks out upward after a period of sideways
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consolidation. Volume is usually high at the breakout

point, where buying pressure is strong. We may buy
back the stock we have sold earlier, or buy more shares
to take advantage of the bullish momentum.
Remark: whilst the price usually breaks out upward, it

may sometimes go in the opposite direction. If the share
price breaks down or crosses below the rising support
line, it then signals the start of a bearish trend.
Figure 7.4.5.7: Ascending Triangle
g. Bullish Trend: Inverse Head-and-Shoulders
An inverse head-and-shoulders pattern is a bullish

reversal of a downtrend indicating that the bearish trend
has come to an end. As soon as the neckline (a line
drawn across the left and right armpits) is broken with a
close above the line, the uptrend is confirmed, we can
take advantage of the momentum by adding to our
position in the stock. After buying more shares at the
breakout point, we may set our profit-taking point based
on the height from head to neckline.
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Figure 7.4.5.8: Inverse Head-and-Shoulders
h. Bullish Trend: Falling Wedge
Falling wedge is a bullish reversal pattern that sloped

downward, with contracting price range, signalling the
beginning of a bullish trend. Trade volume usually picks
up at the breakout point after a period of consolidation,
as sell volume has dried up. This is a good time to add to
our position by buying back the shares we have sold
earlier or by buying more shares to take advantage of the
upside momentum.
Figure 7.4.5.9: Falling Wedge
i. Bullish Trend: Bullish Symmetrical Triangle
An uptrend will begin when the resistance (upper

descending trendline) of a symmetrical triangle is
broken. The price movement of share is bounded by
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upper descending and lower ascending trendlines. The

volume before the breakout is usually low. A close
above the upper descending trendline confirms the
pattern. We may add to your profitable position by
buying back the shares we have sold earlier or by buying
more shares when the breakout happens.
Figure 7.4.5.10: Bullish Symmetrical Triangle
j. Bullish Trend: Bullish Pennant and Flag
Bullish pennants and flags are the patterns indicating

continuation of an existing uptrend if the breakout is on
the upside. (Please note, however, that they may
sometimes indicate the reversal of the existing uptrend if
the breakout is to the downside). Just like a symmetrical
triangle, the price movement of share in a pennant or a
flag is bounded by its resistance and support lines and
the volume diminish gradually before the breakout. We
may increase our position in the stock when the breakout
happens and set our profit-taking point based on the
height of the flagpole or pennant pole if we intend to
take some profit when the share price is on the way up.
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Figure 7.4.5.11: Bullish Pennant
Figure 7.4.5.12: Bullish Flag
k. Bullish Trend: Double Bottoms
Double bottoms pattern is a bullish reversal of a

downtrend indicating that the existing bearish trend has
come to an end. A close above the neckline confirms the
pattern. We can ride the train by buying back what we
have sold earlier or by adding more shares to our
existing position once the breakout occurs, as greed has
overcome fear.
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Figure 7.4.5.13: Double Bottoms
Momentum Indicators
The following indicators can be used in conjunction with chart

patterns to determine a change in the existing price trend.
Indicator 1: Relative Strength Index (RSI)
If the RSI level of a stock is below 30, it indicates that a stock

is oversold. When RSI crosses above the level of 30, it is
considered a bullish signal. We may accumulate or buy back
the stock when its RSI crosses above the level of 30. On the
other hand, the level above 70 represents an overbought
condition. We may sell all our shares or take some profit off
the table when its RSI crosses below 70. Whilst some books
recommend using 20 and 80 as oversold and overbought
reference levels, respectively, it is advisable that you use the
reference levels of 30 and 70, as not all stocks’ price
movement is volatile in nature. We would miss lots of good
buying and selling windows if we use a wider range as
references. Also, we must not forget to pay attention to the
divergence between RSI and share price movements. The
possibility of having a price reversal is very high when
divergence occurs.
Indicator 2: Accumulation and Distribution (A/D)
A/D is a momentum indicator used to judge if the market

participants are accumulating or selling a stock. A positive
gradient indicates that the stock is having high demand, as
investors are accumulating it. When demand exceeds supply,
buying volume is greater than selling volume, share price will
naturally move up. Therefore, when the A/D line of a stock is
trending upward, the price will eventually go up, even though
Page | 18
its share price is initially in a downtrend. We may take the

advantage of the divergence (between A/D and share price
movements) to build position in the stock or buy back the
stock we have sold earlier when the reversal occurs, as the
bulls have prevailed.
Indicator 3: Moving Average Convergence Divergence

(MACD)
MACD is calculated by subtracting 26-day EMA from 12-day

EMA. MACD is a momentum indicator signalling a change of
trend when the signal line, 9-day EMA line, is crossed over by
MACD. When the MACD line rises above the signal line, it
gives a bullish signal. On the other hand, when the MACD
line falls below the signal line, it gives a bearish signal. When
the share price diverges from the MACD, it signals the end of
the current trend. For example, when the share price is in an
uptrend and the MACD line is in a downtrend, the uptrend
momentum is going to end soon and we may sell some shares
into strength. Conversely, if the share price is in a downtrend
and the MACD line is in an uptrend, the downtrend will come
to an end soon and we may build a position in the stock or buy
back the shares we have sold earlier at a lower price.
7.4.5.2 Special Events
Special events generally create some intriguing possibilities,

which may help us avoid some devastating losses or/and
enable us to make some money out of the changes, uncertainty,
or miseries if we know how to capitalise on the developments
or changes to our advantage. That’s how Koon and other
successful investors, like Stanley Druckenmiller, Bruce
Kovner, Jim Rogers and etc,. make big money in the markets.
If we always pay attention to the developments in the world,
and move one step ahead of the crowd, the information could
tip us off to making more money and to avoiding huge losses
from those events. Below is a list of some special events,
which happened in the past, and worth our time discussing
about them.
Example 1: Outbreaks of Diseases
Outbreaks of diseases and infections, and striking of natural

disaster may sometimes lead to a sudden surge of demand for
certain medical products such as medical glove, surgical mask,
vaccine and medicine, and medical equipment. For example,
the outbreaks of diseases such as H1N1, bird flu, MERS,
SARS could benefit medical glove makers due to a surge in
demand for medical gloves. In 2010, during the H1N1 fever
epidemic, the Health Authorities took extra precaution to
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prevent the spread of the deadly virus. As a result, the demand

for rubber gloves far exceeded the supply. During the H1N1
fever epidemic, most of the glove manufacturers were making
phenomenal increasing profit every quarter and their share
prices were shooting through the roof. According to
Koon, when he saw there was a sudden jump in demand (and
profits) for Supermax’s gloves in March 2009, he started
buying it. When he saw X-ray detectors installed at the airport
to prevent the spread of the deadly H1N1 virus, he bought
even more shares aggressively. At the same time, he also
recommended the stock to his relatives and friends. He
accumulated so many shares that he eventually became the 2nd
largest shareholder of the company in 2010. The stock went up
from Rm 0.95 to above Rm 6.20 within 15 months and he
made a lot of money out of the event.
Example 2: Change of Tax Policy or Regulations
Any changes to existing tax policies may lead to either a

decline or a boost in consumer spending, depending on the
objectives of the revisions. For example, the implementation
of GST would deter consumers from spending, push up the
cost of living in the country and push more people to the brink
of poverty. In this case, consumer goods companies are
generally expected to perform poorly once the tax is
implemented. If we possess any of the related stocks, we can
trim our position in the stock before the law takes effect and
buy it back later at a lower price. Similarly imposing of heavy
tariffs on imported steel products, though benefits local steel
players and protects domestic employment, may hurt
consumers, as it leads to an increase in the cost of raw
materials and results in a jump in the prices of consumer
goods. Immediately when the news is released, we can
consider buying some good steel-related companies, which are
likely to be benefited from the change, and trim our position in
those affected consumer product stocks, which will be hurt by
the tariff but are unable to pass on the cost to their customers
or the end users.
Example 3: Invention of New Technology
Scientific and technology breakthroughs do not only change

the way people lives, but they have also made many industries
heading for extinction. For examples, the creation of internet
has led newspaper industry to its current nadir. In addition,
although the rise of automation has lowered manufacturing
cost and improved system efficiency, it too has made many
jobs and companies disappear. If any of the technology or
automation companies we own announces a new discovery or
breakthrough that will benefit the whole world, we should add
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to our position immediately because the technology will soon

create a new market and generate a lucrative stream of
revenue to the company. Likewise, if we have any newspaper
publishing stock in our portfolio, we should pay a close
attention to its performance and development. If it does not
evolve into a growth company, we should consider selling the
stock.
7.4.6 Be Patient
Having the ability to identify good companies can only help us find the
right horse, it is patience that can get us to the place where we want to
be ultimately. After identifying an undervalued stock, we have to wait
patiently to buy it. Our investments will be jeopardised if we act hastily
in the stock market. Warren Buffett once said “the stock market is a
device for transferring money from the impatient to the patient.”
Do not expect it to double our money overnight after buying a stock.

Rome was not built in a day. It took years to build a strong empire. No
matter how efficient the management team is, how great the business
model can be, we need to give the company time to grow its earnings
before we could reap the fruit of our labour. Again, patience is the key
to growing wealth here.
Do not go in and out of the stock market unnecessarily whilst waiting

for the earnings to grow. Your returns would be greatly reduced if you
trade unnecessarily. You will only enrich your brokers by doing so.
Koon always says, “Short term traders cannot be rich.” Therefore, we
should aim to hold for long-term. When we trade sparingly, and invest
for long-term, our cost will be stripped to the bare bone, and the
ultimate return will be maximised.
7.4.7 Mentally Prepared for Market Volatility
According to Benello et.al., the strategy – concentrated investing –

does not only magnify gains, but it also leads to higher volatility. Since
the road to growth is bumpy, we need to be mentally prepared to
stomach the volatility. If you visit any stock forums lately, you would
see people react negatively to market volatility by groaning in pain at
their (realised and unrealised) investment losses. Weak holders who
cannot control their emotions properly, on the other hand, would sell
their shares at a loss even if the fundamentals of the companies are still
strong. They blame everything, including the changes in government
policy, poor market sentiments, falling consumer price index, rising
inflation, trade disputes, lockdown, spread of infection, currency
depreciation, bad news, and lower projected GDP growth, except
themselves, for their losses.
To be a success investor, one should stop grumbling or whining about

market volatility. For better or for worse, we follow our rules or
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principles, and should be happy with the outcomes of our effort. Even
if it does not turn out the way we wanted it to be, we chalk it up to
experience.
Bear in mind that the market hates negative news and uncertainty, and
it is short-sighted. People have a tendency to sell their holdings
immediately when market sentiment turns sour. As a result, they have
to pay higher prices to buy back the same stocks when there are any
good news later. If we invest in a promising stock with the objective to
magnifying gains, but we dispose it before the share price rising due to
mental stress, we are literally following the herd shooting ourselves in
our foot. Remember, the market can be at times inefficient, but it
cannot always be wrong. When thinking goes deeper, ignorance
recedes. The true value of a stock will be reflected in its price one day
when its earnings grow, and the negative sentiments wane.
7.4.8 The Rule of Thumb for Fund Allocation
“Stock trading is not an on-off business; moving from cash into equities
should be incremental. You should start off with pilot buys by initiating
smaller positions than normal; if they work out, larger positions should
be added to the portfolio soon thereafter. This toe-in-the-water
approach helps you keep you out of trouble and building on your
successes. If you’re not profitable at 25% or 50% invested, why move
up to 75% or 100% invested or use margin?”
Mark Minervini
Wise deployment of fund, or position sizing is as important as finding a

winning stock. Immediately investing a substantial amount of money in
a stock after discovering the counter could be a dangerous move if the
company fails to perform later. No intelligent investor would go to the
market without having a proper risk management, position sizing, or
fund allocation plan. Even professional poker players with the best
hand do not normally wager their entire fund, or go all-in at the
beginning of a betting round. They would place a small bet initially and
raise their stake gradually whilst assessing the cards on their hands, and
the response and strengths of their opponents.
Similarly, in investing, shrewd investors like Koon, George Soros, and

Mark Minervini do not invest with all their funds immediately at the
beginning of a round. What they usually do after discovering a winning
stock is placing a decent bet on the stock, which they call a probe trade.
At the same time, they will continue to monitor the performance of the
company, and the supply and demand of the stock. They would only
increase their stake in the company by adding more to their winning
position continuously if initial investment shows them profit, and if the
business continues to expand and its profits continue to grow. By doing
so, they do not just reduce the risk of losing too much money; they also
increase the probability of winning big in the game.
Page | 22
To begin with, we can use 20% - 35% of our money to buy a stock like
Koon, and set aside 65% - 80% of the money as a “war chest”. As the
name implies, the fund allows us to buy more shares on the cheap
when the price goes lower (note: do not buy until the stock turns up)
after our initial purchase if the profit growth prospect of the company
remains intact. Also, we can use the money to add more shares into our
portfolio when the price continues to rise as the company continues to
report increasing earnings until it does not grow anymore or when the
fund is the exhausted. However, the amount of money allocated for
each successive batch of shares should be lesser to prevent the cost
rises significantly.
Example:
Let’s suppose that we have Rm 100,000 in our account, and we would
like to invest in a stock called ABC. We can buy the stock in seven
batches as follow.
Batch Share Price Amount (Rm)

1 0.50 30,000
2 0.55 22,000
3 0.60 16,500
4 0.65 13,000
5 0.70 9,800
6 0.75 7,200
7 0.80 1,500
Figure 7.4.8.1: Pyramiding Table
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Am
oun
t:
Rm Rm
Amount:
1,5
7,200
00
Amount: Rm 9,800
Share price: Rm 0.70
Amount: Rm 13,000
Amount: Rm 16,500
Amount: Rm 22,000
Amount: Rm 30,000
Figure 7.4.8.2: Pyramiding Chart
If we invest using margin trading account like Koon, we may use the
additional margin from our unrealised profits to buy more shares as the
share price goes higher. The advantage of using this system is that the
amount of each successive purchase will automatically be smaller.
Therefore, we do not have to worry that the cost may be rising too fast.
This concept is also known as pyramiding. That said, we must not use
up to the maximum allowable limit of the margin finance. Always
allow some room in case the share price suddenly drops unexpectedly.
Note: if you are the breadwinner of your family, you need to set aside
an emergency fund – six to twelve months of your family’s monthly
expenses. Prior to making any investment decisions, it is advisable that
you take your family’s needs into consideration when making capital
allocation. No matter how great the deal you discover, you should not
touch the money in the fund under any circumstances. A blow to your
investment can sink your family into financial hardship. Therefore, you
must make sure that your family is protected financially before
pursuing your new adventurous investment journey.
7.5 Stocks You Should Avoid
Invest our hard-earned money in a wrong company can be even more painful
than stashing our cash under the mattress. You certainly do not want to have
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sleepless nights for investing in a losing stock. The best solution is to have those
unsuitable companies removed from your watch list at the beginning of the
process.
Below are the types of companies Koon usually avoids betting his money with
7.5.1 Downtrending Stocks
Koon always says “Don’t touch downtrending stocks.” Downtrending

stocks will hurt our portfolios. This is especially true when the share
price of a stock is still near its peak, because the price can go further
down and we will lose money. We do not know when it will reverse its
course. Stock price will not tank for no apparent reason. On normal
days, smart traders, insiders, and investors will not dump their holdings
hastily unless there is some bad news, the businesses have taken a
beating, the fundamentals of the companies have changed or the tide
has turned. We do not have to wait for the announcements from the
management to make our own judgement. When bad things happen or
the fundamentals have changed, some unscrupulous management will
keep the negative news under wraps until their friends and relatives
have exited their positions. To avoid being trapped between a rock and
a hard place, it is better to avoid all downtrending stocks in the first
place.
7.5.2 Companies in the Industry with Oversupply Problem
Oversupply problem is commonly faced by companies operating in

cyclical industry (such as oil and gas industry, property industry and
shipping industry, just to name a few) and companies offering
commodity-like products (such as crude oil, palm fruits, steel pipes,
and meat, which have no patent protection and can be obtained easily
everywhere). When supply exceeds demand, business performance will
deteriorate and profitability will lapse into decline. As a result, the
share prices of the stocks will drop like a stone. They will be
pummelled by the market continuously until the supply and demand
come into balance, and we never know how low the share price can go.
For example, crude oil price dropped about 40% (from $115 to $70)
within six months in the second half of 2014 due to oversupply
problem, as US shale producers ramped up production, OPEC refused
to scale back on production, and the demand of oil from China shrank.
As a result, the earnings of many oil and gas companies sank into red
between 2014 and 2018, with some going into liquidation later on.
Holding on to their shares could be very painful, and the road to
recovery was not smooth. The shareholders would see their stocks
continued to get clobbered and their accounts continue to bleed.
Sometimes, the shareholders may not have a chance to see light at the
end of the tunnel. To avoid being stuck in the stocks that will go
nowhere for years, it is best to shun this type of companies before
recovery begins.
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7.5.3 Poorly Managed Companies
Warren Buffett always advises investors to look for management with

integrity, intelligence, and energy, as management can make a huge
difference in a company. According to studies, “Good management
adds value beyond a company's hard assets. Bad management can
destroy even the most solid financials.” Bad management are either
managing the available resources inefficiently and ineffectively, or
running the companies only to set themselves up for life without
carrying out their fiduciary duty. However, it is very difficult to judge
whether the managers are honest, intelligent, and hardworking because
we do not know them personally for a long time. Therefore, Koon
advises investors to look for companies with controlling shareholders
managing the business. They will surely protect their own interest in
the company. They focus on growing the business, thus creating long-
term shareholder value. Managers who act like employees often focus
on short-term earnings in order to secure a large sum of bonus and
other perks. The companies would lose ground to their stronger peers if
the management is incompetent and running the companies for own
personal gain. Those financially weak ones with bad management may
go under any time. By then the share price will continue to break all-
time low records, and we will have no chance to recoup our losses.
Very often the prices of these stocks are low for good reason.
7.5.4 Stocks with Complex Businesses
Do not touch any stocks that we cannot understand their businesses and
structures within ten minutes. Based on Koon study, if we do not
understand the businesses, estimating their earnings can be very
difficult, let alone valuing their businesses. The higher the complexity
of a business and ownership structure is, the lower the accuracy of our
projections can be. Also, this type of companies is rarely efficient.
When available resources are split over several businesses, with no
relationship at all, hardly this type of companies can grow at a fast pace,
as the synergistic effect is lost.
Most of the great businesses like Public Bank, Liihen, Gamuda, Yinson,
IJM, Favelle Favco, Supermax, Dayang, Dialog, V.S. Industries, and
etc do not have complicated structures. Their structures are quite
simple. Anyone looking at them can understand the businesses and
organisations fairly quickly. As they are focused and do not go beyond
the areas of their core competencies. They possess some forms
competitive advantage over their competitors. When they perform well,
their values will grow noticeably, so are their stock prices.
7.6 When to Sell?
One is unable to turn a great investment into a big profit unless he or she can
sell his or her shares at good prices. In this case, finding the right time to sell a
Page | 26
stock, which has appreciated substantially, is an important process. Below are

the three best times we can cash in our profit.
7.6.1 Take Some Profit off the Table if the Share Price Goes Up Too
Fast
Koon always says, no share can go up indefinitely for whatever reason.

