Is that stock a bargain or a value trap?

Not long ago, I asked how can we tell the difference between a real bargain and a value trap in stock investing.


I recently came across a video by Pat Dorsey which I believe answers this question really nicely:





Thinking of any particular stock now?


Related posts:
1. 3 points in stock investing.
2. Tea with Solace: Valuation, PER and Value Trap.
3. Be cautious as we accept higher risks.

3 points in stock investing.

I like to keep my life simple. I try to avoid complications. 

Life, unfortunately, is rarely as simple as we would like it to be, isn't it?

I am sure we want to keep stock investing simple as well but can it be simple?

1.  Focus on values and not prices.
"Price is what you pay. Value is what you get."

2.  Focus on competitive advantage (economic moats).
“In business, I look for economic castles protected by unbreachable moats."

3.  Focus on having a margin of safety.
"The dumbest reason in the world to buy a stock is because it is going up."





All quotations are, of course, Warren Buffett's.

Distilled to just 3 points, stock investing can be simple. Simple but it definitely requires work.

It can be simple but it is not easy.

Some related posts:
1. 5 rules for successful stock investing.
2. When to BUY, HOLD or SELL?
3. Tea with Solace: Getting ready for investment.
4. Interview with Matthew Seah: Value Investing.
5. Why is Warren Buffett the greatest money maker?

Lending money to someone you care about? Ask questions!

Not too long ago, I blogged about how anyone should have to think like a donor if he was to be a lender of money. 

If we are not comfortable with donating, say, $2,000 to a charity, then, we should not feel comfortable lending $2,000 to anyone! To me, it is quite simple. Why complicate things?



However, a friend who took my advice to heart, quite surprisingly, told me that he lent $10,000 to a cousin recently. Now, he worries that he will not see his money again since the cousin has been borrowing from other relatives as well in the last few months.

I asked him why does his cousin need to constantly borrow so much money. He said he didn't know. Huh?

Why did he lend $10,000 to his cousin if he did not know the reason why the cousin needs to borrow? "Oh, because we are family and we are very close."

I told him to write off the debt right away. He struggled with this idea and I don't know if he has managed to do this.

It makes perfect sense to write off the debt and it is consistent with my belief.

Imagine that the money has vaporised and gone to a better place. If it should come back one day, well, go celebrate!

I am not heartless. I quite understand that there could be certain situations when we might feel obliged to lend money especially to family members.

However, as a prospective lender of money, I have the right to know why a loan is required and why the would be borrower is short of money.

Of course, knowing the answers to these questions will not guarantee loan repayment. Then, why ask the questions? 

Well, if you are asking me this question, then, my earlier point about thinking like a donor when lending money is lost on you.

Just throwing money at a problem might not make it go away. If we understand the problem, we might be able to offer a better or more permanent solution. 

If we truly care for the borrower (why would we even contemplate lending money to the person, otherwise?), we would ask the questions that need asking. 

There is nothing to be embarrassed about.

Related post:
The difference between lending and donating.

A war chest called "SRS".

I have blogged about the advantages of having an SRS account before. Basically, if we are paying income tax, we should think of contributing to our SRS account. It is quite simple.

Now, I am holding a fair bit of cash in my SRS account. Excluding what I will be contributing by the end of this year, the cash portion of my SRS account is about $60,000 now.

Some might wonder why I am not putting the money to work. Even putting the money in a fixed deposit might get me $300 a year in interest income.



http://www.ecitizen.gov.sg/Topics/Pages/Tax-free-investments-with-the-SRS-scheme.aspx

Well, I really want to keep the liquidity on hand to take advantage of any deep correction in the stock market which could happen anytime. Could something like this happen in the next 5 years? It could, couldn't it?

So, over a 5 year period, I would "lose" $1,500 for holding on to cash in my SRS account. Can I afford this? I think so. For me, this is the cost of holding on to liquidity.

However, the cost of not having liquidity could be higher since I could potentially make much more money by deploying the cash during a deep correction in the stock market.

The cash portion in my SRS account now forms one of my 4 war chests. The other 3 war chests are money in my savings accounts, money in my CPF-OA and money in my CPF-SA.

Related posts:
1. SRS: A brief analysis.
2. SRS, CPF-OA, CPF-SA. (Note publishing date.)
3. CPF or SGS.
4. Don't see money, won't spend money.

AK71 is watching Groove Adventure Rave!

I think the is some relation between Fairy Tail and Groove Adventure Rave. There is even an anime where characters from the two came together.

Love the music too!

This will be a busy weekend.

Related post:
AK71 is watching Fairy Tail.

