Latest Articles

»It’s been so long..

It had been so long since I actually contributed to this space here on the internet. This place is the result of my efforts in being financially free and achieving my financial goals, hence neglecting this place means I was neglecting my goals. Discipline is needed to achieve my financial goals, and I must try to learn something new every few weeks, so that this place does not rot.

I am currently reading a book about dividend investing, and I would be putting up some information in here soon enough. I am also going to select a list of about 10 Singapore stocks, and I would be monitoring their share price once a month. I would be doing some analysis of the companies whenever I have the time, and all my details would be placed here, free of charge.

I am also open to any collaboration to raise greater awareness about the topics of financial planning, especially so when I would be ending my “internship” with Great Eastern soon, and will cease to have the latest know how on financial products.

Till the next time, let’s work hard.

---

»Secrets of Millionaire Investors by Adam Khoo & Conrad Alvin Lim

I borrowed this book from the library as I have read another book from the “Secrets” series of books, and in this book, they list out the ways to determine whether a stock should be bought or not, using the principles of value investing. Apart from value investing, the other things discussed are momentum investing (basically using technical analysis), and by using options. Personally I am more interested in the value investing section, as technical analysis and options are things that I won’t want to touch whilst I am still not sure of it. This book gives a good introduction to the world of options, giving me a deeper insight to it.

But what I am most interested in is how Adam Khoo selects stocks based on value investing. I will write briefly the 9 criteria that he uses to determine if a business is good to invest in, and how he calculates the intrinsic value of a stock.

1. History of Consistent Increasing Sales, Earnings and Cash Flow
Sales actually means that the revenue that the company earns. It is the money that the company earns without taking into consideration the expenses. Hence, more money must come in to the business every year. Earnings is also net income or better known as profits. It is revenue minus expenses. It is no use for a company to only have increasing revenue if the expenses are eroding the profits. By cash flow, they actually mean the operating cash flow which can be found in the statement of cash flows in the annual report.

2. Sustainable competitive advantage
This is what Warren Buffet calls an “economic moat”. The idea is that it is something like a strong brand that can ensure that people always buy their products. It might not be a strong brand name, but it usually is. A common example is Coca Cola, which every store must stock, since it is the drink that people will buy. It can also be things like economies of scale, like how Wal-Mart is the largest retailer. Or by being a market leader in an industry. The idea is that it does not depend on price. Even when prices increase, people will still use it.

3. Future growth drivers
Is there anything that can lead to future growth? This is because a business must continuously grow and earn more money, and if they do not have any development in their growth, their earnings will not grow too. A good business is one that will continually earn more and more money for it’s shareholders.

4. Conservative Debt
Adam Khoo considers this to mean: Long Term Debt < 3 to 4 times of current net earnings after tax. This means that the long term debt must be able to be fully paid up using about 3 to 4 years of earnings. If it takes too long to clear the long term debt, it is not conservative enough. It is not safe enough to have a margin of error.

5. Return on Equity must be consistently above average
If the return on equity is more than 15%, it is considered to be above average. The formula to calculate ROE is:

6. Low capital expenditure to maintain current operations
To be able to continue selling the amount of sales they have, does the company require additional capital? For some businesses, they require investments in more advanced machinery, else they will lose out and will not be able to maintain current operations. We want to look at companies that can earn lots of money, but do not need to invest much money just to maintain current operations. We don’t want much replacement of machinery or intensive research.

7. Management is holding or buying company stock
If the management is holding or buying company stock, this means that they anticipate that the stock price will rise. I remember another book saying that if management is selling stock, it does not necessarily mean that the stock price will fall. They might be needing the money to do things like buying property. But there is no other reason other than to profit if they are buying new stock. Hence it is a sign of faith in the company’s operations.

8. The stock is undervalued: Share Price is significantly below intrinsic value
This is Warren Buffett’s main idea. If I offer you a dollar, would you buy it for two dollars? It makes no sense. But if the price of my dollar is 20 cents, would you buy it? You would because you would have made a profit. So if the business is worth a sum of money, it makes sense to buy it at a discount. The method to calculate the intrinsic value as stated is too long to be explained, but it involves projecting the cash flow from operations in the next 10 years and discounting the future cash flows to present value. We also have to take into account the risk free rate, which is the rate of return for a risk free investment like treasury bills. However, I am not sure if that is a good method because it seems like the stocks I analysed are all undervalued and was never overvalued.

