Share Consolidation - PSC Corp

Share Consolidation

When a company finds that the quantity of its issued share is too large and thus resulted in poor performance in share price, it may resort to consolidate its shares. Compare to stock split, you don't see a consolidation often in SGX. By share consolidation, company will merge the shares into smaller quantity, e.g. every 5 shares into 1. If that’s really the main motive of that company, in my opinion, the management is just wasting their time to do something that has no impact on shareholders’ value. If a company is profitable and has sustainable growth, share quantity is never an issue. For example, Singtel has almost 16 billion share floating, but that does not make its share price stagnant or to hovers at low price. On the contrary, Singtel’s shares are always actively traded and with better performance in recent years, especially after their acquisition of Australia’s Optus, Singtel’s share price has been moving up gradually. In mid-2003, Singtel’s share was traded below $1.40. But in Sep 2007, it’s share price break through $4, and this is not the first time Singtel share price reach this height. The strength in rising share price, besides bullish market, was better profit. This is a fundamental we are talking about. And a good management team should divert 100% effort and time into this fundamental.

Experience From Beyonics Tech

In Sep 2003, Beyonics Tech announced its plan to consolidate five shares into two. At the time of announcement, Beyonics Tech has 1,138,334,628 issued shares. In their announcement, the company mentioned that ”the directors are of the view that share consolidation may increase the profile of the company amongst the institutional investors and make the shares more attractive to such investors and thus, increase interest in the shares. Shareholders should note, however, that there can be no assurance that this can be achieved as a result of the share consolidation……” As you can see, the directors' view is "say like no say". One of my friend who followed me to buy Beyonics Tech much earlier asked for my opinion on our course of action. I told him to lock-in our profit and run before the consolidation. And we did.

“What is your basis of such recommendation to your friend?”

Well, firstly, as I mentioned, increasing share profile by consolidation makes no economic sense. I interpreted it as “nothing better to do”. I would prefer that the management spend more time and all effort to improve their bottom line. If a company can prove to the investors that their new initiatives have resulted in higher and sustainable revenue, there would be a demand, and then more than supply and the share price would move up. Before 2002, Beyonics Tech’s net profit was rather unattractive. My second reason was due to uncertainty. You don’t find many share consolidation activities here (in SGX) compare to stock split. So after the consolidation, will the share price stay or surge above after-exercise price? Obviously nobody knows and that is an uncertainty. Uncertainty equals to risk. Is there any catalyst to propel the share price after the consolidation? If not, then the risk will be high. If the company concerned has a visible growth trend, then share consolidation doesn’t matter at all.

After Beyonics Tech’s share consolidation, the exercise price should be about $0.675. This means that if you hold 5,000 shares before the consolidation, it will become 2,000 after the consolidation and the market will adjust the price accordingly. After the consolidation, Beyonics Tech’s share price was indeed strong at the beginning and surged to about $0.80. Unfortunately, within half a year, its share price dropped below $0.60. Poor market sentiment was also to be blame. The share price continued to head south until finally in 2005, my friend and I bought Beyonics Tech’s shares again at around $0.31. As you can see, long-term investors got a slap for nothing. For me and my friend, we got a good bargain plus little profit that we had locked in previously.

PSC Corp

Sometime back, a few friends had asked for my opinion on PSC Corp. I gave very negative remarks. The reason was due to a very bad incidence which I can never forget (and forgive). In 2003, PSC Corp’s Board announced a share option scheme. Its share price was then traded just slightly above $0.10 yet the management set the exercise price at around $0.085!!! An option scheme was supposed to be used as a carrot for staff to work hard and improve company’s result, not for instant gain. I mean out of sudden, the company employees sit on unrealized gain. Why would they need to work hard since they are already sitting on unrealized gain? This issue was also brought up by analysts on the paper. Immediately after that announcement, I have no confidence and faith on the management team. I dumped the shares at small losses.

In Jun 2007, PSC Corp announced their proposal to consolidate five shares into one. At the same time, company also proposed to issue additional shares of one right share @ $0.33 for every two consolidated shares. At the time of the announcement, PSC Corp has 1,868,655,825 issue shares. On 29 Sep 2007, PSC Corp’s announced the date of its book closure. The share was then traded between $0.115 and $0.12. Based on this announcement, and using $0.115 as a guide, the theoretical after-exercise price should be approximately $0.50. Now, the critical question is whether the price will drop below this theoretical price subsequently? This is a difficult question. But I have some points for you to think about it:

1) In Sep 2007, STI break through 3,700 points despites yet-to-resolve US subprime problem.
2) US consumer confidence was reported at year low in Sep and new home sales dropped to 7-years low.
3) Many analysts still believe that a recession is coming.
4) Oil price is expected to surge further.
5) Does PSC Corp has any catalyst or sustainable growth?

I had produce a summarised financial report on PSC Corp for analysis.

Without going into the detail, my conclusion from the analysis is that there is really nothing to shout about. No doubt the company is financially healthy, but what about returns? The margins are thin, ROE hardly reach 6% (my annual returns from stock investment is already above 10%), the yield is pathetic etc. However, it may be interested to note that PSC Corp has two listed subsidiaries: Tat Seng Packaging (64% holdings) and Intraco (29.9% holdings). Also in Sep 2007, Goi Seng Hui has increased his stakes in PSC Corp from 13.9% to 14.3%.

In conclusion, in my opinion, share consolidation is meaningless if it used as a mean to “boost share trading”. In fact, I can’t think of a meaningful reason to consolidate the shares. The highly-paid management team should always focus on the fundamental, i.e. profit growth. They should spend all their effort in improving bottom line and leave the share price to the market forces. If you are currently holding PSC Corp with a short-term perspective, the above five questions may help you to decide whether to quit before or after the book closure.

Wealth Creation - My Learning Curve (final)

SunShine Empire

So what I have learned over the years when comes to investment/business opportunity is this - never be impatient, always get the facts correct. Never invest in anything that your don’t understand and never to succumb to hard-sales tactics. There is no such thing as “this opportunity only happen once in a life time”. I assure you, there are always opportunity presented to us, whether in the form of a scam or otherwise. Greed and fear has always been men’s greatest weakness and one of the main root causes for failure. Everyday, there are people around the globe coming up with fantastic ideas to make good money It can either be a genuine and innovative idea or just a scam for you. You don’t believe? Here I’ve got another opportunity good enough for you to tender your resignation letter after you signed up.

In mid-2007, a few of my colleagues were engrossed in an investment firm known as “Sunshine Empire”. According to them, the company offers investment scheme that comes in different classes – Gold partners, Silver partners and Bronze partners. Comparatively, the Gold partners requires higher investment amount. The returns from the investment is very high. One of them told me that in less than a year, investors will get back their initial capital, and presumably there are still perks after that. Subsequently, I also heard that by sponsoring friends into the investment scheme, you will be rewarded too. I went into Sunshine Empire’s website and they claim that are investing a lucrative broadband business in Taiwan. The latest update is that they are into property investment.

I begin to search through the internet to find more information about this investment scheme. As usual, there are always people claiming that this is a scam, while others do their best to convince you that they had received a few thousands dollars per month from this investment. These investors will “screen-shot” their cheques together with pictures of seminars attended by huge crowd. And there are also heated arguments in forums discussing this scheme.

There is a report in a Chinese website and I had extracted it below for reading pleasure.

“阳光大帝基金”骗局揭秘
发布者：三阳 时间：2007-08-24 09:18

“瑞士共同基金”等黑基金刚刚覆灭，一种名为“阳光大帝基金”最近通过网上又卖得红火。该基金号称投资6万，每月可分红7000元，并在福州设了联络处。据称，福州有几百个投资者买了该基金。收益这么高，这基金靠啥来维持运作？投资者的资金又如何得到保障？连日来，记者做了一番调查。

抽回投资遭到拒绝

福州高先生日前反映，最近“阳光大帝基金”卖得很火，感觉像“瑞士共同基金”变种。他的几个朋友都花了6万买了这只基金，最近也收到了每月7000元的分红。有朋友要求抽回投资金额，但遭到拒绝。

几经周折，记者昨日与“阳光大帝基金”位于广东佛山的中国区负责人于先生取得联系。于先生在电话里自称其公司总部在新加坡，是高科技公司，在全球都有投资，主要做无线宽频、房地产等项目。但记者上网查询“新加坡阳光大帝公司”，却查不到其在新加坡的任何信息。于先生表示，“阳光大帝基金”分三个投资级别，最高级别是投资6万，每月可获得7000元的收益。第二个级别是投资3万。最小的基金投资额是4173元，按照一套复杂的计算方法，两年后按月分红的总额可达2万多。于先生还称，公司运作模式与传销类似，但绝非传销。公司鼓励每个投资者介绍熟人参与投资，并将重奖其中的优秀者。每发展一名自己的下线投资者购买公司6万元基金，可获得2000元奖励。

于先生还透露了在福州联络处联络人陈先生的联系方式，并称福州投资者已经有很多，正准备组织他们到香港分公司去参观。记者昨日找到“阳光大帝基金”福州联络处的陈先生。他说，“阳光大帝基金”在全球有5万多会员，仅仅在福州就有几百人。此后，他又吹了一通基金如何如何赚钱，极力鼓动记者去买。当记者问及为何拒绝投资者收回资金时，陈先生并未回答。另据了解，“阳光大帝基金”网站服务器设在香港…

========

Is the above report trustworthy? I don’t know. Like I said, in the internet, we just don’t know who is really telling the truth! This scheme is currently spreading like wild fire in my office and apparently, a few colleagues had resigned when they collected a few thousands per month from this investment. I was told that one of them invested close to a hundred thousand of his retirement savings. This colleague is at retirement age. Putting your retirement savings to someone with such credential, in my opinion, you are walking on a big plot of land mines. Some forums even refer SunShine Empire as a “Ponzi scheme”. From Wikipedia:

A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more and more investors become involved, the likelihood of the scheme coming to the attention of authorities will continue to increase.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi was not the first to invent such a scheme, but his operation took in such a large amount of money that it was the first to become known throughout the United States. Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit lapses in judgment arising from an investor's lack of information.

