The Five Factors Equity Rating Scorecard

Strictly for educational and illustrative purposes

In an earlier posting, I have developed a preliminary equity rating scorecard. In this subsequent posting, I intend to refine this scorecard and continue to test & refine it over the next 12-18 months. It is very important to reiterate the point that an equity rating scorecard does not “predict” the future target price of a security. It is merely a simple high-level tool / framework / weightage system which serves to harmonise different perspectives / factors that may potentially affect the share price of a security. The end final score / rating does not mean anything (seriously). I personally look at the final score / rating as higher probability of the security hitting my target price or stop loss.

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Equity Rating Scorecard

My view on trading or investing is that it should always be discretionary to large extent. Trading or investing involves significant amount of judgement call. There should not always be one standardised single way of looking at a particular trade or investing idea.

Trading or investing should always be considered from a multi-aspect angle and shall be as dynamic as possible. In this posting, I am trying to develop an equity rating scorecard. The purpose of this scorecard is not to remove the discretion from trading or investing but to nicely link up factors of fundamental, technical, risk management and other critical factors.

It is about placing weightage on what matters when comes to investing or trading. In this scorecard, there is more weightage being anchored towards fundamentals, of which I believe that it is the fundamentals that will drive the long term value of a security. The proposed weightage is as follows: 60% on fundamentals, 30% on technical & risk management and 10% on other critical factors (e.g insider transations, analysts’ target price).

What does the final scoring mean?

This is entirely up to us and it is purely arbitrary. Strictly for illustration, I rank my scoring as follows (seriously, it is purely arbitrary):

4.5 – 5.0                Higher probability to be positive return

4.0 – 4.49              Expected to be positive return

3.5-3.99                Manageable Risk + Possibly Directionless / Breakeven

2.5-3.49                Higher probability of not positive return

<2.5                       Possibly high risk

 

Strictly for illustration – WTK Holdings

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Strictly for illustration – Comfort Gloves (from an earlier posting: see this )

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The effectiveness of the scorecard has not been assessed based on historical financial & market data. Nevertheless, it may be a good starting point in harmonising both Fundamental and Technical analysis. This Equity Rating Scorecard is a dynamic piece of document and shall be continuously refined over time.

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A Not So Convicted Trade Idea

Have you ever come across a trading idea that you are not 100% convicted about it? I do feel it this time. Nevertheless, I choose to share this simple trade idea in order to give a more balanced and realistic view of the world of trading / investment. It is a world filled with contradiction, unpredictability and randomness.

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Digging Deeper

In one of the earlier posts (see this ), Malaysian-listed printing specialist, Tien Wah Press Holdings Berhad was one of the illustrative “buy signal” results extracted based on rules-based algorithmic screening process. Let’s dig deeper into this security. Continue reading “Digging Deeper”

Z-Score Trading Strategy

Using R-programming, for the purpose of illustration, I am customising a mean reversion trading strategy which involves the use of  z-score:

  • z-score >2.25: overbought (“sell signals”)
  • z-score<-2.25: oversold (“buy signals”)

High-level visualization of the proposed trading strategy (using OKA Corporation as an example):

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There may be a number of trading signals that have been generated based on the above set of rules. However, the number of trading actions (i.e actual buy or sell transaction) may be far less if it is assumed that one does not buy what one already owns, as well as one does not sell what one does not have. Moving forward, there is a need to (i) back-test this strategy; (ii) benchmark against other trading strategies; and (iii) optimization of this trading strategy.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES