Wealth in a pic

100 Words of Wisdom?

While many have asked, why do I have to be so frugal, my usual answer was a casual “Because I have no money.” My true answer is more in the tune of what Pablo Picasso said, “I’d like to live as a poor man with lots of money.” Many may not comprehend this, but with this sage advice, you’d be much better off… 

The exact opposite is a reckless lifestyle that is guaranteed to result in financial trouble. Even so, many Singaporeans continue to live beyond their means to get noticed and impress others. But hey, others

DON’T REALLY CARE!!!

The Art of Investing (Adapted from The Art of War)

This is the first time I've read The Art of War by Sun Zi. However I believe what was written as a philosophy for war can also be used in investing.

孫子曰：兵者，國之大事，死生之地，存亡之道，不可不察也。"

Sun Tzu said: The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.

Similarly, the art of investing is vital to your wealth. It is a matter of wealth and poverty, a road to security or to ruin. Hence it is a subject which cannot be neglected.

夫未戰而廟算勝者，得算多也；未戰而廟算不勝者，得算少也。多算勝，少算不勝，而況無算乎！”

Whoever makes many calculations prior to war wins the battle, whoever makes little calculations prior to war loses the battle. Therefore, many calculations lead to victory, and few calculations to defeat; how much more with no calculations at all!

When it comes to investing, plans, analysis, calculations are required. The more analyses made, the better your decisions, and the higher your chance of winning the game of personal finance.

Sold F&N

I've just read through the Crcular to Shareholders from F&N dated 6 Sept 2012.

Many whould have known that F&N has agreed to sell its shares in APB to Heineken @ $53.00 per share.
This would amount to a net gain of $4,770 million for F&N Group.

Seems good? Well, look again at the net profits attributable to the Sale Interests, which amount to $331 million or 48.2% of the Group's 9-month net profits, or 36.1% of its FY estimated net profit. As such, there will be a drastic 36.1% drop in profits from here on....

The board intends to distribute approximately $4.0 billion, representing approximately 84% of the gain on disposal by way of capital reduction. What they will do is cancel 1 share for evey 3 shares held by shareholders (rounded down to nearest 10 shares), and paying $8.50 per share for the cancellation.

This would mean that I will lose a third of my shares but gain $8.50 per share for each share cancelled.

According to the circular, after the proposed transaction and capital reduction, the NAV per share will rise from $4.94 to $8.37, EPS will also rise from $0.457 to $0.595 before adjustment. However, I believe the earnings growth potential will be greatly hampered without APB. Prior to the sale of APB, my conservative intrinsic value of F&N was $8.60, and since it hits $8.60 today, I sold all my F&N shares @ $8.74 for a 240.94% profit. Granted the improved EPS and NAV/share values, the outlook of F&N don't look as good to me now.

Will continue to put it in my watchlist. Meanwhile, I'm searching for more wonderful companies at valuable prices.

Cheers and God Bless

Sold Sakari

I've just sold my holdings on Sakari for a total profit of 32.57% and bought Ezion @$1.10.

Reason for selling: Sakari will remain flat for a while, due to the madatory offer by PTT.

Reason for buying Ezion: Really conservative intrinsic value estimate of Ezion is between $2.16-$2.44. At $1.10, the MOS is so great that the potential profit (conservatively) is 109%. Will probably become my zero-cost stocks.

Putting money in the bank

Recenty I've been asked by person A, "How do you earn more money than putting money in the bank?"

My answer: Putting those money in the bank!

Person A: So how does putting money in the bank earn more than putting money in the bank? Aren't they the same thing?

Me: The answer lies in the definition of "putting money in the bank". "Putting money in the bank" to most people means putting the money in fixed deposit or savings/current account with the bank. To me, putting money in the bank means investing in the bank.

Person A: Won't that be risky?

Me: Do you believe that your deposits with the bank will be safe? That's the reason why you put  deposit with the bank isn't it?

Person A (after some thinking to make sure I'm not asking a trick question): Yeah?

Me: So why will investing in the bank make it more risky than your deposit?

Person A: I don't know, I just think investing is risky.

Me: Banks use your money to lend others, they then make money from the interests. If they are not operating safely, whose money will they lose?

Person A (after some thinking again): Mine?

Me: Yes, and Singapore banks have business models that place them in the #1 to #3 safest banks in Asia. I too, believe they are really safe. So you continue to place your trust in the bank keeping your money safe, why don't you invest in the bank to take a cut of the bank's profit from lending your money to others?

Person A: Woah you damn smart!

