Disclaimer

Do your own due diligence first before investing. The writer will not be responsible for any capital loss as a result of reading this blog.

Saturday, October 11, 2008

Buffett's 3 Rules for Investing in a Crisis

1. "Cash combined with courage in a crisis is priceless"

2. "Don't invest in things you don't understand"

3. "Don't try to catch a falling knife until you have a handle on the risk"

http://www.cnbc.com/id/26963156

Sunday, September 14, 2008

Warren Buffett on Life



My all time favourite video. After 2.40min is his topic on life.

Wednesday, September 10, 2008

Unlocking Value Investing

When someone tells you that they are value investors, what first comes to mind? "Buy and Hold" strategy, invest for the long term, it is futile to time the market, buy on value at a margin of safety and invest in your circle of competence. Is that all? So easy? That is what I thought at first. OK, besides those difficult to understand FA analysis and valuation of companies, I shall touch on the general concepts of value investing that most value investors have not noticed.

"Buy and Hold"

Warren Buffett popularised this strategy and practices it more than often because he had an eye for scouting what I called "super companies" like Wal-Mart, Coca Cola, GEICO. They had superior earnings growth year after year for many years in the past(or now? I haven't looked at their income statement). They had ROE>20%, EPS growth per year and quarterly of >25%. Superb growth companies. Looks like C=current quarterly EPS and A=annual earnings increases, from the "CAN SLIM" method popularised by William O'Neil. They always look for companies with exceptional growth.

What most value investors did not notice is that Warren Buffett do not buy-and-hold forever for every company he bought. He sells off companies that he thinks is over-valued like PetroChina or mistakes like Dexter Shoe and US Air. Although there were no losses but very little gains as capital was not properly allocated. He did not allow his portfolio to tank 50% in value and more or even average down on them. Warren Buffett soon realises his mistake and did not chase good money after bad companies. In fact, he averaged up on Wal-Mart when prices kept soaring over the years with earnings.

If you had read his letters to partners, the Buffett Partnership performed better in a bear market than in a bull market using the Dow as yardstick. In fact, his portfolio has never recorded losses in a bear market. I believe he took some profits when signs of the bear is clear.

On investing long term

Benjamin Graham said "In the short run, the market is a voting machine but in the long run it is a weighing machine."

Value investors never realise that in the short run the market is always correct. Never try to beat the market because the market is bigger than you. It is like trying to out debate with millions of people and you will lose badly. If you think Citi was cheap when it is trading at $30 and 2 months before it was $50, you are so wrong. The market does not think this way and prices continue to tank until $20. At $30, I believe most investors know that prices will definitely go down further and why would someone buy at $30 knowing that it would fall further?

I used to think that it is futile to "time" the market. However by saying that, I am telling myself that I do not understand market psychology which is a very important characteristic in investing. By timing the market I do not mean by the exact buy and sell point of the stock. It is more of demand and supply. Take Koda for instance, I know it has very good management, stock selling at below NAV. However I would not buy it now because demand for their products are decreasing due to the slow down in global economies. Most value investors fail to revalue their companies realising that the bear is coming and sell them when they think it is overvalued.

By failing to do so the value investor did not realise that earnings would slow down or turn negative in a bear market, hurting overall performance of the company in the long term. If in the next 10 years the company can collect 100M of free cashflow, adding 3 years of bear market, they might have 60M at the end of 10 years. That is why prices go down from the high valuation in the previous bull market. Things would have been so different if we are in a bull market now right? It is not very difficult to tell from a bull and bear. Nevertheless nobody can predict the extact top of the bull or the bottom of the bear. We just have to be patient and analyse the market and companies carefully. Warren Buffett also did not rush to buy companies immediately few weeks after the sub-prime crisis. He knows the market very well.

Ps: Have been reading on "Can Slim" and TA stuffs. Some of the concepts makes sense to me and might have influenced my thoughts on value investing. I find that I understand value investing a lot better now. =D On 2nd thoughts, buying SBSTransit might be a mistake.

Wednesday, September 3, 2008

Kingsmen spreadsheet

The figures in spreadsheet are more detailed, finally thought of a way to post it here. Did not analyse a lot on balance sheet cause Kingsmen have very low debts. ROA for this company is not very important as they depend on their designers to work on their contracts. In other words, their people are their assets which is why companies in this industry have very low margins. They pay a lot to keep their good designers.

Tuesday, September 2, 2008

Kingsmen Creatives

Introduction:

Kingsmen has 4 business segments: 1) Exhibitions and Museums, 2) Interiors, 3) Research & Design, 4) Integrated marketing communications. The main drivers of the company are 1 and 2. Over the years Kingsmen has found a niche in high-end retail shop designs, with Interior Designs outpacing Exhibitions. In my opinion they are the leaders of Interior Design in Asia and the Middle East.

Customer base:

Close to 80% are repeat customers with brand names such as Apple, Burberry, Chanel, DBS, Esprit, FJ Ben, Gap, Gucci, John Little, Marks & Spencer, Nokia, Nuance Watsons, Omega, Polo Ralph Lauren, Robinsons, Standard Chartered Bank, Tag Heuer, Tiffany, Tommy Hilfiger, Wing Tai, Aldo, BMW etc.

Competitors:

One of their main competitors are Pico Far East Holdings(listed in HK) which specialises in Exhibition and event marketing services. Although Pico's NAV is approximately 4 times larger than Kingsmen, in terms of revenue from 2H07 and 1H08, Kingsmen's revenue only lacks behind Pico's by approximately 20%. Pico has slightly higher margins by 1%. Kingsmen is securing more contracts and catching up with Pico. The other is Cityneon whom only has a small share in the market.

