Stock Market Review - Oct 08 (Part 3)

5) HupSteel. This is yet another wonderful company and I am still one of its shareholders. I make capital gain out of it before and bought it again when it retreated. Only that now I stuck with this counter but without regret. This is because HupSteel is still a wonderful company earning some decent return. I remember one of ex-colleagues bought HupSteel in 90s at around $0.70. Back then, HupSteel was known as Hup Seng Huat and my friend got stuck with the company for a very very long time. However, things changed after global economy started to recover in 2004. There was huge demand for metal and HupSteel was riding on solid growth. Its share price went up to $0.60 even after the company issues bonus, rights and giving out good dividend. But today, its share price dropped to $0.215. Let’s take a look on its financial performance and position.

Business: dealer in steel products, hardware and property investment holding company.

Report: FY2008
Revenue: surged to S$433.7m (53% variance)
Net profit: surged to S$45.1m (45% variance)
NP margin: 10.4%

Cash: S$27.4m
Working capital: 2.34
LT debt to total capital: 1.8% (very little)
Basic EPS: 7.33 cents
PE: 2.93
NTA: S$0.3298
Yield: 9.3% (excl special dividend)

Director’s remark: demand for steel product to remain strong and full orderbooks from offshore and marine customers.

My remarks: In my opinion, current price does not reflect on the company financial performance and position – it’s under-priced. But then again, we still need to take cue from US economy. So hold on, stay tune and follow this company closely.

6) Pan United. Pan United just another wonderful company and I made a few buck out of it during recent bull run. In fact, I made money out of its subsidiary, Pan United Marine too. Both are wonderful company with strong profit growth and high dividend yield. Pan United is currently traded at $0.44. Let’s take a look at its financial performance and position.

Report: 1H2008
Revenue: surged to S$135.9m (25% variance)
Net profit: surged to S$14.5m (37% variance)
NP margin: 10.7%

Cash: S$53.3m
Working capital: 1.79
LT debt to total capital: 26.5%
Basic EPS: 4.53 cents
PE: 9.71
NTA: S$0.445
Yield: 4.1% (interim excl special dividend)

Director’s remark: positive outlook for FY2008.

My remarks: Pan United’s business is quite diverse and it’s not easy to analyse. However, the company is still profitable and trading at reasonable price. Worth a second look but no hurry.

..........To be continue

Patience Is A Virtue

The following article from Business Times is an excellent report and I shared the same view. When you walk around city area or onboard a train, you will see adverts saying something like stock prices are low, hidden opportunity, this and that has strong fundamentals etc. I always laugh at it. It was all crap to me but I don’t blame the fund managers. This is because if people stop buying the funds and pull out their money, then the fund managers and analysts will be out of job soon.

The following is a good article especially to those with the idea of rushing into the market to buy while it is cheap. As always, how do you define “cheap”? Remember; always to take cue from global/local economy for your investment decision. The economic indicators are the leading indicators.

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Business Times - 02 Oct 2008

Time to buy? No - patience is a virtue

By R SIVANITHY

WHENEVER stock markets behave as they are now, it's tempting to ask whether it's time to 'bargain hunt'. Indeed, as each passing day brings a new low - be it 24, 25 or 26 months for the Straits Times Index - the temptation to buy probably grows stronger, aided no doubt by a steady stream of 'buy' calls from brokers, all and sundry.

So will it soon be time to buy? Maybe it will? And perhaps for the Straits Times Index, the fact that the 2,300 level has held twice in the past fortnight suggests this may be where there is strong support?

Our take, though, is that there is no need to rush and that patience is a virtue. Brokers and independent researchers have consistently under-estimated risks to the downside for the past year, so their 'buy' calls should be taken not with a pinch of salt but a bucket.

Analyst credibility aside, a major reason for saying this is that despite America's woes, and despite it triggering the biggest financial meltdown ever, US stocks have not capitulated yet. Even after Monday's 7 per cent collapse, the Dow Jones Industrial Average was down only 22 per cent this year and the S&P 500 down 25 per cent - much less than the 35-50 per cent falls suffered by other markets.

From its all-time high, the Dow's loss to 10,365 was 27 per cent and the S&P's loss 28 per cent - over almost a year, compared with the 20 per cent crash in one day on 'Black Monday' Oct 19, 1987.

Seen in this light, the current losses on Wall Street could justifiably be taken to be part and parcel of a normal bear market and not really that much cause for concern.

Why has Wall Street not fallen as much as other markets? One possibility is the huge amount of liquidity the US Federal Reserve has pumped into the system. But more likely, it's the still-lingering hope of a government-led bailout, despite the initial proposal being rejected.

If a modified proposal is cobbled together before the end of this week and if this is again rejected, the full-scale removal of a 'bailout premium' will see US stocks start to reflect their true fundamental values.

Furthermore, it is debatable whether any US Treasury-led bailout would have any effect at all. Recall that on Monday, markets went into a tailspin many hours before the US Congress voted on the plan. So, even if a second plan is pushed through and even if this does push stocks up, it can only be a matter of time before reality sets in with regard to the US market and its fundamentals. And once this happens, investors might just cotton on to the fact that US stocks are grossly over-valued.

Bloomberg's analytic service gives the S&P 500 as trading at a historic earnings per share consensus analyst estimate of US$51 and a forecast figure of US$83. With banks disappearing, unemployment rising, consumer spending shrinking, no growth to look forward to, no bottom yet in housing and a possibly vicious recession just around the corner, how likely is it that US corporations will report such a big jump in earnings?

As for the local market, Citi Investment Research warned last week that it is possible for the STI to fall to 1,800 - a warning many investors reckon is too pessimistic. But if the index were to drop to 1,800, that would only take it to a four-year low which, given the huge risks to growth posed by America's problems and the unpre-cedented nature of the present bank failures, is arguably within reason.

The upshot of all this is that risks are still tremendously high and that Wall Street is still heavily exposed to the downside.

Investors should also realise that even if the STI's bottom does lie at 2,300, this does not automatically mean the start of a new bull market - stocks can drift for years within narrow bands before embarking on any uptrend. As such, it is clearly not time to buy yet.

Stock Market Review - Oct 08 (Part 2)

3) China Sunshine Chemical. Actually I don’t really want to discuss on “red” stocks in this series of stock market review. This is because my confident on China companies has always been low due to their corporate governance and internal control. Now before you jump to conclusion, I must let you know that I have nothing against China nationals. In fact I have close friends from China, I have colleagues from China and I love to visit China. But comes to business, I am really worried. I have friends importing goods from China sharing with me the Chinese’s mindset, attitude and method when dealing with business. I don’t think you want to know or perhaps you already knew. So when these red stocks found their way to the SGX, I seldom apply for their IPOs, let alone talking about investment. Yes I know many have made good money out of it, but that’s not my point. My point is with doubt on their corporate governance and internal control, I dare not invest in China companies.

“How come you have doubt? Can you quantify?”

Read the paper lah, brother! Even if you don’t read Business Times, at least read LianHeWanBao right? And I’m not only talking about current milk powder issue. Notwithstanding my negative thoughts, I am still willing to take some risk on a few really good ones. So here I am going to share with you on China Sunshine Chemical.

Firstly, I did not make any profit from this counter. In fact since the day I invested in it, it did not perform as expected. And right now I am sitting on significant losses instead. Then did I make a mistake in my investment decision? I don’t think so. Besides, there are also other professional analysts drawing the same conclusion. Then what’s the basis of my recommendation back then? Firstly, the company is producing a type of chemical that is essential to make rubber into something like a car tyre. The company is one of the world largest producer supporting many world-renowned tyre manufacturers such as Bridgestone, Michelin, Goodyear, Pirelli etc. Most importantly, this chemical only takes up a small percent of a tyre’s manufacturing costs. And in my opinion, recession or economic boom, people still own car, F1 continue to race, buses and airplanes continue to roll out. China Sunshine Chemical is currently priced at $0.205. What about its recent financial performance and position?

Business: one of the largest rubber accelerator manufacturers in the world and in China in terms of production capacity.

Report: 1H2008
Revenue: surged to Rmb402m (41% variance)
Net profit: surged to Rmb61m (37.3% variance)
NP margin:13.3%

Cash: Rmb37.4m
Working capital: 3.84 (healthy)
LT debt to total capital: 0% (wow!!!)
Basic EPS: Rmb10.89 cents
PE: 9.41
NTA: Rmb1.01
Yield: N.A.

Director’s remark: expect to continue its growth for FY2008.

My remarks: I believe the business, to certain extent, is immune to economic downturn. There may be some impact but should not be severe. The company is currently reasonably priced.

4) Courage Marine. Courage Marine was really one of the last marine companies to perform in terms of share price. This was partly due to the fact that it was a new IPO. But what really caught my attention on this company was its high profit margin. And honestly, I don’t understand why its profit margin is so high. So early last year (2007), in the midst of the bull run, I bought Courage Marine at a very cheap price - $0.19. One year later, I sold it at 100% capital gain, excluding dividends! Actually the dividend payout can be very high if not of its high quantity of outstanding shares. Courage Marine, after recent blood bath, is currently trading at $0.215. What about its recent financial performance and position?

Business: ownership and operation of dry bulk carriers and the provision of marine transportation services.

Report: 1H2008
Revenue: surged to US$50m (43% variance)
Net profit: surged to US$30.3m (51% variance)
NP margin: 60.6%!!!!!!!!

Cash: US$68.6m (fat)
Working capital: 16.5 (OMG! Super healthy)
LT debt to total capital: 0% (OMG!!!)
Basic EPS: US$1.67 cents
PE: 9.19
NTA: US$11.75 cents
Yield: 4.65% (for half year)

Director’s remark: BDI collapsing to 5,600 level (I got no clue what’s a BDI). Company expects demand from China to remain strong and the group to continue to do well in second half.

My remarks: Similarly, if not because of uncertain global economy, I would have started buying Courage Marine.




…….To be continue

Speculation - Two Edge Sword

In a turbulent market, you can make big money. But by the same token, you can also get yourself into deep trouble if the market turned against you.

The following is an extract from Business Times on what will happen if you short and failed to cover your position.

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Business Times - 23 Sep 2008

Unknown short-seller hit by $1m loss

SGX initiates buy-in for shares against short-seller who fails to cover his position
By VEN SREENIVASAN

Someone out there is licking his wounds after taking an almost $1 million hit after a naked short-selling adventure that went badly wrong.

The Singapore Exchange (SGX) yesterday initiated a buy-in for a huge chunk of China Hongxing shares against a short-seller who had dumped the stock last Friday but failed to cover his position before the close of the session.

In all, the SGX yesterday bought-in some 13 million shares of the mainboard-listed Chinese sports shoes and accessories maker at around 35.5 cents per share.

This was to cover the short sale of an equal amount of shares at around 25 to 27 cents per share during last Friday's session.

Besides taking a loss on the price difference, the short-seller also took a hit on the transaction fee of $40 per block transacted, and a higher brokerage rate of 0.75 per cent on the deal.

Market insiders reckon the loss could stack up to around $1 million.

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And what if you still stubbornly short the market without covering your position? Well in that case, this is what’s going to happen to you. The following is an extract from Business Times.

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Business Times - 27 Sep 2008

SGX will not penalise naked shorts caused by 'honest mistakes'

By LYNETTE KHOO

…….Starting Thursday, SGX imposed a penalty of 5 per cent of the value of a failed trade subject to a minimum of $1,000, on top of the current processing fee of $30 per contract. A broker who fails to deliver the shares in the buying-in market may also be liable to a penalty of $50,000 and/or barred from participating in the buying-in market.

The penalty is to be paid within five business days of notification. But SGX clarified that there are provisions to appeal against penalties. While a decision on an appeal is pending, the dealer does not have to pay a fine. The result of the appeal will be known within 10 business days of the date of notification. 'We will consider factors such as the intent of the investor who opens the sale, profile of the investor and trades, and whether the trade has any potential adverse impact on the integrity of the settlement system,' said SGX head of markets Gan Seow Ann.

The fines will go towards investor education initiatives.

Mr Gan also said that the primary intent of the new rules is not to curb short-selling per se but to deter failed share delivery - which threatens to compromise the settlement system. 'It was never meant to be a response similar to what you see in other environments, where regulators have banned short-selling,' he said, though it was easy to make such an association as the measures came just after regulators imposed short-selling curbs elsewhere. Mr Gan stressed that the measures are largely pre-emptive. 'Despite the market turbulence and all these uncertainties, trading continues to be orderly and there was no pressure on the system as far as settlement is concerned.'

On the Hong Kong bourse, naked short-selling is illegal and subject to jail terms and/or fines. The Hong Kong stock exchange (HKEx) said yesterday it also plans to increase the penalty fee for securities settlement failure……

Business Simulation - Capitalism II

Last Friday, while waiting for my friend (to pick me up), I had a little window-shopping in Popular Bookstore. As this particular outlet is exceptionally big, it has a comparatively greater variety of PC games. And then something caught my attention. I saw an old game selling at a very cheap price. It wasn’t the price that arouse my interest but the game itself.

This game titled “Capitalism II” is an old game launched sometime around 2003. When I flipped over to read the description on the packing, my interest grew. The description says that the game is about business strategy and building a corporate empire. There are also a few “testimonial” claiming credit of being the ultimate business simulation. Anyway, the price is about $10. So…what the hack…. I decided to buy it to try.

That night after I reached home, I was very curious about this game and decided to test it out immediately. There was no manual inside (what you expect with that kind of price) but the game itself comes with tutorial. Installation is straight forward and I started my tutorial. But even the tutorial is not that easy. For most of the tutorial, I could not meet each of the objectives. Fortunately, the game designed in such a way that even if a player failed to meet the objective, he can still proceed to next tutorial. But player cannot jump to next tutorial without completing current one (pass or fail). That night, I didn’t manage to finish all my tutorials and I finally call it a day.

Day 2 – wonderful Saturday. After I wash up, I quickly completed last few tutorial and voila, I am really for the actual campaign. Now briefly, this is what you can expect from this game.

1) Set your winning parameter. There are whole list of winning parameter but I will skip it (don’t waste everyone’s time here). Basically when I play, I didn’t set any parameter other than the period so that the game will carry on for as long as possible. For the period, I set it as 130 years.

2) I started with 30 million and I quickly build my departmental stores to sell my products. Note that there are whole list of products and many kinds of store a player can choose from. I will skip the detail. When I started my business, as real as it can be, I made a losses initially and my cash holding keep dropping. After a while, I finally breakeven with positive cash inflow. However, soon I started to be impatient. This is because my simulated-competitors are making tones of money like above $100 million a year but I am still earning around $10 million a year. I replayed the game and adopted aggressive expansion but only resulted instant bankruptcy. I suspected that I might have missed some points during the tutorial and so I re-visited the tutorial. And yes, I found certain “secret-to-success” which I didn’t pay attention to.

3) After a few more replaying, I finally get the hang of it and started to make decent money (around $50 million). Then I began building my R&D facility, adopted vertical integration to secure my primary resources and branded my products. The game offers three marketing strategy but I won’t go into the detail here. But still, I faced two problems - the AI-competitors are still much richer and one of the competitors was bought-over by another one. Then I got worried as I didn’t devise my strategy properly when I started the game. So, I have no choice but to re-play the game again!!! I will not tell you about this strategy here.

Day 3 – Sunny Sunday.

With all the strategies I had in mind, I re-started the game again. Cut the long story short, I made $100 – $200 million a year and no competitor can take over my company. I set up my HQ and employed (where necessary) a few Chiefs such as Chief Marketing Officer. Naturally, I am the CEO. I devised my financial (dividend %), marketing (branding) and business expansion strategy. Player can also borrow from the bank or issue IPO. Then I proceed to “play” the stock market – ultimately, that’s the rich men’s game in real life. Player can read financial information about all the competitors. This is where it gets very very exciting. I started to buy stock with the (real) investment knowledge I had and made tones of money out of it. Before I call it a day (again), my net worth was a few billion dollars ranked somewhere number 60 on the top 100 billionaires. My mentor Mr. Warren Buffett was ranked around top 10.

Other exciting characteristics:

1) Property investment.
2) Staff training and development

Conclusion

This is a fantastic business simulation game. Only shortcoming is that the animation is quite poor with today’s standard. But then that is not a bog issue. I think what’s really interest is the stock trading simulation. The buy or sell decision is nerve-wracking and resemble real-time stock trading situation. Most importantly, the teaching on business in the game is exactly what we learned in our (Business Administration) course at diploma level.

Imagine if we played it with a few friends. Just three will be enough and it will be very challenging. Computer AI may be fast and complex but at the end of the day, it is still programmed. There will be certain pattern. But human brain is forever complex and sophisticated. If you are interested, do give me a call. If you know of other business simulation game that is better than this, do let me know please.

The Selling Strategy

When To Sell?

