Friday, 25 September 2015

Make sure you know what STI ETF is all about

In the current market downturn, its always good to stock up on STI ETF's. You know, chuck your money at ETF's, do nothing and wait, collect dividends.

There are a couple of Singapore ETF's currently in the market, but I guess the one that is most well known would be State Streets SPDR ETF (can be found under the ticker STI ETF on any brokerage site) But how well do you know what you are chucking your cash into when you buy these ETF's, and what should you look out for? Or are you anyhow investing again?

1) Its components

The STI itself is dominated by a few large cap stocks, which then negates the benefits of buying into the ETF. By looking at its holdings, 50% of its returns in going to depend on how bullish you are on DBS, Singtel, UOB and OCBC. If you already have these stocks in your portfolio, there would not be much of a point to buy the ETF

2) Its sector weightage

To put it more clearly, buying ETF's means you are bullish on banks, telecos, property and the Jardine group. If you think there are risks in each sector, e.g banks with slowing loan growth, telcos with the 4th operator, property with the cooling housing and china market, and jardine's slowing consumer discretionary growth, then the ETF may not be suitable

3) Total expense ratio
There's actually a hidden cost to buying ETF which is in the total expense ratio that comes to 0.3% for STI ETF. Its still way lower than those charged by mutual funds and a mini plus side is that its taken out of the dividend distribution so you don't actually physically pay the etf every year

4) Dividends

It pays a 3.3% dividend yield, so even if the index gets stuck around the 2800 level, you still get a healthy yield that can handily beat your fixed d, cpf and government bonds.

In conclusion, ETF's are a good thing to have if you don't have any exposure to banks/telcos in Singapore and can't decide what to buy in a downturn. Just chuck your cash in there (even better if you use dollar cost averaging), sit back, wait it out and get 3.3% a year in dividends.

Thursday, 24 September 2015

How my parents achieved financial freedom before 55

I feel extremely blessed that my parents are able to teach me the methods of personal finance and they have been outstanding role models by achieving financial freedom before the age of 55. 

How did they do it? 

They did not come from a privilege background, both my dad and mum didn't go to university and lead your typical average Singapore life in the 1970-1980s, where they shared rooms with their many siblings, ate chicken rice without chicken and worked part-time while studying.

Although luck as always plays a big part of it, it also came down to a fine balance of leading a simple life of wants, but having a detailed life of financial planning. So here are the steps taken by my parents which allowed them to retire at such a young age.

1. Get a stable job and grab opportunities when you can
My dad has been in the army all his life, and despite his lack of education (which means seeing his younger, more educated peers promoted above him) he managed to grab opportunities when he can. Such as getting the signing bonus, going for overseas missions, signing up SAF insurances.

This may not seem much, but an allowance here and there for going overseas, insurance savings etc etc, signing bonuses + early promotions adds up to ALOT in the long run

You can't invest without saving. Its as simple as that, and what better way to save then being stuck in Brunei for 10 months while receiving overseas allowance and pay? Even if you want to spend, where can you spend it on? Alcohol is banned, there's no shopping, no gambling, not much restaurants you can splurge on. 

This is one of the major perks of being in SAF, you get free meals, lodging (if you stay in), parking if you don't, subsidized healthcare etc etc. Even though you get a higher paying white-collar job, your pay gets eroded by eating out, parking fees, your latte and coffee, those little little things.

3. Clear your liabilities ASAP
That means housing, car loans, and yes, your kids education fees. Some people may argue that debt is a good thing, you invest your money at a higher rate of return then your cost of debt. But you have to remember, you are a retail investor. Its not worth screwing around with debt just to eke out that few % points.

4. Do everything early
My parents bought insurance for me when I was 6, and got most of their insurance early. They also made use of the SRS scheme for tax savings, investing their CPF during their working career.

5.Invest early
My mum/dads investing style involves buying every blue chip company when it started and proceed to do absolutely nothing with it. Like. Absolutely. Nothing. To the point of almost forgetting that they own the stock. 

I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett

My parents did one up and assumed the markets didn't open for the next 20 years. They got names like capitaland for $1+, keppel corp at $4 etc etc. I mean the dividends over the years would have already covered the initial cost of the stock.

If you realized the main theme about all these was 'early'. My parents did nothing magical, but by getting a stable job, resisting the urge to splurge it and then proceeding to buy everything early and get out of the way, they managed to let the power of compounding work to its fullest. No need for financial analysis, no need for degrees no need for all the fancy schmancy investment schemes. 

