My Trading Note - Adam Khoo's Perspectives

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

Warren Buffett Beliefs

BELIEFS AND BEHAVIOUR OF THE AVERAGE BELIEFS AND BEHAVIOUR OF WARREN BUFFETT
INVESTOR
1. The market is rational. Stock prices reflect the 1. The market is irrational. It is driven by fear and
value of the company stock greed such that prices do not reflect the true
value of stocks in the short term.
2. I must predict the market’s next move to make 2. The ability to make predictions has nothing to
returns. If I can’t predict the market, there is do with investing success. No one can predict the
someone else who can market consistently.
3. I must take big risks to make big returns 3. When you understand the business behind the
stock, you can make huge returns with little risk.
4. I should diversify funds into many small- 4. Identify a few great companies and make
holdings to reduce risk substantial investments in these companies
5. Buy when the price is rising (good news) and 5. Buy great companies when the price is falling
sell when price is failing (bad news). Focus on (bad news) and sell when price is rising (good
short term. news). Long term value focused.
6. Tends to make decisions based on emotions. 6. Make decisions based on strict criteria. Buy
Buys motivated by prospects of immediate/big stocks when undervalued and sell when
profits (greed) and sells based on fear of loss overvalued.
when prices fall.

1. Stock prices are driven by demand and supply, also driven by greed and fear. Buy when the
market undervalue the company and sell when the market finally recovers or overvalues. The
true source of the company is the annual report that is the true source of info.

2. One can’t predict the short term ups and downs. By analyzing the company’s FA, he can predict
that the company’s profit and stock value will increase over time.

3. Capital preservation. Never lose money. Believes in low risk, high return.
4. Impossible to understand any single investment well enough to make good decision when

diversify. Identifying and focusing in a few great companies that he understand is better.
5. Buy on bad news(stock highly undervalued)-that must be only temporary and bring no harm to

the long term ability of the company to make profit, sell when the price is rising because of good
news(Overvalued). Only applied for strong financial with certainty of higher future profits.
Examples : war, recession, rumours, stupid management mistake that recoverable.
6. No emotion, follow strict criteria. Be conservative.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

Warren Buffett’s Strategy

STRATEGY 1
STRATEGY 2
STRATEGY 3
Identify Buy them Wait for
very good only at a the
business huge market to
discount realise its
true value

1. The business that we can predict confidently that it’s annual earning and stock value will
increase. The business that will always recover after a downfall. The business that have a strong
FA.

2. Being afraid when everybody is greedy, being greedy when everybody is afraid. Saving enough
money to buy the stock at the bottom.

3. Sell when the stock is overvalued.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

The Language Of Money And Business

Balance Sheet PL Statement CF Statement

• Indicate the • P/L during a year • Indicates the
company's asset or a quarter company's
v liability profitability and
• Higher profit will stability
• Indicate financial boost the stock
strength value • Indicates the
company's
generated cash

BALANCE SHEET: Tells about the company financial strength

ASSET = LIABILITY + EQUITY
ASSET(OWN) - LIABILITY(OWE) = EQUITY

CURRENT ASSET : assets that are likely to be used up or easily converted to cash within a
year.

Cash Equivalent

1. Including :
a) The amount of money in savings and checking account.
b) Fixed deposits and bonds-quick cash

2. Having enough cash means good company management.
3. Having too much cash means the management isn’t putting the investors’ money to

good use where it can generate higher return.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

Account Receivables(AR)
1. Money owed by customers in 30-90 days depending on the nature of the business.
2. ↥AR (compared to sales) – company’s credit policy is too lenient- bad sign

Inventories
1. Esp. manufacturing and retail companies.
2. Including:
a) Raw materials
b) Partially finished product
c) Finished product
3. Too much inventories for too long is not good. Longer, the faster its value will drop.
4. ↥Inventory turnover (Cost of goods sold, inventory level), ↥efficient at turning around its
inventory.