If you read a book written by some experts covering buying strategies but never touched on selling strategy, your learning are not complete. A good investment gurus will definitely tells you (or teach you) on the importance of selling strategy. Yes, when to sell is just as important as when to buy. I am not an expert and certainly not a guru. But through years of reading and investment experience, I had developed my very own selling rules. So this is my own “when to sell” criteria:

1. When you need money. This should be self-explanatory. The first rule of investment is when you have spare cash that is not needed in the near future. If this assumption does not hold anymore, you should not invest; at least not in stocks.

2. When a counter has been heavily speculated, price surge aggressively not supported by any news. This is a common phenomenon whereby speculators switch their attention to a counter and trade aggressively. And usually you will see that particular company answering to the SGX’s queries with “we do not know any circumstances that could explain high trading volume”. Basically there is no change in the company’s fundamental. In this case, you should sell high and wait for Ms. Market to cool down. You can re-purchase again when the price retreated to a sensible level.

3. When the fundamental of the company you bought changed. This is really from the teaching of Warren Buffett. As a value investor, you invest in a company certainly due to a value in that company and that the price does not fully reflect that value. That’s why you buy its shares. But if the fundamental of that company changed, depending on the situation, usually you have to get out of the company ASAP. If Coca Cola no longer sell coke but hard disk, you got to get out immediately. A good example in Singapore context would be education provider – Informatics. For many years, Informatics enjoys reasonable growth and was well covered by analysts. It was investors’ favourite stock until the expose of its accounting scandal. The education provider’s brand was seriously damaged and student intake fell drastically. One of the mechanics in my company asked for my opinion in terms of investment and education (for his daughter) in this company. Objectively, I advised him to avoid this company whether it is for investment or education. The company’s brand name was the key reason for buying it. If the company losses its brand name, then you should sell immediately.

4. When the economy is on the downturn. If the generally economic, or the global economy is on the downturn (or recession), you must run like hell. With certain exception, if the economy is entering into a recession, you must make sure that you are one of the first to get out. I’ll discuss more on this point later.

5. When existing price fully valued a company. This means that the price reflects the value of a company. The obvious question would be what’s the value of a company, how to measure it. Well this is not easy and can be very academic. Generally people use discounting cashflow on dividends, free cashflow and other formula to assess a company’s value for whatever remaining life, today. This requires prediction of a company’s future growth and performance. It is a highly difficult task with many assumptions and even two analysts using the same formula may produce different answers. So usually I use other easy method that kill lesser brain cells. For example, I use PE ratio to determine if the company is over-priced. Another situation would be when you buy a company because of a catalyst, and when the price adjusted for that catalyst, generally you can sell it.

When The Economy Is On The Downturn

This is a more interesting topic and I like to talk more about it. My approach to investment is always to look at the generally economy, local and global. We like to invest long-term but not that kind like Warren Buffett because we are a bunch of poor little retail investors. So we must look at the business cycle. When the business cycle is on the recovery to its peak, generally, you will make money in most of the companies you purchased. Think about it again. You are sure to make money by mid-2007 if you buy in almost any company listed in SGX in 2005. You don’t need any analytical skill but just throw your dart on the list of listed companies. Even laggard stocks like the construction companies that hardly move until 2006, can create miracle. Most of them surged aggressively from end 2006 to mid-2007 ensuring that your average uncompounded annual returns is about 30% (I don’t have statistics here).

Now the same rule applies. If the economy is on the downturn, in the mid term, your portfolio will surfer a loss. Although a small group of companies can still outperform (I will cover in another write-up), the problem is that can you spot these and only these companies? Are you that good and lucky. I am afraid most of the time we are not. That is why if the economy is on the downturn, you really must run away from the equity.

“So what’s your opinion on the global economy now?”

Since November this year, or after the exposure of US subprime problem, I had been quite pessimistic about the generally economy. Together with rising oil prices, and that US is one of the highest consumers of oil; I think we have more bad news. It is extremely difficult to predict the future economy but if you ask me to place a bet with all my savings, I will bet that the US economy is on the downturn. This is simply the logic of probability. There is just more bad news than good ones. And we all know that if US economy goes down, she will drag everyone down especially Singapore (being an export country to mainly US and Europe). So if my assessment is true, which we will know very soon, then we are heading to a downturn or to put it clearly, a recession. When will that take place? God knows! But this is my assessment:

We had just passed the peak (or the tip) of the business cycle!

Conclusion

If you have been following my blog, you should recall that I mentioned that the stock market is a leading indicator of the economic movement. Yet it is highly difficult to predict the global economy. But we have to try. Based on what we know to-date, I am definitely not bullish. I believe that we had just crossed the peak and we must be prepared – for the worst. I had advised my friends to start looking at bonds which I had covered extensively in my blog. I don’t mean that you should damp everything away today and switch all your money to bonds. But certainly you should start getting defensive on equity and study the bond market. I am afraid that one of my selling rules has emerged. And I write this blog today to mark my analysis so that my judgment may be judged in the future.

The Days After Tomorrow

On 27 Nov, I returned to my office after a long weekend. If not because of the series of unfortunate events, I should be at Boracay Island now. But actually all my friends and colleagues were supportive instead of been sarcastic. I went out with ex-army friends during the weekend. He told me that, after reading my blog on “My Worst Holiday”, he would have make the same decision if he is in that situation. In my office, a few colleagues encouraged me that my friend in Manila would understand the agony I gone through; reconciliation would not be an issue.

And yesterday, TV Mobile on SBS bus reported that Typhoon Mitag killed 22 Filipinos. But if what Joshua told me is true, he will not be affected. According to him, Boracay Island is surrounded by islands thus having similar strategic location like Singapore. Based on the original schedule, we should be spending three days (26 – 28 Nov) in Boracay Island.

This evening, while I was on my way back home, the TV Mobile in SBS bus reported another shocking news – the army stormed a Manila hotel held by the rebels. Now this is really upsetting. The bad news from this country just keeps coming up none-stop. According to our original schedule, we should have leave Boracay Island on 28 Nov and spend two days at Sonya’s Garden. So I hope that Joshua and his family didn’t head back to Manila. But even if they did, most probably they are staying in another hotel not occupied by any rebels.

I actually thought of calling Joshua but I knew that he does not turn on his mobile phone during his holiday. Besides, I really don’t know what to say if I call him. This is because I might be perceived to be sarcastic because my instinct is, in a way, quite correct. I had emphasized many time that I don’t have the peace for this trip. In any case, I serious don’t think that anything could happen to Joshua and his family. This is because he is very familiar with The Philippines and he knows how to get help from our embassy if there is a need. We have a friend currently working in our embassy in Manila.

As for me, with this experience, I am not sure if I would ever visit Philippines unless the government is able to establish political stability. Notwithstanding the probability of future visit to Philippines, I still need to prepare a thousand dollar cheque for the damages when Joshua returns from his holiday. The damages can only be alleviated if he is able to change his hotel room. And I hope for the best.

Warren Buffett's Teaching - Goes Beyond Stock Investment

Value Investment – It’s True Value

If anyone asked me the best book I ever read, that would be “Essay of Warren Buffett”. I read this book somewhere in 2002 which totally changed my approach and strategy in investment management. The book covers Warren Buffett’s approach in investment analysis and some technical concepts. But if you only read the book and never put it into practice, you gained nothing. You must put it into practice. And this is always the problem with many people; they read self-enrichment books like any storybooks such as Lord of the Rings.

Last year, one of my colleagues was complaining about our job (again) and that he says that likes to read books. Out of curiosity, I asked him if he have read Robert Kiyosaki’s “Rich Dad, Poor Dad”? He couldn’t remember initially, but finally recalled. I continued to ask him for his comment on the book, and whether the book changed his life in any way? He replied “ok lah, it’s a good book, nothing much lor”. I smile and changed the subject. That was an expected but disappointed answer. He read the book like any storybooks – no wonder it took him sometime to recall.

Whenever I lent a self-enrichment book to a friend or colleague, I always tell them beforehand not to read it like a storybook. Instead they are to understand it, appreciate it and try to relate it to their current situation. Buying self-enrichment book is an investment; we should expect a return from it. If you need a storybook, go to library and borrow for free.

Impact Of Reading Essay Of Warren Buffett

After I read Essay of Warren Buffett, I immediately put it into practice. I totally change my approach and strategy in stock investment. I start to analyse company’s annual report and evaluate those figures vigorously. I also use Warren Buffett mindset to question certain figures and corporate announcements. For example, many companies frequently announce to market that it has plans to do this and that. Or that it believes that it can sustain growth by certain percent. Or it targets to maintain certain profit margin or market share etc. But after applying Warren Buffett’s approach, I always disregard this kind of empty promises. On the newspaper, you can also find many analysts writing reports on companies and like to use motherhood statements such as company so and so is expected to clinch so much contracts, or expected to benefit from industrial growth, or pursuing active for mergers and acquisitions etc. I will throw this kind of report immediately into the dustbin.