At some point, the stock will take a breather before it continues its
journey upward. That is the point where we should sell a portion of our
position, so that we have more money to buy during market correction.
Remember, if we don’t take the money off the table, someone else will.
There are many indicators we can use to judge if the share price of a
stock has gone up too fast. Amongst the commonly used indicators, the
following three indicators, which we have discussed in Chapter 3, are
the most popular ones,
• Price curve. We may sell some when its share price begins to
show the sign of exhaustion or retracement after it surges up,
far above 10-day EMA line, as the temporary buying frenzy or
euphoria has waned.
• Momentum indicator. We may sell some shares when
momentum indicator (i.e. RSI or Stochastic indicator) crosses
below the overbought line.
• Bearish candlestick pattern. We may sell some when a bearish
candlestick pattern (i.e. bearish engulfing, tweezer top,
hanging man, bearish Doji star, shooting star, etc.) appears
near the peak of recent advance.
7.6.2 Take Profit Gradually if We Have Found Other Better Stocks
Unlike marriage, investing does not require us to show our faithfulness.

We can cash out anytime, and use the proceeds to buy another
promising stock if we believe that the latter will bring us a higher
return on investment.
Once we have identified another stock to invest in, we can do so in a

few stages. For example, we can sell 35 to 40 percent of the shares we
hold, and use the proceeds to buy the other stock. The main reason of
doing so is to minimise our initial loss in case if the price of our new
investment drops below the predetermined cut loss point, or if we make
some mistakes in our analysis. At the same time, we still get the
opportunity to ride the uptrend of the former, despite growing at a
lower rate. Once the uptrend of the newly invested stock is confirmed,
we may sell another batch of the former to buy the latter, on the way up,
when the new stock continues to report increasing earnings. Also, the
amount of money spent on the following batch of shares should be
lesser than that on the first batch of shares to prevent the overall cost
rises significantly.
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7.6.3 Liquidate Your (Long) Position when Any of The Stocks Reports
Two Consecutive Quarters of Decreased Profits
To some long-term value investors, selling a stock we own within five

years is not an investment. But, we need to understand that we are not
bound to follow their rules. And, we need to be clear that we are here
to make money, and our objective should be to maximise our gains. We
certainly do not want to see our (unrealised) profits go up in smoke.
Remember: if you do not take the money off the table, someone else
will.
The best time to sell a stock is when the company reports two
consecutive quarters of decreased profits. That is, usually, the time
when the share price of a company would start falling down seriously.
Koon usually starts selling some of his shares when the stock he owns
shows a quarter of reduced profits to reduce his margin loan, and will
sell them aggressively when it reports two consecutive quarters of
decreased earnings until he has no more share left in his trading
accounts.
Sometimes parting with our favourite stock can be very painful, especially when
the value of our stock and our account are under water. But, in order to protect
our capital, we need be objective and have our emotions detached from the
stock whilst investing. Below are the situations in which we need to be decisive
to get out immediately when our investment goes wrong.
7.6.4 If Any of the Stocks Fails to Meet Your Investment Criteria,

Dispose It Immediately
When we put all of our eggs in just a couple of baskets, we need to be

vigilant and be firm. We must not be afraid sell our holdings when
stocks fail to meet our investment criteria one day either due to some
changes in its fundamentals, or the inability of the company to make
more profits next year than this year.
For instance, if we set the allowable limit of Net Debt-to-EBITDA ratio

at three, we need to make sure that our stocks have their Net Debt-to-
EBITDA ratios maintained below the limit. When the figure of any
stock approaches the limit, we need to investigate why its Net Debt-to-
EBITDA ratio keeps rising. Is it due to falling earnings? Or perhaps the
company has overpaid for some acquisitions? High Net Debt-to-
EBITDA ratio generally implies that the company has difficulty
servicing its debt, especially during industry downturn. In that situation,
when it exceeds the allowable limit, we must close our position
immediately. It will ensure we are not there when the shit flies.
Bear in mind that our investment criteria is the best defence system in
our investment. We are susceptible to a loss if we ignore the warning
signal. According to Koon, every time when he ignores his golden rule,
his fund will wind up suffering a drawdown.
Page | 28
7.6.5 Do Not Hesitate to Cut Loss if Their Share Prices Hit Your Stop
Loss Points
Similarly, we must not hesitate to cut loss if the share prices of our
stocks fall below our cut loss points, and if we realise that we have
made some mistakes in our judgements earlier on. Unless we are very
sure that the decline has got nothing to do with the business
fundamentals, we should not let our emotions affect our judgements
and decisions.
“If a position doesn’t feel right as soon as you put it on, don’t be
embarrassed to change your mind and get right out.”
Michael Marcus
Keep in mind that cut loss will minimise our loss and protect our
capital. In general, price decline for an undervalued stock with a bright
profit growth prospect is rarely more than 10% during a normal
correction, especially when it is under accumulation and when weak
hands are eliminated. A pullback of more than 10% for an undervalued
stock with high profit growth potential signifies that there is a problem
in the company. Our loss would be widened if we refuse to get out of
our position in the stock when its share price begins to take a nosedive.
When a stock takes a beating, it is unlikely that its share price will
rebound anytime soon. Even if the company’s management expresses
positively about the future of the company, do not hold your breath. It
is better to cut loss and use the sale proceeds to invest in other
promising stocks.
“The elements of good trading are cutting losses, cutting losses and
cutting losses. If you can follow these three rules, you may have a
chance.”
Ed Seykota
Example:
Let’s suppose that we initially invest in a stock called ABC. After six
months, we realise that we had made some mistakes in our estimation
earlier on, and that the share price falls continuously as its business
continue to deteriorate. If we adhere strictly to the cut loss rule by
limiting our loss to only 10%, and we use the proceeds to buy another
high-growth stock, let’s call it XYZ, which will provide us a return of
30% after six months, we will be netting 17% (gain) end of the day
despite losing some money in our first investments.
Calculation:
Total return = (100% − 10%)  (100% + 30%) − 100%
= (90%)  (130%) − 100%
= 17%
Page | 29
Further, cut loss approach helps us avoid losing too much of money in
a stock. The more we lose, the more difficult it gets to recover from the
loss. Bear in mind that we need to make a 100% return for every 50%
of the capital that we lose to get back to our starting point. Below is the
table showing the percentage of gain needed to break-even.
Percentage of loss Percentage of gain to break-even

- 10% + 11%
- 20% + 25%
- 30% + 43%
- 40% + 67%
- 50% + 100%
- 60% + 150%
- 70% + 233%
- 80% + 400%
- 90% + 900%
- 95% + 1,900%
- 99% + 9,900%
Figure 7.6.5.1: Gain Required to Break Even
“Consistent winners raise their bet as their position strengthens, and

they exit the game when the odds are against them, while consistent
losers hang on until the bitter end of every expensive pot, hoping for
miracles and enjoying the thrill of defeat. In stud poker and on Wall
Street, miracles happen just often enough to keep the losers losing.”
Peter Lynch.
The old adage still remains true today that “Your first loss is your best
loss.” Therefore, if we do not want to see a small loss snowballs into a
huge loss, we must adhere to our cut loss rule strictly.
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Chapter Summary
What is concentrated investing?

It means wagering one’s entire wealth in just a few stocks.
Why concentrated investing?

Concentrated investing allows astute investors to maximise gains and grow
wealth faster.
Whilst concentrated investing is an amazing strategy to generating

extraordinary returns, it is not a game for everyone.
The Strategy for Successful Investing
Only invest in a few stocks with promising earnings growth potential.
Invest in a few truly cheap stocks
Stick to your guns
Trade around a core position
Using Turning Point Investing Concept to maximise gain
Technical analysis (chart patterns and momentum indicators)
Special event
Be patient
Mentally prepared for market volatility
Use the rule of thumb for fund allocation
Stocks you should avoid to Invest
Down-trending stocks
Companies in the industry with oversupply problem
Poorly managed companies
Stocks with complex businesses
Page | 31
When to sell?
Take some profit off the table if the share price goes up too fast
Sell gradually if you have found other better stocks
Liquidate your (long) position in the stocks when they report two
consecutive quarters of decreased profits
If any of the stocks fails to meet your investment criteria, dispose it

immediately
Don’t hesitate to cut loss if the share prices of your stocks hit your stop
loss points
Page | 32
Chapter 8
(Bonus Chapter):
The Winning Formula of
Ooi Teik Bee
The Winning Formula of Ooi Teik Bee
8.1 Introduction
The name of Ooi Teik Bee may be new to some of you; he has actually
established his reputation in Malaysia stock market through the Yearly Stock
Pick Competition, organized by i3investor.com, and for topping the table a few
years. In addition, he has been working as a remisier for more than 25 years, and
has survived several devastating financial crises, and has helped his clients
make lots of money in Malaysia stock market.
Over the past seven years Ooi’s personal investments have generated about
2,087% profit for his portfolio. The returns on investment (ROI) of his portfolio
over the past seven years were mostly above 20%, except 2018. Below is the
table of his portfolio performance. Had anyone followed his stock selections
closely, he or she would have made a great fortune out of Ooi’s
recommendations.
Year Annual Return Cumulative Return

2013 + 104% + 104%
2014 + 61% + 228%
2015 + 129% + 652%
2016 + 22% + 817%
2017 + 87% + 1,615%
2018 - 42% + 895%
2019 (as of Sep 19) +120% + 2,087%
Table 8.1.1: Ooi’s portfolio performance
Apart from providing stock recommendations to his clients, Ooi also helps some
of them manage their funds. He had also helped Koon managing some of
Koon’s money, about Rm 12 million, in 2016, for a year, and he generated
about Rm 10 million (or 83.33%) profit for the account Koon entrusted to him.
Some of you may be wondering why Koon let Ooi manage his money whilst he
has hit so many home runs and has made so much money in stock investment.
The answer is: for insurance purposes. As we have learned earlier that no one is
infallible. Koon understands that, just like us, he can make mistakes too. Having
Ooi to manage to some of his money is actually of great help to him in
minimising loss and maximising gain. Whilst the investing philosophy of Ooi
may differ slightly from that of Koon, Ooi’s approach actually provides a
perfect complement to Koon’s method. That is why, even until today, Koon
always consults him before buying (and selling) shares. Ooi will highlight red
flags, threats which can jeopardise Koon’s investments, offer his opinions, show
Koon the charts patterns, and support and resistance levels of the stocks, and
point out the overlooked areas, where special attention needs to be paid, before
Koon places his bets. In other words, Ooi is acting like Koon’s sounding board.
Well, the main objective of this chapter is not to promote Ooi’s service to you,
nor to tell you how spectacular his performance is, but to share with you his
winning formula and investing philosophy, which I hope will give you some
ideas in selecting stocks, to improve your strategy, and to help you make some
money in Malaysia stock market. Of course, if you also find it a sound
Page | 2
investment approach after reading this chapter, but are unable to practice it due
to your hectic work schedule, you may engage him to manage some of your
money.
8.2 What Makes Ooi So Successful?
The secret recipe of Ooi’s winning investments is having a suitable stock

selection and investing system, which can help him make money consistently
year after year and fits his investment style, and his ability to follow the system
religiously.
The system was developed and fine-tuned based on his decades of experience in
the stock market. Having survived the three major market crashes enables him
to build a robust investing system, which does not only perform well in bull
market, but remains profitable in bear market. The model applies both technical
and fundamental analyses in picking stocks. Since the system requires
companies to pass technical analysis screening process followed by fundamental
analysis screening stage to be considered good stocks, those counters selected
using the system are not only uptrend stocks with strong momentum, their
financials are also fundamentally sound. According to Ooi, the upside of stocks
selected using this system is greater than 50%, whereas their risk level is less
then 10%. Thus, the system creates plenty of positive asymmetrical risk reward
opportunities for him, and allows him to enjoy a higher overall return on
investment.
The main drawback of the system, compared to some other trading systems, is
that it requires investors to hold those stocks for three to six months. Sometimes
it may go beyond twelve months, depending on the price levels of the stocks
and the paces of their share price movement. Hour-to-hour and day-to-day price
fluctuations are usually ignored since investors using this system only jump on
the bandwagon when an uptrend starts, and close their positions when the trend
comes to an end. In addition, they find it difficult to predict the movements of
share price within a few hours, and to earn enough to offset the trading
commissions. That is the reason Ooi always says Rome was not built in a day.
The second element of his winning streak is his ability to follow the system
religiously. It is not an easy task. If doing it is so easy, everyone would have
made a fortune in the stock market after acquiring the investing rules and model.
This is what differentiates Ooi from average investors. Doing so usually
requires discipline, right temperament, positive attitude and hardwork. For
example, one must be patient to wait for the perfect breakout situation to
develop, be able to invest with conviction when the market is quiet, and be
willing to spend time studying the businesses of companies at home when other
people are having fun with their friends after office hours.
Page | 3
8.3 First Screening Process: Technical Analysis
“For me, technical analysis is like a thermometer. If you are a responsible

participant in the market, you always want to know where the market is –
whether it is hot and excitable, or cold and stagnant. You want to know
everything you can about the market to give you an edge.”
Bruce Kovner
Ooi always says “Human can lie, but charts don’t lie.” One of the reasons that
the information provided by charts is more reliable than human’s words is that
charts are the trails of money movement. Chart patterns can only be formed
when there are flows of capital into and out of a stock. And he never takes any
CEO’s words for granted, as he knows the words coming out from CEO’s
mouth are sometimes not trustworthy, and The CEO can spin a story with which
the trend does not in sync. For example, the CEO can tell a very beautiful story
of the company’s business in front of journalists, whilst his/her family members,
friends and smart money are selling their shares aggressively during the same
period of time. When the share price of a stock declines continuously that is a
sign showing that the business is facing some challenges or difficulties, and Ooi
will immediately remove the stock from his watch list. According to Jesse
Livermore, “often I have observed that the Chief Executive Officer of most
companies is little more than a cheerleader, who has only one job with regard
to the market. He must assure and reassure the shareholders that everything is
fine – if sales are down he tells the shareholders that the decline in sales is
nothing more than a slight problem due to some temporary reason. If profits are
down he assures the shareholders there is nothing to worry about since the
company has already reached and made adequate plans to recapture their
profitability.” That is the reason Ooi always says “Never trust anyone in stock
market, trust yourself only.”
“Another discipline I learned that helped me determine whether a stock would

go up or down is technical analysis. Drelles was very technically oriented, and I
was probably more receptive to technical analysis than anyone else in the
department. Even though Drelles was the boss, a lot of people thought he was a
kook because of all the chart books he kept. However, I found that technical
analysis could be very effective. I never use valuation to time the market. I use
liquidity considerations and technical analysis for timing. Valuation only tells
me how far the market can go once a catalyst enters the picture to change the
market direction.”
In addition, chart patterns provide some important information that cannot be

obtained elsewhere. Very often share price moves ahead of fundamentals. The
reason is that there are always some people who know the news of an important
development ahead of us. Paul Tudor Jones once said “The first thing I do is put
my ear to the railroad tracks. I always believe that prices move first and
fundamentals come second.” Moreover, chart patterns reflect the behaviour of
market participants. These patterns will repeat over and over again. Experienced
chartists who are able to identify chart patterns and price trends, like Ooi,
definitely can take advantage of the skill to anticipate price movement and time
Page | 4
their entry and exit. That is why Ooi always says “Theory and practical are not
the same in stock market…I am just interested in the trend and what the market
wants,” and “it is not up to us to determine the market price, it is Mr Market.”
To him, it does not pay to argue with the market. Therefore, he always gives
priority to the signals given by chart patterns. His strategy is to buy good stocks
at the right time, not when they are near the bottom.
8.3.1 U = Uptrending stocks
“Big money is made in the stock market by being on the right side of
the major moves. The idea is to get in harmony with the market. It’s
suicidal to fight trends. They have a higher probability of continuing
than not.”
Martin Zweig
As we know downtrend stocks can continue to go down. It can last a

few months or a few years, and you will never know for sure when
reversal will occur. Even buying stocks in sideways market will do you
no good. The only way to ensure profitability is by buying uptrending
stocks. This is the reason Ooi insists on looking for uptrending stocks
in the first step of his screening process.
There are many ways to determine if a stock is on an uptrend. One of

the methods is to look for the stocks with a rising price pattern, which
shows a series of higher lows and higher highs. In other words, the
share price reaches a higher low level and a higher high level than it
did previously for a few times. Figure 8.3.1.1 and figure 8.3.1.2 show
the pattern of higher lows and higher highs.
Figure 8.3.1.1: Higher lows and higher highs pattern

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Figure 8.3.1.2: Share price of Yinson Holdings Berhad from December

2016 to January 2019
Source: ChartNexus
The second method is to find stocks with more bullish/green/white

candlesticks than bearish/red/black candlesticks. According to Ooi’s
observation, uptrend stocks tend to have two to five bullish
candlesticks and a short bearish candlestick. Trade volume should be
light during a healthy correction or decreasing gradually during a
pullback. Figure 8.3.1.3 shows the candlestick pattern of Dayang
Enterprise Holdings Berhad when the share price was on an uptrend. It
can be seen from the chart that there were more green (bullish)
candlesticks than red (bearish) candlesticks between early February,
2019 and early-March, 2019, when its share price was on an uptrend.
Also, its trade volumes during corrections (or down days) were lighter
than those during up days.
Page | 6
Figure 8.3.1.3: Share price of Dayang Enterprise Holdings Berhad from

January 2019 to March 2019
Source: ChartNexus
The third method is to find stocks with share prices above their 200-
day Moving Average lines, and at the same time their short-term
Moving Average (MA) lines must be trending upward. Take, Figure
8.3.1.3, for example, the share price of Dayang Enterprise was in an
upward movement when it crosses above 200-day moving average line
on 7 February 2019. At the same time, its 20-day EMA (yellow
coloured) line was also slopping up. Also, its share price was above its
20-day EMA line.
8.3.2 B = Breakout of resistance
“You should look for stocks making new price highs as they break out
of price consolidation areas (or bases). Why? Because this is the point
where most really big price advance begins, and is the time where the
probability of a significant price move is the greatest.”
William O’Neil
The second step is to look for stocks breaking out of a consolidation

area, breaking out from a stable base, or breaking above strong
resistance. By doing so, investors do not have to hold the stocks in
sideways market, which are going nowhere, in their portfolios for a
very long period of time. According to Ooi’s observation, Malaysian
stocks trend upward and downward 30% of the time, and go sideways
70% of the time. In term of risk-reward ratio, the expected return is
greater than the risk investors have to bear by buying breakout stocks.
Hence, the probability of making money is higher. Keep in mind that
when a stock breaks above its resistance level, there must be a reason
or an important development, which drives its share price higher.
Page | 7
That said, you should not confuse anticipating a breakout with buying
after the breakout. In investing, Ooi does not like to buy based on what
he anticipates to happen in the future, because no one knows when the
breakout will happen, and there is a likelihood that it may never happen
at all. This is the reason why Ooi insists on having the signal of a
breakout from his system prior to performing fundamental analysis and
determining the intrinsic value of the stock. Jesse Livermore once said
“it’s okay to mentally anticipate the action of the market, or a stock,
but take no action until the market has confirmed that you are correct,
by its action: Don’t anticipate market moves with your hard-earned
cash.”
Also, Ooi will look at the trade volume of the stock on the day of the
breakout compared to its volume moving average (VMA) line. The
reason is that if the trade volume on the breakout day is low, the
breakout is more likely to be a fakeout or false breakout. A breakout in
low volume is generally a bad sign, as buying interest, which breaks
the resistance level, is not so great that the stock may go into correction
very soon after the breakout when sellers come in to sell it down
aggressively. That is why you should look for stocks that break out in
high volume.
Figure 8.3.2.1: Share price of Magnum Berhad from October 2018 to