NON-CURRENT ASSET (LONG TERM)
The asset that are not expected to be converted to cash or used up within a year.
Property, Plant And Equipment (PPE)
Including : Building, plant, land, machinery equipment etc.
Long Term Investment
Money invested in long term bonds or other company’s stock.
Intangible Assets
Intangible assets = Intellectual property : label, brand, copyrights + Goodwill ( the value investor
willing to pay for its value the company’s equity)

CURRENT LIABILITY: what a company owes and are due to pay within a year.
Account Payables ( Yet To Be Paid)
Bills that a company owes to individuals (like staff salaries etc.) and other companies (supplier)
that are due to be paid within a year.
Short Term Borrowings
The money that the company borrows for less than a year: credit/ overdraft line.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

NON-CURRENT LIABILITY: what the company owes and can slowly pay back over a longer
period of time.

PL STATEMENT: tells how well the company generate profies
How well the company is making money (profit and loss) within a quarter or a year.

The Formula Of Determining Net Income

Sales Revenue- Gross Profit- Operating Income Before Net Profit After
COGS Operating Income-Interest Taxes - Income Tax ( or Net
Expenses Expense+Interest Income)
Tax
Income

Sales Revenue
Other name : Sales/ Turnover. Indicates the company’s earnings.
SALES = PRICE PER UNIT X QUANTITY
Cost Of Goods Sold (COGS)
All the expenses related to producing the goods or services: salaries, raw materials, supplier cost, goods.
Gross Profit

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

GROSS PROFIT = SALES – COGS

GROSS MARGIN = GROSS PROFIT X 100%

SALES

1. Can affect the stock price
2. Companies that can maintain Gross Margin above 25% for 5 to 10 years indicates that they have

highly differentiated products and strong competitive advantage.
3. Very low Gross margin means the company sell commodity type products

Operating Expenses

1. a.k.a Overhead that include fixed running cost:
a) Marketing
b) Admin salaries
c) Rnd- innovation for continuation of the brand
d) Depreciation-when the company buy physical asset
e) Non-recurring charges/gains(extraordinary items)- not a part of the on-going
operation, not repeated

Operating Income

1. Profit from actual operation
2. OPERATING INCOME = SALES REVENUE – COGS – OPERATING EXPENSES
3. Company also make additional profit/loss from interest income (money they put in bank) or one

off, non-operational activities (selling investment for profit), a.k.a extraordinary item

Net Profit After Tax/Net Income

1. Actual profit the company made after deducting all the expenses, including tax. It indicates how
much goes to you as dividend or goes to retained earnings.

NET PROFIT AFTER TAX = OPERATING INCOME +/- INTEREST INCOME/ EXPENSE - TAXES

From the PL Statement, 2 indicators will tell about how profitable a company is
– PE Ratio and EPS

Earning Per Share

1. Indicates how much the net profit is going to you
2. Directly tell the share price. Company that can increase the EPS will have higher intrinsic value

and share price.

EPS = NET PROFIT AFTER TAX / NO. OF SHARE OUTSTANDING

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

PE Ratio
1. Simplest and the most common way to tell how expensive a stock is.
2. Indicates how many times an investor are willing to pay for a share per dollar earned.
3. PE Ratio = Current Share Price / EPS

Cash flow statement:tell how much cash is going in and coming out
of the company

1. Gives the picture of company’s profitability and stability.
2. Difference with the other statements is accrual accounting – sales and profit are recorded

though cash has not been received. Income taxes and depreciation are recorded as an expense
although no need to physically pay the cash immediately.
3. Without adequate cash flow the company cannot meet its monthly payments and forced into
bankruptcy.
4. Divided into 3 :

Type Usage
CF from operating activities Shows how much money is going in and out as the result of
it selling its goods and services.
CF from investing activities Example:
Depreciation is counted as an expense in PL statement
CF from financing activities though the company does not actually pay out the cash.
Shows how much money is going in and out as the result of
its investing activities
Example :
When the company buys an asset through acquisition or
CAPEX, cash flow decreases.
Shows how much money is going in and out as the result of
financing activities
Example:
1. When the company borrows money or raises capital by
issuing new shares, cash flow increases.
2. When the company pays back its loans, buy back its
shares, or pays out dividends, its cash flow decreases.