SPH: Results are within expectations.

Some people have expressed disappointment at the final dividend of 15c per share announced by SPH. Some people have expressed disappointment at SPH's business performance. What about me?

I am neither disappointed by SPH's final dividend nor its performance because they are within expectations.

I have blogged about how we could see an annual DPS of 21c in future from SPH. If this year's interim and final dividends should become the new norm, then a DPS of 22c a year is 1c more than my lowest expectation. I also said that if I could get a dividend yield of 5% by being a shareholder of SPH, why would I be interested in SPH REIT. That was when I revealed that I increased my long position at $4.20 a share.

SPH's weaker performance when it comes to revenue from its print businesses has been discussed and, some would say, beaten to death. The pertinent question to ask is whether this weakness is going to kill SPH rapidly. Have naysayers focused too much on this and painted a negative picture that is too dramatic?

If we believe that SPH is going the way of the Dodo, then, we should not invest in it. If we believe that SPH has predictable earnings with predictable weaknesses and that its strong balance sheet is able to withstand certain headwinds, then, to be invested for a 5% yield doesn't sound so bad.

Apart from my more recent purchase at $4.20 a share, the majority of my investment in SPH are at prices much lower. Now, even with those purchased at $4.20 a share, I received the recent special dividend of 18c a share. If I do not sell these shares, I would receive another 15c a share later in December this year. That doesn't sound like a bad deal, does it?

SPH is a fortress for anyone investing for income. It is less convincing as a growth story even if we should take into consideration Seletar Mall which is still under construction. Of course, things could change in future and they very often do.

How would Mr. Market react to the results? Your guess is as good as mine. The important thing, as always, is to know what to do in any situation.

See press release: here.

Read a recent guest blog by Mike:
Fundamental Analysis of SPH.

Related post:
SPH or SPH REIT?
"My purchases last month were the highest prices I have ever paid for SPH's stock. Prior purchases were made at between $2.86 and $3.55 a share. However, believing that the management has unlocked value for SPH shareholders in this latest exercise, I am willing to pay reasonably higher prices for the company's stock."

What's for lunch?

What's for lunch? I wonder.

Hmmmm.... I know, take a bite and we will find out.

Tuna and cheese. Yum, yum.

Cost? Less than $1.00, maybe.

Related posts:
1. Healthy bread and healthy jam.
2. Save $1,200 a year by packing lunch to work.

Tea with Matthew Seah: Thoughts on having a regional common currency (Part 2).

Is a common currency for member nations of ASEAN feasible? Matthew goes through some pertinent points:

Economic development

ASEAN countries have highly diverse economic development stages. According to the International Monetary Fund (2011) Singapore and Brunei, the richest countries in ASEAN, has a GDP (PPP) per capita of $59,936 and $49,517 respectively. In comparison, Myanmar’s GDP (PPP) per capita is a mere 2% of Singapore’s at $1,327. In fact, the sum of GDP (PPP) per capita of the other 8 countries namely, Malaysia, Indonesia, Thailand, Vietnam, Philippines, Laos, Cambodia, and Myanmar is less than Brunei, at $43,676. 

This degree of diversity in income could make it near impossible to sustain a monetary union amongst ASEAN countries. Just like how the PIIGS of the European Union (EU) is causing the richer nations in the EU to pay for their fiscal incapabilities, the “less fiscally endowed” countries will cause Singapore and Brunei to pay for their debt in the event of an economic shock.

Economic structures and business cycles

The income differentials across countries within ASEAN also reflect the dissimilarities in the economic structures as well as business structures across countries. This could impede relative price movements and production outputs across the countries.  Singapore and Brunei is probably at a peak-contraction transition phases, while countries like Malaysia, Indonesia, Thailand, the Philippines, and Vietnam are in the expansion phase of the business cycle. Myanmar, Laos, Cambodia are undergoing the trough-expansion transition phases.

The business cycle is affected by the forces of supply and demand. A country that is more exposed to the international market will thus be more affected by the global market. Civil unrest in countries like Laos and Cambodia in recent years have dissuaded investors from investing in them thus creates a void in economic growth, even a decade after the Asian financial crisis in 1997.

Stabilised transfer systems

Due to the differences in business cycles and income differentials, it has proven to be difficult to have a centralised banking system to make transfers of resources across countries. Fiscal irresponsibility also undermine the monetary cooperation of the members within the currency union as witnessed in the EU where Germany has been reluctant in bailing out PIIGS. Much reformation and restructuring in the financial sectors and government policies is required before a common currency could be adopted.

