Your Love Relationship and The Stock Market

Do you remember the last time you fell in love with someone you like? What were the emotions you experienced? You would probably feel excited but at the same time tensed. You may even feel happy but at the same time think how can this be real? Some people say relationships are only exciting during the so called honeymoon period and  becomes less exciting and more comfortable after some time. So how do all these relates to our journey investing in the stock market?

The stock market is full of emotions. It is more complicated than a love relationship between 2 person and even more complicated than a love triangle situation. The stock market is made up of emotions of hundreds of thousands and even millions of people. How does it look like in a chart?

Credits: myenticingjourney.wordpress.com

There are so much emotions as you can see from the chart above. Its like an emotional roller coaster ride. Every investor will go through the stages of excitement, thrill, fear, panic, hope and optimism. Let's take a look at the stages a new investor would probably go through:


1. Excitement

Credit: www.flickr.com

Most new investors who want to start investing would start with excitement. Its like they really fall in love with the stock market. Out of the people I met so far, I've never seen anyone who starts investing without feeling excited. However, when there is excitement, most would forget that they need to be logical as well. This happens in a love relationship as well. It seems like when we fall in love, we forget all about our brains.


2. Thrill

This is the so called honeymoon period in a relationship. The thrill to meet one another everyday. The thrill to talk to one another everyday. This emotion is much more exciting than the excitement phase. For investing, new investors get the thrill when they make some money from the stocks they buy. The stocks start to go up and they see their portfolio increase from $100 profit to $1000 profit to $10,000 profit. This is the thrill which is very real.


3. Fear

Credit: http://commons.wikimedia.org/wiki/File:Scared_Child_at_Nighttime.jpg

Thrill and excitement dies off after awhile for most of the events in our lives. The dream job which you thought would last you for the next 10 years becomes boring after just 1 year. The excitement and thrill of owning that new gadget dies off after awhile. The thrill of a new relationship becomes more comfortable and mundane after sometime when you realise that your partner may not be that perfect. This is the real test for us. For investing, the stocks you bought is losing money. It does not seem as perfect as what you imagined it to be. Now you might be thinking, should I sell or should I average down and buy more? It is very hard to make a decision when you have fear.


4. Panic

After fear comes panic where we make rash decisions. For love relationships, we may end up quarrelling and breaking up. There are lots of hurts involved when we make panic decisions. For investing, we lose so much money that we just sell the stocks away, not thinking whether is it the right thing to do?

In relationships, you'll realise that there are no perfect people out there. In investing, you'll realise that there are no guaranteed money making stocks out there. This is the stage where we really need to calm ourselves down and think carefully on why we started the relationship or invested in that stock in the first place? The partner you chose to be with may not be that perfect now but he or she is probably the same person whom you first knew. The stocks which you bought may be going down a lot in price but it may still be the same company which you know is strong. The fundamentals may still be good.

If you calm yourself down now and make the right decisions, you may realise that the partner you have is still good and you can invest more time and fall in love all over again. If you think that the stocks you bought seems to be still fundamentally stable, you can invest more and average down the price.

On the other hand, if you've thought about it carefully and think that the situation is different from the first time you encountered, then you should cut loss and move on. This applies for both relationships and investing in the stock market.


5. Hope and Optimism

If you've made the right decisions in point 4 above, then hope and optimism comes into your life. Your relationship with your partner becomes stronger now as you put in more effort for it. The investments you average down is going back up and you start seeing profits.

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There are also times when we have to cut loss for our investments. If we know we invested for the wrong reasons in the first place or we are not sure why we invested in that particular stock, cutting loss will let us have a new beginning with clearer direction for our portfolio.

For relationships, sometimes a break up may be inevitable if both are really not compatible. In this case, its better to move on where there will always be hope for a better future.

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Make Money Investing For Passive Income

One of the easiest way to generate additional income for yourself is to invest in the stock market. Depending on how much time you spent researching and analysing the stocks of companies, it could be passive or active income. To me, it's still considered passive income as I only have to research on the stocks once and review it every quarterly when the financial results are released. Sometimes there may be other announcements in between but those don't really take up too much of my time.

Most people invest in stocks to sell it off at a higher price and earn a profit. However, there are some other people who invest in stocks for income. This is a slow way to grow wealth but has worked well for many people. Another way to invest for passive income is to buy a property and rent it out. In this way, you receive a monthly income from the rental collected. However, the problem is buying a property is expensive especially in Singapore. If we were to buy a private condominium, the down payment is already 20% which means it could be $200,000 for a $1 Million dollars condominium. How many of us actually have that kind of cash to begin with?

Investing in stocks seems to be a more practical way for a start. So how do we go about investing for passive income?


Beware the temptation of high yields/dividends

When investing for income, we like to see good dividends which translates into high yields on our investment. Imagine if the yield is 10%, every $10,000 invested will give you $1000. It is really tempting to go for high yields. However, as investors who invest for income, even though high yields seems attractive, we should not jump straight into in.

Jumping straight into a high yield stock is like jumping into an ocean without knowing if its water is shark infested. It all seem good from the outside but if we look deeper, there may be dangers lurking ahead. A company which pay out high dividends have to get the money from somewhere. It can be paid from its income or it can be paid from its existing cash.

There are a few questions we need to ask ourselves when investing into stocks for passive income.

1. Where does the company pay its dividends from?
2. Are the dividends sustainable? Will the company continue to grow?
3. What's the trend of its past dividend payouts? Is it increasing or decreasing year by year?

Since we're investing for income, we want that income to be sustainable and even better if its increasing yearly. Look at the company's business structure for clues on where they derive its income. If income is not stable, most likely the high dividends are not sustainable as well. This is especially so for REITS where their income is derived from rental collected.


Be a lazy landlord by investing into REITS

A REIT, also known as a real estate investment trust, has a portfolio of properties which they rent out to collect income. Buying a share of the REIT makes you a shareholder of the many properties that it has. For example, if you buy the shares of Capitamall or Suntec, then you actually become a shareholder and own part of the shopping malls you see at City Hall, Tampines, Jurong, Woodlands and many other parts of Singapore. Some of these Reits have properties in other parts of the world too.

The rental collected is distributed to all the many other shareholders and each will receive a portion of the income according to the number of shares they own. Reits listed in Singapore typically pay a range of 5-8% in dividends. If dividend remains constant, the lower the price you buy a share of the Reit for, the higher the expected dividend yield will be. The best thing is you don't have to manage the property to get the rental. The Reit manages it for you.

Reits own assets which are mostly properties. If we can buy a Reit at its fair value to its asset or better still at a lower value than its asset, then it may be a good investment. Think of it this way. When you're buying a house in this particular estate and you realise the house is selling at 20% cheaper than the neighbour who stays beside you, is it a good deal? Of course its a good deal which should be kept secret from your neighbour when you move in. This is buying at a lower value to its asset.

Therefore, buying a Reit below its asset value is much better than buying above its asset value. If we buy below its asset value, we're buying it at a discount. The net asset shows the total assets a Reit has. Divide this amount by the number of common shares, we get the net asset value (NAV) per share. If a Reit's NAV per share is $1 and we buy it at 50cents, we're buying it at a 50% discount. This NAV figure is mostly provided by the company in its annual report.


Watch debt like a hawk

Debt is a powerful force. We can use debt to buy a penthouse at Sentosa cove and everyone will think you're rich. But in actual fact, you do not have the actual money to own it. Reits also use debt to buy some of their properties. It may not be a bad thing as long as they don't stay it it or leave it vacant. It has to be rented out to other people so they can collect rental every month.

Renting out your Sentosa cove apartment may make you a lot of money but the problem comes when you can't find any tenants to rent it out to. Without tenants, you lose your income and still have to pay the debt (monthly housing loan) every month. If you still can't find tenants and you don't have money any more, you'll be in deep trouble. This is similar for Reits. If they can't find tenants and their debt is very high and they don't have much cash, it'll be like a bomb just waiting to explode.


Passive income for financial independence

In our early days of investing, the dividends received should be reinvested to let your money compound over the years. Once your dividend income (passive income) surpasses your monthly expenses, you've reach financial independence. If you're still working, you can now save 100% of your take home pay and just spend using the passive income. Now, you can choose to work or not to work. Now, you can choose to do the stuffs you're passionate about.