And they did that perfectly, no time was wasted wondering 'what to do next when the market falls' or day trade your retirement savings to oblivion, the time was better spent trying to squeeze more credit card savings, buying good groupon deals, and basically enjoying the better things in life.

P.S I can't reveal whats the total amount they have, but they have 0 debts (also no kids debt), a hefty nest egg well diversified in fixed D, stocks, bonds, ILP (yes even ILP's although i disapprove), SRS, CPF savings, children paying monthly (My sister already does it and I'm doing so when I work next year)  Along with having coverage with every single hospitalization, critical, death illness insurance plans.

Tuesday, 8 September 2015

When to use P/E, P/B, EV/EBITDA

These are the 3 main valuation tools that people use when trying to quantify the value of a stock. But people have been applying the wrong tools to the wrong type of stock.

For example, if you apply P/E to Olam or Capitaland (during certain years) and the stock looks ridiculously cheap which may result in you buying the wrong stock and the wrong time.

P/E - (Price to earnings)
It can be seen as how may multiples are you willing to pay for one years worth of earnings (earnings per share). This is the most widely used multiple which is used for companies with constant earnings, which can be found by seeing whether your stock falls under any of the 3 categories below
  1. make money by selling inventory
  2. Has a 'moat' in a mature industry
  3. provide constant services

Make money by selling inventory
This is probably the easiest way to tell whether the firm should be valued by P/E. As firms that have sell investor mainly have consumers as their customers, their earnings are generally quite stable which allows for a proper P/E calculation

Stocks include: Thai Bev, Breadtalk, Super Coffee, SPH, Osim

Has a 'moat' 
This usually ensures that their customers are captive and that the businesses are in a monopolistic position which allows them to generate constant earnings

Stocks include, SGX, Dairy Farm, Comfortdelgro

Provide constant services
Same logic as selling inventory

Stocks include: SIA engineering, ST engineering, kingsman, silverlake, Raffles Medical

Even such the P/E for all these companies shouldn't be compared to one another (For example Osim P/E is about 14x while SGX is 20+)

In general the more resilient the stock is to downturns + the larger its moat the higher the P/E

So F&B stocks with a good brand name (Thai Bev), Medical stocks which are resilient to downturns and have a moat (Raffles Medical) can easily trade up to 20x. 

P/B - (Price to book)
The multiple that you are willing to pay for the book (net asset value of the firm). This is mainly used for firms that rely on their book (net assets) to generate profits.

These firms usually make rely on their long-term fixed assets to make money. This is unlike firms that use P/E where they rely on the stuff they make/services to earn.

This involves having a expensive/huge asset that the firm mainly relies on to generate its earnings, or a backlog it has  (projects that the firm won but will take 5 years to complete) which can be converted to earnings in the future.

These stocks include

Airlines -  Earnings rely on how many planes they have
Offshore & Marine - Itt takes 5-10 years to fulfill an order, hence a huge backlog that can be converted to earnings
Property  - Firms have properties that aren't launched and a 'land bank' which can be developed into future profits
Banks - The loans (assets) on their books is how they generate profit
Commodities - Your number of plantations will determine your potential earnings

Here's the shocker, in general most firms are supposed to trade at a discount to P/B (except for banks). So everytime you see a stock that has 0.8x P/B please don't rush in and buy it. The reasons are..

Airlines - Planes have a high depreciation (asset value drops), so your P/B won't look that attractive after some time. Also, airlines don't make any bloody money wth.

Offshore & Marine - Oil drillers have a right to cancel/delay their orders, which means lets say if Keppel Corp has 5billion worth of orders they can deliver over the next 5 years, it may shrink to 3 billion of orders stretching out to 7 years. (Which is whats happening now)

Property - Property that aren't launched doesn't mean it will get 100% sales. Also the cost of land bank + developing the land may be less than the total profit that could be earned from the property. 

Banks - Some loans may default, but since SG banks have a low default rate, they usually trade above book 

Commodities - Firstly, who the hell can predict the weather, how good the harvest will be and the exact number of cows, farmland, plants, trees, coca does the firm actually have?