9. Stock Price is consolidating on a uptrend
The idea is that if it is a downtrend, it could go lower. Hence when it is a long term uptrend, you know that it won’t drop anymore. However personally I feel that this is a speculation, and is highly risky. Besides, value investing does not care if the price is at the lowest, but whether it is undervalued.

These are the 9 steps that the book has advocated for value investment. I think there is much more to be considered and more to read up on before finalising a certain set of guidelines to fill before we invest in an equity.

---

»Getting back to business

Over the past few months I’ve grown busy, and I have forgotten that I should continue my education in investment. I have forgotten that I should write down the things that I have learnt to share with other people and to let it be a way to store my knowledge so that I can read them when I have forgotten some stuff. Especially when most information are obtained from library books and I had to return them.

Hence I will be trying my best to be more consistent, adding in information as and when it is possible. Most likely I will write down the things I have read from books, so it will not be frequent. Everytime I finish a book, I will then try to get the main points which I think should be recorded, and leave out the points that I am not very comfortable in.

I hope I’ll be able to do this diligently.

---

»Price to Sales Ratio

The price to sales ratio (PSR) is used as one of the ratios to analyse stocks. The formula is given by:

It can also be shown to be:

This is true because market capitalisation is just the share price multiplied by the number of shares in the market, and annual sales is just sales per share multiplied by the number of shares in the market.

So what does it mean?

A PSR of 3.5 would mean that for every dollar of sales generated, the price is 3.5. If the PSR is less than 1, it would mean that you are paying lesser than $1 for every dollar of sales generated.

---

»The difference between trading and investment

I’m going to give an explanation on the difference between trading and investment from all the insights I have obtained from reading many different books. Those books have slowly but surely shaped my own opinion on what trading is and what investment is, and which is the style that I am comfortable with.

Traditionally, people have been confusing the term investment. It seems that as long as one puts in money expecting to make a profit, it is an investment. That is probably the modern term of investment, since we keep using it so loosely. However it is perhaps important to recognize the fundamental difference between trading and investment so you can make a rational decision on which method is the best one for you.

I subscribe to the Warren Buffett idealogy on investment. Personally I feel that the fundamentals say it in the best way. In the fundamental era that was long gone, people’s idea of investment requires careful planning. When we put money into a business so that it can run and generate more money, that is a form of investment. Hence when we do an investment, we are buying into a business. We are recognizing the value of the business and trust that the business will grow. When we purchase shares of a company, we are purchasing shares of a business. We become part-owners.

Trading however, focuses the shares as pieces of paper of which you can make money from. Traders sell stocks based on the market’s perception of the value of the stock, although it is irrational since we should be looking at the true value of the business.

Have you heard of technical analysis? From what I have learnt so far, my impression of technical analysis is that it is looking at past trends and patterns and hoping to apply the same patterns to predict the future. In short, it is actually a game of probabilities since no one can be absolutely sure how the market is going to react in another day. As such, trading is not an investment as you are buying into people’s ideas on how the market is going to function.

I would go so far as to say that trading is a speculative game, or a gamble. There is no real basis of market speculation, and it is akin to throwing your money in a game of dice, since both are games of probabilities. Investment on the other hand, requires you to have careful deliberation on where you are going to park your money. You have to have trust in the team managing the business, and you must have hope that the business will improve. Else, what is the point of putting the money in if it’s going to get lesser and lesser?

Hence in my humble opinion, the difference between trading and investment is the speculative nature of trading, whilst investment is supposed to be a very rational and deliberate process. However, I cannot say that one method wins the other, as there can be hits and misses from both sides. It all depends on what you believe. I have not personally tried both methods, so I cannot justify myself if I were to blindly support one side as better. But personally I would prefer investment as it makes the most sense to me.

---

»Features of a Bond – Face Value, Coupon & Maturity

To be able to understand Bonds, one has to understand the various types of words that will be associated with bonds. These definitions are extremely important so you understand what you are getting into, and how much money will you get out of your investment.

Face Value or Par Value
Face Value, also known alternatively as Par Value, is the amount of money that you will receive upon maturity. For bonds, it is typically the amount that you have placed at the beginning. For example, if you place $3000 into a bond at the beginning when it is launched, then at maturity, you’ll receive $3000 back.