INCREASE (DECREASE) IN CASH EQUIVALENTS: OVERALL
INCREASE/DECREASE IN CASH AS A RESULT OF OPERATIONS, INVESTING
AND FINANCING.

INCREASE (DECREASE) IN CASH EQUIVALENTS = OPERATING CF + NET CASH FROM INVESTING
ACTIVITIES + NET CASH FROM FINANCING
ACTIVITIES

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

SUMMARY:
1. If the Increase (decrease) in cash equivalents is positive(+), means the CF of the company is
good.
2. As long as the CF of the company is increasing each year, it is a good sign.
3. Though the company shows increasing profit, does means the CF is good.(Bad sign)

➀History of consistently ➃Conservative debt :
increasing sales & earnings Long-term debt <(3 to 4) x Net Profit

➁Sustainable competitive VERY GOOD ➄ROE (>15%) must be
advantage (wide economic BUSINESS? consistent and high
moat)
➅Low CAPEX required to
➂Future growth drivers maintain current operation

➆Honest and competent
management

GOOD PRICE?

⑧UNDERVALUED : Share price < Intrinsic value

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

CRITERION 1: CONSISTENTLY INCREASING SALES AND EARNINGS

1. Track record must show consistent earnings and sales over the last five years regardless of
recession or good economic period. It’s because the future earnings will be more predictable
with confidence. Earnings can easily manipulated by accountants, but sales cannot be changed.

2. Must also make sure that sales is increasing. If the earnings id increasing, but sales drop or
stagnate, it sometimes means that the company is not really doing better but cutting costs.

3. Where to find? Go through the annual report-under the PL statement and Income statement.
4. Alternative- www.investing.businessweek.com , www.morningstar.com FREE

CRITERION 2: SUSTAINABLE COMPETITIVE ADVANTAGE

1. Indicates strong competitiveness, higher sales, higher profit and regular customer.
2. Factor of huge economic moat:

i. Strong brand loyalty (Nike, Coke, Hershey’s)
ii. Huge economic of scale(Wal-Mart, Amazon.com)-able to buy millions of dollars’ worth of

goods at whopping price, allowing them to price their goods lower than anybody else.
iii. Market leader (VISA)-number one credit card.
iv. Special formula, technology or pattern (Panadol)
v. High switching costs that lock in customers(Adobe, Stryker, Microsoft)

INVEST DO NOT INVEST
Sustainable competitive advantage business Commodity-type product/service
(Wide economic moat)
Consumer monopoly Lowest cost producer always win
Free to raise price without affecting the demand Sells a product that price is the most important
buying factor.
More advantages – little direct competition : High competition:
High profit margins Low profit margins
Consistent, increasing profits Erratic profits
Predictable future growth of share equity and Little future growth in share equity and price
price
Indispensable to stores/distributors. Strong Example:
demand from buyers. Internet service provider, airlines, automobile
Example : manufacturer
Coke, VISA, Nike, Harley Davidson

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

CRITERION 3: FUTURE GROWTH DRIVERS

1. The company should be exposed to markets that have population, demographic growth, rising
employment and wages

2. The company should also have solid growth plans:
i. Development of new product lines
ii. Upcoming product innovations
iii. New application of patents
iv. Expansion in capacity-building bigger factories etc

Where to find these info:

SOURCE DETAILS
Company annual reports Search for the company’s website, download its
Analyst report latest annual report.
Look under CEO message-company growth plans
Projected long-term growth rates and sales forecast
Summary of the company’s market potential and
growth plans.
Including the future revenue, PL projections
US-www.morningstar.com
M-www.bursamarketplace.com
Sing-www.shareinvestor.com
Go to www.reuters.com/finance/stocks
Look for company that are able to grow at least
10% per annum

CRITERION 4: CONSERVATIVE DEBT

1. Taking too much debt can lead to bankruptcy-during prolonged recession and poor
management.

2. Need to make sure the debt is payable in 3-4 years
3. Rule of thumb:

LONG-TERM DEBT (found in balance sheet-long-term liabilities/non-current liabilities) should be
less than 3 times of the current NET INCOME (after tax)(can be found in the income statement)