Investing for passive income can make you money for as long as you live. If you buy a property and rent out over the years, you would have got back all your capital after some time and still be able to collect rent as long as there are tenants. If you invest in shares of companies, you also get back all your capital after some time and this company still continues to pay you as long as its still around and listed on the stock exchange. A slow way to grow money but this patience will definitely pay off after a period of time.

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Investing during a market crash

I haven't been blogging on my investments for a couple of weeks now. Other than the many company annual reports which filled up my letter box, the market has been rather uninteresting of late. My investments have been status quo with no additional buying or selling done.  Somehow I'm waiting for the market to go lower for more buying opportunities. If the market crashes, it's even better since i'm not even heavily invested in the first place.

Buying during a market crash may be the best way to make money in the stock market. But how many people actually dare to buy during a crash? During a market crash, there will be many negative news on the economy. Let me share with you my experience during a market correction. I would not classify this as a crash as its considered mild compared to a real crash.

This was during the year 2011 where there was a possibility of a huge economic crisis looming. First it started with Greece defaulting on its debt then it spread to other neighbouring countries such as Spain, Portugal, Italy, France etc. Some of these countries were the top few economies of the world and they were in trouble. Many economist predict something disastrous is going to happen. The US market dropped almost everyday with a 600-800 points drop on the Dow Jones Index on some days. I saw the biggest decline on the STI i've ever seen with a 100 points drop in a single day.

It is hard to buy any stocks when there is so much negativity. But those who did invest during these times would have made a huge profit and return on investment. It is therefore important to have a war chest(cash) on standby to take advantage during a market crash. How did these individuals manage to buy during times of trouble? I believe to have the courage to do that, we need to trick ourselves into buying and also have a clear strategy.

The trick yourself strategy

The main reason why people are not investing in times of trouble is because of fear. Fear is all in the psychology of the mind. You want to buy a stock but you may think whether this stock will drop further? The way to counter this fear of a stock dropping lower is to divide your capital into different tranche. Do not buy a falling stock at one shot with all your capital. Buy some first and buy the rest if it drops lower. But how to know at which level to buy and how much to buy?


Stocks typically drop around 50%-60% during a market crash

Typically, during a market crash, most stocks drop a maximum of around 60%. Of course this company must have strong fundamentals and a good track record of profits. A bad company can lose everything and go bankrupt during a crisis. Knowing the stock price of good companies drop a maximum of 60%, we can divide our war chest into 2 tranches to buy first at 30% drop and the second at 50-60% drop. Or we can divide our war chest into 3 tranches to buy the first at 20% drop, the second at 40% and the third at 50-60% drop. With this, we will always buy something during a market correction or crash and at least make a decent profit. It is better than trying to predict the exact low of the market and end up not buying at all which most people do. Many end up waiting for the stock price to go lower and scared that the stock price will continue falling. The psychology of this state of mind prevents one from buying stocks at a low.


Real life examples

Technical analysis can also be one way to guide us on our entry buy price. By looking at charts, we can know how much a stock typically falls during a market crash. Below shows the chart of the company called OCBC bank in Singapore. During the 2007 financial crisis, this stock fell from $9.45 to a low of $4.14. That is a 56% drop. If we had bought first at 30% drop which is $6.41 and second at 50% drop which is $4.75, the average price will be around $5.58. The stock recovered from the low of $4 plus to $7 plus in just 3 months. You would have made a profit if you dared to buy during the crash.

If we look at the year 2000 dot com bubble crisis, this stock also dropped around 56%. If we had used the same strategy, we would also have made a profit.

OCBC

Let's take a look at the next company, Singpost. This is also a stable company with strong fundamentals. In the 2007 financial crisis, this stock dropped about 53%. Applying the same strategy to buy first at 30% drop and the second at 50% drop, the same profit would apply. As we can see the stock price has already went above the high of year 2007.

Singpost

There are cases where the stock price of a company is cyclical in nature as seen in the company SIA(Singapore Airlines) below. This stock dropped 60% during the 2007 financial crisis. For cyclical stocks, we can still deploy the same strategy of buying in 2 or 3 different tranches but it will be futile to hold the stock throughout unless you invest solely for the dividends only. The stock price of these cyclical companies fluctuate up and down a lot and goes in a sideways fashion. Most of the time its better to sell it off for some profits before the next crash comes.