Note: Exchange rate S$1 : HK$5.45

Income statement: (values are in '000 unless stated otherwise)

............2003.....2004......2005.....2006.....2007......1H08.....F2008
Revenue..53,477..63,261...76,74...108,945...146,131....77,74..194,350
NP.........1,579.....1,580....2,364....4,684.....10,243....5,750...13,605
NP.margin..3%.......2.5%.....3.1%......4.3%.......7%........7.4%.......7%
EPS(cents)..1.78....1.41......2.17.....4.88.......7.87.......2.85........7
EPS.growth.........-20.8%....53.9%...124.9%....61.3%...............-11.1%

Increasing revenue tells us that this is a growing industry, at the same time their expansion strategies to regional areas are doing well. According to my predictions for F2008, EPS growth might drop due to more outstanding shares issued from acquisition of subsidiary and associates. Usually 2H of results would be better because it will contribute approximately 60% of total revenue for the year. That is how I come out with F2008 prediction as usually there will be more demand for designs from retail stores due to the coming holiday season.

DCF valuation:

.......................2003.....2004.....2005.....2006.....2007....F2008
Net.income........1,579....1,580....2,364.....4,684...10,243...13,605
+Depreciation.....440.......544.......795.......1,137....1,703....2,538
+Amortisation.................................................121.......167
-Capital.exp......610......490.......1,422.....1,172.......866.....1,500
FCF................1,409...1,634.....1,737.....4,649.....11,201...14,810
FCF.growth..................16%.......6.3%....167.6%....141%.....32.2%

Using Warren Buffett's owner's earnings or free cash flow(FCF). Capital expenditure does not include investment into subsidiaries, but only expenditure necessary to keep the company running. Since Kingsmen's core assets are it's people, the costs have been deducted from income statement.

.......................F2008....F2009....F2010...F2011.....F2012
FCF................14,810....19,253....24,066...28,879...33,211
FCF.growth.........32.3%.....30%.......25%........20%.......15%
PV.using.DF.4%.....14,240...17,800....21,395...24,686...27,297

I used a conservative estimate of 30% FCF growth in F2009 and decreasing FCF growth by 5% for the next 3 years to calculate DCF for 5 years. However bearing unforeseen circumstances, I can safetly say that FCF growth will increase in 2009 and 2010, by how much, I do not know.
Discounting factor(DF) of 4% to calculate present value(PV) is the risk-free interest rate for Singapore government securities(SGS) in the long run. (rounded off from 3.5% of 20yrs SGS)

There is increasing revenue growth in China and the rest of Asia. Revenues will increase significantly from the 2 IRs and new malls in Orchard Road. Some say that we cannot bang on the idea of IR, however look at the many retail stores that are going to be setup there, Kingsmen will definitely have a share of it from their customer base. The demand for interior design would be high.

Outstanding shares as of June'08: 194,183
Market Capitalisation at $0.43: 83,499
DCF for next 5 years= 14,240 + 17,800 + 21,395 + 24,686 + 27,297 = 105,418
Cash on hand and at bank= 25,417
Valuation: 105,418 + 25,417= 130,835
Discount: 36.2%

I used cash on hand and at bank instead of using NAV at 38,393 to be more conservative in DCF valuation. Like Warren Buffett said "it is better to be generally correct than precisely wrong". For others, 30% FCF growth may be too optimistic. Another thing I like about Kingsmen is they have very low debts, I got nothing much to comment on their balance sheet.

PER valuation:

Let us look into PER valuation. Average EPS growth for the 5 years is 40%. To be conservative, I will use my estimated EPS of 7cents. 20% growth in F2009 and F2010, 15% growth in F2011 and 10% growth in F2012.

EPS valuation: $0.07 x 1.2 x 1.2 x 1.15 x 1.1= $0.128
Average PER: 7 to 8
Price per share: $0.9 to $1.02
Margin of safety 40%: $0.54 to $0.61

Conclusion:

In general, business prospects look very good for the next 3 years. Kingsmen over the years have built up their brand, increased their moat, increased their market share and are known for their quality designs and efficiency in delivering their product. It is not an easy business as it requires capable management to run, however they are in an easy industry as there are very few competitors thus far. Barriers to entry is huge as multi-million contracts are usually offered to big design companies like Kingsmen, Pico or Cityneon.

Some points to note, that director's remuneration and fees are approximately 16% of gross margin and gross margin is around 25-30% of revenues. So if we know how much revenues they are going to earn, we can easily predict net profits.

So which method of valuation would you prefer? I would prefer DCF.

Please feel free to comment and critique. Thanks!

Ps: Took me quite some time to figure out how to load the excell spreadsheet into Blogger, in the end I gave up. If you would like more detailed figures on Kingsmen, feel free to ask from me.

Sunday, July 20, 2008

Lesson from history: The market shall rise again

A very very good read from Next Insight.

An article contributed from Chris Tan, CEO of Providend.

Teaches you a short history about the stock market. Professional managers may not be always right. Lastly, ignore the noise.

Short quotes from Chris Tan:

"Greed will keep us buying even though prices are at a ridiculous high and will prompt us to sell in panic when we realize how ridiculous we have been."

"Investment professionals always say: 'This time is different'. I disagree. I say there is nothing new under the sun."

"The Internet bubble has clearly shown that professionals are not always right. In fact, they could many times be wrong. How could fund managers, investment advisers, wealth managers, so called experts not know that those Internet stocks were selling at a ridiculous price?"

Click on this link to read.

Monday, June 30, 2008

Mid-Year Portfolio 2008

Performance of STI ETF (16.5% loss for 1H08)

Mid-Yr 2008 closing price (30th June): $3.030
Dividends: $0.06
2007 closing price (31st Dec): $3.699 (adjusted for 1 to 10 stock split on 10th Jan'08)

Performance of Chan Partnership: (11% loss for 1H08) (37% overall gain)

Sold ChinaACorp: $2,455.93(initial capital-trading fee) -$1,168.82(47.6% loss)= $1,287.11

Comment: Sold off the speculative stock ChinaACorp. Risks are high so I dare not put in a large amount. Speculating will never happen again. Never! See what it has done to me. HAHA!