LONG TERM DEBT < 3(CURRENT NET INCOME AFTER TAX)

4. This rule of thumb is not applicable to banking and commodities companies that use high level
of debt (known as leverage) to run their businesses.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

CRITERION 5: ROE MUST BE CONSISTENTLY ABOVE AVERAGE

1. ROE shows how much profit the company generate profit with the money invested.
2. ROE = (Net income After Tax / Total Shareholder’s Equity) x 100%
3. High and consistent ROE indicates:

i. The company has sustainable competitive advantage
ii. Shareholder’s investment will grow at high annual compounding rate that will result in high

share price in the future.
4. Company with 12% ROE is a fair investment. If it is 15%, it is considered rare and a great

investment.
5. ROE can be found in company annual report-under financial performance summary/financial

ratios
6. Alternative-www.morningstar.com under key ratios.

CRITERION 6: MANAGEMENT IS HOLDING OR BUYING THE COMPANY STOCK

1. If key senior directors (CEO, CFO, chairman) are collectively buying the company stock, it is a
good sign- they have the confidence that they are getting a good deal at the current price. It is a
good indication that the price will soon rise.

2. We can check recent insider trades:
i. US-www.moneycentral.com
ii. Sing-www.shareinvestor.com-under insider trading

CRITERION 7: STOCK IS UNDERVALUED-SHARE PRICE< INTRINSIC/TRUE VALUE

1. Intrinsic value: present value of all its future cash flow from operations. We do not want to
overpay to buy a great business.

2. Money received in the future worth less today. It involves discount rate/opportunity cost that is
the time we spend to wait for our return:
a) If the discount rate is 5%, and you are willing to pay only RM100 per share, then
b) 100/(1+0.05)=RM95.24
c) Because you only get RM100 a year later. This is what we call discounting future value
(discounted to DR of 5%) to present value(RM100).

3. IV is get by adding up all the company future operating cash flow to perpetuity and then
discount it to present value, for 10 years conservatively.

4. Steps:
i. Project cash flow for next 10 years
a) Take recent cash form operation (can get from statement of CF) and project it with
the estimated ‘long-term growth rate’
b) Find the mean of ‘Long term growth rate’ from sales and earnings statement and
derive the estimated cash from operation for the next 10 years.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

c) Another way to do it: going through the CF statement and find the operating
CF/cash from operation of the company for the last 5 years. Using financial
calculator, we can easily calculate the average annual compounded growth rate of
CF for the last 5 years. Steps:
a) First, set it to ‘compounded interest mode’.
b) Then, key in the following:
1. PV: Present Value(-)
2. FV: Future Value(+)
3. N: Number of periods(5)
4. P/Y: Number of payment periods a year(1)
5. C/Y: Number of compounding periods a year(1)
6. PMT: payment per period(0)
7. I: Rate of return(%)

c) Project the CF for next 10 years

ii. Calculate the right discount factor (DF)
The more volatile the stock, the higher DF you should use. You need to demand higher rate
of return to compensate for the additional risk you are taking. You can check the risk for
each stock using beta value (beta value >1 means the stock is less volatile)-
www.reuters.com/finance/stocks.

Beta Discount Rate (%)
5
Less than 0.90 6
1 6.8
1.1 7
1.2 7.9
1.3 8
1.4 8.9
1.5 9
More than 1.6

Another way to do it is by calculating the discount factor (DF) on our own:
DF=1/1+P^n
Example:
If the interest rate is 4%, then 1+P^n is 1+0.04^10 where
P is interest rate
N is the number of years

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

iii. Discount all future cash flow to present value and sum them up
DV = CF Proj X DF

In this case, the IV of the whole company is the sum of all the future discounted CF for the
next 10 years, a.k.a the projected value (PV) for 10 year CF.

iv. Find the value of each share
IV of one share based on the company future CF, take PV and divide it by the number of
total of share outstanding:

IV = PV / share outstanding

To be more accurate, add the net cash per share,
= (Cash and Equivalents – Total Debt) / Total share outstanding

Cash and Equivalent, Long Term Debt and Short Term Debt can be found in Balance sheet in
annual report.