March 2019
Source: ChartNexus
8.3.3 S = Sector in bullish mood
“In a bull market it is better to always work on the bull side; in a bear
market, on the bear side.”
Charles Dow
Page | 8
In geography class, we learned that a rising tide can lift all boats. A
bullish sector is comparable to a rising tide. If you want to select a
stock that will go up in value, you need to make sure that it is in a
booming industry so that it can make more money next year than this
year. According to Bill O’Neil, “the majority of leading stocks are
usually in leading industries.”
An investor can be safe in picking a financially strong company, or

company with a steady stream of cash flow, but if he/she is wrong
about the direction of the industry of the stock, he/she would not make
money in his/her investment. That is the reason Ooi insists that the
sectors of the stocks that he picks must be in bullish mood. He will
quickly sell the stocks when he senses that the bear is around. And he
will only come back when the bullish mood has returned.
In 2015, even though FBMKLCI was heading for a bear market, he

advised his clients to buy V.S. Industry Berhad at Rm 2.33/share, as the
industry was still booming and the sentiment of the industry was in a
bullish mood. The stock eventually went up 904%. He and his clients
made a lot of money out of the investment. In 2017, he went against the
crowd again, and he advised his followers to buy the shares of
Hengyuan Refining Company Berhad. According to him,
Industry/Production Index continued to break new high in spite of the
declining FBMKLCI. He asked them to ignore FBMKLCI, as the stock
they bought into belongs to Industry/Production category, which was in
bullish mood. Again, he was right, and he made more than 100% profit
out of the bet.
The easiest way to judge if an industry or a sector is in bullish mood is

by examining the 200-day SMA line of the industry or sector. The
industry is considered to be in a bullish mood if its reading is above
200-day SMA line, and vice versa.
8.4 Second Screening Process: Fundamental Analysis
“Stocks fluctuate together, but prices are controlled by values in the long run.”
Charles Dow
Despite calling himself a chartist, he uses fundamental analysis in conjunction

with technical analysis in his stock selection process. For instance, even if the
outcome of his technical analysis on a stock indicates that its share price will be
moving upward, he would not place his bet until the outcome of his
fundamental analysis shows that the stock is worth buying. In this case,
fundamental analysis acts as a safety net, which provides a downside protection
for his venture, so that the risk of his portfolio is lowered to the lowest possible
level. In addition, it allows him to estimate the upside potential of the
investment, and to ensure that the risk-reward is skewed to the upside prior to
committing his money. According to him, he only started to earn big money
Page | 9
consistently in the stock market after 2009, when he adopted both technical and
fundamental analyses in his stock screening/picking process.
Without further ado, let us take a look at the important metrics of fundamental
analysis that Ooi usually pays attention to in his stock selection process.
8.4.1 G = Growth of profit greater than 10%
Bill O’Neil once said “There is absolutely no good reason for a stock
to go anywhere in big, sustainable way if current earnings are poor.”
So, the key to making profitable investments is to ensure that stocks in
your portfolio are companies with growth, which are generating more
and more profit every quarter.
In order to do so, Ooi usually looks for stocks with the growth of profit
greater than 10% in his screening process. Any stocks with profit
growth rate lower than 10% will automatically be weeded out from his
watch list. The reason why he does so is to select only proven stocks,
which have delivered solid performance continuously rather than
risking his money unnecessarily in some speculative stocks, which may
tumble anytime when the market turns bearish. Moreover, the growing
profits are a good catalyst, which may propel share prices upward when
the market turns bullish.
There are two methods of searching for companies with profit growth
greater than 10%. The first method is by comparing the annual profits
of a company year-over-year (YoY). Let us use the data provided in the
table below, Table 8.4.1.1, for illustration purpose. The annual profit of
Company A in 2017 and 2018 were $410 and $463, respectively. In
this case, the profit growth that Company A achieved in 2018 was
12.93%. The second method is by comparing the quarter profits of the
same company year-over-year. For example, Company A made $110 in
Q4 Y17 and $122 in Q4 Y18. In this case, the profit growth that
Company A achieved in the Quarter 4 of 2018 was 10.91%.
Quarter Year 2017 Year 2018 Change

Q1 $ 100 $ 113 + 13.00%
Q2 $ 95 $ 110 + 15.79%
Q3 $ 105 $ 118 + 12.38%
Q4 $ 110 $ 122 + 10.91%
Total $ 410 $ 463 + 12.93%
Table 8.4.1.1: Profits of Company A in 2017 and 2018
Whilst both methods can be used to determine the profit growth of a

company, the first method is more suitable for use in judging the profit
growth of defensive stocks, which are mostly non-cyclical in nature,
such as utilities companies, fast food restaurants, non-durable goods
producers, etc. The latter, on the other hand, is more suitable for use in
determining the profit growth of cyclical stocks, such as oilfield
services companies, semiconductor manufacturers, property developers,
Page | 10
and steel producers, as the changes or improvements can be spotted

easily and quickly.
Note: make sure that all non-recurring items such as one-time profits or
assets disposal gains are omitted from the profits before making
comparison.
8.4.2 M = Margin of Safety greater than 30%
“The concept of a margin of safety is that an investor should purchase

a security at a price sufficiently below his estimate of its intrinsic value
that he will have protection against permanent loss even if his estimate
proves somewhat optimistic. An analogy is an investor standing on the
10th floor of a building, waiting for an elevator to carry him to the
lobby. The elevator door opens. The investor notices that the elevator
is rated for 600 pounds. There already are two relatively obese men in
the elevator. The investor estimates their weights at about 200 pounds
each. The investor knows that he weighs 175 pounds. The investor
should not enter the elevator. There is an inadequate margin of safety.
Maybe he underestimated the weights of the two obese men. Maybe the
elevator company overestimated the strength of the elevator’s cable.
The investor waits for the next elevator. The door opens. There is one
skinny lady in the elevator. The investor says hello to the lady and
enters the elevator. On his ride to the lobby, he will enjoy a large
margin of safety.”
Ed Wachenheim
Unlike most traders, who pay no attention to the intrinsic values of

stocks yet aggressive, Ooi is cautious and careful with all his
investments. He always says, “It’s better to be safe than sorry.”
Whenever he invests his money in something, he makes sure that all
his purchase prices are 30% below their intrinsic values. His chance of
losing money, as such, is far lower than that of other people.
According to Investopedia, “Intrinsic value is the perceived or

calculated value of an asset, an investment or a company.” In other
words, it is the inherent value of the business. Any purchase price
below this value is considered cheap. When share prices go far too low,
they tend to move back up to this level, as investors rush in to scoop up
the bargains. Hence, intrinsic value acts as a safety net to value
investors in their investments.
There are many methods to determine the intrinsic value of a company.

Some of the valuation methods Ooi uses include EV-to-EBIT ratio of
Magic Formula, Actual Return-to-Expected Return ratio, Graham
Number, Modified Graham Stock Valuation Formula, and Discounted
Cash Flow.
Page | 11
Method 1: EV-to-EBIT ratio (EV/EBIT)

Enterprise value to earnings before interest and taxes (EV-to-EBIT or
EV/EBIT) ratio is a form of valuation method, very similar to Price-to-
Earnings (P/E) ratio, used to compare the relative value of different
companies in the same industry and in the market. But, this method
takes both equity and debt into account in the calculation, which is
more comprehensive compared to P/E ratio.
According to Ooi, a company is considered cheap if its EV/EBIT value

is below 8, and deemed overvalued if its EV/EBIT is higher than 12.
Therefore, he always looks for companies with EV/EBIT multiple
lower than 8, and then set his price target based on 12 times the
EV/EBIT multiple.
Below is the formula of EV/EBIT

EV MarketCap + MinorityInterest + Pr efferedStock + Debt − Cash
=
EBIT EBIT
where
Market Cap = Share price × Number of shares,
EBIT = Net income + Interest + Taxes.
Method 2: Graham Number

Graham Number is a formula taught by Benjamin Graham, through his
book called Intelligent Investor. The formula was developed to
determine if a stock meets his requirements for defensive play. The
formula takes both book value per share (BVPS) and earnings per share
(EPS) data into account.
Below is the formula of Graham Number

GrahamNumber = 22.5  EPS  BVPS , where
EPS = Earnings / Number of shares
BVPS = Equity value / Number of Shares
When performing the screening work, Ooi looks for stocks with share
price 30% lower than their Graham Numbers. For example, if the
calculated Graham Number of a stock is $1.00/share, Ooi would only
give it a serious consideration if its share price is lower than
$0.70/share. The reason of doing so is to ensure that the stock is
undervalued, and the room for decline is small.
Method 3: Discounted Cash Flow (DCF)

Amongst the above-mentioned valuation methods, Discounted Cash
Flow (DCF) is the most popular one, as it takes future cash flows into
consideration. Financially stricken companies with no ability to
generate cash flow in the future will automatically be weeded out
during the screening process. The analysis requires investors to
estimate the present value of a stock based on its expected future cash
flows using a discount rate (required rate of return for the riskiness of
the cash flows).
Page | 12
For example, let us suppose that a fruit seller offers to sell you his fruit
shop for Rm 500,000. The business can generate a fixed amount of Rm
100,000 cash flow stream every year for 10 years, and your expected
rate of return is 5%.
We can use the basic formula of DCF to estimate the value of the
business, and the formula of margin of safety (MOS) to judge whether
the shop is worth your money.
CF1 CF2 CF3 CFn
DCF = + + + ... + , where
(1 + r ) 1
(1 + r ) 2
(1 + r ) 3
(1 + r ) n
CF = Cash Flow,
r = required rate of return.
CF1 CF2 CF3 CF10

DCF = + + + ... +
(1 + r ) 1
(1 + r ) 2
(1 + r ) 3
(1 + r )10
100,000 100,000 100,000 100,000
DCF = + + + ... +
(1 + 0.05) (1 + 0.05)
1 2
(1 + 0.05) 3
(1 + 0.05)10
DCF = Rm 772,173
 CP 
MOS = 1 −   , where
 IV 
CP = Current Price,
IV = Intrinsic Value (or DCF in this case).
500,000
MOS = 1 −
772,173
MOS = 35.25%
From the calculation, we can tell that the business is worth Rm 772,173
and it is safe to buy the shop at Rm 500,000 from the fruit seller.
For experienced investors, if you want to determine the precise value of

business, you may use the advanced formula of DCF, which includes
terminal value, to estimate its value for the first five years and beyond.
CF1 CF2 CF3 CFn  (1 + g )
DCF = + + + ... + , where
(1 + r ) 1
(1 + r ) 2
(1 + r ) 3
(WACC − g )
CF = Cash Flow,
r = Required rate of return,
WACC = Weighted Average Cost of Capital
g = Perpetual growth rate
E   D  
WACC =   Re  +   Rd   (1 − T ) , where
V   V  
E = Market capitalisation,
V = Total value of capital (equity and debt),
Re = Cost of equity,
Page | 13
D = Market value of debt,

Rd = Cost of debt,
T = Tax rate.
Re = Risk free rate of return + [Beta × (Market rate of return –

Risk free rate of return)]
Rd = (Risk free rate + Credit spread) × (1 – Tax rate)
8.4.3 F = Forecasted EPS is greater than current EPS
Ooi always says “We should look at future growth rather than
historical growth (of a company)” The reason is that the stock market’s
mechanism, like driving a vehicle, is a forward-looking mechanism. No
one is able to drive by looking at rear-view mirror. Similarly, investors
will not be able to make big money in the stock market by focusing on
the historical growth data of a company. The data can only be used as
guidance, and should not be used for estimating a company’s future
value. Therefore, investors must learn to forecast the future earnings of
a company, so that they always get themselves a head of the crowd.
In this process, Ooi looks for stocks with forecasted earnings (or EPS)
greater than their current earnings (or EPS). New, hot and innovative
products, superior services, change in management practice, growing
demand of products, changes in currency exchange rate, pricing power,
number of contract awards received and growing market share are
amongst the areas where Ooi always focuses on, as they may bring
higher revenue and profit to the companies.
For example, in 2015, after studying the business of V.S. Industry

Berhad (V.S.), he told his clients that the earnings of V.S. would be
growing exponentially, as the demand for V.S.’s product was very high.
Below are his opinions on V.S., which he shared with his followers in
2015.
“V.S. has been supplying this coffee maker (GMCR) since the second
half of 2014. It is the reason that the profit of Q1 2015 jumped up.”
“I believe this (GMCR) is a fantastic company with explosive earning

growth in 2015. Please note that coffee consumption in the world
grows 25% a year according to BFM 89.9. (In term of coffee
consumption,) USA ranks No. 5, Japan ranks No. 6, China ranks No. 7,
and India ranks No. 8. It is a big market for the coffee maker.”
"As long as there is no quality issue, GMCR will continue to order

coffee making machines from V.S., the future earnings would then be
very high. Hence, I can say V.S. is a fantastic company, and will be the
star performer of 2015. If the joint venture between GMCR and Coca-
Cola works well, the market is very big for this coffee maker."
Page | 14
He was right that V.S.’s earnings would be growing at a rapid rate, and
he made nearly 800% profit out of this deal.
In the same year, he also recommended a few export-related stocks

such as Poh Huat and some furniture makers to his clients, as he
believed that weak Ringgit Malaysia would benefit companies that
export goods to the United States. Below is the extract of his opinion,
which he shared with his followers, on the future earnings of export-
related stocks.
“Look at the latest result of Pohuat. all export orientated stocks will do
well because of the strong USD and weak RM.”
Again, he was right that the earnings of export-related stocks would be

growing. He and his followers made a lot of money out of the
investments.
Note that whilst high EPS and low PER (or P/E) is a perfect
combination, sometimes Ooi would pay a slightly higher price for the
profit growth potential if he believes that it is worth paying more for
the stocks. He once said “the stock market is always forward looking,
high PER does not mean this stock cannot be a good buy. It is growth
that matters most.” The reason is that low PER stocks may get cheaper
and cheaper if the stocks have no growth potential, or the companies
are in sunset industries, or the businesses are going downhill. And, it
seldom pays to put your hard-earned money in this kind of stocks.
8.5 Other Technical Indicators and Signals Ooi Would Monitor
Other than the screening criteria discussed above, Ooi also looks at several
technical indicators for signals to support his buy decisions. Sometimes when
any of the indicators shows that the time for hunting to is not ripe yet, he will
wait at the sideline until the time arrives.
8.5.1 MACD crosses above its signal line
Amongst the technical indicators we discussed in Chapter 3, MACD is

the most popular one, and is one of Ooi’s favourite indicators. The
indicator does not only help identifying the direction of price trend, it
also shows the momentum of the share price’s movement, whether it is
strengthened or weakened.
He prefers to buy stocks (in his watch list) when their MACD lines
cross above MACD Signal lines, especially when the MACD lines are
above the level of zero. When the MACD line of a stock crosses above
its MACD Signal line, it indicates that the stock is turned bullish.
When the MACD line of a stock is above its centreline (or the level of
zero), it shows that its fast-moving average (12-day EMA) line is above
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its slow-moving average (26-day EMA) line and the upside momentum
is strong.
Figure 8.5.1.1: Share price of Thong Guan Industries Berhad from May
2016 to September 2016
Source: ChartNexus
Note that whilst he usually judges the bullish level or bearish level of a
stock based on its daily MACD readings, sometimes, he would also
look at its weekly MACD readings to determine if the bullish level or
bearish level of the stock is still strong or weak.
8.5.2 Force Index colour changes from green to blue and the value is
above zero
Whilst Relative Strength Index (RSI) is more popular amongst traders,

Ooi prefers Force Index (FI) over RSI. The reason is that RSI will scare
traders off when it is getting too high (above the level of 80). It will
indirectly deter them from buying bullish stocks, especially when their
prices are still shooting up like a rocket.
FI uses price and volume to determine the power of a price move. The
stronger the share price move and the higher the trade volume, the
higher the FI reading is. As the indicator takes volume into account,
buying a stock when price breaks above its resistance level with a high
FI reading would give Ooi a higher chance of making a winning bet
and lower his probability of having a false breakout.
Ooi likes to buy stocks in his watch list when the FI reading of the
stock changes from negative reading (green colour or below zero) to
positive reading (blue colour or above zero). When the reading is above
Page | 16
zero, it shows that the price upward move is strong with high buying
pressure.
Figure 8.5.2.1: Share price of Uzma Berhad from Jan 2019 to April
2019
Source: ChartNexus
8.5.3 Stochastic Oscillator reading crosses above the level of 20
The indicator is usually used to ascertain if a stock is overbought or

oversold, and to determine the momentum of price movement. A stock
with Stochastic Oscillator reading above the level of 80 is said to be
overbought. When its Stochastic Oscillator reading falls below the
level of 20, the stock is considered oversold, and everyone is in fear.
Stochastic Oscillator chart generally contains two lines, namely %K

and %D. % K is the current value of the Stochastic indicator,
whilst %D is the fast Stochastic indicator, which is three-period
moving average of %K. Investors can consider buying stocks in their
watch lists when their %K line crosses above %D in oversold region,
and when the %K crosses above the level of 20, as it is a sign of
reversal.
Stochastic Oscillator is another favourite technical indicator of Ooi. He

usually uses the indicator to determine the reversal of a price trend. He
prefers to buy a stock (in his watch list) when its Stochastic Oscillator
reading crosses above the level of 20, which is moment when the
oversold stock reverses and moves upward.
Page | 17
Figure 8.5.3.1: Share price of Wah Seong Corporation Berhad from