1) SBSTransit (4.9% loss)

Bought: $6,900 (capital injection)
Value at 30th Jun'08: $6,510- $46.31(trading fee) +$97.50(dividends)= $6,561.19

Review: SBSTransit have dropped to their 52weeks low due to high oil prices. A blue chip stock trading at 13-14 PER, cheap in my opinion. Public transport pie may actually grow bigger as drivers find fuel price increase and ownership of car hard to cope. Foresee revenue increase as they will raise prices again in the near future. It is not easy to satisfy both shareholders and commuters.

2) Kingsmen (120.9% gain)

Bought: $6,000
Value at 30th Jun'08: $12,300 -$45.62(trading fee) +$1000(total dividends)= $13,254.38

Review: Business fundamentals still intact. Looking forward to listing in Mainboard. Stock definitely undervalued at $0.41. The discount to fair value might help to increase number of shareholders despite the 2 to 3 stock split. Having at least 1000 shareholders is one of the requirements to go to Mainboard. Fair value of Kingsmen $0.60. Foresee more contracts coming from IR.

Total value at 31st Dec'07: $16,810.31+ $6,900= $23,710.31(adjusted for capital injection to compare against 2 different periods)

Total value at 30th Jun'08: $21,102.68

Overall gain: $21,102.68/$15,400(total injected capital)=1.37=37%

Summary

In the first half of the year STI ETF loss 16.5% in value and the Chan Partnership loss 11% in value. I beat the market by 5.5%. Not impressive because my goal is to beat the market by 10% every year. Read my earlier portfolio post on yardstick. However, I am not bogged down by short term results.

Low returns are attributed to weak market sentiments due to high oil prices, inflation and US sub-prime issues. An opportunity for value investors to buy cheap.

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Warren Buffett

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." Warren Buffett

Sunday, May 18, 2008

An update of myself

I have to apologise for the lack of updates to dear readers who have benefited from reading this blog (although it is not much, these are just the basic foundations of value investing). Busy with school work was the primary reason and laziness being the secondary reason. I've actually cut down on a lot of activities and allocate more time to school. Most of my brain cells are now directed towards Anatomy and Physiology. I'm studying Physiotherapy at NYP if you are wondering. It is a 3yrs Diploma and 1yr Degree overseas course. Currently Universities in Singapore don't have this course. Yep! I'm climbing towards the plan that I set up for myself. Graduate with a degree and set up a healthcare business. With the accumulated profits, I can further invest in businesses.

Recent portfolio changes and updates

I will be doing a mid-year review of my portfolio at the end of June. My mom has decided to invest her savings with me and it will be officially called The Chan Partnership. I've sold off my losses in ChinaACorp. A loss of ~$1400, about 10% of my previous portfolio not including injected funds from Mom. This will be my last and final attempt on speculation and deeply regreted it. With the extra funds, I bought SBSTransit giving close to 7% annual dividends at 13X PER. Although crude oil prices will continue to rise but I foresee that the public transport pie will get bigger in Singapore. Margins will be offset by growing commuters as more people realise the high cost of maintaining a car in Singapore. It is not a fantastic investment but it is a safe one with an adequate margin of safety. Mom, your son will be extra careful with your hard earned money! d:D

Kingsmen continues to do well and I'm positive about their business prospect with more IR projects coming in. Much more emphasis is also placed on the designs of retail outlets to attract more customers. I think Warren Buffett said this before 'a business that helps other businesses make more money is a great business'.

The focus now is not really on the sub-prime issue but on inflation which affects everyone globally. It is increasingly challenging for value investors to deal with inflation as we need to adjust our calculations on the value of businesses accordingly. Time may actually be our foe if the price of the business remains stagnant for years even though we know the value of the business should be worth a lot more. Inflation eats into our profits as buying power of money decreases.

