No Random Walking!

Why some people survive and others perish? Why some people are luckier?It's all about "survival psychology" according to this report.

What It Takes to Survive a Crisis | Newsweek Books | Newsweek.com

Leach has a name for this syndrome. It's called the "incredulity response." People simply don't believe what they're seeing. So they go about their business, engaging in what's known as "normalcy bias." They act as if everything is OK and underestimate the seriousness of danger. Some experts call this "analysis paralysis." People lose their ability to make decisions.

Leach says the vast majority of us—around 80 percent—... will "quite simply be stunned and bewildered [during a crisis or emergency]." We'll find that our "reasoning is significantly impaired and that thinking is difficult." We'll behave in "a reflexive, almost automatic or mechanical manner." We'll sweat. ... We'll barely hear people around us. It's OK—it's not necessarily fatal—and it doesn't last forever. The key is to recover quickly from brain lock or analysis paralysis, shake off the shock and figure out what to do.

Wiseman says ... that only 10 percent of life is purely random. The remaining 90 percent is "actually defined by the way you think." In other words, your attitude and behavior determine nine tenths of what happens in your life.

Observations:

1. The US Internet user number (163.3m or around 50%) sounds a little low.
2. China's Internet penetration rate is about 13.8%. Higher than what I thought. Note the data excludes traffic from Internet cafes and mobile phones.
3. I also noticed that 88.2% and 84.8% of Chinese use Tencent and Baidu, respectively, assuming all of their users are from China.
4. Surprised to see AOL is still on the most-visited site list. Also surprised that 27.1% of Internet users worldwide use wikipedia!

Global Internet Audience Tops One Billion, Fueled by China -- Seeking Alpha

A picture is worth a thousand words. This two-year daily chart of China T-bond Index could have saved some investors thousands (or even millions) of yuans! But is it about time for a trend-reversal?

... or was over-blown to start with! Many signs are showing that the worst may be over for China's economy:

• China's December iron-ore imports actually rose.
• The country's stimulating package should show effect soon, if not already.
• Holiday crowds are the biggest ever, according to my friends in different cities.
• China's tax revenue has actually increased.
• Premier Wen's repeated message about "confidence" and actually said China will be the first country out of slump. He must know something we don't know.
• Housing prices in major cities have surprisingly stood strong and have had big gains in second-tier cities during the last couple of months.
• The stock market has been quite strong lately, up about 25% from the low in early November.
• China's internet users increased 48% last year!
• Starbucks Corp said on Tuesday that it had not seen any impact on its China business even as it closes stores in other markets.
• Many US-listed companies that I follow and have China as the main source of revenue have repeatedly say that their business have not been impacted by the global slowdown. Those that do have been affected are export-oriented businesses, such as solar power companies.

The export is sharply down, but it's only a small part (20%?) of the economy. Overall an 8%+ GDP growth is very possible. Never underestimate 1.3bn people's unyielding desire of being rich!

A couple of days ago I briefly mentioned my "theory" on how to make buy-and-cell decisions:

My theory is: If the fundamental is completely unknown, you sell on technical weakness as the price drops; If the fundamental is perfectly known, you buy more as the prices gets cheaper and cheaper than the intrinsic value!

It's definitely not a earth-shattering discovery, but it's really behind the decision-making process of many stock investors. Besides, the theory implies  completely opposite trade actions depending on whether or not the investor know (or thinks to know) the company's underlying fundamentals.

This kind of trading strategy actually has some justification from a statistician's point of view: if applied properly and without other considerations, the outcome is proven to be statistically the "best" and "unbiased". I am going to elaborate it more here by relating it to what geo-statisticians do when they try to estimate a value of a property such as the grade of ore bodies and the porosity of oil-bearing sandstones in un-drilled locations. After-all geo-statisticians and stock traders are facing similar problems: trying to obtain an unbiased estimate of the value (price) of the property of interest (stock)  in un-sampled locations (or in the future). In both cases the only certainty we know is uncertainty!

Below I am going to show how similar methodologies are being used in the two fields, hence the "justification" of the "theory" above.

In Geostatistics:

The Problem: Estimate a property value at an un-sampled location based on neighboring sample data.

Information: (1) data values at sampled locations such as nearby wells; (2) underlying geological information and constraints of the property being studied.

Solutions: The best unbiased linear estimator depends on what you believe about the underlying property.

Note that the methodology is mathematically proven to produce the best unbiased linear estimator [given a few very unrestrictive assumptions].

In stock trading:

Problem: Estimate the price of a stock in the not-so-distance future. Sell the stock if the estimated price is lower than the current price and vice versa.

Information: (1) price and volume data, i.e., technical data; (2) Financial data of the company, industry as well as the economy, in other words the fundamental data.