- end -

So, you see, there are indeed many people who wanted to help you and me to be rich. Now there are also “Paid Survey” and “Diamond Cash Club”. I am not sure what they are or how they work but I am rather tired of doing more of such research. Some schemes require huge investment layout, others just fifty bucks. And we always have unlimited supply of scammers around the world. Whenever someone tried a new scheme, he will help the creator to be a millionaire. You may say that “it’s only $50 mah, who knows it is real and I can get rich”. But that is exactly the kind of behaviour a scammer is hoping for. Remember that if every China people give you a dollar, you are instantly a billionaire. Still I am always skeptical on those get rich ideas that do not require hard work and/or commitment. It is not that I had a negative mindset. I always do my homework, when I am convinced beyond reasonable, I will try. Well at least I tried the MLM before.

Conclusion

In conclusion, everyone wants to be rich, to be a millionaire, and to achieve financial freedom. That is the ultimate objective of earning more money. I had tried and will keep trying, and to do it intelligently and ethically. I believe very soon we will know if SunShine Empire is in genuine business. A good investment/business based on sound fundamental will survive. But those schemes that promised quick and easy money usually won’t stay long, especially those where the earnings largely comes from new recruits. I don’t want to end up joining a scheme that only serves to help others to be millionaires. No doubt we should always keep an open and positive mind, learn to acquire more knowledge. Again, knowledge equals to power. After years of reading materials on Warren Buffett’s teaching, I had acquired basic knowledge in investment that manages risk as well. I always tell my friends that for all kinds of investments, we must first have answers on “risk factors” before we talk about “rate of returns”. If the first element cannot be ascertained, then we should put our money in the bank. The investment products or asset class may be different, but the principal never change. The fundamental questions that I always ask are:

- How does the investment/business generates income?
- What is the income source? Selling product/services or membership?
- Does that income source make economic sense? Is there a fundamental demand?
- Is that income source reliable and sustainable?
- Do I understand the investment/business? Can I see it or feel it personally? I don't want powerpoint slides or video clip or word of mouth.
- Does the company have code of ethic and professionalism?
- Does the business has a sound track record?
- Is the account audited, by whom and can I study the financial report?

When a very attractive investment/business opportunity presented to me, my first response, and you may not like it, is “I will consider”. I will take some time to conduct due diligence until I am fully satisfied. Hard sales tactics will never work on me. And when I am satisfied, I will go for it - no retreat, no surrender.

Wealth Creation - My Learning Curve (Part V)

Using Google Adsense

Google AdSense is a quick and easy way for website owners to display relevant Google ads on their website's content pages and make money as the ads are related to what your visitors are looking for on your site. How Google Adsense work is simple. If people click on the Google ads on your website, you will make money! If you have a website with information like Race Car, you can place Google ads on your website and when somebody clicks on the ads, you will make money. The Google ads displayed will be related to Race Car. For example, if 20 people click on the Google ads a day and Google pays you $0.50 per click. You will earn $10 a day and $300 a month! If you have 10 websites with Google ads, you could be making US$3000 a month. By the way, Google ads are created by advertisers using Google Adwords.....

Chapter 4 - My 6 proven ways to get more sales

Google Adwords is a tool provided by Google for you to create ads based on the keywords you choose. The keywords that you choose are related to what product you are advertising. When people search on Google using one of your keywords, your ad may appear next to the search results as shown below. People can simply click on your ad which will bring them to a website to buy something or learn more about your product. Advertisers using Google Adword need to bid for keywords related to their product. The higher the bid, the higher the chance the advertiser’s ad will appear next to the search results in the first result page. Some advertisers paid US $100 for certain keywords so that their ads will always appear in the first result page.

Advertising using Google Adwords is called pay per click advertising (PPC). You will have pay to Google everytime visitors click on your ads. If nobody clicks on your ads, Google will not charge you. Google Adwords allows you to set a budget for your ads campaign. Once your budget is reached, your ads will not show up next to the search results.

There is other similar pay per click advertising like Yahoo Overture. But if you are starting new online, I don’t advise you to use Google Adwords or Overture because you may end up paying more for advertising than making money. For example, if visitors click on your ads (selling making money e-book) say 500 times a day and you have to pay $0.50 per click for a competitive keyword like making money, the total advertising cost for the day will be $250. If you only sell 1 item at $50, you are making a loss. Advertising using Google Adwords and Overture is expensive. The good news is I will show you in my tips that you can pay as little as 5 cents for each click instead of 50 cents or more for competitive keywords.

-end-

===========================

“So at the end, is this a scam or not?”

Ok, generally, most people (and my opinion too) will conclude that it is and it is not. It is because it gave empty promise of large income within days or a week. That is not true. It is not because their refund policy was genuine based on many feedbacks and if you work hard for it, created genuine traffic on your website resulting in real purchase order, your really can make good money. Guess who is the banker, the sure-winner here? Google and the guy who came up with this concept! In my opinion, the idea is rather similar to MLM: the product/service must be genuine, it can indeed create lots of money BUT comes with hard work and commitment. The fact is, even in a MLM business, not everyone can climb to “Diamond” or equivalent position easily. It takes lots of hard work and certainly no such thing as auto-pilot and collect bank cheque.



To be continue……

Wealth Creation - My Learning Curve (Part IV)

Ultimate Wealth Package

Sometime in early 2007, one of my friend send an email to me to ask if I know of a an internet money-making business. According to him, just pay around twenty over bucks to own a website and you can earn lots of money, or something like that. And then you get more people to sign up. I asked him why should I pay for something I don’t need. He replied that “it’s just twenty over bucks, what’s the big deal”. He didn’t actually answer my question.

Subsequently, I noticed many information and talks about “Ultimate Wealth Package” (UWP) in the net. It claims guaranteed earnings of a few thousands per month by just following simple steps and then the rest will auto-pilot. So I start to search the net for information and read forums discussion on this matter. Channel NewsAsia’s forum has a thread on this topic. It’s quite interesting actually, reading how people fighting over this topic. As usual, everyone come out with his “valid evidence” to prove that UWP is/is not a scam. There are almost 80 pages for this thread and will probably take a few days to read if you start from the very first one. I lost my patient and jumped straight to the most recent posting. Guess what happen? Well, all the excitement and positive feedback almost died off. There are more people talking about how to get a refund from this UWP.

From the forum, this is what I picked up. You need to pay about US$50 to join the UWP and receive a free website plus ‘e-book”. You are suppose to read the e-book as it is a guide to make lots of money from internet. The income source actually comes from selling this e-book. When someone comes into your website and sign up for UWP, you’ll get a commission. Therefore, high traffic is the key to success. Also when someone visits your website and click on the AdSense, Google is going to pay you (I got one on my blog too). And to create the kind of traffic is not easy (that’s why the traffic on my blog is still pathetic). Your so-called upline will teach you on strategies such as subscribing to Google’s AdWords. But you got to pay for Google AdWords!!! This is how it works. You select a keyword for your website. When someone does a keyword search, your website will surface right on top. For every click by a net surfer, you got to pay for it. For hot keyword like “millionaire” you may even have to bid for it at high price. So every click will cost your based on that price. And as you can see, if you are lured to achieve sales result and use Adwords, your cost will go up further.

Next, this is usually how people sell UWP through their website. They are going to use convincing words, testimony to convince you that they are telling the truth; they will swear to heaven and earth. They claimed that UWP is an idiot-prove method of earning a few thousands within a week (and you can fire your boss right away) by doing nothing. You just go through the steps and everything will “auto-pilot”. You continue to make money even while sleeping. They will show you their cheque (screen-shot) and have others to testify on the website. The host will also use local jargon and may also kindly share with you on how to identify internet scam. All these only for one purpose - to win your trust. You will also be given special discount if you “sign up before midnight”; limited editions. So when you sign up the UWP (and the previous host will earn his/her commission), you will also do exactly what the previous host has been doing. Someone in the forum gave a good account about UWP. It sound genuine and I re-produce it below. It may be lengthy.