So what have I actually learnt from Warren Buffett? A few months ago when I attended a seminar conducted by a land banking company, I use exactly the same mindset/approach when I asked critical questions to evaluate its business (you can find it in my archive). If you invest in anything, check for its real (or intrinsic) value. Check the facts and double checks again. The word “expecting” or “target” has zero value. But “signed million-dollar contract" has good value. Also when we study a company’s fundamental, focus on company’s cashflow and not on items that can easily be manipulated. What else have I learnt? I also learnt to overcome greed and fear. If you think that this is pure commonsense and going to rebuke me, don’t! I can show you tonnes of examples on how people got cheated or loss lots of money because of greed and fear. I was once one of them. Commonsense.... my ACCA lecturer used to say that “commonsense is the least common human attributes”.

So Warren Buffett’s teachings not only make me a winner in stock investment but also equipped me with the skill to evaluate any investment objectively. Everyday, there are someone in another part of the world coming up with new investment scheme to “make money”. Some may be genuine while others are scams. I like to ask all readers of my blog, how do you:

1) Differentiate between a genuine investment and scam?

2) For genuine investment, how do you evaluate its risk and return?

If you are hoping that in this article I am going to share the answer with you, you are going to be disappointed. It is not that I am stingy in my sharing, but that this is a huge topic. I can only share with you my experience for a start. To be that good in the above two points, you must keep reading, learning and practicing.

My Approach To Sunshine Empire’s Scheme

I had previously shared my experience on Sunshine Empire in my blog. I never jump to any conclusion; I never allege that it is a scam. But based on what I learnt from Warren Buffett, I am able to evaluate the scheme objectively (point 2 above). Last Saturday, I went back to office to finish a report for Monday. One of my colleagues was working on shift then. She came to me and then suddenly we talked about Sunshine Empire again. It’s a hot topic now. She asked for my opinion. The following is what I shared with her:

1) I discovered that many retail investor, aunties and uncles are seriously lacking of fundamental knowledge in investment evaluation. I am talking about really simple knowledge.

2) If you want to invest in any scheme or products, you must first understand how it generates the income and whether it is sustainable. Preferably, we want to see growth of course.

3) You should never be convinced by PowerPoint slides, pictures or video clips on company's assets and finance. You must obtain assurance by somebody trustworthy which, in an unfortunate event, you can hold him/her responsible if there is negligence or fault. This “somebody” must be qualified and independent. For example, it must be a lawyer, external auditor, independent property evaluator etc. This qualified professional must sign on his report and you must see (and even obtain a copy) of such black and white. Preferably, get a copy of Sunshine Empire’s annual report together with the external auditor’s report.

4) We must be satisfied with all the questions on risk before even talking about return, regardless of the rate. I meant what’s the point of talking about return if you cannot ascertain or manage risk? If risk is not an issue so long the return is very high, then a casino would probably solve everything. There is a chance to earn 100% return in every minute if risk is not an issue! Sunshine Empire certainly cannot provide such return.

5) I told her to first overcome greed if she wants to protect herself forever from all tempting schemes. Of course that does not means that we should become so timid that we place all our savings with the bank. With higher expected inflation next year, you may even incur a loss (in value of money) even if you save your money in fixed deposit.

6) Do not succumb to hard sales tactical. There is no such nonsense as “this opportunity comes only once in a lifetime and valid only for three days” etc. Anyone making this statement, give him/her 50 cents to buy a kite – to fly.

My colleague continues to ask me if there are better investments that come with low risk but reasonable return, at least higher than the inflation rate. I shared with her a few products such as bonds which I had covered intensively in my blog.

So is my approach to Sunshine Empire’s scheme correct? If you read The New Paper on Sunday (18 Nov), page 12 – 13 gives some updates.

1) The press check with the relevant authority in Taishung, Taiwan, found that Sunshine Empire’s affiliate Emcom is not in partnership for the wireless broadband business. Emcom has never contacted them on this project.

2) Malacca theme park. The paper reported that Malacca City Council did not receive any such proposal.

Lacking Basic Knowledge In Investment Evaluation

So I found many aunties and uncles (and sometimes young men) seriously lacks very basic skills in investment evaluation. And I am not talking about reading annual report or legal document. I am talking about not knowing how to “get the facts correct”. And they actually believe that someone is there to help them to reach financial freedom. I asked one of the Sunshine Empire’s partners on why would the founder wants to share such lucrative returns? He could have borrow from the bank cheaply and keep all the remaining. I mean if their investment yield approximately 10% returns a month, the founder could have borrowed from the bank at less then 10% cost a year! The answer given to me was “the company wants to share wealth with commoners instead of bankers”!

I didn’t know Jesus walks the earth again! If anyone can believe such statement, he/she is not naïve – he/she is stupid at an unbelievable level. Perhaps I should start a course on basic investment evaluation.

Speculation - Are You An Expert?

I missed an interesting article in Business Times (1 Nov 2007). I noticed that article and after reading it, I find it a very good article to bring reality to the naïve. All my friends who had sought my advice or had learnt investment from me know my very first rule – I never gamble. It’s not that I never but after I understand the truth from warren Buffett, I strongly protest against stock speculation. No doubt occasionally, I still buy lottery but it is a mere $15 per bet for $1 million and that’s it. There is no repercussion and my maximum lost is a fixed $15 (about 2 x MacDonald meals).

Recently one of my friends called me up and asked me questions on trading. What happened was I recommended him to buy China Sunshine Chemical and then when there was alight movement in the price, his colleague advised him to contra off and locked in profit. Then he can buy back at cheap price again and do the same thing again. I replied that I know what game his colleague is playing, but I am not interested. I told him that if he speculates, he is on his own and I will not assist him in any way. He has to make a choice. No doubt that recent poor market sentiment has caused many stock prices to retreat, but my comment/principal will never change. In fact, I also have friends who tried to invent some methods to correlate it with the stock market, i.e. a secret to success. May we can also use the tide to predict stock market, or the temperature at noon, or the number of adverts on the obituary. All these voodoo tricks, I am not interested.

I like to specially highlight a para in the article. It is something I always warn opportunists or people who try to find luck in stock market, that ANYTHING can happen.

“….There's always a first time for everything, even a default of 'safe' government bonds.”


=====================================
Business Times - 01 Nov 2007

Even the experts can get it so badly wrong

History is replete with heavy trading losses that were all too easily incurred

By LARRY WEE
SENIOR CORRESPONDENT

Within less than a fortnight, two Singapore shipbuilders have announced massive currency trading losses. How and why these losses were incurred will surface only after investigations have been conducted.

However, history is replete with financial case studies of how heavy trading losses can be all too easily be incurred by individuals or corporations. In early 1995, we discovered that Barings trader Nick Leeson had blown a US$1.4 billion hole trading in financial futures on Simex here in Singapore. Three years later, in 1998, veteran traders and Nobel prize winners at the US-based Long Term Capital Management (LTCM) suffered losses of more than US$3 billion in the short space of nine months because of heavily leveraged trades. In 2004, China Aviation Oil blew more than half a billion US dollars on oil derivatives trading.

And just this week, we have discovered that even blue-chip investment banking giants like Merrill Lynch and UBS are continuing to report multi-billion dollar losses from complex mortgage-related debt portfolios that have become nigh impossible to unravel.

How do such trading losses - and we stress we are not talking about SembMarine and Labroy here - pile up? Here are some clues to consider.

Leverage is a two-edged sword. Making bets based on only a fraction of the underlying sums transacted is attractive because profits are correspondingly magnified - but then so are the losses. In the case of blue-chip US hedge fund LTCM, their convergence trades were basically bets that too-large price differentials between different types of bonds should become smaller over time - something which they backed with state-of-the-art trading models which studied historical price movements.

Between 1994 and 1998, LTCM reportedly leveraged US$5 billion in client capital into US$125 billion worth of borrowings, and outstanding swap positions worth more than US$1 trillion in nominal value.

Murphy's Law. 'Anything that can go wrong, will - at the worst possible moment.' In the case of LTCM, the fallout from the Russian debt default of August 1998 shrank their capital from more than US$4 billion at the start of 1998 to just US$600 million by September that same year.

Nick Leeson had to throw in the towel when already bad losses on his large Nikkei futures contracts skyrocketed following a massive earthquake in Japan in January 1995 and forced the Japanese stock market into free-fall.

This time around, one fear which refuses to go away out there is that the sub-prime debt crisis could spiral further out of control - forcing another panicky flight to quality.