SIA

There are many other factors to consider when buying a stock and each stock may behave differently. This blog post would not be able to cover all strategies. By allocating our assets efficiently and minimizing our risks by diversifying into a few other stocks, we can all make some money from the stock market. When the market is all good and prices are climbing, always remember to stash away some cash (war chest) to invest during a crash. As the market goes higher, i actually lessen my exposure to the market and keep more cash. There will always be some form of correction which will allow us to buy stocks at much cheaper prices. I have prepared myself to 'trick my mind' into buying during a market crash. I know at what levels to buy and which stocks to buy when the time comes. Being prepared may be an edge to win this battle. Are you prepared for it?

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Related Posts:
1. Buying the company on the streets (Part 1) - Discovery stage
2. How to pick stocks (Part 1) - Economic Moats
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Want to own some properties and collect rent using little money? Here's how.

We've heard of people buying properties and renting them out. This seems like a good way to have an extra income every month. The only problem is properties especially in Singapore are getting more expensive. If you want to buy one and rent it out, it will cost you a few hundred thousands dollars. You can loan the amount but even the down payment is at least a 5 figure sum. There are also lots of paper work and legal fees involved so after all, it may be too troublesome and not so worth it for us.

But, do you know you can actually own properties and still receive a portion of the rental collected paid to you with little money? From as low as $1000, you can start receiving rental from these properties. Here's how:

Owning a portfolio of properties with little money

Real estate investment trust or REITS provide you this opportunity to own a portfolio of properties. These properties are rented out and a portion of the rental that is collected will be paid to shareholders. You can buy these REITS through the stock market. Here are some examples:

1) Suntec REIT

Have you heard of Suntec or been there before? I'm sure you have if you live in Singapore. Suntec REIT owns their majority of properties in Singapore. This includes the Suntec shopping mall, the Suntec convention centre, the various Suntec office towers, a part of Marina Bay Financial Centre etc. If you buy the shares of Suntec, you are part of the owner of these properties and you are paid rental income from these properties. How much will you be paid?

For the whole year of 2013, Suntec REIT paid about $91 for every 1000 shares you own. If you bought at the current price of 1.64, this works out to a yield of 5.5%. Is this too low for you? Let's see the next one

2) Saizen REIT

You may not heard of Saizen REIT before as all of its properties are in Japan. They own a portfolio of residential properties. All these properties are rented out and a portion of the rent collected are distributed to shareholders. Sounds like renting out your house for extra income? I bet it is.

Saizen REIT owns a portfolio of over a hundred properties spread across Japan. You can own a part of all these from as low as $1000. Sounds like a good deal? The yield of Saizen REIT works out to be around 7.1%. Better still if you bought at the current price of 0.885, you are owning all these properties at a discount. The net asset value (NAV) shows us the fair value of the properties which Saizen REIT owns. The price of 0.885 is lower than the NAV of 1.17. This is a 20%+ discount to its value. Who doesn't like buying properties at a discount?

Buy low, rent out, collect rental

When we buy a house of our own, i'm sure many of us will find the best deals with a good location. If you're buying the property to rent out, you would naturally want to buy one which has a good location so you can rent it out at higher rates. If you can buy the property at below market price, that would be even better. But certainly you would not want to buy a property above the market price. 

When we invest in REITS, its the same analogy. Buy the REITs below its NAV if possible and the properties should be in good locations fetching good rental income. From its annual report, we can see the properties occupancy rate, their locations etc. These are valuable information to look out for. Reading an annual report can be liken to reading a brochure of a property launch. It's fun and exciting sometimes.

Stock prices can fluctuate but it does not reflect the true value of the properties that the REITS own. It's more important to focus on the value of the properties and the income which it produces. In the long run, all else remaining equal, the stock price will reflect the true value of the properties it owns. 

Investing in REITS can surely bring you that extra income. Not a lot but still better than nothing. However, when you have more money, it can become a lot. Invest $500,000 at 7.1% and see what kind of income you get. You'll be surprised. 

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Buying the company on the streets (Part 2) - When to buy?