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Chapter 2 - My 4 proven ways to make money online

Become An Affiliate

When you become an affiliate, you are selling other people’s product online by advertising the product either through your own website or by writing ads using Google Adwords, Traffic Swarm or Instant Buzz which I will cover in chapter 3.

When people buy the product from you, you will earn a commission. The commission can be as high as 75% of the selling price. You can become an affiliate regardless of where you are from. I am from Singapore and I receive a commission cheque every 2 weeks without fail from selling other people’s product. Selling may not be everybody’s cup of tea but selling other people’s product online can be achieved by anyone as you do not need to do cold calling, maintain an inventory, track orders or even ship the product.

If you go to www.clickbank.com, you will see thousands of products that you can promote and earn a nice commission. Most of the products are e-books and software. ClickBank is a super mall selling digital products like e-books and softwares. To become a ClickBank affiliate, you have to sign up for an account at ClickBank http://clickbank.com/signup/. After you have signed up, you can start advertising products.

Let’s say you want to sell the very popular Rich Jerk, create your affiliate link by replacing XXXXX in the link below with your ClickBank ID: http://XXXXX.richjerk.hop.clickbank.net/ Replace XXXXX with your ClickBank ID.

Put the link in your website or ads and start advertising and make money! For example, everytime somebody clicks on the ClickBank link on your website, the link will direct the visitor to the product website and if the visitor makes a purchase, you will earn commission! It is that easy. Let’s say you have a website that sells a product that make US$50 in commission and there are 1000 visitors a day to your website, if 10 visitors buy the product from your website, you will get 10 X US$50 = $500 a day and US$15000 a month! Don’t worry if you do not have a website to promote ClickBank products. You can still promote ClickBank products using ads as described in Chapter 3.

You may be asking everybody is promoting the same product, how can I ever compete with the rest? Yes, this question came to my mind when I started. The strategy is to use my 6 proven ways that I will cover in Chapter 3.


To be continue…..

Wealth Creation - My Learning Curve (Part III)

Email Stock Tips

The wonderful thing about internet is that it brings people all over world closer. It allows information to flow quickly and freely. It allows everyone with internet assess to be updated on world events every single second. Most importantly, it creates millionaires. But there are also problems with such convenience and information overflow. The problem is - you are confused and don’t know who is telling the truth. Internet opens up income opportunities and scams. It allows scumbags to cheat not just on his countrymen, but anyone else living in other part of the world.

For people who are naïve, they will jump into any opportunity that presented to them. Others, including myself, who always get the facts correct and invest based on fundamental and calculated risk, are confused by the large amount of information. On the topic of wealth creation, we are not short of opportunities presented by some “kind-hearted souls” who sincerely want to help you to be rich. Recently, I received many emails spam telling people to buy certain stocks claiming that the stock will surge when market re-open. And there are people who believe in it, bought it and make the whole thing a self-fulfilled prophesy. Until today, when man is about to land on Mars (exaggerated), still there are human beings who believe that someone else is there to help him to get rich for nothing. I received the following email spam on 17 Sep 2007. Whoever wrote it is nothing more than a clown.

Watch UTYW M0nday!

UNITY WIRELESS CORP
Sym: UTYW

This is a REAL COMPANY, REAL EARNINGS, Making thier INVESTORS HUNDREDS OF THOUSANDS!

Current: 0.06
Expected: 0.24
First Half Revenue Grew 53% to $4.8 Million Over the Same Period in 2006

Wireless Technology is and will be the Wave of the FUTURE!
This Company in on the Breaking mark of coming out with a HUGE deal Tuesday!

Monday Is Big Day For UTYW!

-end-

“Then what’s your motive in sharing value investment?”

Firstly, value investing is an open secret. It is also not a quick route to millionaire. There are thousands of books written about it and numerous sharing on the net. You do a Yahoo search and you’ll know what I mean. Secondly, I shared it out of passion, although I do hope that some big-timer may find me useful and employ me as a fund manager. And I do not gain a single cent from my sharing. Most importantly, whether you use my method or otherwise, it has no impact at all on my financial status.

With the internet, anyone including scumbags can reach huge mass easily. We all know that if every China man gives you a dollar, you will be a billionaire instantly. Imagine how lucrative it is if a small fraction of net surfers believe in a “scheme” and willing to surrender their hard-earned money. Just US$10 will do and a scumbag will be more than a billionaires. Another example is fund-raising activities. Singaporeans are famous for been kind-hearted and we are familiar with the NKF issue. If a charitable organization can collect such huge fund for the needy in Singapore, think about global community! You do the math. Recently, there are many fund raising email spam telling story of how unfortunate the sender is, or how he or she wanted to help the needy; a few dollars would mean so much. I say even ten cents would mean so much. I am not saying that they are all scams, but how do you know? You got a copy of their audited report? Audited by whom? The boss himself? For all you know, you may just help another man to be a millionaire.

So again internet is wonderful, but it can be confusing even as you try to find the truth. It is difficult to tell who's right or wrong. But one thing for sure, knowledge equals to power. We have to keep learning and reading and be patient. Only then can we form better judgement on all sorts of opportunities presented to us. Don’t jump into a scheme out of curiosity or greed. Do not subject to sales pressure. There are always opportunities one after another. Find a good and genuine one and then work hard on it.



To be continue…..

Wealth Creation - My Learning Curve (Part II)

It was only after I read Rich Dad Poor Dad that I re-looked into the MLM. I took my time, done some study and attended seminars. Finally I know how to differentiate between a good and lousy MLM: business integrity and product quality.

- Business integrity. An MLM company should have code of ethics and conduct. In addition, there must be clear policies such as refund policy, grievance procedures and rules that govern the way their distributors conduct their business activities. In Singapore context, MLM companies that are registered under the Direct Selling Association of Singapore should be quite reliable although that is not a guarantee.

- Tested product quality. Except for the business model, a good MLM company is no different to Wal-Mart. They are all selling products that are of good quality, of certain commercial value and that people want it. The products must have a reasonable commercial value. If you pay $2,000 for a pen-holder, you may be in a pyramid selling. And the salesmen are rewarded based on their sales result. So the organisational structure is different, but the principal is the same.

Finally I joined an MLM company - Amway. I have done my homework and I have full knowledge of the business. There are no hard-sales tactics, no camera tricks but just selling the (household) products. Hardworking and successful salesmen will finally earn significant passive income. I started to share with a few friends honestly and openly. A few of them joined in but were not motivated to work hard partly because they are in a comfort zone – civil servants. As my mentor adequately put it – if success is not a must, then dream will continue to be just a dream. As a result, my hope of gaining passive income through MLM ended within a year. But my friends, those downlines, continue to be my brothers till now (and forever).

Business Venture

If you have read Rich Dad Poor Dad, you will know that the bottom left quadrant is business venture. Yes, you can make lots of money if the business venture is successful. Compare to employment income, business venture actually make it easier to jump from left to right quadrant (passive income). Naturally, business venture comes with high risk but equally high gains. There are various sources of passive income. In case you ask, I’ll share one that I know. Imagine I strike lottery of say $500,000 to a million, I don’t have to work anymore. I simply put most of the money in high yield and defensive stocks such as bank, SPH, Singapore Airlines etc. In Singapore context, it is not difficult to find companies with stable dividend policy and with the right price, you can get at least 5% yield. Disregard any capital gains, the dividend I expect to collect from these companies will exceeds my annual employment income. I don’t have to do anything. I simply select and invest in wonderful companies and don’t gamble. And I’m free! And when these companies grow and expand…

“That is commonsense, I also know”.

Again I have to repeat my lecturer’s quote “commonsense is the least common human attributes”. One of my colleagues in my office actually strike lottery around end 90s. Without knowledge in investment, his family bought a “big house”. If you are a Singaporean, I am sure your eyes and mouth will open wide. Yes, that’s the worst time to buy property. Indeed, the wrong moves wipe out his windfall. Commonsense you said?

In 2006, Bob, which I mentioned in my previous article was dispatched by his company to emerging countries such as India and Vietnam. His company was expanding into these countries. Shortly after he was back from Vietnam (Da Nang), we met at MacDonald to have coffee. Remember the story of You Tube that made the three founders billionaires? They came out the idea of online video while having a drink in a Pub? During our coffee session, Bob told me that he fell down in the bathroom while he was at Vietnam. So he wanted to find (Chinese) medicated oil to rub on the bruise. Surprisingly, after visited a few pharmacies, none of them sell medicated oil. Naturally, I don’t believe in his story, but he swore on it. And then he said he knew a Sinseh (Chinese Doctor) in Chinatown selling traditional (secret recipe) medicated oil. I said “let’s don’t waste time drinking coffee here, let’s take a walk to Chinatown.