INTRINSIC VALUE CALCULATOR (CF 10 Yrs)-Be consistent with the denomination used, usually millions.

CF Current
CF Growth
Rate
Year
CF Proj
DF
DV

PV of 10 yrs
CF
No. of
Share
Outstanding
IV per share

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

MONITORING STOCKS

1. Reason: to make sure the stock stays uptrend and to make sure the company realised expected
targeted sales and revenue.

2. It is not practical to monitor more than 8 stocks because we do not have the adequate time to
do so unless if we are a professional.

3. Strategies:
a) Take a look once a month for large and defensive companies, with predictable earnings
(can use the CFproj) from the DF and DV.
b) Take a look once a week for smaller, riskier and cyclical in nature companies because
they are more easily affected by economic conditions. Usually take a look at the stock 1
hour after the market opens and 1 hour before the market close. You should not get too
concerned about the daily and weekly fluctuations in the share price. The more you
look, the more emotional you will be and you will make worse decision eventually. Pay
attention on the trend of the stock based on the Moving Average and the support and
resistance line.

MONITORING THE QR

1. Every three months, each company listed in the market will release a quarter report. This QR
can be downloaded from the company website. You can also simply view it on
www.bursamktplc.com or www.google.com/finance .

2. Other website:
a) Malaysia: www.klse.com.my
b) Singapore: www.sgx.com
c) HK: www.aastocks.com

3. Items to check:
a) Quarterly sales revenue
b) Net profit
c) CF from operations
d) Profit margins

SELLING RULES

1. Fundamental reason-company is no longer profitable. You found negative change in QR
especially in one of the first 7 criteria, and it does not seem temporary.

2. Management takes action that are not in the shareholder’s best interest
a) Management is accused of mismanagement
b) Two or more directors sell their proportions of stock

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

c) Profit margin decline for more than four quarters while competitor companies continue
to show consistent margins

d) Account receivable starts to increase faster than the increase in sales revenue.
3. The company lose its competitive advantage
4. If you find any better stock to invest- You identified a better company that selling at even bigger

discount to IV.
5. TECHNICAL REASON-emotions have turned pessimistic

a) Sell if the price reverse to downtrend proven by the cross of 50
b) DMA and 150 DMA
c) Can check other indicators as well such as the ichimoku cloud, 50 EMA, DMX, Stochastic,

MACD
d) Remember-trend is your friend
6. Cut losses with stop-loss orders-as easy as putting 6-8% below purchase price. Remember that
taking a loss is a part of the game. Do not fight the landslide.
7. Protect profit by selling 5% below the recent high (depend on the time frame)
a) Can protect your profit earlier before a clear downtrend
b) If wait for a confirmed 50 DMA/150DMA cross, the profit would not be that high
8. You misevaluate the company; does not meet all the 8 investing criteria

PSYCHOLOGY OF SUCCESSFUL INVESTOR

1. The market is irrational-you cannot predict the market which is filled with emotion of millions of
strangers that based on rumours and news.
a) The analysis made on TV and other media did nothing but to mislead us with confusing
and contradicting facts.
b) Investing is solely based on the valuation and trend-something that you can determine.
c) If the stock uptrend and undervalued, then go long. If the stock is overvalued and
downtrend, then go short.

2. Never rely on “experts”
a) Never believe a buy call, research by securities agency and any other sort of
recommendation
b) A good investor need to work hard to do his own research and know exactly what he is
investing in.
c) If you do not understand how a company works, don’t buy!

3. Buy and sell based on predetermined rules
a) Buy/sell based on the * said criteria
b) Stick to the rule and never rely on rumours, opinions and fake news
c) Set a standard for your own trading

4. Admit your mistake and be responsible
a) Never hold on to a stock when the QR shows poor results and on a downtrend
b) Cut-loss, learn from experience and move on to next investment

5. There is no sure-win investment
a) Never put everything you have into it. Set your risk per share at 2% of your account on
any given trade, according to Alexander Elder.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

Building a winning stock portfolio

1. Defensive stock Vs cyclical stocks

It is important to know whether a stock is defensive or cyclical to find a balance
between them, depending on the economic cycle and your aggressiveness/risk-averse
you want to be.