Me: You did not think out of the box, and I'm not smart.
__________________________________________________________________________________

Think about it, DBS, OCBC, and UOB are the safest banks in Asia.
Don't believe me?: http://www.gfmag.com/tools/best-banks/11929-worlds-safest-banks-in-asia-2012.html#axzz25hpEpOLA

So instead of placing your trust in the bank, believing that the bank will keep your money safe, why not invest in the bank, so that you own a part of the "most legal loan shark" business and collect a cut of that profit regularly?

Starting a new year with new accounts

I’ve just started to really take my accounts seriously. Not that I do not keep track of where my money is flowing, but I find that it is not thorough in my accounts. I realised that my returns for my paper assets far exceed my expectations… I wanted to re-start all calculations as I've made several changes and modifications to my excel sheets. So here's the results of my performance since Jan 1, 2012. Cheers!

Savings

XIRR (Since 1 Jan 2012): 0.00%

Banks have not paid interest yet, especially not in the middle of the month. Don’t expect my savings to soar though, since banks give <1% interest p.a. So if you think putting money in the bank is the best way to keep your hard-earned money, think again!

Inflation rate in Singapore for 2010 is 2.8%, and expecting to hit 5% this year. (http://www.singstat.gov.sg/stats/keyind.html) So unless your money is making more than 5% returns last year, you’re losing money to inflation.

Portfolio

XIRR (since 1 Jan 2012): 901.87%

Some may ask why I use XIRR instead of CAGR. Here’s my CAGR: 3996.11%

Reason for the big difference? I’ve injected cash on 9 Jan… So I’ll stick to XIRR for more accurate tracking of my performance.

Investopedia explains ‘Compound Annual Growth Rate – CAGR’

CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an (initial) investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Don’t worry if this concept is still fuzzy to you – CAGR is one of those terms best defined by example. Suppose you invested $10,000 in a portfolio on Jan 1, 2005. Let’s say by Jan 1, 2006, your portfolio had grown to #13,000, then $14,000 by 2007, and finally ended up at $19,500 by 2008.

Your CAGR would be the ratio of your ending value to beginning value ($19,500 / $10,000 = 1.95) raised to the power of 1/3 (since 1//# of years = 1/3), then subtracting 1 from the resulting number:

1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333).

1.2493 – 1 = 0.2493

Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon.

Read more: http://www.investopedia.com/terms/c/cagr.asp#ixzz1k3sGwNis

However, it doesn’t work if you inject or withdraw cash, affecting the initial value

IRR/XIRR (internal rate of return) will be a better indicator as it takes into account capital withdrawals and injections.

Here’s why and how it works: http://www.jagoinvestor.com/2009/08/what-is-irr-and-xirr-and-how-to.html

Preferred stock

Preferred stock, a.k.a. preferred share, preference stock, preference share.

Definition: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

extracted from: http://www.investopedia.com/terms/p/preferredstock.asp#ixzz1X5HuqypM

In general, preferred shares are a form of corporate debt that has some qualities of common shares as well as that of bonds. The main characteristic of preferred shares are that they pay a fixed return to the holder at regular specified intervals, usually in the form of a dividend. The dividend payment typically does not fluctuate or change over time as it is determined at the time of issue, unlike common shares. However, there are rate resetting preferred shares as well (where the payment is calculated based on a predetermined formula).  The preferred share represents partial ownership in the company just like common shares do. Often, they are redeemable by the corporation after a specified date.

Here's how you read a preferred stock listed on the SGX:

eg. DBS Bk 4.7% NCPS 100

• DBS Bk - The company that offers the stock, in this case, DBS Bank.
• 4.7% - The dividend payout as a percentage of the initial offer price PER ANNUM, in this case, 4.7% of $100 = $4.7 p.a.
• NCPS - Stock type. NCPS means non-cunmulative preferred stock. If they did not declare a dividend last year, you cannot receive what they owe you last year.
• 100 - Quantity per lot (no number = default lot size of 1,000 shares), in this case, 1 lot = 100 shares.

Preferred stock is the preferred choice for growing money compared to fixed deposits as they tend to have a higher return of investment. Why?

The following are the links to the deposit rates of the various banks:

DBS - http://www.dbs.com/ratesonline/Pages/fdsgd.aspx

OCBC - http://www.ocbc.com.sg/personal-banking/tools%20and%20info/Toi_Rates_Dep_Listing.shtm

UOB - http://www.uob.com.sg/personal/deposits/fixed/singapore_fixed_deposit.html

Citibank - https://www.citibank.com.sg/gcb/static/deposit_boardrates.htm?eOfferCode=SGTDULW

Among these banks, OCBC and UOB both give the highest return of 0.7% p.a. for a deposit of >$500,000, for at least 2 years. UOB offers a promotional 0.938% p.a. for a deposit of >$40,000 for at least 3 years at time of posting. Hence the returns of fixed deposit from OCBC and UOB are 14.97% and 27.80% for 20 years respectively. Lets compare these to their respective prefered stock...