Lucrative Medicated Oil Business

Cut the long story short, we visited the Sinseh and expressed our interest to carry his family’s brand. Although their business is just a small shop in People’s Park Complex, they have made enough money from their business and wanted to quit. The Sinseh intends sell his family brand plus recipe to us (at S$1 million). With a good start, we started planning our business venture. We met once a week to brainstorm on our project; I covered Vietnam’s business environment and regulations, analysis of medicated oil companies (Tiger Balm, Eagle Brand, Axe Brand) plus cashflow forecast while Bob study on marketing strategy and linking up with his connections in Vietnam. Although subsequently our research revealed that there are currently a few medicated oils selling in Vietnam, we were not discouraged. This is because with Vietnam’s tremendous growth (just after China), opportunity is in abundance. Most importantly, my research study suggested that selling medicated oil is a very profitable business that makes Tiger Balm into a blue chip stock. Finally, we established certain (verbal) agreement with the Sinseh, registered a company name and book our air tickets. We wanted to do an actual ground study before we put everything in legal forms. With same mindset, same academic ground, and been friends for numerous years, we believed that we are the best team and we are going to make history.

Unfortunately, like in every movie, something happened at the very last hour. I re-looked into my forecast and felt that it may be too optimistic or not conservative enough. In worst case scenario, our capital layout will not last even for a year. We need additional partners. The problem is we could not agree on each other’s candidates. While Bob has his own choice (ex-Informatic chairman), I have mine (my mentor and a trainer in Neuro-Linguistic Programme). Finally, the deal was off, air-tickets wasted, and company not incorporated. There goes another opportunity to earn big money.

Targeting China's Hot Stock

Sometime in Mar 2007, I met another guy Jeff for coffee. He was doing his own rental business but wanted to know more about stocks. I don’t mind sharing with him. During the coffee session, I realised that he wasn’t actually interested in value investment; he was more interested in quick and easy money. Apparently, Jeff is quite familiar with China. He has been flying there frequently. He also knows that China people are crazy for stocks as a mean to get rich. He has an idea to make money from these people. I thought he was thinking of setting up a broking house or some research company. I was wrong.

Well, his idea was to set up a website providing “insider news”. The news may be true or fake. But genuine insider news can also be acquired through kickbacks; that’s how things work in China. In Singapore, you do this (bribery, insider news, misleading other investors) and you get caught, you go Changi straight away. In case you wonder what is a “Changi”. Changi here refers to Singapore Changi Prison. Anyway, Jeff’s strategy is this: people will surf your website and some will use your so-called “insider news” at no cost. Chances are, some will make money while others may incur losses. For those who made some money, they will come back. Then the website will continue to offer inside information, at a certain fraction of the punter’s profit. As long as a small fraction of the China people believed in the inside news, you do the maths.

I told him that I won’t do it. It’s unethical and who knows the 公安 (Chinese police) may also lock us up. He critised that my approach to business venture is wrong; that I’ve been talking too much but no action. “There is no time to wait, research, planning and forecasting etc. When opportunity comes, you must grab first! If there are problems along the way, then solve it one by one!” I just smile, knowing that if I ever venture into business, he will never be my partner. He may be right, but it doesn’t matter to me. I will continue my search for opportunity to earn big money ethically and then to convert the money into sources of passive income.



To be continue……

Wealth Creation – My Learning Curve (Part I)

Introduction

Everybody wants to be rich. But not everybody can be like Cinderella. This is because we are living in a world where the rich will be richer. And that is fully sensible because the rich owns resources to create more wealth. But the most difficult task is actually to preserve it. From Warren Buffett’s teaching, I learned how to invest my income in stocks to earn higher returns and then preserve my profit from been taken back by Mr. Market. But to depend on employment income to generate wealth, the process is extremely slow and is not likely to reach the ultimate goal. Being rich is only the process, not the ultimate goal.

So what’s the ultimate goal?

When I asked a few colleagues on why they want to be rich, the common answer is to buy bigger house, car and more holidays and may be to attract girls’ attention. That is one of the lousiest answers as it implies higher expenditure with more money. Believe me that many millionaires are sitting on huge debts at the same time. I may be poor but I am debt-free. A few years ago, I bumped into a college friend by the name Bob. Bob is an internal auditor with a big listed company earning good income. He is also working very hard for his direct selling business at the same time and Bob recommended me to read Robert Kiyosaki’s “Rich Dad Poor Dad”. Initially, there was some resistance due to my ego, but very soon I persuaded myself to keep an open mind. Fortunately, and for the first time, I finally understand the true meaning and ultimate goal of wealth creation.

The “Rich Dad Poor Dad” Teaching

Robert Kiyosaki’s Rich Dad Poor Dad is a must read for anyone who wants a breakthrough in his/her financial situation. The book will not turn a person into a millionaire magically but will give an insight on how to reach there. From his book, I finally know how to create wealth and most importantly, the ultimate goal of wealth creation – financial freedom. As I am trained in account and finance, it is not difficult for me to appreciate his concept. In fact, after reading his book, I borrowed his renowned Cash Flow board game from another friend. This friend also believes and understands Robert Kiyosaki’s teaching and working towards that goal. So I played the board game with my mentor and I got out of the “Rat Race” in around 2 hours. My mentor got out an hour after me when he realized my tricks. You see, throughout the game, I was randomly selected to play the role of a cleaner while my mentor was a pilot (if I remember correctly). His has a much higher monthly income than me but I got out of the rat race first. To get out is not difficult as long as you understand how to accumulate passive income and managed risk. When you are out of the rat race, you are financially free (in the game)!

Achieve financial freedom means that a person will be completely freed from any forms of financial crisis such as recession, unemployment, lacking of retirement savings, lousy bosses etc. In fact, when a person reached financial freedom, there is no need to seek employment at all. Robert Kiyosaki was financially freed at the age of 46. Besides his own businesses and investments, Robert Kiyosaki has all his books and board games to sell around the world. That is passive income and these items aren’t cheap. The board game will cost around S$100 and of limited production yearly. Everyday, someone in another part of the world is paying for his products. So there is really no practical reason why he would want to be an employee, even if you are the best employer on earth. Robert Kiyosaki still conducts training and seminar not because he needs that income to survive, but because of his passion. I have a similar dream that one day, I will reached financial freedom and I will spend time doing stock analysis and giving training – simply because I love to do it. But at this stage, I think God is not going to let it happen, no matter how hard I try. That is also the reason why I no longer go to church. Anyway, that’s not my point.

So the open secret of attaining financial freedom is to seek passive income. Certainly, employment income will never lead to financial freedom but slavery to the employer. In his book, Robert Kiyosaki gave detail instructions on how to seek passive income through his cash flow quadrant concept. I don’t think I want to go into the detail. You can get his book from Popular bookstore and contribute to Robert Kiyosaki’s passive income. He deserves it.

Back to Bob, his ultimate objective was to convince me to join his MLM company - Amway. This is because one of the sources of passive income is through MLM business. When a person reached certain level in a (good) network marketing company, he can be financially freed. Kiyosaki also endorsed it (he studied and wrote a book on it even though he did not engage in such business). So if I understand and agree with Robert Kiyosaki, and with positive mindset, certainly I wouldn’t reject MLM business. This leaves him one last task; that is to convince me that Amway is one of the few trustworthy MLM company exist today.

Multi-Level Marketing/Network Marketing/Direct Selling

Why so many terms? Actually they refers to the same thing and used interchangeably. For simplicity, I’ll just use MLM throughout my article. I knew this business concept many years ago when I was still in the government sector. I was very much against MLM then as it resembles a pyramid scam. Besides, I was really disgusted with the way those distributors targeting their very own friends. They engaged unethical tactics to get people to sign up and/or purchase the products. Once this has been achieved, there is no turning back. Ten years of friendship would be cheaper than the sales deal. Suddenly you discovered that the friend you called “brother” is so ugly deep inside. Today, none of these people I know make it in MLM business.

The key difference between a pyramid and MLM lies in the source of earnings. While an MLM company offers various products thus earnings comes from the sales, a pyramid scam earns from the downlines, and more downlines. No product changed hand in the whole process. At some point in time, it will collapse and only those on top will make good money (and run away with it). During those days, many of my friends and colleagues joined the MLM company and subsequently resulted in conflicts among them. I remember a colleague (A) engaged hard-sales tactics and induced another colleague (B) to buy his massage chair that cost above S$1,000 paid by installment. But then something went wrong with the contract and colleague (B) wanted to stop the purchase. Obviously, the MLM company is not going buy it and threaten to sue him if he breached the contract. These two colleagues’ relationship turned sour. And this kind of incidence is plentiful for MLM companies without code of ethics and standard of professional conduct.