EV/EBITDA - (Enterprise value to Earnings before Interest, Tax, Depreciation and Amortization)
To be honest, only people the want to look all sophisticated use this when valuing a stock. Anyway its mainly used for companies that have high start up costs and then have very little costs afterwards (and can afk while making money)

Generally used for telcos and casinos, where you spent a huge amount of cash building up a network or casino, and life after that is pretty much on autopilot.

Sunday, 6 September 2015

8 ways to vote like an investor

Its election time, and politics are everywhere in the air! Not going to take a side, but heres a light-headed post on how one would vote if they solely base on investing logic and quotes.

P.S: Yes I know that voting based on investing logic alone is not a wise choice to do, since there's so many other social/personal issues to consider. 

But if you buy a share (pay taxes), receive the company's annual report (GDP numbers), get dividends (GST Vouchers), aren't you a shareholder (voter), participating in this AGM? (Elections)

Ok the comparison is not exact but close enough. We are closer to a worker/shareholder-ish type of person. We like the company to make money, but we also like our wages to go up, which means the company makes less money. Hmm.

Anyway here's 10 things to keep in mind if you are voting like an investor!

Earnings Growth

1) Past performance is not a good indicator of future performance
To be fair, investors assign a higher P/E multiple to company's that showed solid historical growth. 

To be unfair, investors mostly care about the company's plans for the future and its future earnings. Not its past numbers, nor its miraculous growth from a fishing village penny stock to a blue-chip company. 

If that's the case, we should all be buying Osim.

Yeah, I'm an ungrateful investor for selling out a stock even though it gave me 300% returns within a single generation!

2) How will the company fund its future growth?
1) Current retained earnings?
2) Debt?
3) Share issuance?

Would you be alright if the company issues new shares to increase its total number of shares outstanding to 6.9 million which dilutes your stake?
Or would you rather its funded by debt, retained earnings, or a mix of all 3?
Isn't the raising equity the most expensive option?
Would the dilution be worth the future growth?
What if the foreign ownership of the company increases >50% and they sell out at the first sign of trouble?


3) A company's stock usually falls sharply after an accounting scandal/accusations
Take a look at Noble stock price, tanking on accusations from some anonymous twitter handle.

Whether its true or not, investors are quick to sell out when there's a whiff of accounting irregularities (Especially if you submit your financial report late, especially especially when your surplus is suddenly reported as a deficit) 

To be even more unfair, Mr Buffet states 'There is never just one cockroach in the kitchen'


4) A company should only retain its profits if its able to reinvest it at a higher rate of return for its investors than paying it out as dividends.

Plus points if the company has a subsidiary Company to Invest its profits Globally for you. Even Mr Buffet doesn't pay dividends.

5) A company usually allows a person to reinvest his dividends in shares or just take the cash 

Even though every year the form my company sends that allows me redeem my dividends in cash or in stock goes straight into the trash (I don't like odd lots). I would find it weird if the company stops doing so one day and reinvests all my dividends at a 2.5%/4% or whatever rate. 

Come on, at least give me the option of throwing the form in trash. It gives me a sense of power.

6) A company that borrows money to pay dividends isn't really sustainable
Sure its all fun and games when the company gives you $500 in dividends a month, but watch out when its debt/equity ratio balloons. (Especially when the company already has debt > 100% of GDP)

Corporate Governance

7) A company should have independent directors on the board, especially for the compensation committee
Don't look at me, this is stated in my notes. Corporate governance also states that the CEO/Chairman of the board should be different people, even if they are the founders (or the founder's sons) of the company. 

8) Should a company provide food during its AGM?
Hmm maybe chicken rice packets are welcomed, but offering shuttle bus services to the AGM is stretching it abit. Heres Asiaone stating that 'AGM is not an annual general makan'


I guess the best way to round up all this is to ask ourselves whether Warren Buffet would buy Singapore if its a company, since he has a reputation for only buying good quality business

(1)    Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units)

Check, our GDP is way higher than this

(2)    Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),

Check, we have a 50 year old track record, something Warren would appreciate

(3)    Businesses earning good returns on equity while employing little or no debt

Half check, although our returns (GDP) per equity (workforce + capital) is pretty good, we do employ alot of debt.

(4)    Management in place (we can’t supply it),

Check, ok at least by next week it should be check

(5)    Simple businesses (if there’s lots of technology, we won’t understand it),

Not really, we are moving into biopolis, fusionopolis and all that high tech stuff.

(6)    An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

I really hope there's no offering price. Although it be pretty cool if we get bought out and the cash gets redistributed to everyone.