Thursday, April 10, 2008

Conversations

Dear All,
This is an unusual conversation... interesting and very true..
This is an excellent conversation between 'God' and
> > an unknown ' - 'Me'. I don't know as to who has been
> > the composer of such an interesting and captivating
> > conversation ; but has he/she has definitely put in
> > good amount of thought into crafting the same. *
> >
> > Those who don't believe in God, may also find it
> > worth reading once. Enjoy and Think ! *
> >
> >
> > God: Hello. Did you call me?
> > Me: Called you? No.. Who is this?
> >
> > God: This is GOD. I heard your prayers. So I thought
> > I will chat.
> > Me: I do pray. Just makes me feel good. I am
> > actually busy now. I am in
> > the midst of something.
> >
> > God: What are you busy at? Ants are busy too.
> > Me: Don't know. But I can't find free time. Life has
> > become hectic. It's rush hour all the time.
> >
> > God: Sure. Activity gets you busy. But productivity
> > gets you results. Activity consumes time.
> > Productivity frees it.
> > Me: I understand. But I still can't figure out. By
> > the way, I was not expecting YOU to buzz me on
> > instant messaging chat.
> >
> > God: Well I wanted to resolve your fight for time,
> > by giving you some. In this net era, I wanted to
> > reach you through the medium you
> > are comfortable with.
> > Me: Tell me, why has life become complicated now?
> >
> > God: Stop analyzing life. Just live it. Analysis is
> > what makes it complicated.
> > Me: why are we then constantly unhappy?
> >
> > God: Your today is the tomorrow that you worried
> > about yesterday. You are worrying because you are
> > analyzing. Worrying has become your habit.
> > That's why you are not happy.
> > Me: But how can we not worry when there is so much
> > uncertainty?
> >
> > God: Uncertainty is inevitable, but worrying is
> > optional.
> > Me: But then, there is so much pain due to
> > uncertainty.
> >
> > God: Pain is inevitable, but suffering is optional.
> > Me: If suffering is optional, why do good people
> > always suffer?
> >
> > God: Diamond cannot be polished without friction.
> > Gold cannot be purified without fire. Good people go
> > through trials, but don't suffer. With that
> > experience their life become better not bitter.
> > Me: You mean to say such experience is useful?
> >
> > God: Yes. In every term, Experience is a hard
> > teacher. She gives the test first and the lessons
> > afterwards.
> > Me: But still, why should we go through such tests?
> > Why can't we be free from problems?
> >
> > God: Problems are Purposeful Roadblocks Offering
> > Beneficial Lessons (to) Enhance Mental Strength.
> > Inner strength comes from struggle and
> > endurance, not when you are free from problems.
> >
> > Me: Frankly in the midst of so many problems, we
> > don't know where we are heading..
> >
> > God: If you look outside you will not know where you
> > are heading. Look inside. Looking outside, you
> > dream. Looking inside, you awaken. Eyes
> > provide sight. Heart provides insight.
> >
> > Me: Sometimes not succeeding fast seems to hurt more
> > than moving in the right direction.. What should I
> > do?
> >
> > God: Success is a measure as decided by others.
> > Satisfaction is a measure as decided by you. Knowing
> > the road ahead is more satisfying than knowing you
> > road ahead. You work with the compass. Let others
> > work with the clock.
> > Me: In tough times, how do you stay motivated?
> >
> > God: Always look at how far you have come rather
> > than how far you have to go. Always count your
> > blessing, not what you are missing.
> > Me: What surprises you about people?
> >
> > God: When they suffer they ask, 'why me?' When they
> > prosper, they never ask 'Why me'. Everyone wishes to
> > have truth on their side, but few want to be on the
> > side of the truth.
> > Me: Sometimes I ask, who am I, why am I here. I
> > can't get the answer.
> >
> > God: Seek not to find who you are, but to determine
> > who you want to be. Stop looking for a purpose as to
> > why you are here. Create it. Life is not
> > merely a process of discovery but a process of
> > co-creation. You are my co-creator.
> > Me: How can I get the best out of life?
> >
> > God: Face your past without regret. Handle your
> > present with confidence. Prepare for the future
> > without fear.
> > Me: One last question. Sometimes I feel my prayers
> > are not answered.
> >
> > God: There are no unanswered prayers. At times the
> > answer is NO.
> > Me: Thank you for this wonderful chat.
> >
> > God: Well. Keep the faith and drop the fear.. Don't
> > believe your doubts and doubt your beliefs. Life is
> > a mystery to solve not a problem to resolve.
> > Trust me. Life is wonderful if you know how to live.
> > 'Life is not measured by the number of breaths we
> > take but by the moments that took our breath away!
Rgds

Friday, February 29, 2008

Security Analysis Part 2: Analysis of Financial Statements

Chapter 9: Analysis of the Income Statement- General Procedure

This chapter onwards assumes that the reader knows how to read financial statements.

The broad study of corporate income accounts may be classified under three headings:

1) Accounting aspect: "What are the true earnings for the period studied?"

2) Business aspect: "What indications does the earnings record carry as to the future earning power of the company?"

3) Security valuation aspect: "What elements in the earnings exhibit must be taken into account, and what standards followed, in endeavoring to arrive at a reasonable valuation of the shares?"

In order to arrive at the indicated earning power for the period studied, the analyst should follow a standard procedure consisting of 5 steps:

1. He will eliminate nonrecurrent items from a single-year analysis. But he will include most of them in a long-term analysis.

2. He will exclude deductions or credits arising from the use of contingency and other arbitrary reserves.

3. He will endeavor to place the depreciation (or amortization) allowance and the inventory valuation on a basis suitable for comparative study.

4. He will adjust the earnings for the operations of subsidiaries and affiliates to the extent they are not shown.

5. As a check, he will endeavor to reconcile the allowance for income tax with the reported earnings.

Nonrecurrent Items

Nonrecurrent profits or losses are those which arise for reasons outside the regular course of the business. The entries are of 2 main types. In one case the item relates entirely to events taking place in past years, such as the following:

1. Payments of back taxes or tax refunds, not previously provided for, and interest thereon (this may be accompanied by adjustments in depreciation reserves).

2. Results of litigation or other claims (eg. renegotiation, damage suits, public-utility rate controversies) relating to prior years.

The accounting treatment of these entries will vary. It is customary to place them directly in the surplus account, but they sometimes appear in the income statement, especially if they are of minor consequence.

The other type of special transaction has its origin in the year covered by the report but is nonetheless of an exceptional character which sets it off from the ordinary operations. The following are examples of this category:

3. Profit or loss on the sale of fixed assets- or of investments, for a noninvestment company.

4. Adjustments of investments to market value, for a noninvestment company; or write-down of nonmarketable investments.

5. Write-downs or recoveries of foreign assets.

6. Proceeds of life-insurance policies collected.

7. Charge-offs in connection with bond retirements and new financing.

Except for refinancing costs, which are almost invariably charged against surplus, the treatment of these nonrecurring items in annual reports varies widely.

3 suggested rules for the treatment of nonrecurrent items in the income account:

1. Small items should be accepted as reported. For convenience we may define "small" as affecting the net result by less than 10% in the aggregate.

2. When a large item is excluded, a corresponding adjustment must be allowed for the income tax.

3. Most nonrecurrent items excluded from the single year's analysis must nevertheless be included in a statement of long-term or average results.

Chapter 8: Classification of Securities

Securities are customarily divided into the two main groups of bonds and stocks, with the latter subdivided into preferred stocks and common stocks. The first and basic division recognises and conforms to the fundamental legal distinction between the creditor's position and the partner's position. The bondholder has a fixed and prior claim for principle and interest; the stockholder assumes the major risks and shares in the profits of ownership. It follows that a higher degree of safety should inhere in bonds as a class, while greater opportunity of speculative gain- to offset the greater hazard- is to be found in the field of stocks.