Solutions: a combination of fundamental and technical analyses, depending on how much you believe about the company's intrinsic future value.

The ideal case is that we know the fundamental or geology very well, then we don't have to worry about local (daily) variations. But in most cases that's not possible: fundamental data are inherently fuzzy and may not relate to the value to be predicted at all. On the other hand, technical data may be very certain but suffer the drawback of them being local, i.e., temporary, information and using them to infer values at distance or future is certainly risky.

Yet a decision has to be made irregardless of the quality and quantity of data. Integrating all available information certainly will help, but an expert would choose the most important data to use and apply the best methodology accordingly (and understand/document its limitations!). The rest is uncertainty (or risk). If he doesn't make mistakes in other facets (there are many!) of stock investing, the expected accumulated return should be positive and goes higher and higher.

... At least that's the theory!

It's just part of the Paul Merton in China series. He's done a Paul Merton in India as well.

[This video is not available in China as the YouTube site has been blocked in the country as of 09/04/01]

【With updates on 01/11】

It's the time of the year again when I say "I wish I had more cash!". There are many opportunities of high confidence right now, but the following two stand out today, each having released news before the market open, followed by very interesting price action during the session:

American Medical Systems Announces FDA Clearance for Elevate?Anterior and Apical Prolapse Repair System

AsiaInfo lowers EPS guidance, raises rev guidance; sees Q4 EPS of $0.03-0.04 vs $0.17 consensus; revs $48-51 mln vs $48.16 mln consensus

American Medical Systems (AMMD), a maker of surgical products for men and women's pelvic problems and a long-time member in my watch list, reported preliminary revenue and earning for the last quarter that is higher than its own guidance and street estimates. In addition, it has been approved for selling a new surgical equipment for heart problem (see link above). Interesting observations:

1. The management basically has been saying that their business hasn't been impacted by the market downturn, evidenced by the sales increase of last quarter.
2. However the market has been assuming that AMMD's business will suffer greatly just as the rest of the country, taking down the stock price from $18 level to $8 in last three months.
3. Traditionally medical companies are defensive plays in the down markets (other industries include movie and food industries). That's the reason why AMMD and several other medical plays resisted going down with the rest of the market during the most part of last September.  In the end their prices caved in as well because the sentiment went from a wait-and-see mode to sell-no-matter-what mode in October.
4. Last but not the least, the stock has a forward P/E of only 12.6 at the maximum, even with today's 20% surge in price. That's without any contribution from the sale of the just-approved new products, which should have an impact starting from Q3 of '09.
5. The only negative I see is that it carries $591M in total debt, which will be an important factors for investors if the credit market remains tight for extended period of time. Also as the bad economy linggers along,  people may postpone surgiry so AMMD's business can potentially suffer. On the other hand, the  very low p/e ratio should provide some cushion for the price.
6. Ironically it is not the time to buy from a short-term technical point of view. The reason to buy has got  to be for long-term, i.e., 12-month, gain.

AsiaInfo (ASIA), which I profiled recently, offered another interesting but highly informational price action lately, including today's. Since I strongly recommended it a couple of weeks ago, it has released a string of negative news: a major holder (CITIC) wanted to sell (to sell  out?); a border member resigned; and today the company revealed a guidance of only $0.03-0.04 earning for last quarter [previous guidance was 0.15-0.17]. The share price took a hit each time following the bad news. However each time the price recovered very well afterwards. If these were really very bad news, the share price should have been near $6 instead of today's $11. We have to dig deeper and see the prevailing business trend. Fortunately in ASIA's case it isn't very difficult to see its strong fundamental.

1. The sharply lowered guidance is due to investment write-down and it non-cash impairment! ASIA has roughly $37m investment at the end of last quarter according to its 10-Q.  A total of $6.6m loss in investment, or -17.8%, is not bad at all considering how the overall market went during the quarter. It's interesting to find out where they had parked that $37m. In previous quarter the company recorded gain from these funds. 【Update 01/11】亚信在这些股票基金中的总成本约为1390万美元，不过近几个月来，这些股票基金的价值已缩水至930万美元。与此同时，亚信所持有的上海和勤软件技术有限公司的5%的股份价值也不断缩水。CFO: "...我们的投资方式很谨慎，但仍然受到了全球经济危机的影响。"
2. Excluding the non-cash impairment, the expected net earning of $0.03 to 0.04 per share translates to non-GAAP earning of $0.17-0.18 as $6.6m is equivalent to $0.14 per share. In other words, they actually raised Q4 earning from $0.14-0.16 per share, i.e., by  they guided in last conference call.
3. The company made net earning of $0.12 per share in 07Q4. Considering they had positive investment income in that quarter, the non-GAAP earning  in that quarter should be lower than $0.12. In any case, an earning of $0.17 to $0.18 in 08Q4 means that they had an non-GAAP earning increase of at least 40%, which is even better than the 37% y/y earning increase of Q3! In today's market how many companies can make that claim? Correction: Year-ago period's (07Q4) net earning was $0.18/share. It was an upside surprise and made the share price increase from $8 to $12. From last quarter (08Q3)'s earning report, we have the following information:

Net income excluding share-based compensation expense, amortization, after-tax dividend income and gain on discontinued operations (net income (Non-GAAP))(Note 5) was US$7.6 million in the third quarter of 2008 or US$0.16 per basic share. Net income (Non-GAAP) in the year-ago period was US$4.8 million or US$0.11 per basic share. Net income (Non-GAAP) in the previous quarter was US$6.2 million or US$0.14 per basic share. Net income (Non-GAAP) increased 58.0% year over year and 22.2% sequentially.

Add other info from previous 10-Qs, so now we have non-GAAP earnings and its trend:



[Note:] It isn't always easy to extract the non-GAAP information from the published report. I tried my best but I am not surprised if I did make mistakes. Factors such as discontinuing operations can still caused substantial errors in those numbers.

4. With that guidance, the company is basically saying that the company is not being impacted by the global down-turn. On the contrary the company is benefiting handsomely from the government-mandated restructuring of the Chinese telecom industry and the issuance of the 3G licenses.
5. There were headline news a couple of weeks ago that ASIA is one of the companies that were impacted by Madoff fraud. But closer investigation revealed that ASIA didn't invest in Madoff but rather that Madoff was a very minor investor of ASIA. The impact of Madoff selling ASIA's shares cannot be significant.
6. We will probably never know why a CITIC fund wanted out of ASIA. CITIC,  the parent company of that fund, was itself in trouble, having lost billion(?) of dollars in derivatives associated with the Australian currency. The follow-up price action seemed to have showed that CITIC's sale isn't an indication of the bad fundamental of ASIA.
7. It turned out later that the resigning board member is the head of CITIC fund Capital.
8. Today's news appears very bad to unsophisticated or un-informed  investors. That's why the share price took a 15% dive at the open. However the price recovered very nicely in spite of the terrible market sentiment. At the close Nasdaq was down 2.81% while ASIA was only down 0.73%. From technical point view this is very bullish, even if you don't know anything about the company's fundamental! When the technicals align with the fundamental (the "story"), it feels comfortable owning the shares.
9. The reason for the price recovery is that the news is actually very good news with regard to company business. It basically raised the revenue guidance by about $3m! [Update 01/11] 亚信第四季度净营收有望实现同比增长37%到45%。
10. My estimate of the minimum non-GAAP forward P/E is 16. Not bad for a company of such growth rate. The most likely forward P/E is 13 as I see the company make $0.83 per share (non-gap). With a growth rate of say 37%, the p/e/g ratio is [updated 01/11] way less than 1.
11. The company has an excellent balance sheet.
12. The non-cash investment impairment may be temporary. This quarter's loss may turn out to be next month's gain if you believe that the market will recover. [I am curious to know how they actually account for the investment in earning reports. Do they use mark-to-market approach?]
13. Ironically the trend chart shows that ASIA is a sell or hold. However this is the case that the current weakness is an opportunity to buy. The reason ASIA has been weak is because of the "bad" news. The sales of shares by CITIC may hold down the share price further, but the fundamental is so good that the price won't drop much further. If the do, it is the time to load.
14. [Added 01/11] This quarter may be seasonably slower because of the holidays.

The decision to buy or sell depends on how much you know the fundamental. My theory is: If the fundamental is completely unknown, you sell on technical weakness as the price drops; If the fundamental is perfectly known, you buy more as the prices gets cheaper and cheaper than the intrinsic value!

[A side note:] In many cases, a fundamentally strong company would show strong technicals on the weekly chart. Most strong companies such as ASIA and YUM are showing positive weekly technicals even though they might be weak on a daily chart. AMMD has been weak but today's news put it back to the positive territory on the weekly chart.

I cannot believe that I typed so much in 20 or so minutes of time! It must be one of the longest blog entries that I've written.  Also I could be wrong about these stocks as I may have looked at them through rose-colored glasses. However as an investor, one has to make decisions. As decisions are made based on data and experiences, there is a good chance they are good decisions.

Scribd.com is one of the very popular document-sharing site. It stores a lot of journal-quality documents in PDF and other iPaper-compatible formats (Word, Excel, PostScript, ...). Very useful for researchers.

Besides, it is possible to embed iPaper from the site in your own web sites/blogs. Below is just such an example (and the content is very interesting too!):

50 Most Common Interview Questions and Answers