October 2017 to March 2018
Source: ChartNexus
8.5.4 Price breaks above 20-day EMA line
20-day EMA is the average price of a stock over the past twenty days,
but places a greater weight to recent data. When share price of a stock
breaks above 20-day EMA line, it shows that buying pressure is high,
and buyers are willing to pay more to own the stock for some reason.
When Ooi buys a stock, he prefers to have the share price of the stock
broken above its 20-day EMA line before buying it. The reason is that
when share price breaks above 20-day EMA line, its momentum is
strong, and it is likely to go higher and higher, which will indirectly
reduce Ooi holding period of the stock, and give him a higher rate of
return.
Since his average holding period of an investment is three to six

months, the 20-period moving average fits his investment time frame,
as it is not too short and not too long. It allows Ooi to stay in
synchronisation with intermediate-term and primary trends, yet capture
the movement when a stock begins to move upward.
Note that in a volatile market, share price may fluctuate along the 20-
day EMA line.
8.5.5 20-day EMA crosses above 70-day SMA (Golden Cross)
I know what you may be thinking right now – have your finger on the
buy button when the share price of a stock is about to break above the
20-day EMA line and buy the stock before Ooi builds his position.
Page | 18
Wait a moment! That is not the only signal he looks for before buying a
stock. Sometimes, he would also wait for its 20-day EMA crosses over
70-day SMA, which is also known as (intermediate-term) Golden
Cross, before buying it.
We have discussed in Chapter 3 that Golden Cross is a bullish breakout

signal, which is formed when short-term moving average line crosses
above long-term moving average line. Share price is likely to begin its
upward rally when Golden Cross appears, as selling pressure has dried
up, and buying pressure has gained higher momentum. Additionally, it
indicates a change in trend, from either a sideways movement or a
downtrend to an uptrend. Therefore, using the indicator in trading will
increase your chance of making money. Also, the chance of having
whipsaw trades, due to false signals, will be greatly reduced, as the
signal is generated by two smoothed moving average lines.
According to Ooi “If the trend (of a stock) is strong enough, the 20-day
EMA will cross above the 70-day SMA, and it is likely to continue its
upward move.” For inexperienced investors, who always try to pick the
bottom and ended up being trapped in sideways markets or downtrend
stocks, the Golden Cross signal (20-day EMA crosses above 70-day
SMA) is a powerful signal you should not ignore. The signal will
ensure that your investment is, more often than not, in a profitable
position. The chance of losing money in your investment will be
reduced significantly.
Figure 8.5.5.1: Share price of PCCS Group Berhad from December

2018 to July 2019
Source: ChartNexus
Page | 19
8.6 Buying Strategy
No wise trader and investor will buy a stock at almost one price right at the
beginning of the process with only one approach. The risk of losing big is high
if one dashes into the stock market without testing the environment’s
temperature, and trades without a set of profitable strategies. Likewise, Ooi will
not buy a stock in large quantity at one price with only one strategy. From my
observation, he usually buys stocks in several orders at different prices, and with
different methods. Below are some of his favourite buying strategies.
8.6.1 Buy on breakout
Ooi usually places his first order for a stock when breakout happens.
The breakout can be a breakout of a congested zone, or a consolidation
range, or a chart pattern. That is the point where resistance line is
broken with weak bears overwhelmed by aggressive bulls.
The most common breakout pattern Ooi looks for is cup-with-handle

pattern. The reason Ooi likes the pattern is that shaky hands are scared
out and selling pressure will dry up during the formation of the pattern.
He would then start buying when the resistance line of the cup-with-
handle pattern (the right-hand side of the handle) is breached. In
addition, he emphasises on an increase of volume during the breakout.
The reason that a sharp increase of volume is so important is that it
shows strong interest from buyers.
Another breakout pattern Ooi would pay attention to is breakout of

range bound pattern, which is also known as consolidation range. A
consolidation range is a channel contained by support and resistance
lines, where share price moves up and down within the range. Ooi
would usually buy a stock that meets his selection criteria when it
breaks above the resistance level with high volume. The reason is that
the breakout gives him an opportunity to capture a high-probability
(major) upward price move at a very low downside risk. When the
upper barrier is crossed with high trading volume, share price tends to
move upward, as interest for the stock is so high that the limited supply
could not meet the demand of the market. In Chapter 3, we have also
learned that once share price breaks above the upper boundary, the
resistance line will become a support level, which helps reducing the
risk of losing money in the trade.
8.6.2 Buy near support level / buy on weakness
After his initial purchase of a stock, he might consider buying more

shares if his original purchase has shown some profit, and if its share
price still has plenty of room to grow. Of course, the stock must be
undervalued when he considers adding more to his original position.
He will buy it during a pullback (or short-term correction) at an area
where support is strong and trade volume is low. In general, when the
Page | 20
primary trend of a stock is rising, buying it during a short-term

pullback can be very rewarding.
I know you must be wondering why he insists on adding more only at

support level or during a pullback. Well, according to Ooi, “Share
price cannot go up in a straight line, it needs a correction in order to
purge weak holders so that the price can go up further.” Moreover, the
retracement provides an opportunity for investors who missed the train
earlier on to buy at cheaper price before the resumption of the uptrend.
Therefore, when the price of a stock has run up too fast, too high and
too soon, he will not chase it. What he will do is to wait for a reaction
and buy on weakness when the market is not too bullish. He tries to
buy one tick above the support level. He always says “Why would you
pay more if you can get it at a lower price?”
In addition to the support line/zone criteria, other factors he takes into

consideration when determining if he should still add more shares to
his existing position during a pullback includes
1. Fibonacci retracement must be above 50% (on daily chart)
2. Price does not break 3-month low (on daily chart)
3. More blue-coloured (bullish) candlesticks than red-coloured
(bearish) candlesticks over the last three months (on daily chart)
4. Price must be above 20-week EMA (on weekly chart)
5. No three consecutive red-coloured (bearish) candlesticks (on
monthly chart)
8.7 Selling Strategies
In the previous section, we have learned that knowing when to buy is important
to protecting our capital, but it is more crucial to know when to call it quits.
This is the secret of making big money in the stock markets, and it is
particularly true for investing in Malaysia market. Every successful investor
knows the importance of this theory and practices it religiously. Of course, Ooi
is of no exception.
To Ooi, investing in stocks is like doing business. Shares are always regarded as
merchandise. Therefore, he does not keep them in a vault. He would sell them if
the stocks are deemed overpriced, or have no longer met his investing criteria.
That being said, he does not sell it at almost one price. He would sometimes sell
them when the stocks are still advancing, about to reverse, or have gone up too
fast. If he believes that the stocks fail to meet his criteria, he would exit his
positions immediately or even cut loss as soon as he found out the problem.
That is the reason he always says “buying stock is simple, but selling stock
requires some skill.” Below are some of his selling strategies.
8.7.1 Sell partially when share price has gone up too fast
“Repeatedly, I have sold a stock while it was still rising – and that has
been one reason why I have held onto my fortune. Many a time, I might
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have made a good deal more by holding a stock, but I would also have
been caught in the fall when the price of the stock collapsed.”
Bernard Baruch
A wise investor will not allow greed to dictate his/her decision-making

process. When a stock is overbought, it is probably a good time to
realise some gain. Your cost will be lowered when you cash in the
profit. In addition, your exposure to market risk will be reduced.
Ooi is very clear that his objective is to make money in the stock
market, and that he will not lose much money for taking partial profit.
Therefore, he would sell it into strength if a stock has risen too fast or
too soon. He would then buy it back during correction if the uptrend is
still intact.
The things he usually pays attention to are the movement of share price
and trade volume. According to him “Stock price will correct after it
hits 100% gain.” The reason is that there is some emotionalism
involved in the price advance, and that smart money would have started
to distribute their shares to late comers. Therefore, he would begin to
realise some gain if any of his stocks has gone up too much from its
base. Also, when the advance of share price is far greater than forty-
five degrees, or when it spikes up, or has enormous move, it may be a
time that he would to take some profit off the table.
Of course, as a chartist, he also pays attention to technical indicators.

For example, he would prepare to sell his shares partially if the stocks’
Relative Strength Indicator or Stochastic Indicator is in the oversold
territory for an extended period of time, especially when the trend
momentum has started to show a sign of exhaustion. Also, he will look
out for sell signals given by Parabolic SAR, Force Index, and MACD
indicators.
8.7.2 Exit completely when a stock fails to meet his investing criteria
Ooi always says “Buying shares must be slow, selling shares must be
fast.” If any of his stocks fails to meet his investing criteria, he would
not hesitate to sell it. When it happens, he will dispose the stock
immediately, even if the stock still seems strong.
“Sell when there is an abundance of over-optimism. When everyone is

bubbling over with optimism and running around trying to get
everyone else to buy, they are fully invested. At this point, all they can
do is talk. They can’t push the market up anymore. It takes buying
power to do that.”
Jack Dreyfus
For example, if the share price of a stock has shot up too far above its
intrinsic value, he would exit his position quickly, as there is too much
extremism involved in the price advance. Of course, the share price
Page | 22
may go up further, but we cannot always sell at the highest price. It’s
very difficult to predict the market top. When the price of a stock is
overshot to the upside, but its earnings fail to catch up, it is highly
likely that the price will tumble as soon as the earnings report is
released. Therefore, it is better to sell before the stampede begins.
There is a Wall Street adage that says “Bulls make money and bears
make money, but pigs get slaughtered.” The pigs are usually referred to
those foolish people who dabble in the markets without knowing what
is really going on.
Also, Ooi would exit his position if a stock delivers two quarters of
decreased earnings. In his reply to one of his followers in mid-2015, he
stated that “There is no growth (in Naim). Hence I will not be
interested in this stock. I selected it in early 2015 because its PER was
low. The last two quarter (earnings) results were not good, hence I
avoid it now.” The share price of Naim Holdings Berhad fell from Rm
2.50 (in mid-2015) to Rm 0.80 (in 2019) after his disposal of Naim
shares. If you are also a follower of Koon, you should have learned
from Koon that EPS (or earnings) is the most powerful catalyst to
move share price. When its EPS (or earnings) goes up, the share price
will also go up. Likewise, when the EPS goes down, the share price
will also go down. This is the reason Ooi folds his cards immediately
when a stock fails to produce two quarters of increased earnings.
Further, Ooi will liquidate his position when the share price of a stock
crosses below its 200-day SMA and major support line. Of all the
moving average lines, 200-day SMA line is the most powerful one. It
acts as a strong support for an uptrend stock. If the price of a stock
reverses and crosses below the moving average line, it signifies that
supply is greater than demand, and a downtrend or sideways market is
likely to begin soon. You do not have to wait until 200-day SMA line
turns down to sell your stock. You can do it immediately once its share
price crosses below the moving average line.
8.7.3 Cut loss when his initial purchase fails
“The secret for winning in the stock market does not include being
right all the time. In fact, you should be able to win even if you are
right only half the time. The key is to lose the least amount of money
possible when you are wrong. I make it a rule never to lose more than
a maximum of 7% on any stock I buy. If a stock drops 7% below my
purchase price, I will automatically sell it at the market – no second-
guessing, no hesitation.”
William J. O’Neil
Ooi always says “There is no 100% sure win (investment) in the stock
market.” No matter how much due diligence we have performed in the
early stage of the investing process, we are not invulnerable to
cognitive and emotional biases, unpredictable bear attack, and any
unforeseen matters. Therefore, he is prepared to cut his losses short,
Page | 23
always and without hesitation, if any of his initial purchases turn out to
be a bad one.
“Why do most traders lose money? Because they would rather lose
money than admit they’re wrong. What is the ultimate rationalization
of a trader in a losing position? “I’ll get out when I’m even.” Why is
getting out even so important? Because it protects the ego. I became a
winning trader when I was able to say, “to hell with my ego, making
money is more important.”
Marty Schwartz
He always set his cut loss point and criteria before he gets in. The
reason of doing so is to have his investments decision be made
unemotionally, and be as objective as possible. Pride and ego have no
say whatsoever in his investment decision making process. When share
price falls below his cut-loss point, he will press the brake immediately
without arguing with the market. He understands that when the trend
goes against him, he must fold his cards; there is no reward for arguing
with the market.
“If you don’t bet, you can’t win. If you lose all your chips, you can’t
bet.”
Larry Hite.
The reason that he cuts his losses early is to prevent them getting too
large to give him a nightmare. Every big loss usually starts as a small
loss, and then it grows bigger after a while. When the share price of a
stock starts falling, it may go lower and lower, and no one knows how
low it can go. That is why superinvestors follow the rules of cutting
their losses short and letting their winners run religiously. They just
have to take care of the downside; the upside will take care of itself.
Ooi once said “I expect a few losses in my investments. As long as
those losses are kept at 10%, it is acceptable to me. It’s the overall
return that counts. As long as my winning probability is maintained at
70%, any small losses won’t cause a significant damage to my
portfolio.”
Below are some of the stop loss rules he always uses

1. Cut loss if price crosses below 20-week EMA (on weekly chart),
2. Cut loss if price drops below 200-day SMA (on daily chart),
3. Cut loss if price drops below 10% of the original purchase price,
4. Cut loss if there is no earnings growth (YoY) over last 2 quarters.
“I will often sell a stock if it doesn’t go up shortly after I buy it. Even
though it has not gone down, if the stock doesn’t do what I expected it
to do, that’s reason enough to step aside and re-evaluate. When a stock
you have bought falls below your purchase price, it is telling you have
made an error – at a minimum in timing.”
Mark Minervini
Page | 24
Also, he would sell a stock, even at a loss, if its share price does not
move within three months. He does not fall in love with any of his
stocks. He believes that if a stock stays put after some time, there must
be something wrong with the stock. He used the following metaphor to
explain to his followers when being asked why he sold his stock at a
loss.
“Just imagine that your horse is injured, do you think it still can run
and be the champion? The answer is no,” and “when one of its legs is
injured, the horse will never be able to win a race. We should replace it
with a better horse.”
8.8 Use Elliott Wave Principle to Determine the Direction of Price Action
In order to determine the position he is in, and the direction of price action of
his stock or the general market, Ooi, more often than not, applies Elliott Wave
Principle in his analysis.
Elliott Wave is actually a share price pattern theory developed by Ralph Nelson
Elliott in mid-1930s. According to Elliott, share prices of stocks usually move
in certain repetitive patterns like ocean waves. Formation of the waves is mainly
due to swings in investor’s emotion, psychology, or behaviour.
The patterns can be divided into two main types, namely uptrend pattern and
downtrend pattern. Each of the trend patterns can be broken down into five
waves, namely Wave 1, Wave 2, Wave 3, Wave 4, and Wave 5. The trend
patterns usually begin with Wave 1 and ends with Wave 5. Wave 1, Wave 3,
and Wave 5 are impulsive waves, whereas Wave 2 and Wave 4 are corrective
waves. In general, the corrective waves have three smaller waves, which are
labelled as Wave A, Wave B, and Wave C. That said, sometimes the correction
may get complicated, which would result in the formation of a flag pattern or
descending channel, pennant, or sideways consolidation pattern. Therefore, you
need to be flexible when analysing the pattern of a trend.
Page | 25
Figure 8.8.1: Elliott Wave pattern during bull market

Source: DailyFX
https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/201
8/12/26/depth-of-elliott-wave-correction.html
Figure 8.8.1 shows the normal Elliott Wave pattern during a bull run. At the
beginning of a new bull market, the formation of Wave 1 is usually not very
obvious, as the public and media do not show much interest in the stock, except
smart money. The stock will subsequently experience a retracement, which is
known as Wave 2. Note that the lowest point of Wave 2 must not be lower than
the lowest point of Wave 1. The percentage of the correction is generally
between 38.2% and 61.8% of Wave 1’s price difference. Depending on the
situation of supply and demand, sometimes the retracement may be lower than
38.2% of Wave 1, and other times it may be higher than 61.8% of Wave 1, but it
will not exceed 100% of Wave 1.
After the brief pullback, the stock will advance again. This impulsive wave is
known as Wave 3, and is the strongest move amongst the three impulsive waves.
The price difference of Wave 3 is generally 61.8% higher than that of Wave 1.
Therefore, the highest point of Wave 3 is always above the highest point of
Wave 1. During this time, a lot of sell-side analysts will begin to cover the stock
and you will also see some talking heads discussing about the company’s
business and earning prospect. Therefore, the trade volume in Wave 3 will
increase significantly, and is the highest one amongst the 5 waves.
Koon always says no stock can go up continuously in a straight line for

whatever reason, after a while it must come down (either retrace or reverse).
Wave 3 is usually followed by Wave 4, which is corrective wave. The
percentage of the retracement is generally between 38.2% and 61.8% of Wave
3’s price difference. Again, depending on the situation of supply and demand,
sometimes the retracement may go beyond the range of 38.2% and 61.8%, but it
will never be more than 76.4% of Wave 3. The next wave is Wave 5, which is
also the final wave of an uptrend pattern. The length of Wave 5 is generally
between 61.8% and 100% of Wave 3’s length. That said, the length of Wave 5
may sometimes exceed 100% of Wave 3, if there are too much supply of money,
Page | 26
and if the market shows overconfidence in the stock, but it is always shorter
than 161.8% of Wave 3’s length. In comparison, the trade volume in Wave 5 is
lower than that in Wave 3. This will result in a bearish divergence, rising prices
with declining volumes. During this time, the shares of smart money have
almost been distributed to those late comers, and the trend is about to reverse
soon.
Note that the ratios of 14.6%, 23.6%, 38.2%%, 50.0%, 61.8%, 76.4%, 85.4%
and 100.0% are called Fibonacci ratios, which are discovered by Leonardo
Fibonacci da Pisa in the 13th century. Elliott noticed the relationship between
Fibonacci ratios, wave length, and mass psychology, and he recognised the
importance of Fibonacci ratios when he studied the patterns of those waves.
Therefore, he integrated the ratios into his Wave principle.
By arming himself with the knowledge of Elliott Wave Theory, Ooi can tell the
direction of a stock or the market, where the price of a stock or the market is
likely to go, and devise suitable strategies to capitalise on the price trend to
maximise his return.
8.9 Investing Principles
You can have the above-mentioned stock selection criteria coded into your
algorithmic trading system, and let your computer and smart-phone trade for
you, but you would not be able to emulate the performance of Ooi if you do not
understand his investing principles. It is the guiding principles, which Ooi spent
a few decades to develop, influence the outcome of his investments. Therefore,
we must also study the investing principles of Ooi in order to understand how
he makes his investment decisions, and how he achieves the striking
performance.
“If the investment game were all about numbers and calculations, then, in theory,
given the computer programs available these days, you should be able to punch
in the right criteria and make money all the time. It doesn’t work that way.”
Thomas Kahn
8.9.1 Avoid stocks in downtrend market
According to Business Dictionary, downtrend is defined as “Sustained

downward movement in the price of an item or trading activity in an
economy.” The main cause is that the selling pressure of the item is
greater than its buying pressure.
When a stock slides downward, there must be a good reason for the
decline, and no one knows when the trend will reverse. There is a high
possibility that the price may never return to your original purchase
price. Therefore, Ooi always advises his clients to stay at the sidelines
instead of pounding their hard-earned money down the rat hole when a
stock is on a downtrend.
Page | 27
Whilst some “Kamikaze Warriors” believes falling knives very often

beat the market by a wide margin, and consider catching the knives a
rewarding attempt if done carefully, Ooi does not like the idea of
buying shares when uncertainty is still high. He would rather wait for
the dust to settle down before making any investment decisions on the
counters.
8.9.2 Other metrics he would study
“It’s much easier to stay out of trouble now than to get out of trouble
later.”
Warren Buffett.
Other than the main metrics of fundamental analysis discussed earlier,