Classification

1) Securities of the fixed-income and stable-value type: A high-grade bond or preferred stock

2) Senior securities of the fluctuating-value type
A. Well-protected issues with profit possibilities: A high-grade convertible bond
B. Inadequately protected issues: A lower-grade bond or preferred stock

3) Common stock type: A common stock

Wednesday, February 27, 2008

Chapter 7: Quantitative & Qualitative Factors in Security Analysis. The Margin-Of-Safety Concept

After the analyst has learned what information he can get and where to find it, he faces the harder question of what to make of it. Analysing a security involves an analysis of the business.

Quantitative might be called the company's statistical exhibit. Included in it would be all the useful items in the income account and balance sheet, together with such additional specific data as may be provided with respect to production and unit prices, costs, capacity, unfilled orders,etc. These various items may be subclassified under 1) capitalisation, 2) earnings & dividends, 3) assets & liabilities, and 4) operating statistics.

The qualitative factors, on the other hand, deal with such matters as the nature of the business; the relative position of the individual company in the industry; its physical, geographical, and operating characteristics; the character of the management; and, finally, the outlook for the unit, for the industry, and for business in general.

Qualitative Factors (these factors are important, but also difficult to deal with intelligently)

Nature and Prospects of the Business. Industry Analysis. It is an established canon of investment in common stocks that one should first select the most promising industry or industries and then picking out the best companies in those industries. Many statistics are compiled and studied, the trade papers are read with care, and interviews are sought with well-informed people in each industry.

The Factor of Management. Picking a company with a good management is considered by many to be even more important than picking a company in a promising industry. The most convincing proof of capable management lies in a superior comparative record over a period of time. (which brings us back to quantitative data)

The Trend of Future Earnings. Financial theory sometimes sought to estimate future earnings by projecting the past trend into the future, and it has then used this projection as a basis for valuing the business. But while a trend shown in the past is a fact, a "future trend" is only an assumption.

Security Analysis and the Future. The kind of security analysis we regard as a most rewarding principle is concerned primarily with values which are supported by the facts and not those which depend largely upon expectations. In this respect the analyst's approach is diametrically opposed to that of a speculator, meaning thereby one whose success turns upon his ability to predict or guess future developments. Needless to say, the analyst must take possible future changes into account, but his primary aim is not so much to profit from them as to guard against them. Broadly speaking, he views the business future as a hazard which his conclusion must encounter rather than as the source of his vindication.

Margin of Safety as the Basic Quantitative Factor

Offsets to the Hazards of the Future. Place prime emphasis upon the presence of a large margin of safety for the security, which should be able to absorb whatever adverse developments are reasonably likely to occur. In such cases, he will be prepared to see unsatisfactory earnings for the issue during depression periods, but he will expect that (1) the company's financial strength will carry it unharmed through such a setback, and (2) its average earnings will be enough to justify fully the bond or stock purchase he is recommending.

Monday, February 25, 2008

Chapter 6: Nature & Sources of the Analyst's Information

All the information regarding this chapter is based on US rules and regulations by the US Securities and Exchange Commission (SEC). Hence, it is a bit challenging for me to interpret the information into Singapore's context. However, I shall give the information for the part on US and then Singapore as accurate as possible with my current knowledge. Older and more experienced investors please correct me for any mistakes I made. Thank you!

Most of the corporate data used by the security analyst will have come originally from 2 parallel sources. The first is material filled with a regulatory body- most often the SEC. For Singapore, its the Singapore Stock Exchange (SGX) and the Monetary Authority of Singapore (MAS). The second is information sent by the company to the stockholders or the press. Nearly all this information is reproduced or condensed by the financial services, as it becomes available. For many analytical purposes it is sufficient to take the material, at second hand, from the various manuals, supplements or "daily sheets". But for a full-scale analysis the practitioner will generally find it advisable to consult the original sources, to make sure that nothing of importance is overlooked.

3 Types of Material available for analysis

1) The Basic Registration Statement (Prospectus): This statement provides a detailed description of the company's business and properties and will often serve as a starting point for detailed analysis. When companies are applying for Initial Public Offerings (IPOs) they will give out a prospectus. Can be found in the companies' or SGX website.

2) The Annual Report: It is here that the dualism between voluntary and required data is most manifest. Listed securities must file with the SEC a form (10-K for most companies) which contains a balance sheet, income account and cash flow statement in prescribed detail, and which also adds material that may be needed to bring the registration statement up to date. For Singapore listed securities, go to SGX website and look in announcements for financial statements.

3) Interim Figures: Quarterly net income figures. It was originally the accepted view that companies with a pronounced seasonal bias in their results should not publish interim figures, on the ground that these could be misleading. One method of overcoming the objection to seasonally unstable interim figures is by publication of successive 12 month totals at quarterly intervals.

Some important information still not generally available

1. Explanation of important differences between the income reported and that on which income tax was computed.

2. Where last-in, first-out inventory ("LIFO") basis is used, the equivalent value on a first-in, first-out ("FIFO") basis.

3. The present insured or appraised value of the fixed assets.

The analyst would like to have the following material if he can get it:

a) Orders booked and unfilled orders
b) Productive capacity where relevant
c) Production in units where relevant
d) Division of products by principal classes or departments, in dollar amounts or in percentage of total.
e) Data on concentration of business with few customers, if it exists, and any significant dependence on exports.
f) Description of property owned, including types of buildings and combined floor area.

Supplementary Information

The security analyst uses a vast amount of economic statistics, which relate either to business as a whole or to a particular industry. Most of this material is found in the Department of Commerce. For Singapore it is the Ministry of Trade and Industry (MIT).

Trade Journals: Detailed information of the current and prospective state of the industry. eg. its history and problems or in some cases unofficial data relating to individual concerns.

Tuesday, January 22, 2008

Time To Look For Companies Selling At 50% Below Valuation

Very massive panic selling this week. The Singapore stock market fell to a 52 week low. I think most companies now are selling close to valuation especially properties because sentiments were high last year.