In the previous post, the companies on the streets were discovered in our everyday lives. I have said that even though we have discovered them, we should not buy them immediately. In this post, I'll touch on some simple ways we can value a company.

Knowing the nature of a business is important before anything else. What business does the company engage in? How much does that product contribute to the company's profits? For example, we know G2000 is partly owned by Wing Tai. Wing Tai has a retail business but they also engage in building properties. G2000 is an established brand with good sales record. However, Wing Tai only owns 45% of G2000 and this only contributes to a small portion of its income. The main income comes from its property business. So no matter how successful G2000 may be or how long the queues you see outside G2000, the impact on Wing Tai's profit is very minimal.

Now, even before you start investing, i would suggest you forget about the stock price. The stock price the company is trading at now does not mean anything. You are not buying the stock price but buying a part of the business. Look at the company with the eyes of a business owner.

When to buy?

This is a question a lot of people ask. To be honest, there is no perfect entry point to buy a stock. In fact, most of the time when investors buy the stock, its price will most likely go down. Does it sound shocking to you? Of course you do not want to be buying at the high also and don't want to be paying a high price for what the company is actually worth. It'll be good if you can buy the company at a discount of its fair value.

Now, to determine the value of the company, we can look at 2 things:

1. Intrinsic value
2. Assets the company owns

Intrinsic Value

You might have heard of this term called the intrinsic value. Investopedia defines intrinsic value as "The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors". So how do we calculate the intrinsic value of a company?

Cash flow can be used in the calculation of intrinsic value. Cash flow is a more accurate measure of a company's worth than earnings. It is the real cash that the company generates every year. To know more about cash flow, read: Understanding Financial Statements (Part 3) - The Cash Flow Statement

The most common valuation that investors use to calculate intrinsic value is called the discounted cash flow model. It factors in the estimated future cash flow growth rate of the company and discount it to the present value. Intrinsic value is therefore the present value of all expected future net cash flows to the company. This will give a rough gauge of how much value the company is worth today based on the predicted cash flow growth. 

Not to worry if you do not understand what i wrote above. I know sometimes it is not easy to understand the finance concepts if you're not a finance student. There is a free intrinsic value calculator you can use provided free by Bigfatpurse.com. You can download the free intrinsic value calculator here. 

Assets the company own

Assets have value and this is especially important for companies that deal with or own properties. We can do a simple valuation of property stocks using the Price to Book(PB) ratio. Book value is similar to what we call Net asset value(NAV). The NAV of a stock is derived by taking the total Assets minus the total liabilities. The NAV shows us the total net assets the company has. The PB ratio is derived by taking the stock price per share divided by the NAV per share. A PB ratio of less than 1 means the stock is trading less than its NAV per share.

Let's say Capitaland stock price is now at $2.50. Assuming it's NAV per share is $5, the PB ratio would be 0.5 ($2.50 divided by $5). If you buy its stock at $2.50 now, you would have bought at less than it's actual value based on its assets. Isn't that a good value that you have found?

Margin of Safety(MOS)

Buying a company below its intrinsic value gives us a margin of safety. This will somewhat limit the downside risk if the market turns bearish. Buying 25% below the company's intrinsic value is a safe margin. However, the stock price can fall even lower and when that happens, it should be good news for value investors like us. This also means that we should always have extra money on reserve no matter what. This is to take advantage to buy at lower prices when Mr market decides to have a bad mood. Unless if i can find many stocks trading at more than 50% lower than it's intrinsic value, then maybe i will be invested fully. When the crash comes it takes courage to invest. Will you be in the game when it happens?

Conclusion

This ends the 2 part series on buying the company on the streets. Next time when you go shopping, remember to look around to find companies which you can potentially buy. Then, research on the company based on its economic moats, profitability of its business, strong balance sheet, intrinsic value and assets. This is what Warren Buffet says to buy good companies at undervalued prices.