sometimes Ooi would also analyse the ability of a company in
servicing its debt. In the world of business, debt is not a bad thing.
Debt offers organisations plenty of benefits, which include but are not
limited to investment and expansion opportunities, low financing cost,
capital for day-to-day operation, lower taxable income, if people know
how to tame the monster. Failure to manage it properly, on the other
hand, will drag their stocks down and give investors a lot of troubles.
Therefore, Ooi would examine the cash flow record of a company and
its debt-to-equity ratio level, interest cost, net debt and liquidity ratio,
in order to get a better picture of the company’s financial health before
trusting his money to its management.
Also, Ooi would study the Return on Equity (ROE) and Return on
Invested Capital (ROIC) of the company in order to assess the
efficiency of the management in managing their capital and assets. The
higher the figures, the higher the management’s efficiency is in
allocating their resources. He prefers to buy highly efficient companies,
which are able to produce ROE and ROIC higher than 10% and 12%,
respectively. Of course, this is just a guideline and is not a hard-and-
fast rule to determine if a stock is a good buy. Sometimes, he would
purchase a stock even though its ROE and ROIC do not meet his target
(i.e. stocks in cyclical industries) if he believes that the company’s
business is booming, and is generating higher and higher cash flow.
8.9.3 Hardwork, hardwork, and hardwork
“The only way to gain an edge is through long and hard work.”
Li Lu
“If you don’t work very hard, it is extremely unlikely that you will be a
good trader.”
Bruce Kovner
If you want to know the secret of Ooi making so much money in the
stock market, the answer is hardwork. Hardworking may also be the
best word to describe about him. He is a hardwork believer. He always
Page | 28
says hard work beats talent. He told his followers that “I work 12 hours
a day everyday on (studying) KLSE stocks alone, including weekend.
Investing is what I am most passionate about. I do not want to miss any
of the precious opportunities. I came from a very poor family, and
earning money is very important to me. I also do not want my clients to
lose money and opportunities,” and “writing the Weekly Market
Outlook Report alone would take me more than 5 hours. I need to
spend the whole Saturday or Sunday morning, locked inside my private
room, to write it without anyone to disturb me. I treasure my reputation.
I want to ensure that my report is value for (my clients’) money. It
takes a lot of hard work and sacrifice. I hope all my subscribers will
get the best out of me.” Also, he always says he could not sleep well if
his clients lose money. That is why he works so hard.
Another reason he works so hard is that he wanted to learn more and to

improve his performance constantly. According to him, his made many
mistakes during the 1997 Asian Financial Crisis, which nearly wiped
him out. But it did not deter him from climbing back up. Quite the
opposite, it lays the groundwork for him to improve his investing
system further. Even though he is very successful today in investing, he
continues to work hard so that he will not repeat those deadly mistakes.
Sometimes Ooi will read articles, and information provided by other

people, but he will do the analysis, go through his checklist and study
all parameters of the stocks, and make judgement himself. He always
tells his followers “You can listen to tips, (but) you must do your
homework before you buy. It is your hard-earned money.” Indeed,
there’s no such thing as a free lunch. People, who listen to tips, take
things for granted without performing their own obligatory due
diligence always wind up losing money in the market. According to
Jesse Livermore, “In speculation and investment, success comes only to
those who work for it. No one is going to hand you a lot of money… If
there was any easy money lying around, no one would be forcing it into
your pocket.” He also said that “Tips come from many sources – from a
relative, a loved one, a pal who had just made a serious investment
himself and want to pass on his expected good fortune. They also come
from hucksters and criminals… often misleading articles are planted
by people or brokers with hidden agendas, who want to sell their stock
on the good news or they want to keep people invested while they go
ahead and distribute their own stock.”
8.9.4 Only buy stocks with high market liquidity
High liquidity is particularly essential to Ooi, who relies on both

fundamentals and charts to make his buy and sell decisions. If the trend
or the fundamental of a stock has changed unexpectedly, he must buy
or dispose it immediately. Therefore, he needs the high liquidity nature
of stock to get in and get out quickly, so that he does not lose money in
the investment.
Page | 29
Unlike small investors, who can buy and sell a stock easily without
causing a significant move in its share price, Ooi has a large sum of
money under his management. Each time when he wants to buy and to
sell his stock, he will have some difficulty building and closing his
position if the market liquidity of the stock is low. For example, if the
liquidity of a stock is low, he would have difficulty finding buyers
without lowering his asking price when he sells the stock. Also, when
he sells a stock, its share price will fall continuously. By the time he
disposes all his shares, the price will be very low, and his average
selling price will be reduced greatly. Hence, before buying a stock, he
also looks at the record of its trade volume. If the liquidity is low, he
would rather give it a miss. In 2017, he told one of his friends that
“Superlon passed my stock selection criteria. The only problem is the
volume is too thin. I have many followers, it is difficult to get out when
we want to sell.” In that case, he could only watch the opportunity
slipped through his fingers.
8.9.5 Patience is extremely important
“The big money is made by the sitting and the waiting – not the
thinking. Wait until all the factors are in your favour before making a
trade – follow the Top Down Trading rules. Once a position is taken
the next difficult task is to be patient and wait for the move to play out.”
Jesse Livermore
In the previous chapter, we have learned that being patient is extremely

important in investing. That is why Ooi always advises his followers to
be patient. When the market sentiment turns bearish, he will advise
them to close out their position, and when there is no opportunity to
invest, he will ask them to wait at the sideline. According to Jack
Schwager, investing and trading is likened to playing poker, “You don’t
just play every hand and stay through every card, because if you do,
you will have a much higher probability of losing. You should play the
good hands, and drop out of the poor hands, forfeiting the ante. When
more of the cards are on the table and you have a very strong hand – in
other words, when you feel the percentages are skewed in your favour
– you raise and play that hand to the hilt.”
“We do a lot of thinking and not a lot of acting. A lot of investors do a

lot of acting, and not a lot of thinking.”
Lou Simpson
After buying a stock, Ooi will hold it, and wait for three to six months.
And he always advises his followers to avoid getting in to and out of
the market every day, and to avoid taking profit too early. When they
trade too often, they do not only pay hefty amount of money in
commission to their brokers, they also miss the opportunity to make big
money when the stock moves upward in a significant way. Moreover,
when they take profit too early, they give the opportunity for their
Page | 30
skilled counterparts to capture the large chunk of profit. That is why

Ooi says “The best thing to do is to avoid watching share price
everyday.” William Eckhardt once said, “One common adage on this
subject that is completely wrongheaded is: you can’t go broke taking
profits. That is precisely how many traders do go broke. While
amateurs go broke by taking large losses, professionals go broke by
taking small profits. The problem in a nutshell is that human nature
does not operate to maximise gain but rather to maximise chance of
gain. The desire to maximise the number of winning trades (or
minimise the number of losing trades) works against the trader. The
success rate of trades is the least important performance statistic and
may even be inversely related to performance.”
8.9.6 Keep an open mind
“Those who stop learning get passed by.”

Whitney Tilson
“Those who cannot adjust to change will be swept aside by it. Those
who recognize change and react accordingly will benefit.”
Jim Rogers
Whilst he possesses a set of rules to guide him in investing, Ooi

understands that in order to stay profitable in the ever-changing market,
he must evolve constantly. Therefore, he always keeps his mind open
to new ideas, concepts, theories, and developments, and learns as many
different investing strategies as he possibly can. He does not mind to
learn from other young investors who have some special skills in
investing, be it in value investing, momentum investing, income
investing, dollar-cost averaging investing, growth investing, small-cap
investing or socially responsible investing. He would study each of the
investing methods and integrate the some of principles into his own
approach. He always tells his followers “You need multiple skills to win
big in stock markets. Please do not confine yourself to a single skill.
Just like playing basketball, you must be able to shoot with your left
hand as well as your right hand. I don’t care if the cat is black or white,
so long as it catches mice.”
8.9.7 Use leverage to maximise gain
Despite being a prudent investor, Ooi understands that being too

conservative will do no good to his investments. He tries to increase his
gain when he is right and minimise his loss when he is wrong.
Therefore, he would sometimes use leverage, such as margin loan and
warrants, to maximise his overall return if he believes that the risk-
reward ratio of his targets is skewed to the upside.
Page | 31
Whilst some investors believe that using margin finance adds

unnecessary extra risk to their existing investments, and advise their
peers to avoid it like the plague, Ooi thinks otherwise. According to
him, using margin finance does not equate to getting a death sentence.
It depends on the skills and discipline of an investor. He usually takes
margin loan to invest when the market sentiment is bullish and will
stop using it completely if the sentiment turns bearish. He limits his
borrow to 50% of the purchase price of his marginable investments.
Margin financing has helped him made a lot of money in the stock
market. Therefore, he always says “There is nothing wrong to use
margin financing provided that you are proficient in using it. I have
been using it for 25 years, and I am still in a financially sound position.
But I don’t encourage investors to use margin finance if they do not
have the necessary skills.”
Below is his advice for people who consider using margin finance in
their investments. “Look at your trading history in last 5 years. If you
are in a winning position, then you are qualified to use it. If you are
still in a losing position, you are not encouraged to use it. Margin
finance is like a machine gun, if you have the skill to use it, it is a very
useful and effective tool. If you do not have the special skill to handle it,
it will kill you and your love ones. Please learn the special skill and
you must prove to yourself that you can make money from stock market
consistently year after year before using it. Note that you cannot use
margin finance in a bearish market, you will end up with a big loss. So,
never use margin finance if the overall market is bearish. Use it only in
bull market to maximize your gain. In addition, you should use margin
finance for a short period of time only, and you should not keep your
share under margin financing for 365 days. My advice is to avoid
keeping your shares in margin account for more than three months.
You must be disciplined if you want to use margin finance. If you do
not have a good money management skill, please avoid using margin
financing. Also, if margin of safety of your stock is less than 30%, you
should not use margin loan for the stock.”
Other than using margin loan, Ooi also trades warrants to maximise his
return. When he buys warrants, he will look at the values of the
warrants. According to his study, “A warrant trading at a discount is
one that nobody is interested in. In general, a warrant is ‘in the money’
when the stock it attached to is on a downtrend. Most of the times, no
one is interested in the stock and warrant for a reason that we do not
know.” Therefore, he tries to shun those warrants trading at a discount
to their underlying values and look for those trading at a premium to
their stocks. In one of his replies to one of his follower, he said “I do
not care much about dividend, I aim for capital gain. Dividend is only
a bonus to me. Generally, I like warrants trading at a premium; I do
not like warrants trading at a discount. Warrants trading at a premium,
most of the time, are the warrants with an uptrending stock and the
stock must be very bullish.”
Page | 32
8.10 A card up his sleeve - WuXing Theory and BaZi Astrology
Other than applying fundamental analysis and technical analysis, and having the
ability to control his emotions and maintain discipline, Ooi also capitalises on
his Chinese Astrology knowledge such as WuXing theory (the five basic
elements: metal, water, wood, fire, and earth) and BaZi (the four pillars of
destiny) to determine the most suitable periods of time and the best areas, when
and where he should make his investments, in order to increase his chance of
making winning bets.
According to WuXing theory, the five elements – metal, water, wood, fire, and
earth – will interact with each other when they come in contact together. Two
predominant effects produced by them are generating and overcoming effects.
For example, water will nourish wood when rain water falls on plants, but it will
extinguish fire when they come in contact together. The diagram below depicts
how they interact with other elements and the impacts these elements will cause
when they come in contact together.
Figure 8.10.1: Five elements chart

Source: Wikipedia https://en.wikipedia.org/wiki/Wuxing_(Chinese_philosophy)
Before Chinese New Year, Ooi would usually study Chinese Lunar Calendar,
which is also known as JiaZi Calendar, to find out to which element the
following year belongs and to which element each month in the year belongs.
The objective of this study is to choose some suitable sectors, which are more
likely to perform in the year or in certain months, for his investments in that
particular year, and to determine which stocks should be removed from his
portfolio.
Page | 33
Other than WuXing theory, he also studies his BaZi to find out his own destiny.
By understanding his own potential, he can deploy his strategy wisely. Just like
a cyclical business, every one of us will experience the inevitable ups and
downs in life. Ooi believes that if he could reduce his losses to the lowest
possible level in his down years, and maximise his returns with the use of
leverage during good times, he would be able to amass a huge fortune in
investment in his life.
Page | 34
Chapter Summary
Ooi’s investments have generated about 2,087% profit from 2013 to 2019.
The secret recipe of Ooi’s winning investments is having a suitable stock

selection and investing system, which can help him make money
consistently year after year and fits his investment style, and his ability to
follow the system religiously.
The system applies both technical and fundamental analyses in picking

stocks.
First screening process: Technical Analysis
U = Up-trending stock (share price must be above its 200-day SMA,

and must demonstrate high lows and higher highs),
B = Breakout of resistance, and
S = Sector in bullish mood (sector index above 200-day SMA),
Second screening process: Fundamental Analysis
G = Growth of profit must be greater than 10%,
M = Margin of Safety must be greater than 30%, (determined using

EV/EBIT, Graham Number, or/and DCF), and
F = Forecasted EPS must be greater than current EPS.
Other technical indicators and signals Ooi uses to support his buy decisions
MACD crosses above its signal line,
Force Index colour changes from green (below 0) to blue (above 0),
Stochastic Oscillator reading crosses above the level of 20,
Price breaks above 20-day EMA line, or
20-day EMA crosses above 70-day SMA (a.k.a. Golden Cross).
Types of buying strategy Ooi usually adopts
Buy on breakout, and
Buy near support level / buy on weakness.
Page | 35
Types of selling strategy Ooi usually adopts
Sell partially when share price has gone up too fast,
Exit completely when a stock fails to meet his investing criteria, and
Cut loss when his initial purchase fails.
Ooi also uses Elliott Wave principle to determine the direction of a price
action
There are two types of pattern, namely uptrend pattern and downtrend
pattern,
Each of the trend patterns consists of five waves, namely Wave 1,

Wave 2, Wave 3, Wave 4, and Wave 5,
Wave 1, Wave 3, Wave 5 are impulsive waves, whilst Wave 2, and

Wave 4 are corrective waves.
Ooi’s investing principles
Avoid stocks in downtrend market,
Other metrics he would study - debt-to-equity (D/E) ratio level,

interest cost, net debt, liquidity ratio, return on equity (ROE) and
return on invested capital (ROIC),
Hardwork, hardwork, and hardwork,
Only buy stocks with high liquidity,
Patience is extremely important,
Keep an open mind, and
Use leverage to maximise gain.
A card up his sleeve - WuXing Theory and BaZi Astrology.
By understanding his own potential and knowing which industries are

likely to do well every year, he can deploy his strategy wisely.
The objective is to reduce his losses in his down years, and maximise
his returns with the use of leverage during good times.
Page | 36
Case Study 1 - V.S. Industry Berhad
Chapter 9:
Case Study 1 -
V.S. Industry Berhad
Page | 1
9.1 Fundamental Analysis
V.S. Industry was a one-stop solution provider of electronic manufacturing

services Koon invested in 2013, and held the stock until 2016. Koon started
buying it when its share price was Rm 0.215/share in late 2013, and began
selling it when it was around Rm 1.300/share in late 2015.
Prior to investing in a stock, Koon would look at the business, and earnings
growth prospect of the company. In addition, he would also assess the
efficiency, and capability of its management, and the value of the stock
compared to its share price.
9.1.1 Understanding the Business of V.S. Industry Bhd.
V.S. Industry is a leading provider of integrated electronic manufacturing

services in Malaysia. With headquarter and manufacturing facilities in
Senai, it currently employs more than 12,000 staff across Asia for its
manufacturing plants in Malaysia, China, Indonesia, and Vietnam. In
addition, it has operations in the United Kingdom, the United States,
Japan, and Europe.
Its broad range of capabilities include design, development,

manufacturing, assembling, and testing of electrical and electronic
products, and plastic moulded components. In addition, it produces a
range of original design manufacturer (ODM)/original equipment
manufacturer (OEM) products, including remote control units, printers,
vacuum cleaners, home appliances, white goods, audio, video and DVD
products. Also, it produces large-scale printed circuit boards, and provides
packaging and logistics services to customers.
When Koon first invested in the stock, the company continued to expand
its capacity and product lines aggressively to meet the needs of its existing
and new customers.
9.1.2 Assessing the Financial Performance of V.S. Industry Bhd.
Having a good understanding of the business and its outlook is not enough,
we must also analyse the financial health of the company and buy it below
its fair price. To judge the financial status of V.S. Industry, we need to
study the profitability, solvency, liquidity and activity ratio of its business.
• Profitability
First of all, we must make sure that the business made more profits
this year than last year and will earn more profits next few years
than this year before placing our bet.
Page | 2

= [(Net profit in 2013 / Net profit in 2012) – 1] × 100%
= [(Rm 43,910,000 / Rm 37,390,000) – 1] × 100%
= 17.44%
Profit growth rate (4-yr CAGR)

= {[(Net profit in 2013 / Net profit in 2011) 1/2 ] – 1} × 100%
= [(Rm 43,910,000 / Rm 27,721,000) 1/2 ] – 1 × 100%
= 25.86%
It can be seen from the calculation above that the net profit growth
rate of V.S. Industry in 2013 was maintained around 20%. This is an
indicator showing that the company was able to grow its business at
a constant rate, around 20%. Also, in 2013 it had developed a few
new key customers, which was expected to contribute significantly
to the top and bottom lines, and the growth of V.S. Industry.
Moreover, the strengthening of USD against MYR would benefit
V.S. Industry. As a result, the net profit of V.S. Industry shot up to
Rm 53.63 million in 2014, and Rm 132.74 million in 2015 (refer to
Figure 9.1).
Figure 9.1: Net Profit of V.S. Industry from 2011 to 2015
Net profit margin (NPM)

= Net profit / Sales
= (Rm 43,910,000 / Rm 1,163,910,000) × 100%
= 3.77%
In addition, the net profit margin of V.S. Industry showed an

improvement from 2.70% in 2011 to 3.77% in 2013, which was
higher than that of the industry average, 3.24% in 2013. This
implied that the business’s profitability was improving and was
better than that of its peers.
Page | 3
Return on equity
= Net profit attributable to shareholders / Shareholders’ equity
= (Rm 43,910,000 / Rm 479,646,000) × 100%
= 9.15%
Further, its return on equity demonstrated an improvement from

industry average, 8.69% in 2013. This figure suggested that the
management was efficient in utilising the available resources to
generate profits for the company. The return of equity of V.S.
Industry hit 17.08% in 2015 as the company’s net profit continued
to rise (as shown in Figure 9.2).
Figure 9.2: Return on Equity of V.S. Industry from 2011 to 2015
• Solvency
Subsequently, we have to ascertain the solvency of the company to

ensure that the company has the ability to meet its long-term
financial commitments. It can be done by analysing the debt-to-
EBITDA and debt-to-equity ratios of the firm.
= Debt / EBITDA
= Rm 361,757,000 / Rm 92,027,000
= 3.93
= Rm 361,757,000 / Rm 479,646,000
= 0.75
Page | 4
The debt-to-EBITDA ratio and debt-to-equity ratio of V.S. Industry

in 2013 were at 3.93 and 0.75, respectively. The figures were higher
than those of the industry averages, 2.71 and 0.59, respectively. The
reason is that the company took more loan to expand its business
aggressively in 2013, as the management foresee more opportunities
and orders would be received in the next few years. Koon always
says, debt is not a bad thing if a business owner knows how to use,
and manages it wisely. If we shun stocks with higher debt blindly
without trying to understand their reasons of borrowing more money
from banks, a lot of good opportunities would be slipping through
our fingers.
• Liquidity
Current ratio
= Rm 686,454,000 / Rm 591,893,000
= 1.16
Quick ratio
= (Rm 686,454,000 – Rm 177,760,000) / Rm 591,893,000
= 0.86
The current ratio and quick ratio of V.S. Industry in 2013 were 1.16
and 0.86, respectively, which were slightly lower than those of the
industry average, 1.25 and 0.94, respectively. But the company still
managed to maintain them at a manageable level, and had no
problem in meeting its short-term obligations.
• Activity Ratio
To prevent investing in a poorly-managed company, we have to

compare the total asset turnover ratio, inventory turnover ratio, and
receivable turnover ratio of the company with those of its peers.

