Being Contrary: Part II

Continuation of Being Contrary

Let's use a real example, thedisc storage manufacturer, Megan Media Holdings.

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

Now based on Fama and French theory, we now have a stock which had a 3 month high of around 1.08 and a 12 month high of around 1.40.

Price of Megan Media is now 62 sen. Would one be influenced just because of the low price to adopt a contrarian investing approach on Megan?

Let's see, Megan has performed poorly and fallen out of favor. (Dun have the the previous 2 year highs ler.. )

Soo... would one consider Megan Media as a candidate under this contrarian theory approach?

If so... let's put a marker at 62 sen.. and do a reveiw on it ... maybe a year later?

Now compare the other contrarian approach. The selective contrarian approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Simple issue. Does Megan Media, currently specialising in DVD discs, have a durable competitve advantage?

My answer as per previous blog posts is a simple NO.

Margins have been poor all along and the balance sheet issues has given a clear indication that there is a very strong likelyhood for Megan Media to struggle.

So there is absolutely no reason why to buy whatsoever if one adopts the selective contrarian investing approach.


Btw..

Commonsense thingy...

A stock that is beaten down. Why? Stock lousy mah.

So does betting it based on this factor make sense?

Or put it this way.. why should the stock, Megan, rebound?

Doesn't it need a really strong set of earnings and clear sign of improvement in its balance sheet issues?

Without this two issues being solved, what will be ze catalyst to attract and seduce buyers to buy the stock?


Unless of course, one believes in the Kaki-Kia (have you heard the hokien KIA joke before? if no, feel free to click on the comments to this blog entry!) theory in stock! (ho ho ho ho!!!)


Oh... another commonsense thingy...

Now.. u see a hugely popular recommended stock in a stock message board gets beaten down teruk-teruk.. and instead of seeing the so-called advicer admitting their own faults in their recommendation(s) (simple issue mah, all of us are merely human and we all do make mistakes. Admitting and owning up to the mistake is the right thingy to do, isn't it?), the advicer twist and turns and stubbornly admits that their stock picking is spot on.

How?

How would one evaluate such a situation?

For example, using our commonsense thingy, doesn't it kinda get rather really silly when one shouts M a buy at 1.40, M still a buy at 1.20, M a buy at 0.80, M still a buy at 0.60 and so on and so on..

Why not admit the mistake and move on?

Why drag on?

Ahh.. perhaps... the advicer knows only the theory but cannot excute the theory of correcting their mistakes when they are wrong (ze theory: a good coach does not necessary equate to a good player and vice-versa! Meaning sometimes people cannot practice what they preach!). So what do they do? They continue to shout out loud-loud a buy for long term, contrarian investing and so on and so on, twisting and turning, all becuase of their own vested interest!

Think about it... The bugger has the stock and the bugger has no heart and simply do not know how to cut-loss and correct their mistakes. So what do they do? They continue digging a bigger hole.

Also think about it.. would the bugger admit the fault in the stock selection when the bugger still have vested interest in it?

Also think about it... if that is all true.. then isn't it logical why the bugger continues to advice a buy on it?

How?

ps... me just mumbling and bumbling hor.... and oh... i am still thinking about it!

:P