In late 90s, another friend called me up to invite me to join his business venture. As I am always interested in doing business, I agreed to attend his “business talk”. Sigh… the seminar was organized by New Skin. The seminar touched on how MLM helps to create huge income and that the business concept will soon replace traditional business model in big waves. They highlighted their plans to enter the un-tapped China market. To become a ‘partner”, I need to fork out more than S$2,000. And when I asked exactly what they meant by “entering China market”, that friend replied that I need to join first to know more. I told them that I need to think about it and discuss with some friends. But his upline discouraged me from doing so claiming that other people may mislead me. Instantly my confidence in this so-called business venture dropped to zero. Thereafter, that friend kept persuading me to join and his upline never fail to follow up with me. I pretended to be friendly, playing around with them depleting their stamina. Finally they gave up and we are not in contact ever again.



To be continue…….

I Got My Trading Account, What’s Next (Part II)

The third thing you need to do is to read financial news on the paper. You cannot invest if you don’t even know what’s going on to local and global economy. Besides, your very own analysis could be bias. So it is good to know what investing public or other analysts think about the economy or the company you going to investing. In Singapore, Business Times is the best source for business/financial news. If you don’t want to pay for it, you can read it on the net or download it F.O.C. after about 7pm everyday.

“7pm! So late? The war is over!”

But you are not trading/speculating, why do you need to be so updated? Don’t you have work to do during office hours? And that is exactly the wonderful thing about value investment – you don’t need to be updated every second! Yes you need to be updated but not every second! You can start your reading comfortably at home after work and after your dinner. Now that you know the three things you need to do, the next obvious question is how to do?

Identify Potential Companies

You want to invest in potential companies and you got a copy of an investment journal, but how to start your stock selection? Stock selection process requires basic skill/knowledge in ratio analysis. Fortunately, a copy of the ratio analysis is in my blog’s archive. It may take a while for you to fully understand all the ratios but for a start, you don’t need all of them. My method is to use a few important ratios so as to narrow down to those companies that met my criteria. The following are some of the more important ratios I used to identify companies that worth my time for deeper study.

1) Price-Earning (PE) ratio and Price-To-Book (PTB) ratio. Let say I will only looked at company with PE of 12 times and lower or PTB of less than 1 time. I will reject anything higher than that. In Singapore context, generally, 10 time PE or less is quite safe, i.e. the price of a stock not likely to be excessive. Of course PE alone is insufficient.
2) Net tangible assets (NTA) per share. For a non-service company, usually I prefer to have share price lower than its NTA. So for non-service companies with share prices higher than its NTA will be reject. You may wonder why this criterion is only used for a non-service company. For a company providing services, its assets are usually low as these companies have low assets investment. Also, some companies may have high stock prices relative to its NTA due to excessive speculation or growth factors. For a beginner, it may be difficult to understand.
3) Last 3 years operating profit or net profit (is it making a profit and any growth trend?). Certainly, loss-making companies will be rejected immediately. A loss-making company may turnaround making it a good buy but for a beginner, you may not be ready for such analysis.
4) Dividend yield. One of my all time favourite strategies is to invest in high yield companies. I may decide that a yield of 5% and above would be acceptable.

How about the share price? Well, the price factor, whether the existing price is acceptable, is captured in the PE ratio. Again, you need to study these ratios for a start. If you can’t even do this, then forget about investment. Let the fund managers do it for you; at a small commission of course.

Detail Study On The Potential Companies

After you identified a few companies that look attractive, you need to do a research. Our research will be simple. There is no complex methodology and no chance to interview the CEO. To do a simple research, you need to gather and put all information together. This is how I do it:

Step 1) Download these companies past years audited financial report (at least most recent 3 years) from their websites. An audited report is trustworthier than an unaudited one although still not a 100% guarantee.

Step 2) You need to learn and apply more ratios to confirm on the company’s financial health and performance. E.g. ROE, liquidity ratio, cash per share, gearing etc. In addition, study its past years’ growth in term of:

- Revenue
- Expenses such as administrative expense
- Operating profit
- Cash generated from operations
- Growth of each business sector or product type

You can take a look on my articles on Breadtalk and Popular and you will know what I mean.

Step 3) Numbers alone is not enough to make investment decisions. You also need to do qualitative analysis. For example:

- The strength of its management team, especially the one sitting right on top. If you refer to my article on “Investment Based On The Character Of Those At the Helm”, you will know what I mean. And I can tell you that Warren Buffett emphasize a lot on CEO selection.
- Company’s expansion plans and whether those plans make economic sense.
- Strength of company’s brand name.
- Locations to customers and suppliers.
- Market share and ease of new entry.
- Contracts awarded recently.

And the list goes on. All these qualitative information is difficult to collect and the only source to a retail investor is the analysts’ report or from newspaper. That’s why you have to read the papers and corporate announcements regularly.

Form Your Final Conclusion

So after all these microscopic analysis and you final have a “feel” of this company. Assuming you concluded that target company is a good investment, the last question would be – is existing price the right price. Is current price undervalued? Looking at the company’s historical price movement, does current price reflects all the good news? You may think that share prices always reflect all announcements made by the companies. I assure you, NOT EVERY TIME. For example, recent US subprime problem caused a deep correct in global stock market. Here in Singapore, we have numerous companies making good profit based on sound economic fundamental; some even exceed analysts’ expectation but yet all their price gone down hill. Why? It’s a game created by mankind remember? Just accept it. I can bet with you with all my savings, it will happen again. And when it happens, it is our lucky day. That’s the great thing about value investing and I always share with my friend that we (value investors):

“ARE QUALLY HAPPY WHETHER MARKET MOVE UP OR DOWN”

Once you concluded that this particular company is wonderful and price “looks” cheap, go buy it!

FAQs

How to know if my decision is correct?

You cannot judge a decision by staring at its share price for next few days, weeks or month. That is silly because you are not trading. You will know whether you made the correct decision based on the result of your analysis. For example you concluded that the company’s operating profit will grow, or its expansion will be translated into higher revenue, or higher revenue due to its competitive advantage etc. So did those things happen? If no, then there is an error in your decision and you must find the root cause.

What if someone else have different conclusions?

You must understand that another person conducting his own analysis on the same company may come out with different conclusions. At this point in time, nobody is for sure who is correct. I would suggest that since you have done your homework thoroughly, have faith on your own work, not others.

So what if my analysis is really wrong and I made a loss?

If finally the company you invested performed poorly with bad news everywhere, cut loss immediately. Don’t be discouraged, you’re still on learning curve. Find out what has gone wrong in your decision and make sure you don’t make the same mistake again. A good fund manager will tell you that “it is ok to make mistake; is it not ok to stay with the mistake”.

So with value investing, I still can incur losses?

If you think that learning value investing will ensure 100% correct investment decision, you come to the wrong place. Grow up! There is no investment without risk. Personally, I don’t believe that Peter Lynch or Warren Buffett has never made a single (investment) mistake! You want zero risk then put all your savings in the bank, and you will earn peanuts out of it. I mean get real! Banks make big money by borrowing from you cheaply (through saving account) and lend it out expensively (bank loan) to you! Don't tell me you don't have a savings account plus bank loans for your car, house, renovation or study etc.

But through value investing, your success rate will be much higher than monkey throwing darts. If you make seven good investment decisions out of ten, you are going to make a lot of money. That’s what I experienced after I adopted value investing. Since then, I made a reasonable profit every year (>10%). It’s not like lots of money but definitely many times higher than bank rate. And I can assure you that there are many more value investors earning a much higher returns than me.

Lastly, knowing what, how and when to buy is not enough. This is only part of the lesson. You also need to know when to sell. Yes, when to sell is just another important topic that you cannot live without it. I will share on this topic some other time.

I Got My Trading Account, What’s Next? (Part I)

I Got My Trading Account, What’s Next?

For beginners, it is easy to get the necessary account set up to buy stocks (I have covered all that in my previous articles). You want to invest base on fundamental and you have all the accounts set up. But there are thousands of listed companies! So how and where should you start?

One thing for sure, you just can’t write to a company’s investor relation manager and ask for a copy of annual report and start reading it. You won’t survive that thick annual report especially if you are just a retail investor. You also just can’t throw darts on the paper and then buy those companies, although the Random Walk theory says that. This Random Walk theory comes from a Princeton University professor named Burton Malkiel. Basically the theory says that stock price moves randomly and historical price movement cannot be used to predict its future movement. Therefore it is pointless to employ ten of thousands of analysts to predict stock prices. So if you use a monkey to throw darts on the list of listed companies and then buy them, you will get same results compared to portfolio created by professional analysts. As you can expect, the analysts are pissed off!!!

“So how about you?”

Me? Well, firstly, I never believe in predicting stock prices. And you will never see me saying something like “expect the stock price to reach $XXX” etc. I had a few friends who love to ask me when a particular stock price will rise”. And I replied: “you are not suitable for investment”. We must understand that man created this stock trading or investment thing; God was never involved. The food chain, water cycle, menstrual cycle (no offence to ladies) and any natural cycles that existed since the creation of earth were created by God; the business cycle is not. Stock trading is not. It was created by man and man has intelligence and a complex mind. Therefore, there cannot be a fix pattern or otherwise, we either become animals or a programme (see the movie Matrix, that explain how human become part of a large programme). However, I equally don’t believe that a monkey produces same result compared to a professional analyst. This is because it is very important to choose the right company to invest.