= Rm 1,163,911,000 / Rm 1,404,443,000
= 0.83
Page | 5

= Rm 1,163,911,000 / Rm 177,760,000

= Rm 1,163,911,000 / Rm 410,526,000
In comparison, the asset turnover ratio of V.S. Industry in 2013,

0.83, was lower than that of the industry average, 1.13. The reason
is that the company anticipated that more orders would be received
in the coming years. Therefore, they invested more heavily in plant,
property and equipment than their peers ahead of time, in order to
expand their plant capacity, and offer a wider range of services.
Its inventory turnover ratio, 6.55, was lower than that of the industry
average, 8.75. As the management foresaw more orders would be
coming in near future, it was sensible that the management kept
more inventories so they could fill the new orders quickly once they
received them and to prevent shortage of stock. Moreover, fifty six
days of inventory on hand signified that the inventory moved fairly
quickly.
Compared to its peers, its receivables turnover ratio, 2.84, was lower
than that of the industry average, 3.91. This was an anomaly as the
company took a month longer than usual to collect the receivables.
But the company quickly corrected it by increasing the turnover
ratio to 3.83 the following year.
• Cash Flow
Just like managing our personal finances, we must make sure that
the company can continue its operation without running out of cash.
Therefore, we must analyse the free cash flow and operating cash
flow to sales ratio of the firm.
Free cash flow

= Rm 19,666,000 – Rm 31,394,,000
= - Rm 11,728,000
Page | 6

= Rm 19,666,000 / Rm 1,163,911,000
= 0.02
The free cash flow of V.S. Industry, - Rm 11,728,000, was lower

than that of the industry average, Rm 6,793,134. The reason is that
the company expanded aggressively in 2013 in order to meet the
needs of its clients.
Page | 7
Industry
Description 2011 2012 2013 2014 2015
Average (in 2013)
Revenue (Rm) 1,026,818,000 1,201,992,000 1,163,911,000 1,715,082,000 1,936,885,000 434,957,148
Net profit (Rm) 27,721,000 37,390,000 43,910,000 53,633,000 132,739,000 14,104,333
Earnings before interest, tax, depreciation and
95,712,000 95,275,000 92,027,000 119,548,000 239,218,000 35,382,928
amortisation, EBITDA (Rm)
Profit growth (year over year, %) 14.13% 34.88% 17.44% 22.14% 147.50% -64.34%
Equity (Rm) 393,609,000 410,491,000 479,646,000 526,160,000 777,034,000 162,236,056
Return on equity (%) 7.04% 9.11% 9.15% 10.19% 17.08% 8.69%
Debt (Rm) 134,829,000 138,008,000 361,757,000 409,791,000 412,208,000 96,059,991
Capex 43,268,000 40,360,000 31,394,000 55,704,000 64,302,000 12,828,452
Operating cash flow 94,277,000 34,111,000 19,666,000 46,368,000 56,452,000 19,621,586
Free cash flow (Rm) 51,009,000 -6,249,000 -11,728,000 -9,336,000 -7,850,000 6,793,134
Operating cash flow to sales ratio (times) 0.0918 0.0284 0.0169 0.0270 0.0291 0.0451
Market Capitalisation (Rm) 391,440,000 447,360,000 372,800,000 773,560,000 2,190,200,000 199,080,694
Figure 9.3: Summary of V.S. Industry Berhad’s Financial Performance
Page | 8
9.1.3 Valuing the Business of V.S. Industry Bhd.
To avoid paying too much for sellers, and to avoid overpaying for what
the business is worth, Koon would make sure that the Price-to-Earnings
ratio or forward Price-to-Earnings ratio of the stock did not exceed 10, and
did not exceed that of the industry average.
= Rm 0.2150 / Rm 0.0236
= 9.13

= Rm 0.2150 / Rm 0.0300
= 7.17
Predicted share price of V.S. Industry in 2014

= 15.43 × Rm 0.0300
= Rm 0.46

stock were only about 9.13 and 7.17, respectively, when Koon started to
accumulate the shares of V.S. Industry in 2013. Both ratios were lower
than 10, and were below the industry average, 15.43. Based on the
calculation above, the share price could go up to Rm 0.46 when Mr.
Market re-valued it using the industry average P/E the following year.
Page | 9
9.2 Technical Analysis
Figure 9.4 is the price chart of V.S. Industry from November 2013 to May 2016,
the period when Koon invested in the company. The green coloured line and red
coloured line are 50-day SMA and 200-day SMA, respectively. The Golden
Cross appeared in the chart on 2 December 2013 when the price was Rm
0.215/share, whereas the Death Cross appeared in the chart 5 April 2016 when
the price was Rm 0.975/share.
Figure 9.4: Price Chart of V.S. Industry from November 2013 to May 2016
Prior to studying how Koon traded V.S. Industry, it is important to analyse the
support and resistance areas of the stock. Then we have to draw those obvious
and not-so-obvious support and resistance lines and to identify the price levels
that had been tested a few times. Those are the points where Koon would pay
attention to, and would make his buy and sell decisions. In addition, Koon
would also monitor the trade volume of the stock, and its trend. Figure 9.5 is the
price chart of V.S. Industry with its support and resistance lines drawn on the
chart.
Figure 9.5: Price Chart of V.S. Industry with Support and Resistance Lines from
November 2013 to May 2016
Figure 9.6 shows the major points where Koon would buy and sell V.S. Industry
shares. The points with strong support or weak resistance were probably his
Page | 10
buying points, whereas those points with weak support and strong resistance
after peaking were probably his selling points.
Figure 9.6: Price Chart of V.S. Industry and Good Trading Points from
November 2013 to May 2016
Point A
The first point where Koon would start building his position in V.S. Industry
was Point A, where its short-term moving average (50-day SMA) crossed above
its long-term moving average (200-day SMA), on 2 December 2013. Even
though the fundamental analysis of V.S. Industry’s business showed that it was
safe to buy the stock, Koon would not go all-in at the beginning of his venture
in the investment. Instead of taking too much risk before his hypothesis was
proved right, as usual, he would probably dip his toe in V.S. Industry with just
20 ~ 30% of the money in his fund, around the price of Rm 0.215/share, when
the Golden Cross appeared. He would cut loss if the company reported two
consecutive quarters of reduced profits, or if downtrend started.
Point B
As can be seen from the chart, the share price of V.S. Industry had stopped
falling after the golden cross appeared. Point B was probably the time when
Koon would add more shares to his original position, with 20 ~ 30% of the
money in his fund, when the stock tested its bottom, around the price of Rm
0.220/share, and when its price broke above its previous high or resistance
(LN2), with higher volume (1.75 million shares) around Rm 0.235/share the
following month. In addition, the company just reported the second quarter of
increased profits (on a YOY basis).
Point C
After rising for a while, the stock came down to retest its short-term moving
average support (50-day SMA) at Point C, around Rm 0.225/share, with light
trading volume, on 5 February 2014. Short-term traders and weak holders who
had no intention to hold the stock for long term would be taken out of the stock
when the share price declined. Other than the emotions of market participants
turned negative, the profit growth prospect of the company had not changed.
That was a great bargain that Koon would not want to miss. He would add more
shares to his position, with another 5 ~ 10% of the money in his fund.
Page | 11
Point D
The stock retested its short-term moving average support (50-day SMA) again
at Point D, around Rm 0.235/share, on 3 March 2014 with light trading volume
(0.41 million shares). In general, a low volume pullback toward a support area
near the bottom is actually a healthy correction, which signifies not many
people are willing to part with their shares, and that the uptrend is still intact.
That was another time when Koon would add more shares to his position, with
another 5 ~ 10% of the money in his fund, before the value of the stock was
discovered by the crowd.
Point E
The stock retested its short-term moving average support (50-day SMA) the
fourth time at Point E on 27 March 2014, but at a higher price, Rm 0.240/share.
It is noteworthy that the stock did not make a lower low even though it came
down to retest its support. That was an indication that the demand for the stock
was getting stronger and stronger. Again, that was the time when Koon would
add more shares to his position, with another 5 ~ 10% of the money in his fund,
as the share price continued to climb. Also, smart money would take advantage
of the elevated platform to build their positions in the stock.
Point F
The stock broke above its previous high (Rm 0.255/share) with high volume
(5.70 million shares) on 30 April 2014. Around that time, the stock reported the
third quarter of increased revenue and earnings. In addition, the management of
V.S. Industry mentioned in the quarterly report that the company had developed
a new key account, which was expected to contribute meaningfully to its top
and bottom lines. That was another point where Koon would to add more shares
to his position, with 5 ~ 10% of the money in his fund.
Point G
After moving sideways for six weeks, the stock retested its short-term moving
average support (50-day SMA) again on 13 June 2014. But its trading volume
had dropped significantly (46.25 thousand shares), as the number of people who
were willing to sell their shares at the level had also dropped a lot since many of
sellers had been taken out of the stock earlier. That was the point where Koon
would scoop up the fantastic bargains before they were gone. In investing, when
you discover a gem, you cannot get enough of it.
Point H
The stock broke above its resistance (LN4), around Rm 0.265/share on 8 July
2014. At the same time, its volume jumped to 9.99 million shares at the
breakout point (higher than the trade volume of the previous high), which
showed that the breakout was a valid one. That was the point where Koon
would add more shares to his winning position, as its resistance was weak,
supply was low and demand was high. In addition, the company just reported
the fourth quarter of increased earnings on a YOY basis. Further, the uptrend
was strong, as the stock continued to produce more higher highs and higher
lows.
Page | 12
Point I
After consolidating for two weeks, the stock crossed above its resistance (LN5),
around Rm 0.300/share, and produced another higher high on 23 July 2014,
with high volume (17.80 million shares). That was another point where Koon
would add more shares to his winning position. By that time Koon probably had
used up all his original capital. But his accounts would not run out of money. In
fact, with margin finance, he would never short of fund to add more shares if the
share price continues to rise. As the share price of V.S. Industry went up, his
collateral value also went up in tandem. Therefore, Koon could borrow more
money from his brokers through margin finance to buy more shares as the price
continued to climb.
Point J
After rising for a while, the share price stopped moving upward. The stock
traded within a narrow price range, around Rm 0.350/share. It could also be due
to a shakeout to drive weak holders out. The stock moved sideways for a month,
from 14 August 2014 to 18 September 2014, and formed an elevated platform.
The stock broke above its resistance (LN6) on 19 September 2014 with high
volume (8.78 million shares). The elevated platform, and the breakout point
were the area where Koon would add more shares to his winning position using
borrowed money from his brokers. Additionally, the acquisition of shares by the
founding directors in open market, and share buybacks were also important
signs showing that it was safe to add more shares at the breakout point. Peter
Lynch once said, “insiders might sell their shares for any number of reasons, but
they buy them for only one: they think the price will rise.”
Point K
After the breakout, the original resistance (LN6) had now become a new support.
The stock continued to rise following the breakout, but was rejected at the level
of Rm 0.415/share. The stock then moved in a horizontal channel within a range,
bounded by support (Rm 0.350/share) and resistance (Rm 0.415/share) for three
months. On 15 December 2014, the stock broke below its support, but quickly
regained its strength three days later, on 18 December 2014. In hindsight, the
false breakout was actually a shakeout to eliminate weak hands. It is important
to note that even though the price broke below the support, the stock had not
shown any lower high and lower low, which indicated that the uptrend was still
intact, and the bulls were still in control. Also, the company just reported two
quarters of highest ever quarterly profits within that period of time. That was the
area where Koon would add more shares to his position using borrowed money
from his brokers.
Point L
Eventually the stock broke above its resistance (LN7) at Rm 0.415/share with
high volume on 7 January 2015, after moving in a horizontal channel for three
months, and tested its resistance for five times. Most of the weak holders and
short-term traders had been taken out of the stock at the breakout point. In
general, the more times price hits the key level, the more likely it is going to
break it. Again, the breakout point was the point where Koon would add more
shares to his position using borrowed money from his brokers.
Page | 13
Point M
Following the breakout, the stock shot up nearly 50% within three weeks
without experiencing any pullback. The movement was obviously too fast, and
the gradient was too steep, the stock was due for a correction. Koon always says
no stock can continue to go up and up for whatever reasons, and after some time
it will experience a pullback. A bearish engulfing candlestick was then appeared
in the chart on 29 January 2015. That was the point or area where Koon would
take some profit off the table to pare down his margin loan, and to reduce his
cost.
Point N
After a brief correction, the stock continued to climb again until profit-taking
began in March 2015. It then faced a strong resistance around Rm 0.700/share,
and experienced a consolidation for four months. The price movement of V.S.
Industry was bounded by its upper descending resistance (LN8) and lower
ascending support (LN1). Shares changed hands from weak holders to
newcomers, who had a tendency to hold the shares longer in their portfolios.
That was not an alarming sign. In fact, the process would increase the stability
of the stock. The volume dropped significantly when share price approached the
apex of the triangle. A breakout then occurred when the share price crossed
above the upper descending resistance with high volume on 19 June 2015,
which showed that the buying interest was high. That was the area where Koon
would add more shares to his position using margin loan.
Point O
After breaking above LN8, the share price continued to move up. It then
stopped at the level of Rm 0.750/share, and moved sideways for a while. The
stock broke above its resistance (LN9, around Rm 0.750/share) on 13 July 2015
with high volume (28.72 million shares), and continued its upward trend. One of
the reasons why the share price continued to rise was the company just reported
the eighth consecutive quarter of increased profit on a YOY basis, as the
company was still expanding at a very fast pace. That was the time when Koon
would add more shares to his position.
Point P
Following the breakout, the stock climbed rapidly. Within two weeks, the stock
rose more than 33% without experiencing any pullback. Again, the share price
went up too fast, too soon, and the gradient was too steep. A shooting star
candlestick then formed on 3 August 2015. That was the time when Koon
would sell some of his shares into strength, take some money off the table, so
that he could buy more shares during correction.
Point Q
After that the stock experienced a brief high-volume-pullback, and subsequently
it formed a double bottoms (BTM1 and BTM2) pattern. Its price crossed above
the neckline (LN10 at Rm 0.895/share) of the double bottoms on 1 September
2015. In general, a high-volume pullback indicates that the correction attracts a
lot of buyers, and is a form of divergence, which suggests that the market may
be reversing up soon. The double bottom pattern is a bullish reversal pattern.
Page | 14
That was the time when Koon would add more shares to his winning position
with the sales proceeds.
Point R
After rising for a month, the stock experienced another high-volume pullback
(but with relatively lower trading volume), and the second double bottoms
(BTM3 and BTM4) pattern was then formed. Its share price crossed above the
neckline (LN11 at Rm 1.17/share) of the double bottoms on 19 October 2015
with high volume (32.24 million shares). That was the area where Koon would
add more shares to his position with borrowed money.
Point S
Following the breakout, the original resistance line or neckline (LN11) had now
become a new support line. The stock attempted to climb after the breakout, but
on falling volume. It was then rejected at the level of Rm 1.300/share (LN12),
thus forming the first top. The stock then retraced and found a support near the
level of Rm 1.170/share (LN11), as late comers who missed the buying
opportunity during the breakout came in to buy at that level. That was also the
time when Koon would add some shares to his position, but at a relatively lower
volume. In general, rising price on decreasing volume is a form of bearish
divergence, which suggests that the uptrend is not sustainable.
Point T
The stock tried to climb again after testing its support (LN11). Even though it
managed to break above its resistance line (LN12) on 28 December 2015, it
quickly reversed, gapped down, and crossed below the line (LN12) after the
company issued bonus shares to shareholders, and had never broken through the
barrier again. It was clearly a false breakout, which signified that the price
might be changing its original direction, as smart money who just received the
bonus shares had started to cash in after the issuance of the bonus shares. That
was the period when Koon would start selling his shares.
Point U
The share price declined after the false breakout, which resulted in the
formation of double tops (TOP1 and TOP2) pattern. The breakout (of the
double-tops’ neckline or LN11) to the downside on 18 January 2016 was a
bearish sign that investors should not ignore. In addition, the price made a series
of lower highs and lower lows. That was the time when Koon would continue to
sell his shares as the stock declined further.
Point V
The stock continued to move downward, and crossed below its main trendline
(LN1) on 11 February 2016 with high volume. It then breached its long-term
moving average (200-day SMA) support the following day with higher volume.
It implied that smart investors had been selling shares aggressively to realise
their gains, whereas dumb money bought the shares from the smart money as
the stock became more affordable after the share split, and issuance of bonus
shares. That was another bearish sign that should not be ignored. That was also
the area where Koon would continue to sell his shares. Bear in mind that the
Page | 15
only way to turn paper gains into hard cash is by selling stocks near their peaks,
and if we do not act, someone else will.
Point W
After the share price crossed below its main trendline (LN1), the function of the
trendline was changed from providing support to exerting resistance. The stock
attempted to rally but was rejected when it touched the main trendline. A
shooting star candlestick was then formed on 23 February 2016. That was also a
bearish sign that should not be overlooked. If Koon still had any V.S. Industry
shares left unsold in his portfolio, he would take advantage of the sucker rally to
dispose his shares.
Point X
The price then retraced, and crossed below its long-term moving average (200-
day SMA) support again on 2 March 2016. That was another bearish sign that
any serious investors should not ignore. After the share price crossed below the
long-term moving average (200-day SMA) support, the line would become a
new resistance line.
Point Y
The stock attempted to rally again after the retracement, but was rejected when
it hit the long-term moving average (200-day SMA). That was another sign of
weakness, and it was the point where Koon would continue selling his shares if
he had not completely disposed all his shares earlier.
Point Z
V.S. Industry’s short-term moving average (50-day SMA) crossed below its
long-term moving average (200-day SMA) on 5 April 2016. The death cross
was the last bearish signal, and a loud warning alarm. On 28 March 2016, the
company also reported decreased profits, on a QOQ basis. Long-term investors
who had not sold their shares earlier should dispose their shares as soon as
possible.
Remark:
The above-mentioned points are just some of the points where Koon would buy
and sell the shares of V.S. Industry from 2014 to 2016. In fact, there are many
other points where Koon would buy and sell. Sometimes, if the volatility was
high or when the stock was overbought or oversold, he would trade around the
core position actively in order to reduce his cost, and to optimise his return.
Page | 16
Case Study 2 - Supermax Corporation Berhad
Chapter 10:
Case Study 2 –
Supermax Corporation Berhad
Page | 1
10.1 Fundamental Analysis
Supermax Corporation Berhad was a five-bagger stock that Koon invested in

May 2009, and held until November 2010. Koon started buying it when its share
price was Rm 0.30/share in May 2009, and began selling it when it was around
Rm 1.60/share in August 2010.
Prior to investing in a stock, Koon would look at the business, and earnings
growth prospect of the company. In addition, he would also assess the
efficiency, and capability of its management, and the value of the stock
compared to its share price.
10.1.1 Understanding the Business of Supermax
Supermax principally involved in the production of medical gloves, and

later in contact lens. It began as a latex glove trading company in 1987. As
the business grew, the management increased their investment in the
company, ventured into manufacturing, marketing and distribution of
medical gloves. After thirty-three years of aggressive expansion. it now
has 11 manufacturing plants in Malaysia.
Being the second largest medical glove manufacturers in Malaysia after