Double or nothing usually means you end up with nothing. Every veteran trader knows that he must squeeze the most money out of his good bets but keep loss limits tight on those that go awry.

But human nature often finds people cashing in too quickly on the good stuff but massaging losses for far too long - in the hope that they will come right someday, somehow. In the case of Barings and China Aviation, history tells us that record-sized positions - and therefore record losses - were accumulated because of a desperate effort to average down the cost of what was to become awfully wrong (and highly leveraged) bets about the direction of the Nikkei and oil prices respectively.

Here's a simple example. Let's say that about one year ago, your banker persuaded you to buy US$100,000 at S$1.60 because it could enhance the yield on your fixed deposit by at least 2 per cent. Then, as the US dollar fell, he encouraged you to buy more to average down your cost. Let's say that you bought another US$100,000 at S$1.55 and again at S$1.50.

By July 2007, you own US$300,000 at an average of S$1.55. In August this year, the US dollar rebounded to S$1.54. Had you sold out then, you would have reduced your total currency loss to S$3,000 - which is more than offset by the extra US$6,000 in interest earnings from your US$300,000 deposit.

If however, you had chosen to hold on until now - hoping for an even stronger US dollar rebound - the currency losses would have swelled to S$30,000 as the US dollar has now fallen to S$1.45.

Admission is free, you pay to get out. As banks from Goldman Sachs to UBS have found out to their detriment, it is all too easy to find rocket scientists who will happily structure complicated financial products - whether based on derivatives or housing loans - which offer superior yields. And the longer the tenure, the more you stand to make.

But here's the problem. When you discover, as they have, that nobody is willing to fund those fancy CDO (collateralised debt obligation) structures, or buy them back from you when you need to sell them, then you are also stuck with losses for a nerve-wrackingly long time. Worse, the structure can be so complicated that you are not even sure how much they are worth at a given point in time, or how to unravel them without paying a hefty penalty.

Illiquid can too quickly become insolvent. Buying an asset at tempting yields is all too easy. But any corporate treasurer worth his salt will also want to find out how easily he can dispose of the asset. LTCM could not find any buyers for their less than desirable bonds when Russia's declared moratorium on US$13.5 billion of its Treasury issues caused a nervous flight to quality in fixed income markets.

The other important lesson from LTCM to take home here is that historical evidence must be taken with a pinch of salt. There's always a first time for everything, even a default of 'safe' government bonds.

It is not known whether some of these problems, so painfully experienced elsewhere, also touched SembCorp Marine and Labroy Marine. But these firms' shareholders will want to know how they could have allowed themselves to get so deeply embroiled in foreign exchange speculation when their core business is the building of oil rigs.

How To Read Financial Report (Part II)

b) Consolidated income statement, balance sheet, changes in equity and cashflow statements.

The word “consolidated” means that the Group (集团) consolidates all its subsidiaries financial statements. The next thing to do is to determine whether the Group is worth an investment. I will not go through how to read and use the financial data here because to do that, you need to know how to conduct ratio analysis. Fortunately for you, a copy of the ratio is in my archive. You have to read and practice those ratios. But I’ll just show you the more common and important figures and ratios that I always use. The following analysis was done on Breadtalk peviously.

Do take note that for earnings per share, you can get the figure right below the consolidated income statement. For accumulated profit or reserve, you need to refer to the consolidated statement of changes in equity. You must also study the cashflow statement to see how much cash the company generates from its operations. Cash is the most reliable figure because it is extremely difficult to manipulate cash figure and escape the eyes of the auditors. Also, “cash = king”. After the analysis, and you are still interested in the company, then you shall continue your study.

c) Notes to financial statements

Skip all these except the segment information. These are all about accounting issues which you may not survive especially if you are not in accounting field. You should keep flipping the pages and before the end this session, you will find segment information. You need that. The Group will report their revenue and profit in terms of geographical segment and individual product/service. This will give you a good understanding of the growth of each product/service and of different geographical location. This will helps you a lot together with your knowledge in general economic and industrial development.

d) Statistics of shareholdings

Here you can get the number of shares issued. This is needed in your ratio analysis. Also, you can see who has the highest shareholding on the company.

e) Notice of AGM and Proxy Form

Here you will know whether the Board recommends dividends. If the Board so recommended dividend payout, it will be in the agenda. Throw away the proxy form as small fish like us couldn’t be bothered.

f) Chairman and/or CEO’s Statement

I see you are shocked. The big bosses statements are the last to read. Yes, and you have to read it with a pinch of salt. This is because nobody will or wants to reveal bad news to the public. Make sense? Even if there is, by human nature, you will want to tone it down. Therefore, it is pointless to read these reports at the beginning. The objective of reading it now is to have better understanding on the top management:

- Work and achievement so far.
- Future plan. Take note on all negative reports such as rising material prices, intense competition, price erosion etc.

Anyway, even if you skip this whole session, there is no harm.

g) Corporate Governance Report

This report is required by the Council on Corporate Disclosure and Governance and is mandatory to all listed companies. By “corporate governance”, we are talking about a company making decision in the best interest of its stakeholders. The Code aims to promote transparency. There are lots of information provided in this session includes top management’s pay (in band, not in absolute value), composition of their remuneration package etc. Again, as a small investor, you may skip whole part of it except that you should take note of the employees’ share options scheme, if any.

Personally, I always take note of a company share options scheme. Under normal circumstances, it usually does not affect my investment decision. In fact, sometime, it becomes an added motivation for me to invest in that company. What is an employees share options scheme (ESOS)? The ESOS serves to reward employees for improving company’s bottomline. It is a scheme that gives the employees (usually applies to people of management position) an option to buy the companies shares at the exercise price a year later but before the expiry date. The exercise price is usually, and should be, higher than prevailing market share price. The logic is simple. If the employees work hard and generate profits which add to shareholders value, the share price will rise above the exercise price. And the employees shall reward himself by exercising the option (buy the shares from the company) and sell it in the open market for a profit.

This should be the way ESOS is used under normal circumstances. But sometime, some company do it differently such as PSC (refer to my archive article on PSC) which in that case, I dump its share. ESOS can also be an incentive for me to buy the company’s share although it should not be the primary reason. For example, GP Industry has been generating high revenue and profit for years. It is quite a conglomerate with a few really big subsidiaries, a few of them used to be listed. The only problem is that the Group is dragged by GP Batteries although they are still earning a profit. Among other things, one of the motivations for me to invest long-term in GP Industries was because its ESOSs are much higher than current market price. This gives me a comfort that unless the management work hard to produce higher profit, none of them will never get a chance to exercise the options. So, I bought the share at a price lower than the options ESOS price. Heehee!

Again, I repeat, this factor is only a motivation, it alone cannot be use to make investment decision.

Conclusion

So that’s it. I have given you that few hundred buck for free; free only before the traffic in my blog exploded. We have gone through the annual report but only on those that are critical to your investment analysis. Any other things, you can throw it away. My advice is that as a beginner, you should take it one step at a time. Learn how to use the ratio analysis first. This is the most important skill that you must acquire. But again, financial report alone is insufficient to make an investment decision. It only gives you the quantitative factors. Do not forget about qualitative factors such as brand (e.g. MacDonald), location (e.g. prime land), industrial growth (oil exploration), global economy (e.g. US recession) etc.

How To Read Financial Report (Part I)

Today is Your Lucky day

If you have been visiting my blog, and that you are happy with my sharing so far, I am going to reward you with few hundred bucks. As a value investor, you need to analysis a company performance both on quantitative and qualitative factors. On quantitative factor, you must be able to study and analyse a company’s financial report. This is one of the important and basic skills that a value investor must acquire. I mean if you don’t even know about a company’s performance and health, what value investment are you talking?

If you attend a training or workshop on “how to read financial report”, it’s going to cost you a few hundred bucks. You don’t believe? Our SGX conducts such workshop too. Go to their website and see how much they charge you.

But today, I’ll teach you for free. Like I said earlier, “I am going to reward you with few hundred bucks”. This will be very useful especially for non-accounting students or a beginner. Otherwise, you will fall asleep within 1 minute after you start reading an annual report. I’ll break the whole session into various parts with detail explanation in each for your easy reading.

1) What is a financial report

The first question is what is a financial report. A financial report, whether it is a quarterly, interim or annual report contains, among others, a profit and loss statement (also known as income statement), balance sheet, statement of changes in equity, cashflow statement etc. A quarterly or interim report would be much simpler in its format than an annual report. Under the SGX’s listing manual, a listed company must observes the following listing requirements:

- Generally, to release audited annual report not more than 60 days after its financial period.
- Generally, if market capitalization exceeds $75 million, must issue three quarterly reports. Otherwise, quarterly reports are not required.

