Share valuation, I did it my way - Part 1

Back to the basics
When a company starts up, it needs capital to commence its business. It issues certificates known as "shares" to those people who are willing to fork out the money to start the business. In exchange, the people who paid for the shares will be known as "shareholders" of the company and they will be entitled to a portion of any profits or assets of the business, according to the percentage of shares he/she holds, or known as "part ownership". These shares will also give the owners voting rights during shareholders' meetings, as per the percentage of shares held. Fair and square.

So, as the business grows, the business will need more money to expand, like buying new machines, employing more manpower, carrying more inventory and etc. It has a few ways in getting the new fund and one of it is by issuing more shares in the company (hence, increasing the share capital). The company can either sell the new shares to existing shareholders (right issues), to new shareholders (placement) or by converting reserves fund, such as retained profit (bonus issues) into equity. Until a certain stage, when the company fulfill a certain requirement, it can opt for listing, which we call Initial Public Offering (IPO). This is by offering the shares of the company to the public. Ahhh..... this is when small timers like us have a chance to have a share on the good and bad times of the company. Well, practically, as most of our holdings are too small, what we can share are really limited. For example, as a minority shareholder, we can't use the company's car, we can't use the company's private jet, we can't fly in first class in the company's expense, we can't stay in big hotel suits with girl friends in the company's expense, we can't spend tens of thousands ringgit per night to entertain customers in the company's expense, we can't go shopping for a million ringgit paintings in the company's expense and the list goes on.. sounds familiar? you know I am not so creative in making these up, don't you?

Anyway, as a shareholder, one is entitled to a portion of assets and profits of the company, and of course, liability and losses as well. If one were to be given a choice, would he/she opts for profits or losses? assets or liabilities? Profits and assets of course, you say? nah.. certainly not everyone is as rationale thinking as you are. Haven't you seen someone chasing after companies that made heavy losses for a few consecutive years and are on the verge of bankruptcy before? How would you explain that?

Well, as a investor, logically, I prefer companies that I have a share in to be profitable, to have good management, to continually grow its business and good stuff like that, which will ultimately increase the value of my investment. Don't you? Well, naive I may be, but please tell me, if you don't analyse a share or a part ownership of a company based on its value, what the heck should your analysis based on?

Is Longer Better? (don't say "of course" just yet..)

It is a difficult task in convincing a speculator or a day trader to convert into a long term investor. Even if they tell you statements like, "Yes, I am a natural born long term investor, I can feel it from the blood in my vein.." and "of course I am a long term investor, if not, how to win money?" and such, go one step further and ask them, "How long is the average holding period of your investment?" From my past experience, their answers range from: 1 week, 1 month, 3 months, and longest 6 months. Well, if you ask me, 6 months cannot be considered as a long term investment anyway. Remember Mr Warren Buffett used to say something like, "the most ideal holding period for a stock is.. Forever" (this is not a direct quote)

But, have you heard of people still holding counters they've bought more than 10 years ago and are worth less than 10% of its cost now? Do you think these counters will go back to how much it costs 10 years ago? The holders do think so, don't they? or else, why are they still holding them?
Likewise, have you heard of statements like "it's already so low, how much lower can it goes?" of course, the worst is still zero, but isn't it better to sell something worth 10 cents for 50 cents?
Another case, "If I sell now, I am making a loss. Anyway, I am a long term investor, I will wait, I believe it will go up later.." So this is a case where short term trader become long term investor. Will the wait be worthwhile after all?
There are times when things do change for the better. So, when should we decide to cut the losses? when should we wait? How about: should we start accumulating on weaknesses, as these sell down might be an oppotunity? just like the old saying "the dawn is usually the darkest". so, how? That would be another topic later.

So, is longer better (I am referring to the holding period of shares)? My answer is: it depends.
If it is a good company, which has high quality management, good earnings and cash flow, strong growth, competitive advantage over the others and etc., hold it forever, like suggested by Mr Buffett.
But if it is a bad company, hold it for one week is still considered too long.