Top Glove, Supermax produces more than 24 billion pieces of gloves
every year. Its latex gloves are exported to over 160 countries worldwide.
In addition, has eight own distribution centres based in the US, Brazil,
Canada, Germany, UK, Hong Kong, Singapore, and Japan. The brands of
medical gloves they offer include Supermax, Aurelia, Maxter, Medic-dent,
and Supergloves, which are extensively used in hospitals, and laboratories.
When Koon started investing the company in April 2009, the market
capitalisation of Supermax was only Rm 400 million. Today, as of May
2020, the market capitalisation of Supermax has crossed the mark of Rm
10 billion. In terms of capacity, it was also ranked No 2 in Malaysia in
2009, and could produce 14.5 million pieces of gloves per annum when
Koon started investing in the company.
10.1.2 Assessing the Financial Performance of Supermax
To Koon, having an appreciation of Supermax’s business and its outlook

was not enough, he would also study the financial reports of the company,
and would try to build his position in the stock below its fair price.
To judge the financial status of Supermax, it is important to study the

profitability, solvency, liquidity and activity ratio of its business.
• Profitability
First of all, Koon would make sure that the business made more
profits this year than last year, and could make more profits next
year than this year before placing his wager.
Page | 2
Figure 10.1: Net Profit of Supermax from 2005 to 2008
In order to determine the growth rate, we can use the linear equation
in the chart above to determine the adjusted net profit of Supermax
from 2005 to 2008.
In 2008, the company made a full impairment of its investment in its

associate company, APLI, amounting to Rm 16.7 million, as the
management believed that APLI was unable to carry through its
restructuring exercise. As a result, the net profit of Supermax in
2008 was lower than that in 2007, even though its revenue
continued to grow. But that exception would not bother Koon, as he
paid more attention to the demand of the company’s products, and
the ability of the company to generate higher revenue and earnings
in the next few years.
Adjusted net profit growth rate (3-yr CAGR)

= {[(Adjusted net profit in 2008 / Adjusted net profit in 2005) 1/3 ] – 1} × 100%
= [(Rm 51,996,600 / Rm 37,485,900) 1/3 ] – 1 × 100%
= 11.52%
It can be seen from Figure 10.1 that the Supermax did not suffer any
financial losses in 2008 in spite of the subprime mortgage crisis, and
the impairment charge. Moreover, it delivered 11.52% CAGR in net
profit during FY05-FY08.
Further, it was expected to deliver higher profit in 2009, as the

outbreak of H1N1 Swine Flu would lead to a higher demand of
medical gloves, which in turn allowed Supermax to increase their
selling prices without costing the company any additional expenses.
In other words, the profit of the upcoming year would be higher than
that of this year. In hindsight, Koon’s judgement on the potential
growth of Supermax’s net profit was right, as its net profit surged
from Rm 46.997 million in FY2008 to Rm 126.585 million in
FY2009.
Page | 3
Figure 10.2: Net Profit of Supermax from 2005 to 2009
Further, the net profit margin of Supermax was maintained at a satisfactory level,
around 10%, despite the increasing revenue. The number suggests that the
management was successful at controlling its cost.
Figure 10.3: Net Profit Margin of Supermax from 2005 to 2009
Also, the return on equity of Supermax was maintained at a high

level, around 15%, despite the growing shareholders’ equity. The
figure suggests that the management was efficient in utilising the
available resources to generate profits.
Page | 4
Figure 10.4: Return on Equity of Supermax from 2005 to 2009
• Solvency
One of the methods to assess the ability of Supermax to meet its

long-term financial commitments is by analysing its debt-to-
EBITDA and debt-to-equity ratios.
= Debt / EBITDA
= Rm 390,749,423 / Rm 101,119,000
= 3.86
= Rm 390,749,423 / Rm 416,380,000
= 0.94
The debt-to-EBITDA ratio and debt-to-equity ratio of Supermax in

2008 were 3.86 and 0.94, respectively. The ratios were higher than
those of industry average, 2.09 and 0.57, respectively, and were also
somewhat higher than the upper limit of normal ranges, as the
management of Supermax took more loans to expand their business,
buy assets, and build inventory, in order to meet the strong market
demand.
• Liquidity
Page | 5
Current ratio
= Rm 407,312,394 / Rm 347,382,835
= 1.17
Quick ratio
= (Rm 407,312,394 – Rm 135,507,463) / Rm 347,382,835
= 0.78
The current ratio and quick ratio of Supermax in 2008 were 1.17 and
0.78, respectively. In comparison, the figures were somewhat lower
than those of the industry average, 1.33 and 0.86, respectively, and
were the lowest ones in the past five years. One of the reasons why
the figures were so low is that the company borrowed a lot of money
to facilitate its expansion plan. Nevertheless, the company still
managed to maintain its current ratio above 1.00, which showed that
the company was able to meet their short-term obligations, and had
the necessary financial resources to maintain its solvency.
• Activity Ratio
To prevent investing in a poorly-managed company, we have to

analyse the total asset turnover ratio, inventory turnover ratio and
receivable turnover ratio of the company.

= Rm 811,824,000 / Rm 946,726,801
= 0.86

= Rm 811,824,000 / Rm 135,507,463

= Sales / Average accounts receivable
= Rm 811,824,000 / Rm 124,698,879
In comparison, the asset turnover ratio of Supermax in 2008, 0.86,

was lower than that of the industry average, 1.06, but was the
Page | 6
highest one in the last five years. This implies that the company was
working hard to utilise its assets to generate higher revenue.
In addition, its inventory turnover ratio, 5.99, was lower than that of
the industry average, 6.89. Given the increasing demand of gloves
amid the widespread of H1N1 virus, it was sensible that the
management built higher inventory in 2008 so that they could
deliver goods to clients once they received their orders, and to
prevent shortage of gloves.
Compared to its peers, its receivables turnover ratio, 6.51, was

slightly higher than that of the industry average, 6.02. This signifies
that the management were less efficient as its peers in collecting its
credit. But that figure would not bother Koon, as many companies
offer 90-day payment (or credit) term to their customers in order to
bring in new blood, and to grow their business.
• Cash Flow
To ensure that the company is not running out of cash, we must also
analyse the free cash flow and operating cash flow to sales ratio of
the firm.
Free cash flow

= Rm 53,085,879 – Rm 38,544,696
= Rm 14,541,183

= Rm 53,085,879 / Rm 811,824,000
= 0.07
The free cash flow of Supermax in 2008 was Rm 14,541,183, and

was higher than the industry average. This was a positive sign,
which showed that the company was still able to generate cash flow
internally to pay dividend to shareholders after allocating fund for
expansion.
Its operating cash flow to sales ratio, 0.07, was close to that of the
industry average, 0.07. This indicates that the management was as
good as their competitors in turning sales into cash in their day-to-
day operation.
Page | 7
Industry
Description 2005 2006 2007 2008 2009
Average (in 2008)
Revenue (Rm) 284,688,000 400,324,000 574,260,000 811,824,000 803,633,000 563,642,076
Earnings before interest, tax, depreciation and
44,522,000 61,113,000 93,730,000 101,119,000 205,670,000 75,992,563
amortisation, EBITDA (Rm)
Net profit (Rm) 36,273,000 39,749,000 55,946,000 46,997,000 126,585,000 42,461,192
Equity (Rm) 204,522,000 239,904,000 383,789,000 416,380,000 558,835,000 279,166,032
Return on equity (%) 17.74% 16.57% 14.58% 11.29% 22.65% 15.21%
Debt (Rm) 179,570,848 196,899,547 345,936,125 390,749,423 289,607,227 159,118,718
Total assets (Rm) 473,013,618 521,974,073 868,528,734 946,726,801 945,249,232 533,278,407
Free cash flow (Rm) -20,661,938 9,974,470 39,958,453 14,541,183 208,421,277 -5,679,413
Operating cash flow to sales ratio (times) -0.0050 0.0781 0.1287 0.0654 0.2810 0.0725
Figure 10.5: Summary of Supermax Corporation Berhad’s Financial Performance
Page | 8
10.1.3 Valuing the Business of Supermax.
To avoid paying too much for sellers and avoid overpaying for what the
business is worth, Koon would make sure that the Price-to-Earnings ratio
or forward Price-to-Earnings ratio of the stock were lower than 10, and
lower than that of the industry average.
= Rm 0.300 / Rm 0.035
= 8.57

= Rm 0.300 / Rm 0.07
= 4.28
Predicted share price of Supermax

= 14.90 × Rm 0.07
= Rm 1.04

stock were only about 8.57 and 4.28, respectively, when Koon built his
position in Supermax. Both ratios were lower than 10, and were below the
average of industry P/E, 14.90. Compared to its peers, whose P/E
multiples were in range between 14 and 18, the P/E ratio of Supermax was
only 8.57, which was very low when Koon started buying it. In addition, it
had an upside potential of Rm 1.04 per share, which would give Koon
247% profit.
Page | 9
Case Study 1
10.2 Technical Analysis
Figure 10.6 is the price chart of Supermax from April 2009 to November 2010,
the period of time when Koon invested in Supermax. The green coloured line
and red coloured line are 50-day SMA and 200-day SMA, respectively. Golden
Cross appeared in the chart on 7 May 2009 when the price was Rm 0.30/share,
whereas Death Cross appeared in the chart 15 Oct 2010 when the price was Rm
1.10/share.
Figure 10.6: Price Chart of Supermax from April 2009 to November 2010
Prior to studying how Koon traded Supermax shares, it is important to analyse

the support and resistance areas and of the stock. Those are the points where
Koon would pay attention to, and would make his buy and sell decisions. In
addition, Koon would also monitor the trade volume of the stock and its trend.
Figure 10.7 is the price chart of Supermax with its support and resistance lines
drawn in the chart.
Figure 10.7: Price Chart of Supermax with Support and Resistance Lines from
April 2009 to November 2010
Figure 10.8 shows the major points where Koon would buy and sell Supermax
shares during the outbreak of H1N1 Swine Flu after noticing that Malaysian
Airport Authorities installed temperature testing equipment to check the
temperature of arrival passengers, and after seeing the removal of the
Page | 10
Case Study 1
temperature detection equipment from the airport when the situation was under
control.
Figure 10.8: Price Chart of Supermax and Good Trading Points from April 2009
to November 2010
Point A
The share price of Supermax climbed for a couple of months after the global
stock market bottomed out in March 2009. The stock then traded within a
narrow price range and formed a strong platform between May 2009 and July
2009. The elevated platform was the best area where smart money took
advantage of to build their positions in the stock. The first point where Koon
would start building his position in Supermax was Point A, where its short-term
moving average (50-day SMA) crossed above its long-term moving average
(200-day SMA), around early May 2009. It was also the time when he saw the
temperature detection equipment installed at airport and train stations. Note that
even though the fundamental analysis of Supermax’s business showed that it
was safe to buy the stock, Koon would not go all-in at the beginning of his
venture in the investment. Instead of taking too much risk before his hypothesis
was proved right, he would buy the stock with just a fraction of his fund. For
example, he would probably dip his toe in Supermax with just 30 ~ 40% of the
money in his fund, around the level of Rm 0.300/share, when the Golden Cross
appeared. He would cut loss if the company reported two consecutive quarters
of reduced profits, or if downtrend started.
Point B
The stock then climbed for a couple of days, and fell again to test its support, as
some doubtful traders sold it when it approached the resistance (LN3). It could
also be due to a shakeout within the narrow price range to drive weak holders
out. As can be seen from the chart, the share price of Supermax did not produce
a lower low after the golden cross appeared, as other smart money had also
started to discover the value, and future earnings of Supermax’s business. Point
B was probably the time when Koon would add more shares to his original
position, with 5 ~ 10% of the money in his fund, when the price retested its
support (LN2) around Rm 0.300/share the following week. The reason of
adding shares progressively in this manner is to avoid losing too much money in
the stock at the beginning of his venture.
Page | 11
Case Study 1
Point C
The stock moved in the narrow trading range for a couple of weeks. It retested
its support (LN2) at Point C, with light trading volume, on 28 May 2009. That
was another time when Koon would add more shares to his position, with
another 5 ~ 10% of the money in his fund, as the stock did not make a lower
low. It can also be seen from the chart that its trading volume was getting lighter
and lighter (about 2 million shares per day) as the stock tested its support,
around Rm 0.300/share. It signified that those doubtful traders and impatient
sellers who intended to get out of the stock had become fewer and fewer. Hence,
it was very safe to buy the stock during that period of time before it broke above
its resistance (LN3).
Point D
The stock broke out of its resistance (LN3) on 8 July 2009 with high volume
(21.09 million shares, which was higher than that of the previous high). The
break out signified that those weak sellers who wanted to sell their shares near
the resistance (LN3), around Rm 0.340/share, had all been taken out of the stock
by eager buyers. In addition, the buying pressure was higher than the selling
pressure. That was the time that Koon would add more shares to his winning
position, with about 5% ~ 10% of the money in his fund. Latecomers or
indecisive investors who were interested in the stock but did not buy before the
breakout occurred would miss the opportunity to buy the stock at cheap prices.
Point E
The share price of Supermax continued to move up after the breakout, as sellers
became fewer and fewer, and some major investors’ aggressive buying pushed
the price up. Subsequently, the stock hit its next resistance (LN4) around Rm
0.500/share. The stock traded in a range-bound market (descending channel) for
a week, and then broke out again on 7 August 2009 with high volume (58.88
million shares). The trade volume at breakout point was also higher than that of
the previous high, which signifies that the breakout was a valid breakout.
Therefore, the breakout was the area where Koon would add more shares to his
winning position, with 20% ~ 30% of the money in his fund, as sellers were
getting less and less, buying interest was high, and the company had just
released the second quarter of increased earnings.
Point F
After the breakout, the original resistance line (LN4) turned into a new support
line, as investors who missed the opportunity to buy at the breakout point would
join others to buy when its price approached the price region. The share price of
Supermax rose quickly after the breakout. Profit-taking then began after the
stock went up about 25% to Rm 0.625/share. Shakeout could also be happening
at the same time. The stock came down to test its support (LN4) on 1 September
2009 with low trading volume. The low volume pullback toward support area
was actually a healthy correction and the long-term uptrend remained intact.
That was another point where Koon would add more shares to his winning
position, with 5 ~ 10% of the money in his fund, before the value of the stock
was realised.
Page | 12
Case Study 1
Point G
Supermax retested its support (LN4) on 2 Oct 2009. At that point, the stock was
not only supported by the descending support (LN4), it was also supported by
the short-term moving average (50-day SMA). Technicians or traders who
waited at the side line patiently would come in to buy the stock at that point in
time, thus preventing the share price of Supermax from declining further. In
addition, the number of people who were willing to part with their shares at the
level had dropped significantly, as many of these weak longs had already been
taken out of the stock earlier. That was the point where Koon would scoop up
the fantastic bargains before the supply dried up.
Point H
After a period of consolidation, the stock broke above its descending resistance
(LN5) or falling wedge on 5 Oct 2009, around Rm 0.500/share. At the same
time, its volume picked up at the breakout point. That was the area where Koon
would add more shares to his winning position. By that time Koon probably had
used up all his original capital. But his accounts would not be running out of
money. In fact, with margin finance, he would never short of fund (to buy more
shares) if the share price continues to rise. As the share price of Supermax went
up, his collateral value also went up in tandem. Therefore, Koon could borrow
more money from his brokers through margin finance to buy more Supermax
shares as the price continued to climb. Note that even though his original fund
had run dry, Koon would not settle down for just a small gain. If he believed
that the stock still had plenty of room to grow, he would stick to his guns, and
borrow money from banks to buy more shares, despite the disagreement of his
friends.
Point I
The stock continued to rise, crossed above Rm 0.600/share (LN6), and produced
another higher high on 13 October 2009, with high volume (44.03 million
shares). That was another area where Koon would add more shares to his
winning position, using margin loan, as the resistance of the stock was very low
at that level. Note that as the share price climbed, the trade volume also
increased in tandem. This signified that the price rise had attracted a lot more
market participants to the stock.
Point J
The stock continued its upward move, and attracted more and more traders into
the game. A bearish engulfing candlestick then appeared on the chart of
Supermax on 23 October 2009, as S&P500 index futures fell more than 1% after
US market hours. At that point in time, the price of Supermax had gone up too
fast, and its gradient was too steep. It was due for a correction. Koon always
says no stock can continue to go up higher and higher for whatever reasons.
That was the point where Koon would take some money off the table, so that he
could reduce his margin loan, realise some of his gains, and buy more shares
during pullback.
Point K
Supermax’s share price then moved in a narrow descending channel (bullish
flag) from 23 October 2009 to 9 November 2009. The pullback on falling
Page | 13
Case Study 1
volume was not only a good time for the stock to take a breather, it was also an
opportunity to drive weak holders out. Subsequently it crossed above the
resistance or upper descending line (LN7) on 10 November 2009. The lower
section of the consolidation zone, and the breakout point were the area where
Koon would add more shares to his winning portfolio, as the price had fallen
15%, but the demand for gloves was still expected to increase since the H1N1
Swine Flu epidemic had not shown any sign of improvement. Around that
period in time, the company also indicated that the gains from the sale of
treasury shares at higher prices, and the extraordinary profits from higher
demand of gloves would be distributed to shareholders as special dividend.
Point L
An ascending triangle subsequently formed, as its share price failed to move
higher after hitting the resistance level (LN8), but each pullback within the
triangle reversed at a higher low. Note that the trade volume was getting lighter
and lighter before the breakout occurred. It was an indication showing that weak
holders or sellers had become less and less as the consolidation continued. After
trading the range bound for eight weeks, the stock broke above its resistance
(LN8) on 17 December 2009 with high trading volume. Additionally, it showed
that the buying pressure was higher than the selling pressure. That was the
period in time that Koon would add more share to his position using borrowed
money from his brokers.
Point M
After the breakout, the old resistance became a new support. The stock came
down to test the new support (LN8) after the breakout, and moved sideways,
bounded by LN9 (resistance) and LN8 (support), for a week, which led to the
formation of a small box pattern. Impatient speculators, doubtful traders, and
other weak holders, who had no intention to invest for long-term, and had no
confidence in the company, were taken out of the stock slowly within that week.
After a week of sideways drift, the resistance dropped significantly. The stock
then crossed above the resistance (LN9) of the box on 28 Dec 2009. The
sideways market, and the breakout point were another area where Koon would
add more shares to his winning position.
Point N
After breaking through the line of least resistance, Supermax’s share price
moved up very fast, as many of the weak holders had been taken out of the
stock earlier. It shot up nearly 50% within two weeks without experiencing any
corrections. The movement was obviously too fast, the gradient was too steep,
and the stock was due for another correction. Koon always says no stock can
continue to go up and up for whatever reason, and after some time it will
experience a pullback. A shooting star then appeared on the chart on 14 January
2010. That is an indicator showing that whilst the crowd still pushed the share
price up, smart money had started to take some profits off the table. That was
also the point where Koon would sell some of his shares into strength, in order
to pare down his margin loan, to realise some of his gains, and to bring down
his cost. To Koon, profit is not a dirty word if earned ethically. If he did not take
it, someone else would.
Page | 14
Case Study 1
Point O
Subsequently the stock experienced a correction, as profit-taking began after the
stock rose 50% within two weeks. At the same time, short-term traders,
gamblers, or weak holders were also forced to either take a small profit or cut
loss when the share price dropped. The stock came down to test its support (50-
day SMA) on 9 February 2010. Traders who missed the chances to buy earlier
would take advantage of the opportunity to build their positions at that level.
That was also the point where Koon would use the sales proceeds to buy more
shares at a lower price (around Rm 0.95/share). The reason of buying at that
point was that many of the weak holders had already been taken out of the stock,
and newcomers had a tendency to hold the shares longer in their portfolios,
which would increase the stability of the stock. In addition, the demand for
medical gloves was still high. Therefore, the company would continue to
produce increasing profits, which was one of the key factors that could drive
interest of market participants in the stock higher.
Point P
The stock broke above its descending resistance (LN10) with high volume on 17
Feb 2010. It is noteworthy that trade volume before the breakout was very light,
which signified that most if not all weak holders and sellers who intended to sell
near the level had already been taken out of the stock. That was another area
where Koon would continue to buy with borrowed money from his stock
brokers.
Point Q
The stock continued its upward trend following the breakout until profit-taking
began on 4 March 2010. It then experienced a mild correction for two weeks,
from 5 March 2010 to 22 March 2010. The next breakout occurred on 23 March
2010 when Supermax crossed above its previous high or resistance (LN11) with
high volume. Again, that would be the point where Koon would add more
shares to his winning position.
Point R
The stock experienced a consolidation following the breakout at Point Q, and
led to the formation of a descending triangle. Its share price broke out upward
(crossed above the descending resistance or LN12) on 9 June 2010. The
breakout was a signal of the continuation of the original bullish trend. At the
same time, it crossed above the 50-day SMA. That was another point that Koon
would add more shares to his position.
Point S
After rising for a week, its share price stopped rising again. It then went through
a period of consolidation, for about two weeks. During the consolidation, its
share price made a series of higher lows, thus forming a rising support (LN13),
and several equal highs, thus forming a flat resistance line (LN14). Breakout of
the ascending triangle occurred on 12 July 2010, but with a relatively low
volume. That was the point where Koon would buy, but with just a very little
amount of money. The reason is that the breakout with low volume and the rally
on contracting volume, were a bearish sign, which indicated that people
interested in the stock had decreased.
Page | 15
Case Study 1
Point T
After peaking around Rm 1.620/share, the share price of Supermax began to
decline on 20 July 2010, and crossed below its main trendline (LN1) on 12
August 2010. That was a warning sign indicating that the uptrend has ended.
Also, the temperature testing equipment used at the airport had been removed at
that point in time. It implied that the situation was under control, and the
demand for medical gloves would begin to fall. That was the time when Koon
would start disposing his shares, as the demand for medical gloves would
decrease, and the earnings of Supermax would decline.
Point U
The price crossed below its prior low (Rm 1.400/share) or support (LN15) on 18
August 2010. The series of lower highs and lower lows were a sign showing
that the downtrend was confirmed. As can be seen on the chart, there were more
bearish candlesticks than bullish candlesticks in that area, and the bullish
candlesticks were short, which indicated that the buying pressure was low,
selling pressure was higher than buying pressure, and most of the buyers were
dumb money. In addition, the price decline was on increasing volume, which
was also a bearish signal. That was the point where Koon would dispose his
shares aggressively.
Point V
The price crossed below its prior low (Rm 1.250/share) or support (LN16) on 3
September 2010. It signified that the support was weak, and the selling pressure
was strong. That was another good selling opportunity for investors who wanted
to get out of their positions.
Point W
Supermax crossed below its 200-day SMA (Rm 1.220/share) on 7 September
2010. It was also a bearish sign, as the long-term support (or long-term moving
average) had been breached. That was another selling opportunity for investors
who had not sold their shares earlier. By that time, Koon had completely sold all
his Supermax shares. After several weeks of decline, the writing was on the wall
for all investors, and there was no reason to not getting out, as most smart
money had disposed their shares.
Point X
The long-term moving average support (200-day SMA) then became a new
resistance for the stock after the breakdown. The stock attempted to bounce
back but failed to crossed above the 200-day SMA. Sellers would dispose their
shares aggressively when price approached the line. Apparently, the selling
pressure was too strong. The price then resumed its downward move on 14
September 2010.
Point Y
The stock continued its downward move and its price crossed below the prior
low (Rm 1.140/share) or support (LN17) on 17 September 2010. The support
was a weak one, as there were not many peaks and troughs on the left-hand side
of the chart. The breakdown of LN17 was another selling opportunity for
Page | 16
Case Study 1
investors who wanted to get out of their positions, and to turn their paper gains
into cold cash.
Point Z
After hitting the trough with high volume on 30 September 2010, the stock
attempted to bounce back. At that level, the stock was oversold, and its price
had gone down too fast. At the same time, dumb money who missed the chance
to buy previously would join the crowd to buy shares aggressively at the level.
After rising for two weeks, Supermax’s short-term moving average (50-day
SMA) crossed below its long-term moving average (200-day SMA) on 15
October 2010. The death cross was the last bearish signal that investors should
not ignore. Investors who had not sold their shares earlier should take advantage
of on the dead cat bounce to sell their share at a higher price before the stock
falling further.
Remark:
The above-mentioned points are just some of the major points where Koon
would buy and sell his Supermax shares during the outbreak of H1N1 Swine Flu
in 2009. In fact, there were many other points where Koon would buy and sell
within the two years, in order to reduce his cost, and to optimise his return.
Sometimes, if the volatility was high, or when the stock was overbought or
oversold, he would get in and out, several times a day, to make some small
quick profits.
Page | 17
Further Reading
Further Reading
Books:
1. Active Value Investing: Making Money in Range-Bound Markets. By: Vitaliy