I used the word “generally” above because there are other clauses but I am not suppose to make it more complex otherwise you might as well read the full listing manual. It is important to highlight here that a listed company’s annual report must be AUDITED by an EXTERNAL auditor. But the quarterly reports and interim report need not to be audited. Interim report refers to first half-year report. And certainly, an audited report is more reliable. While the external auditors add pain to a listed company, they are our friends and “policemen”.

2) Where to get a financial report

Please take note that when a listed company announces its year-end result on the SGX, it is usually NOT audited. How to know? Well, for an audited report, it certainly cannot be just five or ten pages like those on the SGX’s announcement. But the announcement of unaudited report is equally important because it give us first hand guide before the auditors complete their job. Usually the final audited figures will be slightly different but not too far off. It cannot be that the company released a good profit at the end of the year but turned out to be a loss after the auditors’ checks and adjustments. If it happens, then both the company’s management and shareholders’ are in a “shit”.

If you are a shareholder of a company, you are entitled a hardcopy of (colourful) audited annual report. Alternatively, you may also download the report from the company’s website. You may also, as potential investor, email to the company’s investment relation officer for a free copy. I did once on Tan Chong International and they send a copy to me from Hong Kong. If you invest through CPF, you must give instruction to your agent bank.

Just to share my experience. DBS is my investment bank and preivously I had an argument with them for not sending a copy of annual report to me. They push the responsibility to the listed company itself and make me call here, there and everywhere including the CDP. I was pissed off. Finally, I confirmed that it should be the investment bank’s responsibility and wrote to their management a last warning letter - if they cannot resolve it by certain dateline, I’ll change to another bank. They investigated and resolved it. They explained that the root cause was because I did not check a particular box in my application for CPF Investment Account.

3) In the annual financial report

Firstly, in the audited financial report, you can find the following items:

- Chairman and/or CEO’s Statement
- Board of Directors
- Financial Review/Highlights
- Corporate Governance Report
- Information and Report of Directors and Management (including share options scheme)
- Auditors’ Report
- Consolidated Income Statement
- Balance Sheet
- Consolidated Statement of Changes in Equity
- Notes to Financial Statements
- Statistics of Shareholdings
- Notice of Annual General Meeting
- Proxy Form

Take note that for a very big company or company listed overseas, the content may be different. I’ll go through to explain each of them by orders of importance (according to me). Take note again that subsequent points should be read in conjunction with an audited financial report instead of a quarterly or full year result announcement made to the SGX.

a) Auditors’ report

The very first report that you should read is the auditors’ report. Like I said, the external auditors are our friends and policemen. They are independent and should be the first person to rely on. Why are they independent? These auditors are not paid by the company they audit but their very own bosses (the audit firm). The listed company will pay the audit firm for their service. But could there be some “connections” between the audit firm partners and their client? Well, the partners are fully and “personally” liable for any mistakes and wrongdoings. They signed on the report; they signed their reputation and business on the report. The partners can be sued for wrongdoings or even negligence. That’s why none of my friends want to set up an accounting/audit firm.

Now, if the auditor “qualified” the report, you can dump the annual report and move on to another potential company. Qualifying a report here is an accounting jargon. We don’t mean that the auditors give the company a certificate. By NOT qualifying a report means that everything is in order and nothing unusual was discovered from auditors’ random checks. In an unqualified report, the auditors will first explain their work and then form their opinion as such:

“In our opinion, the consolidated financial statements and balance sheet are properly drawn up according to the Act and Accounting Standards and give a true and fair view of the state of affairs…..”

“The accounting and other records required by the Act to be kept by the company…… have been properly kept……”

The first Para is telling you that the financial statements had been sufficiently prepared according to the Act and accounting standards. The second Para is telling you that the company has prepare and keep its accounting books properly. In sum, everything is OK! When the auditor qualified the report, they will say some other things like “we like to draw attention to….” or “we could not agree with a accounting practice by the company” etc. The worst opinion is when auditor “doubt that the company is still a going concern”. This means that company’s business may not go on for the next one year. In this case, you don’t have to continue reading the annual report anymore. In times of crisis or recession, this kind of opinion is more common than current bullish market.



To be continue……

Make Quick & Easy Money From Stock Market? Grow Up!

1999 Small Bull

How do you feel when many of your friends are making easy money in the stock market? Worst still, one of your colleagues just changed a car during current bull market, and you are sitting inside. You try to not to fall into the temptation but many of your friends keep making money with very little investments. One of them told you that he bought 50 lots based on somebody’s “insider news” and the next day, he contra off and make more than $1,000 with zero investment. Can you survive this?

No, you gave up and ask him your first deadly question – “how to contra/short huh”?

In early 1999, local stock market started to recover after couple of years of “bear sleep” (started from Jul 1997 Asia Financial Crisis). I call it a “small bull” because it didn’t last for more than half a year, unlike what we are seeing now (from 2006 – 2007). It was slow initially and then somewhere after Mar 2007, it was obvious that market started to pick up and speed up. I was then just another speculator, and helped my colleagues to set up CDP and trading account. Very soon, we were all earning easy money. By mid-99, a few of of us occasionally made about $1,000 a day. We were laughing at the back of our directors, that they couldn’t earn such an income. Our contra orders got bigger and bigger and one of them traded in 100 lots most of the time. We were gambling, and there is a price to pay. A horrible correction set in in early Jul 1999 and within three days......

While you may have heard on how people changed car through stock market trading, I’ll share with you on how people suffered when market turned against them.

Story 1: Last Man Standing And Then Die

In the 1999 small bull which lasted until end of June, one of my friends was making lots of easy money by trading stocks. Let’s call him Mr. T. Mr. T was the one and only lucky guy who got out of the market almost immediately and totally when the severe correction sets in. He was the “last man standing”. He kept all his prizes which worth about $50,000 to $100,000. Subsequently he stopped stock trading, got married and bought a four-room resale.

But I knew that he would come back. Basically that is human nature. When you found a quick and easy method to win money, and you have been successful, you will come back sooner or later.

After the dot.com burst, Mr. T came back as expected. Somewhere in 2003, a few counters were heavily traded with high volume. For those who had stayed in the market for long should remember BIL, an investment company in hotel and airline. As usual, Mr. T punted with huge orders with only one problem. The market had been hot with BIL for quite a while and Mr. T was, in a way, late and became one of the “last men”. Share price of BIL got weaken and didn’t move beyond his purchase price. As he traded in huge quantity, a drop in every cent means a lot for an average income-earner. I was told that he also got burnt in other counters too. Mr. T ended in huge debt between $10,000 to $100,000 which he could not pay off. The broking house blacklisted him and took action to claim back their money.

Mr. T start to borrow money everywhere, from friends, colleagues and even superiors. He wanted to sell his house to pay off his debt but he couldn’t do it. This is because the property market was very bad then. If he sells it, he will realise another big losses. He kept his secret from his company but was soon exposed. Disciplinary action was taken against him and he resigned from his comfort zone in the midst of global recession. Unemployment rate was high then and in order to keep his family, Mr. T worked as a nightclub “manager” after daytime’s job.

One more thing, from what I was told, Mr. T never return the money back to his ex-colleagues after his resignation. He just disappeared. So, remember that if you lend money to a gambler, the first thing you should do is to write-off the loan as bad debt. Chances are, you're not getting it back.

Story 2: From Stock Market To Commodity

I had another friend who is a handsome chap. I mean it. Let’s call him Mr. A. Mr. A is handsome and change “partners” frequently. I used to joke with him that someday, he would have to payback. He was also one of those who speculated heavily during 1999 small bull. Similarly, he got burnt but one of his girls settled the debt for him. Wow.

Thereafter he was posted out and we seldom keep in touch. A year later, I was invited to attend an “old buddies” gathering. The purpose of the gathering was actually because Mr. A got into severe financial problem, not with loan sharks but with SIMEX. He confided to us that his new girl was working in SIMEX. And then he was persuaded to trade commodity after he was convinced on how easy it is to make money from it. The end result was that he made a loss of approximately $60,000. He paid the debt through credit cards and then the banks were suing him for payment. By the way, last time you can have duplicated credit limit with many cards. You finished the limit with one card and you can go on to spend on another. Today you can’t do that. There is only one credit limit no matter how many cards you hold. A brilliant policy lay down by the MAS.