I will be busy these few weeks applying for courses, ORD in 060208! Will also be looking out for companies selling at a huge discount. I have only one punch card this year and limited cash, cannot afford to make any mistakes. The stock must get me really excited, must be a leader in its own field and trading at 50% or more below my valuation. They must have very little debt and lots of cash in hand. Giving 4-5% dividends. Good future prospects not affected by US mortgage crisis. No losses in the previous 5 years of operation.

ChinaACorp taught me a valuable lesson. I still cannot control my emotions well. Greed climbed over my head. This is what I learnt, do not buy out of favor stocks when sentiments are high even though they are undervalued because when sentiments are low, the price will definitely drop even lower at an increasing rate. So far, I have lost 50% of my initial capital on ChinaACorp. Considering selling it at a loss, but not until I see their financial statements for 2007 first. All buy and sell decisions must be made according to valuation and not through gut feeling. Will sell it immediately if I find another stock that suits the above requirements.

Happy shorting!(sadistic remark haha)

Monday, January 21, 2008

Asia Stocks Sink Amid US Recession Fears

Monday January 21, 6:08 am ET
By Carl Freire, Associated Press Writer

Asian Markets Plunge Amid Pessimism Over US Stimulus Plan; Nikkei Sheds 3.9 Percent

TOKYO (AP) -- Asian stock markets plunged Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.

India's benchmark stock index was down a stunning 10.9 percent in afternoon trading, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Investors dumped shares because they were skeptical about an economic stimulus plan President George W. Bush announced Friday. The plan, which requires approval by Congress, calls for about $145 billion worth of tax relief to encourage consumer spending.

Concern about the U.S. economy, a major export market for Asian companies, has sent Asian markets sliding in 2008.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

My Thoughts

STI fell 6.03%, worst decline ever seen since when I started investing last year.

The blue-chip Straits Times Index dived 187.10 points to 2,917.15, falling below the psychologically important 3,000-point level to a five-month low.

Would encouraging more consumer spending help to revive the economy?

I remembered clearly taking economics in my A levels class. GDP=C+I+G+(X-M). My teacher Mr Pillai(very good teacher) mentioned that C(consumption expenditure) constitutes a very large percentage of GDP in the US economy. Basically the US economy is stimulated by large consumer spending, so might Bush's policies work? Short term maybe, by generating more income for companies, but not long term. The policy might even increase more credit card debts and more write downs for banks! People might say "if can I default my mortgage payments, should I also stop paying my credit bills too?"

Solution?

The problem is a lot more complicated than we thought, so to find a solution is not that simple. Saving criticism for comments later, I would like to advise the Bush administration. They should hammer down hard on those who default mortgage payments. Make them sell their cars, houses and assets, anything that can exchange into cash. No house to live? Rent a room or build tent. Still can't pay? Extend their debt payments and impose laws to allocate a % of their income to pay back the debt. I feel that Bush is not focusing into the problem, which is the mortgage defaulters.

Saturday, January 19, 2008

Chapter 5: Investment Policy

There are 2 types of investment policy, for institutions and individuals. I will only focus on individual investment policies as most of us are individual investors.

There are 2 classes of security buyers, the defensive investor and the aggressive or enterprising investor.

Defensive investor

Defensive investors are those who should place their chief emphasis upon the avoidance of any serious mistakes or losses and their second emphasis upon freedom from effort, annoyance, and the necessity for making frequent investment decisions.

Their portfolio should be divided into 2 parts between a 75%-25% stocks and bonds or 25%-75% depending largely on the subjective feeling of the investor.

The defensive investor may properly do his common stock purchasing through the medium of investment-fund shares or diversify in a list of leading common stocks, purchased at a reasonable price level.

Enterprising investor

The distinguishing feature of individuals in this class is their willingness and ability to devote time and care to the selection of sound and attractive investments. The enterprising investor may take calculated risk at times if he is convinced that his chances of profit sufficiently outweigh the hazard of loss.

The enterprising investor need not be a full-fledged security analyst in his own right. He may depend on others for detailed analysis, and for ideas and advice as well. But the decisions will be his own, and in the last reckoning he must rely upon his own understanding and judgment. The first rule of intelligent action by the enterprising investor must be that he will never embark upon a security operation which he does not fully comprehend and which he cannot justify by reference to the results of his own study and experience.

The endeavor to make money in securities is a business undertaking, and it must be conducted in accordance with business principles.

An enterprising investor may follow the simple 2 part policy of the defensive investor with respect to some portion of his funds, and employ the remainder to more aggressive operations. There is no single pattern for the latter. He may endeavor to buy in low markets and sell in high markets, in accordance with the age-old principle of shrewd investment. He may try to select companies that have unusual prospects for long-term growth, making sure he is not paying too much in advance for these favorable possibilities. Or he may place his prime emphasis upon the purchase of "bargain issues" which are selling considerably below their true value, as measured by reasonably dependable techniques.

My conclusion

The individual investor should be both enterprising and defensive when investing. Defensive in not speculating and to avoid serious mistakes. Enterprising in investing in your own circle of competence and having a margin of safety in the purchase of common stocks. I believe that enterprising investors should be 100% in stocks and not diversify.

Formula-timing Plans

The investor automatically does some selling of common stocks when the market advances substantially, and some repurchasing or original purchasing when the market has a significant decline.

Dollar Averaging

An increasing amount of favorable attention in recent years has been directed toward the comparatively simple idea of placing the same amount of money in the same stock, or group of stocks, in successive months, quarters or years. In a period of wide fluctuations in stock prices, dollar averaging will show better results than the method of purchasing a fixed number of shares each year regardless of price.

The real implication of dollar averaging is that investors should be wary of putting more money in stocks at higher prices than they did at lower prices--which is a common failing --and that they should never let a lower price level scare them away from buying.

Wednesday, January 16, 2008

Asian Stock Markets Plunge


Wednesday January 16, 1:52 am ET
By Dikky Sinn, Associated Press Writer

Asian Markets Plunge on Worries That US Is Sliding Into Recession; Hang Seng Down 4 Percent HONG KONG (AP) -- Asian stock markets plunged Wednesday on growing speculation the U.S. economy -- a vital export market -- is sliding into a recession that could lead to a global slowdown.