2. Defensive stocks
a) Companies that sell a product/service that is a necessity
b) Health care, utility and consumer staples companies
c) Not so much affected by economical downturn-able to maintain their revenues and
profits
d) Slow-growth industries
e) Low beta value – fluctuates lesser than the overall stock market
f) So the best time to hold on to defensive stock is when the market is starting an
downtrend/recession
g) Defensive stock slows down when the market booms
h) Example-consumer staple, health care, utilities, telco sectors

3. Cyclical stocks
a) Companies that sell product/service that are a luxury, not necessity – cars, high-end
retail, computers, houses and travel services.
b) Depend on the economic health
c) High level of correlation to the economy and the overall market(high bet value) – when
the market rises, cyclical stocks will lead the way, rising even faster. When the market
falls, they will crash down even harder
d) Example – consumer discretionary, tech, finance, industrial, materials, energy sectors

LOWEST RISK, LOWEST #1:Dividend #2: Large
POTENTIAL RETURN Cash Cows Cap

Predictables

#3: Large #4: Deep
Cap Growth Cyclicals

#5: #6: Small HIGHEST RISK, HIGHEST
Turnarounds Fast Growers RETURN

EXCHANGE-TRADED #7: ETFs 7 STOCK
FUNDS CATEGORIES

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

7 Categories of Stock

1. Dividend cash cows
a) High in dividend yield, do not appreciate very much in price
b) Usually market leaders in slow growth, mature industries.
c) High dividend yield – means the company has huge free cash flow, do not need the cash
to grow and expand their operation anymore
d) Aim of investment – getting passive income
e) Safe stock – do not fall very much during recession
f) Find dividend yield of 5% or more, belong t-o defensive sector, has large market cap of t
least 10 bil, including REITs

2. Large Cap Predictables
a) Company that sell product/service that has highly predictable future sales revenue,
profits and CF (also a boring business and never gone obsolete)
b) Ideal for a long-term investment – safest stock to buy
c) Example – Nike, McDonald’s, SMRT and Colgate-Palmolive

3. Large Cap Growth
a) Stocks of companies that grow rapidly (sales revenue and net profit grow rapidly >20%
annually)
b) Usually tech stocks that are cyclical in nature – their product can go obsolete rapidly if
they do not continue to innovate aggressively
c) Medium-term investment – sell immediately when the stock reverse to a downtrend
d) Never buy on average down when the price is falling.

4. Deep cyclicals
a) Relatively riskier stock but you can make huge profit if you know how to invest in them
at the right time
b) Stocks of companies that are in capital-intensive and highly cyclical industries – airline,
shipping, real estate, commodities, construction, banks and manufacturers.
c) The stocks make huge profits when economy booms and huge losses during recession –
huge uptrends and huge downtrends
d) You should never hold deep cyclicals for long term – only buy when it starts an uptrend

5. Turnarounds
a) The stocks of companies that are hit by bad news – will result in a downturn of 20%-90%
depending on the severity of the bad news.
b) Must be sure that the bad news is temporary and its sustainable competitive advantage
and ability to recover its profits remains intact (quite risky-not always easy to do)
c) If you are right, then you are able to double/triple your money. If not, then you are
going to- make a loss.
d) Rules to follow:
i. The company must have a large cap with sustainable competitive advantage
– financial strength to withstand the temporary loss
ii. The bad news must be temporary in nature and should not affect the
company’s sustainable competitive advantage and long-term economics.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