OCBC Bk 5.1%NCPS 100

Last traded price: $106.00 (5 Sep 2011)

Dividend yield: $5.1/share p.a.

Real Return: $5.1/$106 = 4.811% p.a

Minimum "deposit": $106 x 100 shares = $10,600
Total Yield in 20 Years: 4.811% x 20 = 96.22%

UOB 5.05%NCPS 100

Last traded price: $105.00 (5 Sep 2011)

Dividend yield: $5.05/share p.a.

Real Return: $5.05/$105 = 4.810% p.a

Minimum "deposit": $105 x 100 shares = $10,500

Total Yield in 20 Years: 4.810% x 20 = 96.20%

As you can see, preferred stock far outpace fixed deposit in terms of returns.
Of course the risk is that the banks may choose not to pay dividends for the year. Historically though, all 3 banks have been declaring regular payouts even during the great recession of 2008-2009.

6 keys to finding companies with economic moat

1. Solid Identity
When investing in the stock market, identify companies with a solid identity. Differentiation of the company from the rest of the players in the marketplace is one way to spot a company with a solid economic moat. When stock-picking companies, identify companies with a distinctive and outstanding look, brand name or brand symbol because these products ensure the companies’ profitability, which makes your investment profitable as well. Examples of strong global brands who were able to give a strong brand identity are Coca-cola, McDonald’s, Mercedez Benz, Apple, and Google.

2. Exclusive Rights
Investing in a company with exclusive product right is always a good idea. A patent or copyright grants a company exclusive rights to manufacture and market products, which translates to a monopoly of the market for the duration of its patent or copyright, which is a considerable amount of time. This is indicative of a considerable economic moat, which makes it a good choice for investing because it ensures a profitable investment. When stock-picking companies, bear in mind that multinational pharmaceutical companies would have products with exclusive rights.

3. Looking to the future
A company with explicit long term strategy is a company that visualizes its growth and the strategies necessary to achieve it. It also plans for unforeseen circumstances that can hamper the company’s growth. When stock picking and making decisions on investing in a company, the company’s future directions accounts for additional economic moat.

4. Deterring customer switching
With the many choices available in the market today, switching products and services has become a common practice among customers. When the cost for switching is negligible, customers are more open to vary their product consumption. This is one thing to look into when stock-picking and investing. Companies and products with a higher cost for switching will have stronger economic moat. When switching is hampered by a high cost, product loyalty is assured, and high stock performance can be expected. Mac products for one, creates this scenario. Since you have to invest on software, which is exclusive for Mac products, the urge to switch is significantly curbed.

5. Big Capital
Products needing a high capital to develop, maintain, and improve also strengthens its economic moat. Companies with a high capital requirement guarantees limited competitors. When there are limited competitors, the customers will also have limited choices from where to source their products. Example of which are cable and telecommunications companies.

6. Low capital
On the other end of the spectrum, low cost of production produces products, which can be passed on the consumers at a lower and more competitive price, opening itself up to a broader consumer population. This increases the product’s economic moat and should be considered when stock-picking. Before investing though, you also need to analyze how varied the market is. In a varied market, a lower prize can also predispose frequent switching from customers.

Leverage, the Double-Edged Sword

Most brokers provide leverage to investors and traders alike. So what is leverage?

The textbook definition of "leverage" is having the ability to control a large amount of money using none or very little of your own money and borrowing the rest.

For example, you deposit $10,000 in your trading account. You buy 2 standard 100K lots of EUR/USD at a rate of $1.0000. The full value of your position is $200,000 and your account balance is $10,000. Your true leverage is 20:1 ($200,000 / $10,000)

Let's say you buy another 2 standard lots of EUR/USD at the same price. The full amount of your position is now $400,000, but your account balance is still $10,000. Your true leverage is now 40:1 ($400,000 / $10,000)

Let’s say the price of EUR/USD increased by 2% to $1.0200. Your 4 standard lots of EUR/USD will now be worth $408,000. If you closed the position, you would have made $8,000 in profits which equates to a 80% profit.

However, suppose the price of EUR/USD fell by 2% to $0.9800. Your 4 standard lots of EUR/USD will now be worth $392,000. If you closed the position, you would have made a loss of $8,000, depleting your account by a whopping 80%!

Your profit/losses are calculated using the following:

(true leverage used)  x (% change in market price)