The Random Walk

Anyway, this argument will continue indefinitely and I think it is more of insulting the chartist, not us (value investors). I will continue to select wonderful companies based on Warren Buffett’s teaching. The following is extracted from Wikipedia on how this professor conducts his test:

Burton G. Malkiel, an economist professor at Princeton University and writer of A Random Walk Down Wall Street, performed a test where his students were given a hypothetical stock that was initially worth fifty dollars. The closing stock price for each day was determined by a coin flip. If the result was heads, the price would close a half point higher, but if the result was tails, it would close a half point lower. Thus, each time, the price had a fifty-fifty chance of closing higher or lower than the previous day. Cycles or trends were determined from the tests. Malkiel then took the results in a chart and graph form to a chartist (a person who “seeks to predict future movements by seeking to interpret past patterns on the assumption that ‘history tends to repeat itself’”) (Keane 11). The chartist told Malkiel that they needed to immediately buy the stock. When Malkiel told him it was based purely on flipping a coin, the chartist was very unhappy. This indicates that the market and stocks could be just as random as flipping a coin.

The random walk hypothesis was also applied to NBA basketball. Psychologists made a detailed study of every shot the Philadelphia 76ers made over one and one-half seasons of basketball. The psychologists found no positive correlation between the previous shots and the outcomes of the shots afterwards. Economists and believers in the random walk hypothesis apply this to the stock market. The actual lack of correlation of past and present can be easily seen. If a stock goes up one day, no stock market participant can accurately predict that it will rise again the next. Just as a basketball player with the “hot hand” can miss his or her next shot, the stock that seems to be on the rise can fall at any time, making it completely random.

Investment Materials and Information

Now let’s get back to our main purpose. As a beginner, you need an investment journal. For example the Wall Street journal or in Singapore context, the “Shares Investment”. You need this kind of investment material because you need to know which company to start with. To choose a company for further detailed analysis, you will need basic data of the listed companies. An investment journal should provide basic data such as:

1) Information on a company’s IPO.
2) Summary of company’s businesses and recent developments/announcements.
3) Historical price movement and trading volume.
4) Simple data on a company’s financial health and performance such as current asset value, cash, operating profit, reserves, shareholders’ funds, past dividends paid out etc.
5) Basic ratios such as EPS, PE, NTA, ROE, profit margin, gearing etc.

What you really don’t want at this early stage is a 2-pages essay or a hundred-pages annual report. If you wish to invest in Singapore, then the “Shares Investment” book will give you almost all the above. I am sure you can also find such investment materials in mature markets such as US, Japan, UK, France etc. But I am not sure for emerging countries. The Share Investment is a fortnightly issue priced at S$6 per book. But you don't have to buy it everytime there is a new issue; it is not cost justifiable. I buy it on quarterly basis. My remisier also frequently send me a free copy. I like to clarify here that I don’t earn a single cent for recommending Shares Investment, although I have a friend working in that company.

The second thing you need is to be updated on listed companys' announcements. In a well-development, well-regulated market, listed companies must make announcement promptly on material information to the stock exchange. Such daily announcements can be found easily from the SGX or HKSE website. The picture below will show you where to find these daily announcements from the SGX website.

Most of the announcements will be made after the close of the stock market. Therefore, you don't have to look at it every hour; you are not a trader. Generally, the important announcements that you must take note are:

1) Order books or contract awarded
2) Corporate action such as M&A, spin off etc.
3) Quarterly and annual reports
4) And any sort of bad news


To be continue……..

The Ups And Downs Of Creative Technology

The One Man

On 6 Sep 2007, there was an article in Business Times on Creative Technology which I think is good to put it on my blog. Besides knowing Creative Technology development, there are also other things that we can learn.

If you have read one of my article about a taxi-driver turned into millionaire (indirectly) because of the founder of Creative Technology Mr Sim Wong Hoo, I am sure you will be interested to read this article. Personally, Mr Sim Wong Hoo is one of the few local CEOs that I admire. He is a role model to many entrepreneurs. From various reports, I know this man to be philanthropist; he does good deeds behind the reporters. He is humble and kind-hearted. I remember when One.99 was at the verge of bankruptcy, very few stretched out a helping hand. Mr Sim was one of them. Bank? Bank was trying hard to recoup their money by folding it up. (That’s why my personal philosophy is to do my best to ensure that banks earn terrible interest from me). I also remember there was a story which was published on the paper about some China men selling potteries (or something like this) in a pasar malam but faced with extremely poor sales. I think it was due to bad weather and they seem to be in financial difficulties. And then this man walk passed their stall, understand their situation and cleared their stocks. If I remember correctly, Mr Sim bought it back to his company and offered it to his employee at cheap price. Subsequently, this was reported on the paper. If you know the exact story, please share with me. And the most important lesson any Singaporean can learn from Mr Sim is this: if you are willing to work hard in life, you can be successful too, with or without an MBA.

Anyway, there are sufficient good reports about his humble man in the internet, so I don’t need to waste my time here. The following is an extract from Business Times and you should be able to learn two things from the article:

1) Updates on Creative Technology and little historical background.

2) This may be a little bit “deep” to many – in the long run, tech stock is unpredictable, cyclical and that Warren Buffett doesn’t has a single tech stock in his top ten investments. I don’t deny that there may be wonderful tech stock but that is only one in a thousands. For as far as I know, the more impressive one are Venture Holdings (SGX), Microsoft Corp (Nasdaq) etc. The rest of them especially the dot.coms, they come and go like tidal waves.

=====================================
"The need to engage the market here creatively"

Creative Technology this week completed the delisting of its shares from Nasdaq in the United States, which leaves it with only its Singapore Exchange (SGX) listing. The move to quit Nasdaq - which the company has said was driven by administrative and cost reasons - is arguably also symbolic of the company's decline. More pertinently, it also raises the question of how Creative will now communicate with the market going forward.

The reasons for leaving Nasdaq are sensible enough. Creative first broached its intention of delisting from Nasdaq in 2003 but suspended its delisting plans in 2004 because it found the process 'very challenging' and 'tedious'.

The company, however, revived the plan in June this year, saying that the delisting will help it reduce administration costs and expenses associated with increasingly burdensome US reporting obligations, which are not justified by the low trading volume of its shares on Nasdaq.

But it does not hide the fact that the weak interest in the shares in the first place tells the story of Creative's fall from being the maker of one of the hottest products in gaming to a company struggling to stay out of the red. Things were certainly quite different when Creative, confidently armed with solid earnings projections, headed for Nasdaq in August 1992 - two years before it met the requirements for a listing on SGX. Creative in the 1990s had a 'killer application' which made it a hot stock: its Sound Blaster soundcards set new benchmarks in the gaming world. It caught the eye of US investors and Creative shares on Nasdaq often set the tone for the trading of the stock on SGX.

Unfortunately, Creative since then has struggled to come up with another winning product or business. Its recent forays into the personal digital entertainment space has seen it embroiled in fierce battles - both in the marketplace and in the courts - with market leader Apple, which makes the i-Pod. While Creative has scored some victories in its legal battles, it has not overcome its business challenges. For its fourth quarter ended June 2007, Creative suffered a net loss of US$19.3 million - 52 per cent larger than the US$12.7 million deficit for the corresponding quarter in the previous year. The Q4 loss was Creative's fifth in the past six quarters. Revenue for Q4 fell 28 per cent to US$165.2 million on the back of a fall in US sales. While Creative managed to end the full year to June 30 with a net profit of US$28.2 million, this was due, ironically, to a US$100 million licensing fee from Apple as a result of the legal wrangle.

The Nasdaq delisting, in a sense, closes the chapter on Creative as a business growth story……..

Guaranteed Strategy - Invest In Brand Power (Part II)

Brand Power: Popular Bookstore

How to know whether Popular has a strong brand? Only an idiot will ask such a question because almost every Singaporean heard of Popular and visited its bookstore at least once in his/her lifetime. If you take a walk to Popular at the end of the year, you will be impressed. This because many parents will spend on books and stationeries for their children before school re-opened. I did that too, for my student. Almost 10 tens ago, I was a Sunday School teacher then. Besides bible and prayers in class, I love to play simple games with my little students. I invented many games and I spend on little gifts out of my own pocket. So I went to Popular, grabbed a basket and swept the packed stationery into my basket. People were looking at me and since I was relatively young then (and still young now!), most probably I would be perceived to be a teacher. The important question here is: why didn't I spent in a small bookstore located around the neighbourhood? How to explain the fact that I "automatically walked into Popular" to purchase my gift?