NEVER invest in companies hit by accounting scandals – they usually never
recover
iii. Only invest when the stock starts a new uptrend.
6. Small Fast Growers
a) Small (Market cap less than 1 bil)/medium-size companies (Market cap 1-10 bil)
b) Have even greater growth potential – could see your investment multiply a few hundred
fold
c) However, SMEs are much riskier than blue chip stocks – narrow economic moats and
not financially strong
d) Tips :
i. Make sure that the SME company dominate a niche
ii. Have little/no debt
iii. Healthy level of CF
7. ETFs (Exchange-Traded Funds)
a) A good choice if you do not have time to study individual company – easiest and the
safest way to invest
b) ETF investment means you are investing in a basket of hundreds of companies – do not
have to calculate the company’s intrinsic value and afraid of the company’s specific risk
c) Only monitor the ETFs’ price trend – buy on an uptrend and well when it starts a
downtrend

Winning Portfolio Building

1. Invest in a max number of 8-10 stocks at any one time
a) You have to regularly monitor the price trends, QR and recent developments
b) Less attention to the stocks you buy means you are exposed to making big mistakes and
lose money

2. Never invest in more than 2 stocks in the same sector
a) They tend to have the same characteristics and move together – called movement in
sympathy
b) The listed sector:
i. Consumer goods
ii. Industrial products
iii. Oil and gas
iv. Technology
v. Construction
vi. Commodities
vii. Trading/services
viii. Finance
ix. Property
x. Plantation
xi. Mining

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

3. Invest in no more than 3 turnarounds and small fast growers, no more than 4 deep cyclicals at
any one time
a) They are much riskier than the dividend cash cows, large cap predictables, large cap
growths and ETFs
b) Deep cyclicals – will suffer the greatest downfall during recession. So the other half o
four stocks need to be defensive stocks to cushion the fall
c) Adam Khoo’s deep cyclical stocks – banking, real estate, commodities and energy

4. Always keep at least 10% of your portfolio in cash
a) Never let yourself be fully invested into the market at any time – need to leave a portion
of your money just in case
b) If the market go down, you still have some money to buy your favourite stock at lower
price
c) When the market is at the bottom, it is the point of max opportunity – the time to be
fully invested in the market, keeping only 10% cash
d) When the market reverse to downtrend, sell everything and keep 100% money in cash
e) It is better to hold on to cash when the market is not favourable – wait for the right time
to reinvest

5. Your portfolio should be aligned to your lifestyle and risk appetite
a) Investing deals with how much time you have, how much risk you are willing to take and
how much returns you are aiming for.

Portfolio A: Conservative Portfolio B: Moderate

STOCK: ETF and REIT STOCK: ETF, REIT, dividend cash cows and large
PREFERENCE: Those who have little time to study cap predictables (safer stocks)
financial statements and fear picking wrong PREFERENCE: Those who want to play safe and at
stocks the same time expect a higher return

Portfolio C: Aggressive Portfolio D: Very Aggressive

STOCK: Large cap predictables and large cap STOCK: Large cap predictables, large cap growth,
growth turnarounds/deep cyclicals and small fast growers
PREFERENCE: Those who are more aggressive and PREFERENCE: Those who like to maximise his
like to study individual companies and pick potential returns and study his stocks regularly to
winning stocks that will beat the market. They are minimise risks. They also willing to cut loss so that
also willing to monitor their stocks and sell the they can generate even larger returns in other
stocks to lock profits when the time is right stocks.

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

6. Adapt your portfolio to the market cycle
a) Highs and lows of economic cycle happen once every 6-9 months
b) When the stock market is recovering:
i. A lot of fear and uncertainty
ii. Many stocks under sectors like banking, real estate, industrial and consumer
discretionary will be undervalued (cheap)
iii. Defensive stocks will be very expensive – people are putting their money in
safer heavens
iv. Thus a good time to shift your portfolio from defensive stocks to cyclical
stocks – buying them at huge discount (make sure the stocks already
reversed to an uptrend)
a) When the market at its high:
i. Cyclical stocks will be very expensive and defensive stock will be cheap
again
ii. Investors would dump the boring defensive stocks for more exciting cyclical
stocks
iii. Thus a good time to lock profits from the cyclical stock and revert to
defensive stocks
iv. Remember that the key to beat the market is to buy low and sell high (when
the majority is fully invested)

Method, Money and Mind: Three Keys to Success

Method

1. Many untrained investors make their buy and sell decisions randomly.
2. Good investors must have a winning strategy that gives them high probability of being right