Investors dumped stocks after an overnight sell-off in U.S. markets and on news that Citigroup Inc. had lost nearly $10 billion in the fourth quarter as it wrote down bad mortgage assets. Weak U.S. retail sales figures also added to the gloom, sending the Dow Jones industrial average down 277 points, or 2.2 percent.

"The moves on Wall Street signal fears that the U.S. is going into recession," said Rommel Macapagal, chairman of Westlink Global Equities in Manila, Philippines, where the market sank 2.7 percent.

Such concerns are becoming widespread in Asia, he said. "We're all looking for new support levels."

In Hong Kong, the benchmark Hang Seng index was down 4 percent at 24,815.61 in afternoon trading, while Tokyo's Nikkei 225 index fell 3.35 percent to close at 13,504.51 points.

Markets in Australia, China, South Korea and New Zeland also fell sharply on worries about slower growth in the U.S. and around the world.

The United States economy, battered by problems in the housing and credit markets, is a major export market for Asian companies, and weaker demand from American consumers will likely hurt profits at some of the region's companies. The U.S. Commerce Department said Tuesday that retail sales fell in December, and it revised the November figure lower.

Investors saw more fallout from the subprime mortgage market when Citigroup said Tuesday it had written down $18.1 billion for bad mortgage assets.

"The fallout from the Citigroup result is significant, with many saying ... there is more bad news to come," said Trent Muller, an ABN Amro Morgan analyst in Sydney, Australia. "We will see a bit of panic selling with a lot of investors taking cash off the table today."

There is also a growing fear that the Federal Reserve hasn't done enough to keep the U.S. economy going. The central bank has lowered its key interest rate by a full percentage point to 4.25 percent since early August.

Now many investors and analysts believe the Fed will cut rates by a half-point at its Jan. 29-30 meeting.

"The risks of a recession in the United States appear to have increased," said David Cohen, director of Asian forecasting at Action Economics in Singapore. "It's still clearly up in the air and that is reflected in the volatility that we see in the markets day-to-day. Every new headline can spook the market."

Japanese semiconductor stocks also fell after Intel Corp. shares plunged on concerns that the world's largest semiconductor maker is feeling the pinch of an ailing U.S. economy.

A surge in the yen, which hurts Japan's vital exporters, also depressed Tokyo stocks. The U.S. dollar fell to 106.02 yen, the lowest level in 2 1/2 years.

"The Tokyo market is very sensitive to the strong yen," said Tsuyoshi Nomaguchi, an analyst at Daiwa Securities Co. in Tokyo.

In China, the benchmark Shanghai Composite Index fell 2.6 percent to 5,302.64 by midday. China shares, which are mostly isolated from world trends due to regulatory controls, have gained about 1 percent since the beginning of the year, compared with losses in several other Asian markets.

But worries over the U.S. economic outlook and possible lending curbs by the central bank have hurt bank shares.

"The market is divided over the potential impact the U.S. subprime crisis may have on China's economy, and Hong Kong's weak performance gave some jittery investors the final push to sell," said Essence Securities analyst Zhu Haibin.

Associated Press Writer Hrvoje Hranjski in Manila, and AP Business Writers Yuri Kageyama in Tokyo, Elaine Kurtenbach in Shanghai and Thomas Hogue in Bangkok, Thailand, contributed to this report.

Thursday, January 10, 2008

The FTSE ST Series Of Market Indices

Singapore Press Holdings (SPH), Singapore Exchange (SGX) and FTSE Group have jointly developed a new Straits Times Index (STI) as the Singapore stock market's main benchmark and created a family of new FTSE ST indices that will complement the STI.

The aim of the collaboration is to create a comprehensive suite of indices that will better reflect the performance of various sectors of the Singapore stock market and meet the needs of both retail and institutional investors. The revamped STI and the new FTSE ST Index Series will stimulate development of index-related products to serve diverse market needs. This in turn offers investors wider investment choices and opportunities in the Singapore market. With the availability of more indices, more listed companies can expect to be included in an index and achieve higher visibility with international fund managers and investors.

The new set of FTSE ST indices, which comprises the new STI and 18 new FTSE ST indices, were launched on 10 January 2008.

STRAITS TIMES INDEX (STI)

The STI now comprises 30 blue-chip companies on the SGX Mainboard ranked by market capitalisation as at 31 August 2007, which have passed the selection citeria outlined below. The constituents of the revamped STI can be found here

In line with FTSE's international methodology, these companies have been included based on the following criteria:

• Free Float. The free float of a listed company must be greater than 15%. The definition of "free float" includes portfolio investments, nominee holdings and holdings by investment companies.

• Liquidity. A stock must trade with a median daily turnover value of at least 0.05% of the value of its free float-adjusted shares in issue for at least 10 out of the last 12 months.


FTSE ST INDEX SERIES

The STI will be complemented by a new family of FTSE ST indices that will consist of 5 benchmark and 13 industry indices, including a new theme index to represent China stocks listed in Singapore. The new indices, by tracking the different sectors of the Singapore market, will help investors make better-informed investment decisions. The new indices will adopt FTSE's international methodology and will be based on the International Classification Benchmark (ICB), the globally renowned classification system created by Dow Jones Indices and FTSE. The use of the ICB will facilitate cross-border analysis and comparisons.

The full list of indices can be found here

To qualify for inclusion in any index, except the FTSE ST Fledgling Index, the market capitalisation of a listed company must fall within the top 98% by full market capitalisation of all SGX Mainboard companies.

The FTSE ST Fledgling Index includes all the other qualifying companies comprising the last 2% by full market capitalisation. These stocks are not screened for stock liquidity.