Valuations

I had gone through Popular’s financial reports for past few years. My spreadsheet auto-compute the ratios and my interpretation as follow:

- Profit & loss. Since 2004, Popular’s turnover has been on a steady up trend. For the financial year ended Apr 2007, turnover has a compounded annual growth rate of 4.65%. However, administrative expenses have also increased steadily over the year mainly due to labour cost and rental expense. Every Popular’s outlet requires large floor area and thus resulting in high rental expense. Popular’s finance expense has been very low. It has a very low gearing of less than 10% due to low borrowings. The net profit has fluctuated badly for last 3 years like a roller coaster and this is not something that will attract value investors.

- Liquidity. Popular’s liquidity is acceptable at around 1.8:1. Popular has about 47 cents cash to meet every $1 debt obligations.

- An important strength of popular is that it is cash rich. For every share you invest in, it is supported by 11 cents. Assuming at current price of 30 cents, you actually pay 19 cents for its assets.

- Margin. The operating margin is thin and has been fluctuating since 2004. This is a big negative as we would like to invest in a company with a more stable profit and growth.

- Due to the fluctuation in net profit, Popular’s return on equity suffers the same fate.

- PE. Assuming at price of 30 cents in Aug 2007, Popular is priced at 12 times PE. With current bullish market, 12 times PE is considered to be attractive.

- NTA. With continuous growth since 2004, Popular’s net assets also grew from around 27 cents to 30 cents in Aug 2007. As such, the PTB ratio is about 1 time. This may not look attractive but is reasonable.

- Business growth. Popular’s retail and distribution business has been growing steadily at about 5% per year. However, the publishing and e-learning business seems to be running out of steam. Data also suggest that Popular enjoy higher growth in Malaysia followed by Singapore. In 2007, Popular announced the development of two residential properties; one at Shelford road and another one at Robin road. With strong demand for properties in Singapore, I believed that cash used in property development would enhance shareholders’ value very soon. On 10 Sep 2007, Popular issued their first quarter result for financial period ended 2008. On month-on-month basis, Popular’s profit after tax increased by nearly 40%. Higher chance is that Popular net profit for 2008 is likely to exceed that of 2007.

So, it is clear that Popular enjoys customer loyalty and thus recurrence sales. It is relatively cash rich and started to invest in lucrative property market. While it is difficult to quantify whether current price of 30 cents is undervalue, in my opinion, it is certainly not overvalued. Its share price has been rather stagnant for quite sometime. The reason was partly due to disappointed 2007 result plus US subprime crisis that affect global market. While it may be difficult to determine if Popular’s business will grow steadily, it has an important catalyst, the two residential properties. I believe that 30 cents is a good buy for Popular and has invested in it since early 2007.

Lastly, in the first part of this article, I specially highlighted the term “gut feeling”. This is an important element when comes to investment. When I discussed with friends on whether if “Warren Buffett’s can be duplicated”, we came concluded that Warren Buffett cannot be duplicated. We may learn his investment methodology, follow his teaching and put it into practice. But there is just one thing that cannot be taught – gut feeling. We believed that with superior knowledge and strategy, supported with advance information system and special privilege to reach the top management of a company still doesn’t guarantee a 100% correct investment decision. There is just one more element that is needed, i.e. gut feeling. Take Popular for example, looking at its performance so far, another analyst may find the company's business has nothing to shout about, but I felt differently. This is my gut feeling.

Guaranteed Strategy - Invest In Brand Power (Part I)

The title may look daring and arrogant, but it is backed by years of experience. If you are a novice in stock investment, today is your lucky day. Today I’ll share with you on a long-term winning strategy of stock investment backed by the experience of a renowned investment gurus: Warren Buffett. In some of my earlier articles, I had discussed on wonderful companies such as Breadtalk and Super Coffeemix. I had also produced Warren Buffett’s top 10 holdings as at Aug 2007. Actually, these articles had indirectly pointed out this long-term winning strategy.

There are many approaches/theory exist today on stock investment strategy. But the simplest method tends to work in all situations. This method that I am talking about is to invest in a company with strong brand name. This is an extremely easy investment strategy that will always work in any stock market; in any country and for any kind of investor as long as you believe in value investing. I learned it from Warren Buffett, I tried it and now I share it. With this approach, you are only required to do two things:

1) Identify household/consumer products/services with strong brand especially those that meet people’s basic needs.

2) Determine if the company that offers these products/services is undervalued and with growth potential.

Let me elaborate these two points. Warren Buffett’s top holdings are mainly products/services that people used frequently, if not daily. For example shavers, toothpaste, soft drinks, coffee etc. A product/service that has a strong brand will lead to consumers’ loyalty and as a result, enjoy recurrence sales. You can see it in the supermarket, or even right at home. You will be surprised to know that sometimes people buy a product without actually making a choice. This may be due to “follow the crowd” behaviour, or subconsciously they just pick up the product because they heard the brand too often. I am sure that to identify this kind of products/services is a simple task even for a primary school boy. There is still another way to test which product or service has strong brand name or I call it “brand power”. You do a test among your friends randomly by giving them an article and they are suppose to say whatever comes out of their mind within split second. Yes, that is a test of their sub-consciousness. For example, you can give them:

- Fast food
- Soft drink
- Car
- Computer
- Sports shoe
- Insurance company
- School

You collect these data and you will know the popularity of each of them. Anyway, I don’t expect you to do this unless you really have nothing better to do.

After you have identified such a product, assuming that the company selling the product is listed, your next job is to determine whether the company is undervalued and with growth potential. This requires analytical skills and gut feeling. Yes, I say gut feeling. If you read analysts’ report regularly, you will know that everyone of them has a secret formula to derive a company’s value so as to recommend a “buy”, “sell” or “hold” etc. One thing for sure, you won’t know how they come up with these “magic” figures, and therefore, their recommendation. Let say even if you know, as a retailer, I don’t think we want to do this. I mean you don’t expect me to do a “discounting cashflow”, “free cashflow”, “return on investment”? I will only if someone pays me high salary to do it. Besides, different analysts with the same formula with come out with different answers, I guarantee. And then the next question is, who is correct? I say forget it. In my opinion, for a retail investor, an idiot-proof method is simply to compare a company’s share price with:

- Share prices of a competitor selling about the same product/service
- Compare the PE with the industry/competitor
- Compare with the company’s asset backings especially CASH!!!
- Determine the company's market share.

- Identify book orders
- Identify corporate actions to expand and whether shares price takes into account such announcements.

That’s what I do for company such as Breadtalk, Super Coffeemix, Aqua Terra, Want Want, Metro etc. With the exception of Aqua Terra which I recommended to a few friends only recently, the rest of the companies had increased the wealth of my friends/colleagues.

If you go through the above exercise thoroughly, you will be able to say something like this, “I think this company’s share price does not reflect its actual strength or progresses”. The word “I think” implies that the power of “gut feeling” has been deployed. Since this is the second time I mention on “gut feeling”, I’ll explain in detail later on. Once you got an answer, the next thing is to determine whether this particular company is growing. The good news is that the exercise you have just completed will more or less give you an answer on growth. You don’t believe? Ok, I’ll briefly repeat my story on Breadtalk again.

When I reviewed Breadtalk’s business again in Dec 2006, I discovered that they have been aggressive in expanding their business. From increasing their franchise outlets, they also bought over “Megabite” in China to compete the food court business there. Breadtalk also brought into Singapore the famous Tin Tai Feng (from Taiwan) and started to slice the cake of local food court business. With so many actions that, in my opinion, will soon be translated into revenue growth, Breadtalk’s share price hardly moves and was rather illiquid. Even if I cannot conclude that Breadtalk is undervalue at $0.23 then, but I can safely say that its price failed to factor in Breadtalk’s progresses. Even if I may still be wrong, gentleman, I won’t be that wrong; we are in a recovery market (and subsequently turns out to be a bull run). And do not forget that another food court operator “Food Junction” was priced above $0.60.

So lots of things are really commonsense. And I shall repeat my lecturer’s quote “commonsense is the least common human attribute”. There is another company with strong brand (household brand) that in my opinion, Mr Market had overlooked. I had recommended a “buy” on this company to some of my friends and colleagues and very soon, we will know if I am correct. I’ll demonstrate how I go through the two tasks: identify a company with strong brand; determine its value and growth potential.

This company is a popular bookstore: Popular Holdings.


To be continue……

Warren Buffett's Top Ten

Isn’t it interesting to know Warren Buffett’s top 10 holdings? Hopefully there are some things for us to learn by looking at Warren Buffett’s favourite stocks. I have found an article from fool.com on Warren Buffett’s favourite stocks (dated 22 Aug 2007).

1) Coca-Cola - soft drinks
2) Wells Fargo - banking, insurance, investments, mortgage and consumer finance
3) American Express - credit cards, financial services, travel services
4) Procter & Gamble - consumer products such as Pampers, Tide, Ariel, Gillette, Pantene, Bounty, Folgers, Pringles
5) Johnson & Johnson - consumer products, medical devices and diagnostics and pharmaceutical
6) Burlington Northern Santa Fe - railway delivering cars, coal, clothing, games and nearly anything else found in homes and businesses
7) Wesco Financial - insurance, furniture rental, and steel service
8) Moody's - credit ratings, research and risk analysis
9) Anheuser-Busch - Bud Light and Budweiser (beer)
10) ConocoPhillips - petroleum exploration and production, refining, marketing and supply; natural gas gathering, processing and marketing.