Legal, cultural, and linguistic barriers

South East Asia is home to myriad cultural and linguistic differences. Unlike Singapore which promotes mutual respect and racial harmony, as well as having a common working language (English), the other ASEAN countries have been intolerant to other races and religions as can be seen in Indonesia and Malaysia to say the least. Political unrest also plagues countries like Laos, Cambodia, Myanmar, and Thailand.

It would be a high bar to reach for ASEAN nations to achieve cultural and religious tolerance. Most of the natives of the ASEAN countries also speak a different language across countries. A linguistic barrier would dampen the mobility of workers across countries. Hence, it would be hard for a Thai or Viet to find a job in an MNC in Singapore where the common language is English even if they may be highly skilled.

Yet, if the economic advantages of a regional monetary union are large, it is possible that countries may make political compromises so as to reap the economic benefits. Economic interests may persuade countries to set aside political differences and forge strategically beneficial political alliances. Economic and political integration in the region may span perhaps decades.

Though a common currency area seems improbable now, as the ASEAN nations become more developed, it may then be feasible to create a common currency area in ASEAN.

Related post:
Tea with Matthew Seah: Thoughts on having a regional common currency (Part 1).

Land Transport Master Plan 2013.

If you have yet to do so, watch this video.



Looks good. Don't you agree?

I will be 59 years old by 2030. It seems that all the improvements will be just in time for my golden years. :)

Related posts:
1. Can Singapore really house 6.9m people?
2. How to get free rides on buses?
3. Tea with AK71: Nightmare at Bugis.

Tea with Matthew Seah: Thoughts on having a regional common currency (Part 1).

The Euro is a common currency for members of the European Union. When it was implemented, there was much hype on the new currency. However, over the years, the member nations are in a state of inequality in income, welfare, employment, prices, etc.  Is it really feasible to have a common currency? Should ASEAN have a common currency like the Euro? 


With the integration of our stock exchanges, one might be thinking about whether a common currency is feasible in ASEAN, especially those in the upper echelon within each member country in ASEAN. (I think policy makers in Singapore are probably thinking of integrating, and they are using the European Union as a case study.)

I would go through the pros and the cons of having a common currency. Let’s start with the advantages:

A common currency creates ease of trade and investment among countries under the common currency area. This allows for the facilitation of trading of material goods as well as services, thereby promoting income growth within the region, by the reduction of transaction costs in cross-border trades, removal of exchange rates’ bid-ask spread, and the removal of the exchange rates’ volatility. 

A single currency also implies having a central bank (like that of the European Central Bank). Having a central bank with note-issuing powers provides the necessary liquidity to cater for inter-ASEAN payment using a single currency.

Under a floating exchange rate system, volatility in exchange rates tends to be disproportionately greater than the underlying economic fundamentals of the affected economy. We can see this in the day to day fluctuations in the exchange rates between member countries even though the economy of each country is pretty much the same (just like a business, the underlying fundamentals of a country takes a long time to change, perhaps even longer than individual companies). This volatility creates much uncertainty, which in turn, creates unexpected losses and diminishing returns on investment. As a result, a floating exchange rate system discourages cross-border trade and reduces overall economic growth, especially among small and medium sized enterprises. A common currency can therefore potentially negate the adverse effects of having a floating exchange rate system, where there is no worry of potential losses caused by exchange rate changes.

A common currency area allows factor mobility within the ASEAN region, factors such as labour and capital. As such, individual ASEAN nations can focus on developing their comparative advantage while workers immigrate through the region to countries where the workers feel can develop their niche in specialisation. Wages and price flexibility further improves labour mobility within the region.

With a single currency, a consumer can easily compare prices of a product between countries, creating efficiency in market pricing. Thus a single currency would create a more uniform price within ASEAN and enhances competition among business entities.

Skilled labor and experts in various fields such as pharmaceuticals, petrochemicals, finance etc. can better serve member states and provide their expertise to benefit the region as a whole.

Although there are benefits, there are many challenges and obstacles hampering the integration of a common currency area in ASEAN. It is also not feasible for ASEAN to have a common currency area for now. In order for a common currency area to be successful, the member states must have similar business cycles, economic development and structures, absence of legal, cultural, and linguistic barriers that would limit mobility, wage flexibility, and a stabilised transfer system.

In Part 2, Matthew considers the challenges to having an ASEAN common currency: Part 2.

Related post:
Mr. Lee Kuan Yew on the Eurozone crisis.

Healthy bread and healthy jam.

No Trans Fat. Filled with rolled oats and raisins.
Price: S$ 3.00 for a 400gm loaf.

 PLUS



No additional sugar. Healthier choice!
Price: $8.85 for 2 jars of 284 gm.