– What to BUY, When to BUY, When to SELL
i. What to BUY
a) Buy stocks that have strong FA – consistent increasing sales revenue,
net income and CF
b) Make an overview of their high future growth, ROE and conservative
debt
ii. When to BUY
a) ONLY buy on uptrend – using 50 and 150 DMA
b) Alternatively, The daily candles must be above the 200 DMA and the
200 DMA should be sloping upward
iii. When to SELL
a) When the stock price drops 5%-8% below your purchase price (cut loss)
b) The stock price reverts to downtrend – 50 DMA crosses 150 DMA
c) The stock price falls 5%-8% from recent high – protect your profits
d) Follow one of the 3 rules that comes first

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

Money – Risk and Management

1. You should manage your risk so that you will never suffer huge financial losses in the event of
losing investment.

2. The best investor/trader achieve the percentage of win rate of 55%-70%. They end up very rich
because they do not lose much money on losing investment

3. Golden rule for money management:
a) Risk a fixed percentage of your capital for any single trade/investment
b) Risk a max of 1.5%-3% of your capital on any single trade/investment

4. For example:
a) If, capital=20,000
b) Risk=1.5% x 20,000 = 300 (on any trade/investment)
c) Risk per share is determined based on where you put your stop loss (5%-8% below your
purchase price)
d) Let say, if SASBADI worth 0.95, so the SL is 5% x 0.95=0.90 (Risk per Share 0.475 is rounded
to 0.05)
e) So, the number of share that you can buy is 300 / 0.05=6,000 shares

5. Position sizing formula ; Number of shares = % Risk per trade x Capital

$ Risk per Share

Let’s take HEVEA priced at 1.66,

i. Capital=$20,000
ii. SL=$1.53 (8% below purchase price)
iii. % RPS=1.5%
iv. $RPS=$1.66-$1.53=$0.13
v. No. of share=1.5% x $20,000 / $0.13 = 2307 shares
vi. So, Investment = 2307 shares x $1.66 =$3829.62
6. The number of trade/investment that you can have at any one time depends on the RPS. You
can also increase the RPS to 3%.

Let say you have capital of $20,000;

RPS(%) NO. OF INVESTMENT TOTAL RISK
1.5 5 different stocks (Around $3,500- 5 X 1.5% = 4.5%
$3,800 per stock)
3.0 3 different stocks (Around $7,000- 3 X 3%=9%
$8,600 per stock)

Just remember that you should never expose your investment portfolio to total risk of 10% or
more, even if you use leverage.

7. In order for your strategy to be profitable, you should only take on an investment if the
potential profit per share is at least double your potential RPS (Your TP is double your SL) giving
you the risk-to-return ratio of 1:2

MY INVESTING NOTE: ADAM KHOO PERSPECTIVE

8. You can set your TP based on the intrinsic value/the next level of price resistance (whichever
nearer)

9. Expectancy (winning expectancy) = (% Win x Average Win) – (% Loss x Average Loss)
Conservatively,
Expectancy = (60% x 1.3R) – (40% x 1R) = 0.38R
So, taking 1R as 1.5% RPS,
10 investments = 3.8R = 5.7% ROI
20 investments = 7.6R = 11.4% ROI

10. Calculating the expected yearly achievement based on the expectancy per investment (EPI);
Let say,
Capital = $10,000
RPS = 1.5% (1R), EPI = 0.38R = 0.57%
Goal = To achieve 30% ROI per year (around $3,000)
No. of trade = 30% / 0.57% = 52 trades per year, 4 trades per month

Mind – managing emotions

Invest Emotional The more you trade, the
consistently discipline to more experienced you will
become, the more wins
over the manage you will have
long term drawdowns

Investors are deviated Greed, Fear Think
from their rules and and Statistically
over the long
goals. They can easily feel Recency term - Use R
overconfident and Bias Multiples
greedy.

Cut losses Pride - They It is more to make more
and let are not money when you are right
your willing to and lose less money when
admit you are wrong
profits run defeat