Most of the top 10 companies are household names with very strong brand names globally and enjoy recurrence sales. The business of these companies is simple, with growth potential and easy to understand. Most of these companies offer products/services that meet consumers’ basic needs and has certain degree of immunity to the business cycle. For example, you always need a credit card, your decision to drink coke is not affected by economic crisis and you will still shave even in times of recession.

A few years ago, my coursemate and I were looking into Super Coffeemix, a listed company on the SGX. We believe that Super Coffeemix has most of the characteristics of a company that Warren Buffett will buy. The most obvious attribute is that it had huge market share for instant coffee in Singapore. However, it was also around that time that local tycoon Mr. Oei Hong Leong invested in the company at less than 30 cents. I was slow in action and subsequently refused to invest in Super Coffeemix. I was very obstinate as I hate buying shares at a price that is higher than those tycoons. I felt that if I do it, it is as good as giving money away to these rich men.

As expected, Super Coffeemix continued to report higher profit year after year and together with strong market sentiment, it share price surged 100% by Mar 2006. Then one of my friends, who was learning value investment asked for my opinion on Super Coffeemix. I replied that it is a wonderful company and shared with him on Super Coffeemix’s history. I recommended a “buy” even when the price had surged 100%. He bought it and lock in his profit when Super Coffeemix’s share price surged pass 60 cents. I told him that he had made a wrong move for failing to understand its growth potential; he failed to recognise Super Coffeemix’s brand-power. And what’s my problem? I am super obstinate.

In Jul 2007, just before the exposure of US subprime woes that cause global market to plunge, Mr Oei Hong Leong disposed off his entire 13.17% stakes in Super Coffeemix and bagged approx. $40 million profit!!! Supercoffee was trading at around $1 then.

In my next article, I will share and analyse another local company with strong brand.

Hedge Fund - A Time Bomb? (Part II)

When Was Hedge Fund Born?

Reported on Business Times Mar 2005, the first hedge fund was started in1949 by this man call Alfred Jones. Jones was able to identify undervalue and overvalue stocks and his strategy was to buy the undervalued stocks and short the overvalued one. Over time, he will make money. So Jones has “hedged” his portfolio and the term hedge fund was born.

But personally, I don’t understand that article. In what way can “buy the undervalued stocks and short the overvalued stocks” produced a hedge effect? If Jones bought put option on his stock I would agree. But buying overvalue stocks? Different stocks? Regardless of correlation between these stocks? All I can say this, that when stock market enters into a period of correction or collapsed totally, undervalued and overvalued stocks suffer the same fate. Anyway, the word hedge has different meaning in (corporate) finance term.

The Collapse of Major Hedge Funds

Lately I was reading an article from Moody’s – “large hedge fund may collapse”. The article points out that current credit crunch in global market may cause major hedge funds to collapse thus disrupt market stability. In the article, it mentioned “Long Term Capital Management, a hedge fund that borrowed heavily and had to be bailed out by Wall Street banks after collapsing in 1998”. This again brings back memory of a friend who attended options training for a few thousand bucks. But the study materials contain pictures of bankrupted hedge fund managers. But yet the training was to impact skills in options trading. So is the trading activity more profitable or the training?

So out of curiosity and interest, I started to do some search on hedge funds, particularly on those with big size and had collapsed. Naturally I started with Long Term Capital Management. Through Yahoo search, the information available is an endless list. I really want to thank the creator of Internet. He made the world into a global village and information readily available. I remember during college days when many of my friends had encyclopedia at home. And there were salesmen going door-to-door selling their encyclopedia. I was poor then so the only way to have assess to encyclopedia is to go to the national library. Today, nobody go door-by-door selling encyclopedia; nobody buy encyclopedia.

So from Wikipedia (see, don’t need to buy encyclopedia any more) and through yahoo search, I found lots of information on Long Term Capital Management. And then I remember of a bankrupted fund known as Tiger Fund. I continue searching and I also found information on Basis Hedge Fund. In summary about these three funds:

1) Tiger Fund (CNN, Mar 2000). Julian Robertson (once regarded as one of Wall Street's highest rollers) liquidated all six of his Tiger Management funds in 2000. This marks the downfall of a veteran hedge fund manager, whose fund bets on value stocks but was backfired as investors turned to technology stocks - the dot.com era. Tiger Fund's success over the years was based on the “buy the best stocks, short the worst” strategy. In a letter to investors, Robertson wrote. "In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much". The Tiger Fund suffered sharp losses for more than a year, tumbling 7.8% in February and 13.8% as of 29 Feb. The fund's assets plunged from roughly $20 billion in 1998 to about $6.5 billion.

2) Long Term Capital Management (LTCM). LTCM was a hedge fund founded in 1994 by John Meriwether (former vice-chairman and head of bond trading at Salomon Brothers). On its board of directors were Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economics. Similarly, the fund was very successful initially. With complex mathematical models, the fund makes good money from the fixed income arbitrage deals. By 1998 LTCM had extremely large positions in areas such as merger arbitrage and S&P 500 options. In order to generate significant profit, the fund borrowed to speculate. At the beginning of 1998, the firm had equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion. Its off-balance sheet derivative positions amounts to $1.25 trillion, most of which were in interest rate derivatives such as interest rate swaps. The fund also invested in other derivatives such as equity options.

In May and June 98, net returns from the fund fell 6.42% and 10.14% respectively, reducing LTCM's capital by $461 million. In Jul 98, Salomon Brothers pulled out from the arbitrage business. Such losses were accentuated through the Russian Financial Crises in Aug and Sept 98, when the Russian Government defaulted on their government bonds. Panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to earn as the value of these bonds converged became huge losses as the value of the bonds diverged. By the end of August the fund had lost $1.85 billion in capital.

3) Basis Hedge Fund. In Aug 2007, Basis Yield Alpha, a hedge fund backed by Australian funds management firm Basis Capital, filed for bankruptcy protection. The Basis Yield Alpha fund began to lose value as investments it made in subprime mortgage-backed securities in the U.S. began to falter in June. Worried investors avoid buying mortgages on the secondary market. With almost no market for the loans, their value has fallen precipitously. The drop in value led to margin calls, which Basis Yield Alpha was unable to meet. That led investors to issue default notices, which would have given them the right to seize the fund's assets. Besides Basis Yield, Bear Stearns Cos. Also shut down two hedge funds in July after announcing they were essentially worthless because of bad bets on subprime mortgage-backed securities.

The Lesson

Out of the three hedge funds listed above, the first two were huge in size. I am able to sum up the three stories into a few points:

- Hedge funds are managed by best of the best.
- Hedge funds can make huge returns double that of Warren Buffett's.
- Aggressively they speculate and have complex system or “proven betting system”.
- There may be incidence that comes along the way; so sudden, so unexpected and may strike down funds within very short time. It is like a time-bomb. When it exploded, it will be very damaging.
- When the fund suffers huge losses, it doesn’t have the chance to recover. The fund manager usually pull the plug.
- A zero sum game. Yes, God has never drop a single cent into this game. If someone made the money, then someone else has to pay for it.

There are tens of millions of genius out there. Since it is a zero sum game, everyone is trying his best to make money out of someone else’s pocket. You can do it by depending on sheer luck, or by developing a sophisticated system to trade. But human brain is complex, unpredictable and ever changing. So even the best mathematical system can fail too as in the case of LTCM. And in the case of Tiger Fund, the fund bought undervalued stocks and short on overvalued one. Without the shorting part, the fund would have grown in size today. Warrant Buffett and many other value investors equally turned a blind eye to the dot.com; he is still one of the top ten richest men today.

So really there is never quick and easy money. As the saying goes, high risk high gain, low risk low gain. But if an insurance agent came to you with this statement, you give him/her 50 cents to buy a “kite”. Because if that’s the kind service he/she can offer (high risk high gain, low risk low gain), why pay him/her? I mean what value has the agent (or a fund manager) added? But for value investment, we are low risk high gain. Every value investors will tell you that they have zero tolerance for losses. Hedge fund is really for people who can throw away a few hundred thousands or a million and yet feel no pain. If you want to sleep peacefully, knowing that the assets you invested in will always be there regardless of the business cycle; and you don’t like to receive a sudden call in the morning telling you that you have just in a huge loss position; and you don’t want to be worried about the index in the midst of a meeting with your CEO; invest base on fundamental.

Before I end, the article on Basis Hedge Fund actually warned of the collapse of more hedge funds due to subprime woes. This may destabilize the global market. And this has been my primary worry since the market wipe off my entire portfolio’s unrealized gain in Jul 07 – will the housing slump and loan problems in US become a catalyst to send US into a recession? Is the subprime problem over yet?