I guess Warren would rate this country ok!

Wednesday, 2 September 2015

Buffet only has 3 types of quotes

We have often seen Mr Buffet's quotes being thrown left right center in all occasions, and it seems like his quotes are telling us a lot of things. But all his quotes actually fit into 3 main categories.

Don't anyhow invest - Stop doing stupid shit.
Chill - Stop predicting, thinking too much about share price movements
Generic advice about value - His not going to give you all his secrets

Out of the 3 categories, the one I like best is about telling people not to anyhow invest?

Why? Because we keep doing the same mistakes over and over again. Its all well and good to quote warren about how to make money (buy stocks below intrinsic value, economic moat bla bla bla), but most retail investors forget the 1st step of making money is not to lose it.

Here are my top 3 favorite quotes:

“The first rule is not to lose money. The second rule is not to forget the first rule.

Everyone states their goal is to earn double digit returns/beat the market/whatever. For my personal portfolio, it has always always been 'don't lose money'

When I analyze I stock, I always start of with, is this cheap enough? Why the hell am I paying for stock when its trading so and so discount/premium to its 5 year average PE? After that then I start looking at the company's prospects going forward and its financials.

Its like jobs, wanting a job that has good career prospects, high pay, fulfilling out is all good. But my overriding factor is 'I don't want to wake up dreading going to work 5/7 times a week' or 'a job that makes me dread the least when I wake up'

Ground yourself by looking at the value/downside first, then we talk about making money

“I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that …I’m paying $32 billion today for the Coca Cola Company because… If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money.“

I stated this in the previous post, but grounding yourself is important so I'll say it again, before buying a stock, write your reasons why you are buying this stock, and then read and ask yourself 'Am I really really going to put $5,000 of my hard earned money because of these few lines?'

Additional questions include

'Where the fuck did I get that 10% earnings growth number from?'

'Did I really believe that the company is going to turnaround with new store openings, like how do I even know that the new stores will succeed. Faith? Crystal Ball? Good management?

'Ok so the company has a good cash flow management and balance sheet, so what? 400 other companies have that. Am I really going to buy it because its historical fundamentals look nice?

'Why am I buying it at $5? Why not $4? Whats my selling price? $10?, $1, 'see how?'

Is my entire argument based on 'commodities are finite and the world population is growing so I should buy commodities because... demand and supply'. You'd be amazed how many people make this type of argument (yes even me), other variations include

'this company is going to china, I like china growth'
'more and more people will take the mrt'
'property values in Singapore always go up because not enough land'

If you want to make this argument, fine. But make sure this is point 1 out of the 20 reasons to invest

“It is not necessary to do extraordinary things to get extraordinary results.”

This quote along with 'step over 1 foot bars', 'know your circle of competence', 'I get maybe 2-3 good ideas a year' mean the same thing

Don't know anything about commodities? Screw it, don't buy olam. 'Have no idea what capitaland is doing is china?' Fuck it then, I rather play dota.

Stick to what you know, if you don't know anything stick to easy to understand companies like consumer goods. Warren Buffet gets about 2-3 good ideas a year where he goes all in, and sometimes even less, so I'm not sure how can people come up with 10-20 must buy things in 6 months.

When you don't know what to buy with your money, don't buy. Losing money by inflation is better than losing money by buying the wrong stock (+ you still get hit by inflation, double sucky)

Anywhere here is the rest of the quotes I can find on Warren Buffet that can be classified into these few categories

Don't anyhow invest - Stop doing stupid shit.
  1. “Never invest in a business you cannot understand.”
  2. “We will only do with your money what we would do with our own.
  3. “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
  4. “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
  5. “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
  6. “The first rule is not to lose money. The second rule is not to forget the first rule. 
  7. “It is not necessary to do extraordinary things to get extraordinary results.”
  8. “You only have to do a very few things right in your life so long as you don't do too many things wrong.”
  9. “I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that …I’m paying $32 billion today for the Coca Cola Company because… If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money.“
  10. “You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.“
Chill - Stop predicting, thinking too much about share price movements

  1. Always invest for the long term.
  2. No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.
  3. “We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”
  4. “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”
  5. Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.”
  6. “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.
  7. The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch.
  8. For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.”
  9. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Generic advice about value - His not going to give you all his secrets
  1. “I am a better investor because I am a businessman and a better businessman because I am an investor.”
  2. “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
  3. “Buy companies with strong histories of profitability and with a dominant business franchise.”
  4. “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
  5. “The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”
  6. “I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.“
  7. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price

10 ways to 'chill out' during the market downturn

Yep, I have jumped on the bandwagon on touching on the market downturn. Its ugly, its nasty but it has been a long time in coming.