Mr. A tried to negotiate for easier payment scheme with the banks’ management but they referred him to their lawyers. And when he wanted to negotiate with these lawyers, they replied that they had to follow their clients’ instructions. So the banks reached my friend’s company and his pay was frozen. According to him, his pay was “re-structured” and a large part of it was used to pay bank debt and court/legal fees. And for that large part that was used to pay off the debt, a large portion of it was used to cover interest. For those who studies account or finance should understand amortising loan. And now we know how mean a bank can be when they want their money back. That’s probably why I am always sarcastic when bank salesmen “beg” me to use their loan. I always replied, “Why do I need a loan for out of nowhere? I’m so fortunate to be debt-free”.

Mr. A has problem even with his meals!!! Collectively, we lend him some money to tide over. He knew this blood-sucking arrangement cannot go on and so he applied for bankruptcy. Yet there was one very last problem. Mr. A’s company is likely to terminate his contract before expiry. But he was sponsored for further study before and he may have to payback this benefit for early termination. 一波未平一波又起.

What happen to his relationship with this SIMEX girl then? You will never believe me. Mr. A told us that this time, he really really fell in love with her and beg for her return. She didn't give a damn. Anyway, that is not my point here and is a bit out of scope.

Conclusion

I had numerous stories like this. I can go on for days but let’s don’t waste our time and come straight to the learning point. If you gamble in whatever forms – stock market, football, casino or commodity, high chances are someday, you may have to chop off both hands. Your life, career and business may be shattered and you will also implicate your whole family. When you gamble, the cruelest thing that can happen to you is that you make lots of money initially. This is because when you finally incurred a loss, usually it is like "one time finish all" scenario. One loss and you are finished. That's why whenever someone made small losses in stock investment, this is how I encourage him – “it is good that you fell down initially and learn and become successful later. Life would be cruel to you if it is the other way round”.

After the 1999 small bull, I started to (self) learn value investment through books written about Warren Buffet’s investment strategy. I grasped the idea easily with accounting background and experience in the stock market. Nowadays I seldom introduce friends to my remisier and I never teach or write article about stock speculation. To-date, I have many times recovered all my previous losses. Back in 90s, one of my ex-colleagues asked me if I was making money from stock market every year. I couldn’t answer that question. I was hoping that someone could ask the same question again. Because this time, I got a firm answer and records.

Xtra! Xtra! Oil Price At US$86

Oil Hits Record

On 13 Oct 2007, oil price was reported (in Business Times) to hit a record of above US$84 a barrel due to tensions between Turkey and Kurdistan Workers Party. Coincidence or what I don’t know. But this is certainly not a good news, at least not for me. But the stock market doesn’t seems to bother and they are still “frying the pan”. Some of my friends called me for my advise on next course of action. I don’t really like this kind of question but I offer them my opinion - their profit only becomes “real” when they transformed it into hot cash in the wallet (or bank). There is lots of uncertainty now than early 2007.

This morning (16 Oct 2007), I received another report that oil price had reached US$86 a barrel. Although last night DJIA plunged more than 100 points and STI down by twenty over points when market started, people are still (selectively) “frying the pan”. To me, this is a good news as I had been throwing more shares to them so that they can continue to enjoy their game. Last night, I keyed in my sell orders through the internet. I wanted to sell Courage Marine at $0.45 a share based on its last closing price. Guess what happened? When market re-opened, punters came in to buy at $0.475 opening price!!! As a result, the exchange adjusted my selling price to $0.475.

Like I said (in my previous post), “in a bull market, you can’t sell cheaply”.

To-date, I had almost halved my portfolio realizing a highest gain record since I adopted Warren Buffet’s methodology on investment in around 2002. My realised gain this year is expected to hit above 20%, a lovely record to call for a celebration. I should give my close friends/colleagues a treat to share my joy.

Further Update On PSC

Today PSC’s share price continued to head southward and closed at $0.455. Everything is according to my prediction based on my past experience. I am not God, please, but I have experience. Again I repeat, share consolidation, generally, does not add value. And when it was done in the midst of uncertain market, chances are that the long-term investors may suffer a loss value. Come to think of it, experience does carry a value. I should sell it! heehee

Tips On IPO Application – An Update

In my previous article, I had shared my little tips on IPO application. Let’s see if it is true. Today, China Oil Field announced its IPO balloting result.

As you can see, applying eleven lots allow you to jump to next higher balloting box. Your balloting ratio increased by one person (not a lot but at least something) and if you are successful, you will get 2 lots. This is better than those applying for nine lots or less. Of course at the end, it still depends on your luck. But let’s say you are always lucky, then you will prefer to get 2 lots instead of one, am I right? As you can see from the ratio, even if you are rich and are able to apply for four hundred lots, your probability is only 6% and you’ll only receive 3 lots if you are successful. If you are thinking about getting a private placement, it’s not going to be easy. Your broker may not entertain you because comparing to big institutions and syndicates, you are still a small fish (as a retail investor). But of course you can and should try.

So in this case, China Oil Field is a super hot IPO. When it start its first trading tomorrow, I guess the opening price will be above $1. By the way, in case you ask, my application was unsuccessful. ------ ("chey, after such long speech!")

PSC Corp Stock Consolidation & Tips On IPO Application

After Share Consolidation

On 15 Oct 2007, PSC Corp’s shares consolidated five into one and traded at an open price of $0.52. This is close to what I had calculated in my previous posting on PSC. Unfortunately, PSC share closed at $0.48 which is lower than the theoretical price after the consolidation and rights issue. Of course, one day’s trading is not conclusive. It will probably take a few weeks to know whether PSC’s share price can maintain or surge above (and maintain) the theoretical price after share consolidation. Otherwise long-term investors will be worst of. They would be better of by disposing the shares before the consolidation. In this case, history has predictably repeated.

Whatever the ultimate outcome, my opinion is still the same. Share consolidation, generally, do not add value to the shareholders. It is a waste of time and the management, if indeed capable, should divert all efforts in bringing in profits.

Tips On IPO Application

In a bullish market like now, IPO is one idiot-proof way to make money. Many people rush into it and good IPOs are always numerous times over subscribed. Here I like to share a little tips on IPO application. It’s nothing big deal but for a beginner and a retail investor, this should be useful. If you are rich enough to apply for 100 of thousands of shares, this article will be irrelevant to you. So here are the tips:

1) When applying for IPO, always apply one lot (1,000 shares) or 11 lots (11,000 shares). Never in between.
2) Always apply near the end of the closing date. Never be the first hero.

Based on my ten years of experience, in a normal market, most IPO will usually be a few times oversubscribed. Normal market here refers to anytime other than a crisis or recession. When it is many times oversubscribed, every applicant will not receive the full quantity he/she applied for.

Refers to the picture above which is one of the recent IPO balloting result. Generally, those who applied from 1 to 9 or 10 lots will be thrown into the same balloting box. Let’s call this as Cat A. So it doesn’t matter whether you apply for 1 lot or 9 lots. You get same balloting ratio, same allotment, same probability. What you should do is to apply for eleven lots so that you can “jump category”. The next category will be for those applying, say, eleven lots to thirty, forty or fifty lots. So again, if you are slightly rich, it doesn’t matter if you apply for eleven lots or thirty lots - same balloting ratio, same allotment, same probability. Then you might as well apply for eleven lots.

The benefit of jumping category (let’s call the next higher category as Cat B) is that you are likely to enjoy one or two things. Firstly, the balloting ratio may change. For example, in Cat A, 5 out 50 applicants will get it, and Cat B 10 out of 50, depending on how hot is the IPO. So in Cat B, your chance increases. It’s not much but at least something. The second likely benefit will be the number of shares allotted may be different. In Cat A, successful applicants usually get one lot. In Cat B, successful applicants may get two lots. Again, this depends on how hot is the IPO.

Next, never rush to the ATM (or send your application form) immediately after the IPO is open for application. The market sentiment may change anytime. Mr. Market is temperamental, remember? If you apply the IPO early and suddenly Dow Jones plunged, there is no chance to retract. And then many people may change their mind about the application (to play safe), and you had it. You may be fully allotted. I usually applied an IPO during the last day.

“But between the IPO closing date and the official listing date, there may be bad news also?”

Yes that’s right but everyone had applied for it. And as usual, you won’t be fully allotted. You may get one or two lots but it’s not that bad. In any case, usually, an IPO will be listed within two or three days (some may be more) after the close of its application.

So in conclusion, IPO application is a probability game. I am sure many people can afford to apply eleven lots and thus giving yourself a better chance of getting it and getting more. Alternatively, if the IPO is underwrite by the broking house you used, call your broker/remisier and pressure him/her for private placement.