But, does this mean that you’re getting the same amount of money back? No, because you have to understand that a bond gives you a certain amount of money each year and it has something to do with:

Coupon
The coupon is indicated as a percentage value, for example, 4%. This means that every year you’ll receive 4% of the face value that you place invested. So if you had invested $1000, you’ll receive $40 every year until the bond matures. At the end of the bond, you’ll then get back the face value, so there is meaning in investing in bonds.

Maturity
The maturity is the number of years that the bond is going to take before it matures. Bonds have maturities of different years, including 1 year, 3 year, 5 years, even 10 years and more. The longer the maturity, the longer your money is tied into the bond. Do take note that you will not be able to take the money out unless you sell the bond, but you may incur a possible loss when you do that.

Will the amount of money I earn be restricted to the coupon value? Will I have to definitely hold the bond to maturity? Is bonds risk free? The money you earn can differ, and you don’t have to hold the bond to maturity. Bonds are not risk free either. All these are possible though the buying and selling of bonds, which is a different concept for another post.

---

»Pay yourself first

“Pay yourself first” is the single concept that every book which attempts to teach people how to become rich will have. I have never read a single “get wealthy” book that does not ask people to “pay yourself first”. The concept of “pay yourself first” does indeed seem very strange. When we get our monthly pay check, aren’t we already paying ourself? Are we not already enjoying the fruits of our labour?

According to the books, “pay yourself first” merely means to allocate a portion of your pay check to yourself for your future savings needs. To make it simpler to understand, let me introduce Mr Retirement. Mr Retirement is here to make sure that you will have enough savings so that when you retire, you can still have enough to live by.

Hence, “pay yourself first” simply means you have to pay Mr Retirement first, before you pay for your internet bills, your utilities bills, your housing loan and whatever debts or bills that you have. The difference is that Mr Retirement is working for you, whilst Mr Bills and Mr Debts are not.

Can’t I just spend and save whatever is left?
Yes, you can! If you are disciplined enough to make sure you have savings that you want to pay to your retirement account, then it is perfectly fine. However this is also the same as allocating the same amount of savings to yourself first. “Pay yourself first” comes about because we got so used to spending all our money when we got our first paycheck that we didn’t have a disciplined savings program. By deciding to allocate a portion to savings first, we then have to work out our expenses from the remaining money. It is easier to be more disciplined that way.

How much should I pay myself first?
Well, there are many answers to this question in all the different books. The general consensus is that you have to save at least 10% of your monthly salary. So if you earn $3000 a month, you pay yourself $300 in your retirement account. Other articles tell me that it is best to save 1/3 of your monthly salary. There are many different answers and opinion, but personally I’ll stick to the 10% at the moment. We can’t really scrimp on ourself when we have studied so hard to find a job isn’t it?

What if I do not have enough money to pay my bills if I pay myself first?
It is now time to answer this question truthfully: How much do you wish to have money when you retire? If you do wish to have enough money, then you can adjust other expenses. For example, eat cheaper food. Eat at food centres instead of at restaurants. Use a 1mbps internet connection instead of a 10mbps internet connection. Buy lesser new clothes. The priority should be your retirement savings. After all, what’s the point of having all the good stuff but end up having to scrimp when we retire? I would rather have a comfortable and not so luxurious life and be able to live the same standard of living when I retire.

So what do you think? Should you start to “pay yourself first”?

---

»Introduction to Bonds

Bonds are one type of financial tools that can make your money work for you. Generally bonds are considered to be an instrument of a very low risk. This means that there are very few chances for you to actually lose your money.

Basically bonds are like IOUs (I owe you). You lend a sum of money to the company, and the company promises to pay you back a certain percentage of money every year. At the end of the loan period, the company will return the full sum that they owed you. For example, you lend them $1000 and they promise to pay you 4% every year for 10 years. For each of the 10 years, they will pay you 4% of 1000, which is 40 dollars. At the end of the 10 years, you will receive $1000 back. In total you would have earned $1400 for the loan.

Who are bonds for?
Bonds are for the conservative investor who wants stability in his portfolio. This means that he does not want to worry about the value of his investments dropping at anytime. People who are reaching retirement age are normally encouraged to put their retirement savings in bonds since it is a relatively safer investment compared to stocks. If they invest in stocks, they may not be able to cash out at a profit when the market is bad. Hence bonds are good for stability.