DBS trading at 2x P/B along with STI hitting 52 week high back around April with negative growth outlook should have sounded the alarm bells.

But anyhow if this is your 1st market downturn, heres some ways to chill out during the turmoil.

1. Stop logging into your brokerage
I make it a point to check my portfolio once a week or whenever i feel like it.

Unlike my friends that like to 'monitor' their portfolio (like what the hell is that supposed to mean), I stick to the plan of

1) Knowing my buying/selling/taking loss/profit price before I bought the stock.
2) Set alerts when it hits/gets close to these prices
3) Allow an indulgence of 3 days of looking at the stock price after i bought/sell it
4) Delete the shit out of the stock from my price watchlist
5) Do something when my price alerts tell me to

(Just to clarify this still means keeping updated about the company's news, but not the price)

2. Check out your friends facebook feeds
No really, its fun. Suddenly everyone becomes an expert on China and people that don't follow the market all have a view.

3. Join the SGX bashing on their facebook page
Gotta vent your anger somewhere.


4. Record this down in your diary
During the EU crisis, I had a nice screenshot of my portfolio being down -20% which went back up to par few years later (eked out a small gain). It always good to remind yourself of the good/bad times

5. Read Warren Buffet quotes
Here's a link of not just the top 10, top 20, but 101 warren buffet quotes to soothe the soul

6. Count how many times Warren Buffet gets quoted in blogs during a market downturn
Why is it that no one quotes him during roaring markets thou?

7. Stop doing portfolio allocation
Ok bit 'controversial' here, but I don't really focus much on 'adjusting' portfolio allocation, because it means knowing whether stock markets are going to tank or recover, which I have zero butt shit clue.

My style of portfolio allocation comes naturally, when stocks are too expensive I don't buy and end up holding lots of cash, when stocks are cheap I buy and I have no cash.

And sometimes I have too much cash because I'm too lazy to hunt for bargains. Tadaa

I think Mr Buffet hits in on the nail when he says
“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

Yes I know he mostly refers to sticking to your circle of competence, but it also means stop looking for bargains that don't exist. Even if I've been in the market for 5 years, I have plenty of cards left to punch

8. Check out your friends facebook feeds
Sorry but its hilarious. Just a thought, if its time to sell when your taxi driver gives you stock tips, is it time to buy when you see your friends that don't invest panicking?

9. Update that shopping list
Remember the time when you did analysis of lets say comfortdelgro and your target price was @ $2.50 while the stock was at $3 and you started doubting yourself and revising your target price upwards?

Nows a good reminder of why you should not do that. Its fine when your buying price of a stock is 20%, 30%, 40% off the current price for a few years. When the prices come down it will come down, don't revise it upwards/downwards to make it more 'reasonable'

(P.S no I don't have comfortdelgro, and my target price is not at $2.50 either)

10. Take note of everyone's predictions
Whats more fun then predicting the market? Watching people predict the market!


Tuesday, 1 September 2015

Current Yield Preference shares/bonds in the market

Thinking of buying sgs bonds? Here's just a simplified table of the 'yield to call' (assuming they get redeemed at their optional callable date at par) on the other corporate bonds, prefs that are available in the market currently

It's mostly useful if you have
  1. Holding power
  2. Just want to park cash somewhere until maturity
  3. Take on a bit more risk, and lock in your money at a higher rate and lower 'maturity' date than the sgs bonds

My own personal take
  1. We may probably see more last grasp attempts of more companies issue bonds before rate rises
  2. Which means yields on the current issuance may get more attractive.
  3. Case in point: Genting Perps dropped a whopping 8% since aspial launched its new bonds
  4. Even so its always good to pick up some of these to give yourself a peace of mind if you are able to hold to maturity
  5. OCBC 5.1% matures in 3 years and has a YTC of 3.48%, not too shabby when you compare it with a fixed d
  6. I only invest if the cash yield is at LEAST 1% higher than my cost of funds.
Anyone else have some of these in your portfolio? Any thoughts on adding to them now in times of volatility or waiting on the sidelines for yields to get more attractive when I/R increases?