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)

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.

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.

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.

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.

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.

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.