N. Katsenelson
2. Beating the Dow. By: Michael B. O'Higgins
3. Beating the Street. By: Peter Lynch
4. Berkshire Hathaway Letters to Shareholders. By: Warren E. Buffett
5. Brandes on Value: The Independent Investor. By: Charles Brandes
6. Buffettology : The Previously Unexplained Techniques That Have Made
Warren Buffett the World's Most Famous Investor. By: Mary Buffett and David
Clark
7. Charlie Munger: The Complete Investor. By: Tren Griffin
8. Common Stocks and Uncommon Profits and Other Writings. By: Philip A.
Fisher
9. Concentrated Investing: Strategies of the World’s Greatest Concentrated Value
Investors. By: Allen C. Benello, Michael Van Biema, Tobias E. Carlisle
10. Contrarian Investment Strategies: The Psychological Edge. By: David Dreman
11. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of
Losing Corporations. By: Tobias E. Carlisle
12. Dividends Don’t Lie: Finding Value in Blue Chip Stocks. By: Geraldine Weiss
13. Dividends Still Don’t Lie: The Truth about Investing in Blue Chip Stocks and
Winning in the Stock Market. By: Kelly Wright
14. Elliott Wave Techniques Simplified. By: Bennett A. McDowell
15. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in
Financial Reports. By: Howard Schilit
16. Fooled by Randomness. By: Nassim Taleb
17. Fooling Some of the People All of the Time, A Long Short (and Now Complete)
Story, Updated with New Epilogue. By: David Einhorn
18. Fortune's Formula: The Untold Story of the Scientific Betting System That Beat
the Casinos and Wall Street. By: William Poundstone
19. Getting Started in Technical Analysis. By: Jack D. Schwager
20. How Markets Really Work. By: Laurence A. Connors and Cesar Alvarez
21. How to Make Money in Stocks: A Winning System in Good Times or Bad. By:
William J. O’Neil
22. How to Make Money in Stocks: Rules for Investment Success. By: Sir John
Templeton
23. How to Trade in Stocks. His Own Words: The Jesse Livermore Secret Trading
Formula for Understanding Timing, Money Management, and Emotional
Control. By: Jesse Livermore
24. Inside the Mind of Turtles: How the World’s Best Traders Master Risk. By:
Curtis M. Faith
25. Invest Like A Guru: How to Generate Higher Returns At Reduced Risk With
Value Investing. By: Charlie Tian
26. Investing and the Irrational Mind. Rethink Risk, Outwit Optimism, and Seize
Opportunities Others Miss. By: Robert Koppel
27. Investing for the Long Term: My Experience as an Investor. By: Francisco
García Paramés
28. Investing Psychology: The Effects of Behavioral Finance on Investment Choice
and Bias. By: Tim Richards
29. Investment Biker: Around the World with Jim Rogers. By: Jim Rogers
Page | 2
Further Reading
30. Investment Philosophies: Successful Investment Philosophies and the Greatest

Investors Who Made Them Work. By: Aswath Damodaran
31. Investment Valuation: Tools and Techniques for Determining the Value of Any
Asset. By: Aswath Damodaran
32. Irrational Exuberance. By: Robert J. Shiller
33. Japanese Candlestick Charting Techniques. By: Steve Nison
34. John Neff on Investing. By: John Neff
35. Learn to Earn: A Beginner's Guide to the Basics of Investing and Business. By:
Peter Lynch
36. Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful
Investor. By: Seth Klarman
37. Market Wizards: Interviews with Top Traders. By: Jack D. Schwager
38. Martin Pring's Introduction to Technical Analysis. By: Martin Pring
39. Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own
Game. By: Kathy Lien && Boris Schlossberg
40. More Mortgage Meltdown: 6 Ways to Profit in These Bad Times. By: Whitney
Tilson and Glenn Tongue
41. More Than You Know: Finding Financial Wisdom in Unconventional Places.
By: Michael J. Mauboussin
42. One Up on Wall Street: How to Use What You Already Know to Make Money
in the Market. By: Peter Lynch with John Rothchild
43. Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger. By:
Peter D. Kaufman
44. Reminiscences of a Stock Operator. By: Edwin Lefèvre
45. Security Analysis. By: Benjamin Graham, David Dodd
46. Stan Weinstein's Secrets For Profiting in Bull and Bear Markets. By: Stan
Weinstein
47. Stock Market Wizards: Interviews with America's Top Stock Traders. By: Jack
D. Schwager
48. Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns
& Long-Term Investment Strategies. By: Jeremy J. Siegel
49. Street Smarts: Adventures on the Road and in the Markets. By: Jim Rogers
50. Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013 .
By: Carol J. Loomis
51. The Alchemy of Finance. By: George Soros and Paul A. Volcker
52. The Art of Value Investing: How the World's Best Investors Beat the Market.
By: John Heins and Whitney Tilson
53. The Big Secret for the Small Investor: A New Route to Long-Term Investment
Success. By: Joel Greenblatt
54. The Complete Turtle Trader: How 23 Novice Investors Became Overnight
Millionaires. By: Michael W. Covel
55. The Dhandho Investor: The Low-Risk Value Method to High Returns. By:
Mohnish Pabrai.
56. The Dividend Connection: How Dividends Create Value in the Stock Market.
By: Geraldine Weiss
57. The Education of a Value Investor: My Transformative Quest for Wealth,
Wisdom, and Enlightenment. By: Guy Spier
58. The Emotionally Intelligent Investor: How Self-Awareness, Empathy and
Intuition Drive Performance. By: Ravee Metha
Page | 3
Further Reading
59. The Essays of Warren Buffett: Lessons for Corporate America. By: Warren E.
Buffett and Lawrence A. Cunningham
60. The Four Pillars of Investing: Lessons for Building a Winning Portfolio. By:
William J. Bernstein
61. The Great Minds of Investing: William Green, Michael O'Brien, and Hendrik
Leber
62. The Guru Investor: How to Beat the Market Using History's Best Investment
Strategies. By: John P. Reese and Jack M. Forehand
63. The Intelligent Investor: The Definitive Book on Value Investing. By: Benjamin
Graham.
64. The Intelligent Investor's Mind: The Psychology and Philosophy of Smart
Investing. By: Eldon Frost
65. The Interpretation of Financial Statements. By: Benjamin Graham.
66. The Little Book of Behavioral Investing: How not to be Your Own Worst
Enemy. By: James Montier
67. The Little Book of Common Sense Investing: The Only Way to Guarantee Your
Fair Share of Stock Market Returns. By: John C. Bogle
68. The Little Book of Trading: Trend Following Strategy for Big Winnings. By:
Michael W. Covel
69. The Little Book of Valuation: How to Value a Company, Pick a Stock and
Profit. By: Aswath Damodaran
70. The Little Book of Value Investing. By: Christopher H. Browne
71. The Market Gurus: Stock Investing Strategies You Can Use from Wall Street's
Best. By: John P. Reese and Todd Glassman
72. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. By:
Howard Marks
73. The New Market Wizards: Conversations with America's Top Traders. By: Jack
D. Schwager
74. The New Sell and Sell Short: How to Take Profits, Cut Losses and Benefit from
Price Declines. By: Alexander Elder
75. The Only Investment Guide You'll Ever Need. By: Andrew Tobias
76. The Outsiders: Eight Unconventional CEOs and Their Radically Rational
Blueprint for Success. By: William Thorndike
77. The Psychology of Investing. By: John R. Nofsinger
78. The Swing Trader’s Bible: Strategies to Profit from Market Volatility. By:
Matthew McCall & Mark Whistler
79. The Tao of Charlie Munger: A Compilation of Quotes from Berkshire
Hathaway’s Vice Chairman on Life, Business and the Pursuit of Wealth. By:
David Clark
80. The Treasury of Wall Street Wisdom. By: Harry D. Schultz & Samson Coslow
81. The Value Investors: Lessons from the World’s Top Fund Managers. By:
Ronald W. Chan
82. The Warren Buffett Portfolio: Mastering the Power of the Focus Investment
Strategy. By: Robert G. Hagstrom
83. The Warren Buffett Way. By: Robert G. Hagstrom
84. Thinking, Fast and Slow. By: Daniel Kahneman
85. Trade Like A Stock Market Wizard: How to Achieve Superperformance in
Stocks in Any Market. By: Mark Minervini
86. Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market.
By: Gil Morales and Chris Kacher
Page | 4
Further Reading
87. Trader Vic--Methods of a Wall Street Master. By: Victor Sperandeo, T. Sullivan
Brown
88. Trend Trading for a Living: Learn the Skills and Gain the Confidence to Trade
for a Living. By: Thomas K. Carr
89. Valuation: Measuring and Managing the Value of Companies. By: McKinsey &
Company
90. Value Investing: How to Become a Disciplined Investor. By: Glen Arnold
91. Value Investing Made Easy: Benjamin Graham's Classic Investment Strategy
Explained for Everyone. By: Janet Lowe
92. Value Investing: From Graham to Buffett and Beyond. By: Bruce C. N.
Greenwald, Judd Kahn, Paul D. Sonkin, and Michael van Biema
93. Value Investing: Tools and Techniques for Intelligent Investment. By: James
Montier
94. Visual Guide to Chart Patterns. By: Thomas N. Bulkowski
95. Way of the Turtle: The Secret Methods that Turned Ordinary People into
Legendary Traders. By: Curtis M. Faith
96. What Works on Wall Street, Fourth Edition: The Classic Guide to the Best-
Performing Investment Strategies of All Time. By: James O’Shaughnessy
97. Why Moats Matter: The Morningstar Approach to Stock Investing. By: Heather
Brilliant & Elizabeth Collins
98. Winning on Wall Street. By: Martin Zweig
99. Winning the Loser’s Game: Timeless Strategies for Successful Investing. By:
Charles D. Ellis
100. You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock
Market Profits. By: Joel Greenblatt
Page | 5
Further Reading
Website:
1. https://klse.i3investor.com/index.jsp
2. https://seekingalpha.com/
3. https://www.gurufocus.com/
4. https://www.investopedia.com/
5. https://www.koonyewyin.com/
6. https://www.valuewalk.com/
7. https://www.zerohedge.com/
Page | 6

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INVEST LIKE

KOON YEW YIN

LEARN HOW A PHILANTHROPIST AMASSES

According to Koon, since the publication of his Rm 50 million donation to the

1.2 Why Are Malaysian Companies Not the Same

1.2.1 Most of the companies do not have durable competitive advantage

Unlike US companies, most of the companies in Malaysia do not have

If you have no idea of what a sustainable competitive advantage is, the

Unlike Starbucks, Pepsico, and 3M, most Malaysian companies do not

Unlike Autodesk, Microsoft, and TransDigm, most of the public

Now, do you see the main difference between Malaysian companies,

Without having a durable competitive advantage (to protect it from

Thus, when we invest in a company with no economic moat for long

Even if we have found a stock with a competitive advantage, we should

1.2.2 The performance of most Malaysian companies is cyclical in

Based on Koon’s observation, no matter how good the business of a

crisis, industry downturn, or when the company management makes

As an investor, we are unable access to insider information, and,

Also, do not buy a stock because it is cheap, especially when its

1.2.3 Political influence also plays an important role in the performance

Unlike US companies, some Malaysian companies have strong ties

In addition, the decisions of politicians or lawmakers may have an

Further, the decision of the government (or Bank Negara Malaysia) to

1.2.4 Some of the companies are run by crooks

Based on Koon’s observation, many of the public companies in

Whilst some companies, such as Lii Hen, V.S. Industry, Supermax,

In addition, they, together with their cronies, trade against minority

Also, instead of benefitting their shareholders, some of the owners list

companies make money every year. Investors get no chance to enjoy

When you invest your hard-earned money in this type of companies,

1.2.5 The future of most Malaysian stocks is fraught with many

Bear in mind that expansion does not guarantee profitability. Bigger

Of course, during this stage, managements may paint a bright future

If we want to invest in this type of companies, the only way we can

1.3 How to make money in Malaysia Stock Market then?

Warren Buffett said that “The key to successful investing is to determine if a

Benjamin Graham advocated to purchasing “Securities at prices less than their

below their net tangible assets (NTA), or liquidating values in Malaysia

Why Malaysian companies are not the same

Most of them do not have durable competitive advantage

Their performance is cyclical in nature

Political influence also plays an important role in their performance

Some of the companies are run by crooks

The future of these companies is fraught with many uncertainties

Fundamental analysis is a subject studying the underlying business of a company

To Koon, fundamental analysis is a foundation of stock investing. Buying a stock

A share of stock usually represents a fraction of ownership in a business. According

Before performing fundamental analysis, we must be able to read financial reports

2.1 Introduction to Quarterly Financial Statement and Annual Report

Quarterly financial statements are statements comprise of income statement,

Annual report, on the other hand, is a document published by a public listed

Although reading financial statements and annual reports can be time

2.1.2 Understanding Quarterly Financial Statement and Annual Report

As mentioned earlier, every annual report comprises of financial

• Financial statements are four reports in a set; consist of income

• The chairman’s statement is an overview provided by the CEO of a

• Business and financial review summarises the business performance

• The top thirty shareholders list is a summary that illustrates the

Berhad, Digi.com Berhad and Panasonic Manufacturing Malaysia

• The remuneration of the board of directors reported in the annual

2.1.2.1 Income Statement

• An income statement (refer to Figure 2.1), also known as a profit

Gross profit = Revenue – Cost of goods sold