 EQUALS

 

Yummilicious lunch!
Price?
You say leh?

Related post:
Afternoon tea break.

Is it OK to underperform the market?

Some mutual funds require fund managers to stay fully invested. Sometimes, large investors in a specific fund stipulate that the fund avoid holding cash.

Mr. Will Browne, a manager of Tweedy, Browne Global Value Fund whose fund holds nearly 17% cash said he pushes hard against such demands.

He prefers to buy companies at prices that are lower than what an informed buyer would pay in an acquisition. If he cannot find them, he is prepared to lag behind market returns for a while.

Source:
The Business Times, 9 Oct 13, page 36

Sounds familiar?

"In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued."

Source:
$15,000 passive income. To pursue or be pursued?

It is OK to underperform the market in the short term. Don't feel compelled to put all our money to work here and now. It is more important that we have the resources to load up on undervalued stocks as and when they appear in future.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” Benjamin Graham. In the long run, the true value of a stock will be reflected in its price. Don't be too bothered with the short run. The long run is what really counts.

Related posts:
1. When to be fully invested in the stock market?
2. Little Book of Value Investing.

Romance of the 3 Counters: Blumont, Asiasons and Liongold.

Romance of the 3 Kingdoms, despite the elegant name, is about a bloody past in China.

Blumont, Asiasons and Liongold remind me of the 3 sworn brothers, Liu Bei, Guan Yu and Zhang Fei. Are the 3 counters just just down on their luck? Could they not regain the lofty heights attained only a few sessions ago?

Today, the counter opened at 30c, 17c higher than the closing price of 13c yesterday! To those brave enough to buy at 13c yesterday, congratulations. Short covering in progress, perhaps?

Like I said on my Facebook wall, I hope no one was exposed or overly exposed to the carnage. I wonder if people would look back and romanticise this whole episode when it finally ends.

Of course, I also wonder if there will be an episode 2.

Blumont Group Ltd, Asiasons Capital Ltd and LionGold Corp Ltd have shed up to S$8.7 billion ($7 billion) in combined market value since Thursday's close, transforming the companies back into the penny stocks that they once were before the strong run-up in their shares this year.

Source: REUTERS

Dinner with AK71: Ben & Jerry's CCC Dough.

Haven't had ice cream in a long while. This is one of my favourites:

I was watching TV at the same time and...

Argh!!! What happened to all the ice cream? Did I do that?

Bad AK! Bad AK!

OK, I must do something about it. Some Genmaicha?

Better. ;)

Related post:
Genmaicha.

$15,000 passive income. To pursue or be pursued?

Regular readers know that I would never tell people what to do. I am not qualified to and neither am I allowed to. Partly for the same reasons, I have declined invitations by a few readers to conduct talks for private groups or to have courses for the public.

Of course, we know that there are many investment courses out there and, recently, there has been discussion as to whether the authorities should step in to regulate these.

R Sivanithy says it well in a column in The Business Times recently that we "should always be leery of claims of fantastic performance that come with profit guarantees and no risk. After all, there are no free lunches in the cut throat world of finance - unless of course, one happens to be in the business of conducting "get rich quick" seminars."

So, when someone who is receiving about $15,000 in annual passive income from his investments in stocks and REITs asked me what he should buy next, I was ready to side step the question in my usual style but I decided to ask what percentage of his portfolio was in cash. He said about 3%.

Pause.


Pause.


Pause.


Pause.


The pause should be longer but I think you get the idea.

There is nothing wrong with keeping more cash even though cash is an asset that earns practically nothing in a savings account. Well, some banks offer 0.4% to 0.88% per annum now and although Garfield would say, "big, fat, hairy deal", having cash provides us with a peace of mind. The low returns for holding cash is the price we must pay for now. It is like having insurance and insurance cost money or don't we believe in insurance?

In an article I read some time ago, it was revealed that the UHNW rich in America (those with investable assets of $15m) would only feel rich if they had at least a million dollars or two in cash. That means a minimum cash position equivalent of 6.6% to 13.3% of their total wealth.

Remember, however, we could do quite a lot with a million dollars or two. If our 6.6% to 13.3% is ten or twenty thousand dollars, can it make a big difference?

In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued.

Related posts:
1. If we want peace, be prepared for war.
2. Be a real estate owner the easy way (4).
3. STE's story: The Millionaire Next Door.
... it is revealed that most high income earners are not wealthy. They make a lot of money but they don't keep much of it.

Tea with Mike: UOB KayHian Holdings.

Getting a sense of a fair price to pay: UOB KayHian Holdings as a case study.