Constituents for the family of FTSE ST indices can be found here

GROUND RULES

The constituents of the STI and the new FTSE ST Index Series are reviewed semi-annually in accordance with a set of publicly available Ground Rules which can be found here

An advisory committee comprising of market practitioners, and/or representatives from SPH, SGX and FTSE undertakes the reviews. The first review is scheduled for September 2008.

Real time FTSE ST indices price.

Wednesday, January 9, 2008

Chapter 4: Investment and Speculation

General Connotations of the Term "Investment"

1) Putting or having money in a business. eg. A man "invests" $1000 in opening a grocery store.
Note, however, that it accepts rather than rejects the element of risk- the ordinary business investment is said to be made "at the risk of the business."

2) All securities(stocks, bonds, warrants, etc) are "investments".
No real distinction is made between investment and other types of financial operations such as speculation.

3) It is commonly thought that investment is good for everybody and at all times.
Such a distinction is generally taken for granted.

A Proposed Definition of Investment

An investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative.

The "safety" sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations.

Eg. A safe bond is one which would suffer default only under exceptional and highly improbable circumstances. Similarly, a safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experience indicate that a chance of loss must be recognised and allowed for, we have a speculative situation.

Additional Criterion of Investment

An investment operation is one that can be justified on both qualitative and quantitative(price) grounds.

Many have the misconception that "blue chips" were safe investments. They may be good quality stocks, but the public unconsciously assume that no price would be too high for a good stock. Carried to its logical extreme, such an issue was equally "safe" after it had advanced to 50 as it had been at 2. The issue then becomes speculative without quantitative grounds or a margin of safety in price.

Types of Speculation

1) Intelligent speculation- the taking of a risk that appears justified after careful weighing of the pros and cons.

2) Unintelligent speculation- risk taking without adequate study of the situation

Margin-of-Safety concept

In the case of bond or preferred-stock investment this margin is usually represented by the excess of earning power over interest or dividend requirements, or of the value of enterprise above the senior claims against it.

In the case of a common stock it should be represented either by the excess of calculated intrinsic value over the price paid, or else by excess of expected earnings and dividends for a period of years above a normal interest return.

Tuesday, January 1, 2008

Portfolio 2007

Straits Times Index(STI) closed at 3,482.30 higher for the year 2007, which is an increase of 16.63% excluding dividends.

The 10 year annualised return for the STI is approx. 8.93% taken from fundsupermart. The average investor who diversifies would also expect to get almost the same results like 9-10% p.a. over the long term.

The STI alone is not a good indicator of measuring performance because investors cannot buy the STI. Instead investors will have to buy streetTRACKS Straits Times Index Fund(an exchange traded fund-STI ETF) listed on 17th Apr'02 designed to track the performance of the STI. Its objective is to replicate as closely as possible, before expenses, the performance of the STI. To provide a fair computation of the performance of the STI ETF, we should use its NAV from 3rd Jan'03 $14.05 as a base. The closing price for STI ETF for the year is $36.99. Total dividends received for the last 5 years is $3.33. Hence the annualised return for STI ETF is 32.7% and 37.4% including dividends, excluding management fee of 0.3% p.a. Also take note that the STI ETF is approximately 1/100th of the STI.

Some may ask why the large discrepancy in the annualised return of the STI and STI ETF? The reason is that STI ETF is only set up 5 years ago and these 5 years are bullish years. Another reason is that the STI ETF closed at $36.99 which is $2.17 or 6.22% higher than the STI. Market sentiments are still bullish which contributes to the bidding up of prices higher than the STI. As such I should also provide the previous 5 years annualised return of the STI which is 19.47% excluding dividends. To conclude, the management of STI ETF did 13.23% excluding dividends better than the STI by trying to mimic its share holdings.

STI ETF vs investment funds that invest in the Singapore market

To prove that the STI and STI ETF are no pushover, let us look at some of the funds that invest in the Singapore market. On average some of the funds like Aberdeen Singapore Equity, Schroder Singapore Trust and UOB United Growth Fund managed an annualised return of 20-22% over the last 5 years. The funds managed to beat the STI by 1-2%, however if fund management fees between 1-2% p.a. were included, their performance were only average or maybe some below average. Needless to say comparing the funds with STI ETF. Only DBS Shenton Thrift managed to get close with 29.88% annual returns over 5 years and 2nd runner up would be Lion Capital Singapore Trust with 26.06% annual return over the last 5 years too. Hence none managed to beat the STI ETF which did no stock pickings but merely imitate the stock holdings of the STI. This further proves what Warren Buffett said that it is better to invest in index funds as only 1-2% of fund managers globally managed to beat the index. Index funds also charge much lower management fees than investment funds.

Note: Fund % figures were taken from fundsupermart between the date of 31st Dec'07-2nd Jan'08.

Yardstick

Like most things we do everyday, we should have a yardstick to measure performance. I hope to do better in bear markets than in bull markets as I'm looking for companies with good future prospects at depressed market prices. I would be happy if my portfolio can outperform the STI ETF by 10% each year. For example the STI ETF this year gained 22.1%, I would do well if I can achieve >32.1% gain in portfolio for the year. I also consider in a year whereby my portfolio is down 20% and the STI ETF down 30% to be a better year.

Stock holdings

1) Kingsmen (145.9% gain)
Bought: $6,000
Market value at 31st Dec'07: $14,400-$45.62(trading fee) +$400(dividends)=$14,754.38

Reason why I buy: Bought at low P/E, industry leader, foresee many contracts in IR and F1, improving earnings and unnoticed by the market.

2) ChinaACorp (17.8% loss)
Bought: $2,500
Market value at 31st Dec'07: $2,100-$44.07(trading fee)=$2,055.93

Reason why I buy: Purely speculative by listening to Dad saying some 'big shot' buying tonnes of it. Could not find its financial statements. Formerly Acma Ltd.

Total portfolio market value at 31st Dec'07: $16,810.31 (97.8% gain)

Past performance is not a good gauge for future performance.