Bonds are also recommended for situations whereby you need to have a sum of money ready in a few years time. For example, you may want to have enough money to pay for your child’s university education, or a new car. When the duration is coming near, you will want to ensure that the sum of money is there when you need to make payment. Hence bonds would be a good tool.

What kind of bonds are there?
There are two type of bonds in the market. The first is corporate bonds. Corporate bonds are bonds issued by companies who need to loan a sum of money. Corporate bonds are typically riskier since there is a chance of the company going bankrupt. If the company goes bankrupt, it may not have enough money to pay you back. However, in the event of a bankruptcy, a company is required to pay back the bond holders before the shareholders.

The second type is government bonds. Government bonds are loans made by the government. Typically the risk of the government not paying you back is close to zero. It is considered the safest types of investment, and one may also think that government bonds are safer than bank deposits, since the government has reserves and banks may go bankrupt. In Singapore, there are two types of government bonds: Singapore Government Securities (SGS) and T-bills. Their difference is the duration you are required to wait before the loan is repaid. T-bills are normally of duration that is less than a year. MAS has a website for frequently asked questions.

---

»How to Pick Stocks like Warren Buffett

I reserved this book in the library and I paid $1.55 for the reservation. It was definitely worth the money. Reservation is the best way to get good books (content wise) at a cheap price. If you buy anything from a bookstore, it will cost about $40 for a hardcover at least, and you still have to keep it at home.

The book started with a short background on the man himself, Warren Buffett. I think he’s really an amazing man because he sticks true to his fundamentals and keeps himself clear headed, constantly practising sound value investing rather than getting into the “excitement” of the market, where people lose money in the rush.

Warren Buffett is famous for practising value investing, whereby one judges a company by its value. He believes that the value of a stock will go towards the company’s intrinsic value, so if the value of a stock is less than the book value of the company, then it is a bargain. However I did not understand completely on his practices, so I borrowed the book to know more.

The book taught me plenty of things. For example the concept of opportunity cost. He used the example of a 20million dollar auto mobile. Would you buy such a thing? When you pay $25,000 more for a car, in some tens of years later, you would have lost 20 million if Buffett had used it for investments and compounded the money. Hence Buffett is actually very frugal. He will not spend excess money and choose to use it for investing.

I used to have this thought in my mind and I was surprised to find out that Buffett had originally thought of the same idea many many years before I did! I was thinking that it is pointless to donate 10% of my salary to charity now when I can use that 10%, invest it and give back a lot more in the future. Buffett shares this idea too! Amazing.

In the book you’ll learn about Buffett’s magic 15% rule, how he values a stock and determines if he should buy the stock to get him the returns that he wants. After calculation, the price of the stock should be below that of his calculated value, else there is no point in buying.

The book also shares several common sense factors Buffett uses to make decisions. One of them is to make sure that stock yields are greater than bond yields, if not there is no point in investing in stocks.

The book also introduces a concept called Arbitrage, which Buffett uses when the economy is bad. Basically its about buying a stock when a take over is announced, so that you can profit since takeovers will usually use a higher price to buy the stocks available. This enables Buffett to have a growth in his portfolio even when the economy is bad.

In short, this book is a must read for people interested in value investing. If your belief is in trading, then you should get a technical analysis book. However if you are like me, and you want to learn about reducing risk and getting excellent returns, then this book is a must read. It’s quite a beginners book so it is not that difficult to understand.

---

»How to calculate annualised returns?

If you already know the total return over a period of time, then the next step is to learn how to calculate annualised returns. Investments like bonds and fixed deposits give a fixed return each year and your investment in, for example, stocks should have an annualised return better than that of bonds or fixed deposits, else it would be pointless to invest in stocks.

This is the method to calculate annualised returns:

---

Tag Cloud

Annual Returns Book Value Buying a house Buying HDB flat Conservative Investor Coupon CPF Contribution Rate Face Value Getting Married Getting rich Graduating Having Children History of Insurance ILP Charges Insurance Agent interest rates Investment Linked Plan Liabilities Maturity Medisave Medishield Par Value Power of Compounding Interest Responsibilities Retirees Retirement Rule of 72 Rules of Investments Savings SGS Stages of Life Stock Ratios Stocks Supreme Health T-bills Technical Analysis Total Returns Trading Understand Insurance Unit Trust Value Investing