I was screening for companies with decent yield and growth for the past 5 to 10 years, using a Google screener, and I decided to do some in depth study of UOB KayHian.

UOB KayHian pays out about 50% of earnings as dividends for almost a decade. In the earlier years, the payout was more than 50%. So there is certainty of payment, and it has been profitable for the past 12 years, and last year was actually the weakest year in a decade.

I use the spreadsheet to churn out important numbers such as revenue, NP, margins etc for the various markets, such as Singapore, Hong Kong, Thailand. I wanted sustainability of dividend income. So, I want to know what income I can expect going forward and I gave myself a few scenarios:

Click to enlarge.

At its peak, net profits is almost 3 times of what it is in 2012, if you take the average of $100 million over 12 years, it is still higher than 2012.

1H2013 results has already recovered, its 1H EPS of about 8 cents, is already almost as high as full year EPS of about 9 cents in 2012. Assume full year EPS to be 16 cents, they will pay out about 8 cents, giving a yield of 4.8%. That is my best case scenario.

If you take the average of 12 years, EPS is about 13 cents, so payout will 6.5 cents, giving a yield of 3.9%. This is my conservative scenario.

Although Singapore contribution is in decline, it is generally in line with SGX trading income revenue, which reflect the prevailing market conditions and not loss of competiveness. The “other” and Thailand operations have been bucking the trend and is contributing more despite market weakness, this could be due to its expansion bearing fruits.

Next,

Click to enlarge.

I want to get a sense of market valuation of the counter throughout the years, so I use the highest price, lowest price and average price of each year to calculate the corresponding yield and PE.

If I take away the super exceptional year of 2007, the average lowest yield is 5% and average highest yield is 9%, and the average lowest and highest PE is 10 and 17 respectively.

If I take conservative EPS of 13 cents, and DPS of 6.5 cents. I would like a yield of 6% and a PE as close to 10 as possible, and what would that price be?

To give a yield of 6% based on EPS 13 cents, price will be about $1.09 and PE 8.4.

If I am content with PE 10, I need the price to be $1.3.

To give a yield of 6% based on EPS 16 cents, $1.33. And a PE of 10 at EPS 16 cents will be $1.6.

Now, I know I will not touch this company at price above $1.6, unless I believe the next few years will see EPS growing to its peak soon. But there were not many years in which the company had above average results. So, most probably I will only start buying at $1.6 and below.

Other considerations like market share, gearing level and positive average FCF are also looked at, they are not significant enough to offer a further discount or premium.

I do like its profit resilience and rather undemanding valuation as compared to SGX and GK Goh, but given the amount of competition and my estimated calculation of only 10% Singapore Market share, I would not allow myself to pay a premium above $1.6.
 

Related posts:
1. Tea with Solace: Valuation, PER and value traps.
2. STE's story: Investment strategy.
3. When to BUY, HOLD or SELL?
4. Interview with Matthew Seah: Value Investing.

UOB Asset Management: Lost money and still losing.

Many years ago, I bought into a few unit trusts. I recently received reports from two which I have been a unit holder of since their inceptions:

Lost and still losing money. I would have been better off managing my own money.

Related posts:
1. Nobody cares about our money more than we do.
2. Tea with Solace: Common Sense Investing.
3. Is investing in stocks suitable for you?

Where to buy a shoebox apartment for investment?

If we are going to buy a shoebox apartment (506 sq ft in size or smaller) as an investment property, make sure to buy in CCR or RCR (central region). 

Don't buy one in OCR. 

As developers tried to move their stock more quickly, they introduced shoebox apartments in OCR in the last couple of years. 

As investment properties, National Development Minister Khaw Boon Wan cautioned not too long ago that this was an untested market.

According to Square Foot Research, out of 50 projects with shoebox apartments completed since 2012, 38 are located in the central region and these saw a higher rental take-up rate compared to those in OCR. They also rented for as much as $3,400 a month or about $6.72 psf (based on a unit of 506 sq ft in size).

There is also an interesting observation that short term leases of 6 months are on the rise. 6 months is the shortest lease period allowed by the URA for private residential properties.

Square Foot Research said that the high replacement rate is yet another indication that rental demand for such units is strong.

Related post:
Smaller apartments' prices more resilient.

AK and "Full Metal Alchemist: Brotherhood".

I watched Full Metal Alchemist many years ago. That was the first anime adaptation of the manga in 2003. I didn't know they had a second anime adaptation in 2009.

Another time guzzler. Lots of catching up to do! Yeah!

I like this anime. 

There is no free lunch in this world!

Believe in the principle of equivalent exchange?