What Is A Stock Index? (Part II)

Nasdaq Index

On 8 Feb 1971, an automated quotation system called Nasdaq (National Association of Securities Dealers Automated Quotations) provided up-to-date bid and ask prices on 2,400 leading over-the-counter (OTC) stocks. Prior to Nasdaq, quotations for these unlisted stocks were submitted by the principal trader or by brokerage houses that carried an inventory. Now Nasdaq linked the terminals of more than 500 market makers nationwide to a centralized computer system. The Nasdaq Index is owned and operated by The Nasdaq Stock Market, which list mainly the technology stocks.

The Nasdaq Index, which is a value-weighted index of all stocks traded on the Nasdaq, was set at 100 on the first day of trading in 1971. It took almost 10 years to double to 200 and another 10 years to reach 500 in 1991. It hit a milestone of 1,000 in Jul 1995. As the interest in technology stocks grew, the rise in the Nasdaq Index accelerated, and it doubled its value to 2,000 in just 3 years. In the fall of 1999, the technology and Internet boom sent the Nasdaq Index into a frenzy, peaking at 5,048.62 on 10 Mar 2000.

Straits Times Index (STI)

Lastly, we come to Singapore’s Straits Times Index (STI), a value-weighted index. It was previously known as the Straits Times Industrial Index (STII). On 31 Aug 1998, the STII was renamed and ended at 885.26 points in the midst of Asia Financial Crisis. The STI is a value-weighted index constructed by the SPH, in conjunction with the SGX and a few other professionals.

Currently, there are 48 STI component stocks. In early Oct 2007, SGX announced that they are will revamp the component stocks again. Twenty-two current component stocks will be removed and four new stocks will be added in. To be eligible for entry to the new indices, a stock must have a free float - the proportion of shares available for trading by investors - of more than 15% and it must also pass a liquidity test.

Finally, have you ever think carefully what actually drives the index? If your answer is the investors, yes but what will affect these investors decision (whether they are speculators or value investors)? If you answer is corporate performance and/or market sentiment, yes but what will affect directly corporate performance and/or sentiments?

The Economy

Yes, the stock market performance, measured by various indexes is ultimately affected by the economic performance of a country or major developed countries. As such, we know that stock market is an indicator of future economic performance. When analysts, speculators and investors believe that an economic downturn is approaching, they will take one of the two actions – run or short. Either way, the stock market will clash. Therefore, as a value investor, we should study corporate performance and most importantly, the general economic performance.

“But I thought that as a true value investor, we should focus on a company long-term prospect and Warren Buffet does not dispose his stocks away during market downturn!”

Some of my friend had made such remarks to me before. If that is also your views, you are not wrong and I understand what you mean. But there is a different between Warren Buffett and a retail investor in investment management. But this is outside the scope of this article. I’ll talk about it in another article.

What Is A Stock Index? (Part I)

Many people know that we use index to measure stock market performance. So exactly what is an index? What’s the use of an index and how is an index calculated?

Firstly, an index is a basket of stocks that is use to represent broad market performance. These selected stocks are known as index component stocks. These stocks bear certain characteristics such that collectively, they can be used to measure the broad market or certain industry’s stock market performance (and sentiments).

Uses Of Indexes

1) Benchmarks portfolio performance. When you invest through a fund manager, i.e. buying a unit trust, how do you know or gauge the performance of your fund (or the fund manager)? Well, you measure it against certain related index. Therefore, if your fund manager can’t even match the index stocks, let alone talking about beating the index which is your expectation, then you might as well buy those index stocks rather than paying the fund manager.

2) Constructing index fund/portfolio. There are fund houses that introduce Index Fund to the market. This simply means that the fund manager will buy the index stock of a specific financial market and will hold on to it. This type fund is a passive fund as the fund managers do not need to manage or trade it actively. In fact, trading decision can be made through some computer model and little human decision is needed. The operation cost of an index fund is low compared to the usual actively managed funds. Comparatively, an index fund will charge a much lower commission. An Exchange-Traded Fund is also an index fund only that it is listed and traded actively by the investors. For more information on the ETF listed on the SGX, please click on the above link. The ETFs that are currently (Oct 2007) available on the SGX are:

Equities:

· CIMB FTSE ASEAN40 ETF
· iShares MSCI India ETF
· Lyxor ETF China Enterprise (HSCEI)
· Lyxor ETF Hong Kong (HSI)
· Lyxor ETF MSCI AC Asia-Pacific Ex Japan
· Lyxor ETF Japan (Topix)
· Lyxor ETF MSCI Korea
· Lyxor ETF MSCI Taiwan
· streetTRACKS® Straits Times Index Fund
· U.S. Cross-Listed ETFs (JV ETFs)

Fixed Income:

· ABF Singapore Bond Index Fund

Commodities / Precious Metals:

· Lyxor ETF Commodities CRB
· streetTRACKS® Gold Shares

3) Technical analysis. Obviously, speculators/punters/technical analysts uses index to predict stock movement. In this case, an index is simply a reflection of human beings’ current behaviour (i.e. stock market sentiments) and these analysts hope that through identifying certain pattern (that repeated over and over again), they could make profitable investment decisions that are usually short-termed. It is really about predicting investors’ behaviour. Or alternatively, if a person can read everyone’s mind, then technical analysis on indexes will not be needed.

4) Academic purpose – calculation of beta and portfolio theory studies.

Index Computation

1) Price-weighted index. In a price-weighted index such as the Dow Jones Industrial Average and the NYSE ARCA Tech 100 Index, the index is derived by summing up all the prices of the component stocks and divide by the number of component stocks. However, this divisor had to be adjusted over time to prevent jumps in the index when there is a change in the companies stocks and when there is a stock splits. A price-weighted index has the property that when a component stock splits, the split stock has a reduced impact on the average, and all the other stocks have a slightly increased impact. In a price-weighted index, proportional movements of high-priced component stocks have a much greater impact than movements of lower-priced stocks regardless of the size of the company.

2) Value-weighted (or capitalisation-weighted) index. In a price-weighted index, the size of the firm has no impact on the index. A market-value weighted or capitalization-weighted index such as the Hang Seng Index and Straits Times Index factors in the size of the company. The size of a company is measure by its market capitalisation (no. of shares issued x current share price). Thus, a relatively small shift in the price of a large company will heavily influence the value of the index.

Dow Jones Industrial Average

Charles Dow, one of the founders of Dow Jones & Co., created the famous Dow Jones Averages in the late 19th century. On 16 Feb 1885, he published a daily average of 12 stocks (10 railroads and 2 industrials) that represented active and highly capitalized stocks. Four years later, Dow published a daily average based on 20 stocks-- 18 railroads and 2 industrials. On 26 May 1896, the Dow Jones Industrial Average (DJIA) was created from the following stocks:

· American Cotton Oil
· American Sugar
· American Tobacco
· Chicago Gas
· Distilling & Cattle Feeding
· General Electric
· Laclede Gas
· National Lead
· North American
· Tennessee Coal & Iron
· U.S. Leather
· U.S. Rubber

Today, only GE survived through the centuries and retained its membership in the DJIA. Now, the DJIA 30 component stocks are:

· 3M (NYSE: MMM)
· Alcoa (NYSE: AA)
· Altria Group (NYSE: MO)
· American Express (NYSE: AXP)
· American International Group (NYSE: AIG)
· AT&T (NYSE: T)
· Boeing (NYSE: BA)
· Caterpillar (NYSE: CAT)
· Citigroup (NYSE: C)
· Coca-Cola (NYSE: KO)
· DuPont (NYSE: DD)
· ExxonMobil (NYSE: XOM)
· General Electric (NYSE: GE)
· General Motors (NYSE: GM)
· Hewlett-Packard (NYSE: HPQ)
· Home Depot (NYSE: HD)
· Honeywell (NYSE: HON)
· Intel (NASDAQ: INTC)
· IBM (NYSE: IBM)
· Johnson & Johnson (NYSE: JNJ)
· JPMorgan Chase (NYSE: JPM)
· McDonald's (NYSE: MCD)
· Merck (NYSE: MRK)
· Microsoft (NASDAQ: MSFT)
· Pfizer (NYSE: PFE)
· Procter & Gamble (NYSE: PG)
· United Technologies Corporation (NYSE: UTX)
· Verizon Communications (NYSE: VZ)
· Wal-Mart (NYSE: WMT)
· Walt Disney (NYSE: DIS)

Analysis of the Dow trend since 1885 shows an annual compounding gain of 1.85%, excluding inflation. The Dow Jones Industrial Average, like most other popular averages, does not include dividends, so the change in the index greatly understates the total return on Dow stocks. I do mean greatly-- as with about 4.6% annual dividends reinvested since 1896, the Dow would be somewhere around 700,000 today!

To be continue......