It's bad to go to bed at night thinking about the price of a stock. We think about the value and company results; The stock market is there to serve you, not instruct you. -Warren Buffet, 2003 

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Related Posts:
1. Buying the company on the streets (Part 1) - Discovery stage
2. Understanding financial statements (Part 1) - The income statement

Buying the company on the streets (Part 1) - Discovery stage

Introducing the company on the streets

Everyday we go to work, we go to school, we hang out with friends and we go shopping. What if i tell you that you can actually own the shopping malls you go to, own the restaurants you patronise, own the retail outlets you buy clothes from, own the hospitals you visit, own the bus and MRT you ride everyday and even own the airlines you travel on? It is possible through a financial intermediary called the stock market. 

When a company is listed on the stock market, it becomes a public company. Many shareholders collectively own a part of the company and are entitled to a share of the income through dividends distribution. It is no longer a private company once it is listed. The surprising thing is all these companies on the stock market are actually all over the streets which we walk on. Well, maybe not so surprising to people who already know but it is to people who live everyday without knowing. 

Many people ask how do i know which company to invest in if i want to start investing? Do i look through the SGX website and scan from A to Z? The answer is no. You don't have to do that. You just have to open your eyes to see it on the streets. 

Which are the companies on the streets?

Imagine how you would live your daily life. You get out of your house and take the bus. It's a sbs transit bus. This company is owned by comfort delgro. 

You reach the MRT station and transfer to take the MRT. The MRT is operated by SMRT.

You buy a straits times newspaper and proceed to read the daily headline news. The newspapers are published by Singapore Press Holdings(SPH).

Your mobile phone rings and you pick up a call. This service is managed by either of the three telcos in Singapore, Singtel, Starhub and M1. 

You reach your office and make your daily favourite 3 in 1 coffee. The coffee sachet has the word super on it. This coffee is manufactured and produced by Super group Your company is kind enough to buy you some curry puffs for breakfast. Those are from old chang kee.

During lunch time, your company catered buffet from Stamford catering. This catering service is provided by Select group.

After work, you meet your friends for dinner at Din Tai Fung. This company is owned by Breadtalk.

You go shopping at G2000 and Uniqlo after dinner. These 2 companies are owned by Wing Tai.

You're at the newly opened Bedok Mall. This shopping centre is owned by CapitaMalls Asia.

You're so tired after a long day and hailed a taxi to go back home. The taxi is called comfort and it is again owned by comfort delgro, similiar to the morning bus that you took.

Does this life sound familiar to you?

Throughout just that one day, you had used the service and products of the following 10 companies:

• Comfort Delgro
• SMRT
• SPH
• Singtel/M1/Starhub
• Super Group
• Old Chang Kee
• Select group
• Breadtalk
• Wing Tai
• CapitaMalls Asia

 

 
 
 

That's it. You have just found 10 companies without even looking at the stock price on SGX or any stock screens on your computer or TV. 

The good news here is: You can own a part of all the above companies. In just one day, you would have discovered 10 listed companies in Singapore if you had looked carefully enough. Some people would even have used the services and products of more than 10 companies in a day.

Think about it, wouldn't it be good that you can receive a part of the expenses you spend on back into your pockets? This is just like having rebates and discounts for the things you buy. In actual fact, when it is done correctly, you can even enjoy the things free of charge for many years to come. But hold on, you don't just go back and buy the company through your stock broker immediately. There's more to it. We'll get to it later. 

This is the power of investing. You can own a part of your everyday life!

Is it possible to get free products and services for many many years?

This idea of investing by looking at companies on the streets was introduced by Peter Lynch in his book "One up on wall street". He wrote about how his wife was commenting on how good a departmental store was and later on this company's stock price went up many many times. 

Let's look at some companies in Singapore which you might potentially have free stuffs for many many years if you've bought their stocks.

Breadtalk

This is a company we're familiar with. I first heard of it as a bread that talks. They were rapidly expanding and more and more stores opened up. When the company was first listed on the Singapore stock exchange in 2003, its offer price was 24cents. Now the price is 90cents which means it has increased by almost 4 times. Putting it in numbers, this means a $5000 invested in 2003 will become $18,750 now. This is a profit of $13,750. How many breads can you buy with this money? The answer is around 9000 breads if each bread cost $1.50 on average.

Breadtalk Chart

Comfort Delgro

This company owns the popular comfort taxi, the comfort driving centre and 75% of the SBS buses that we take. What you may not know is this company not only operates transport services in Singapore but also other parts of the world. This includes, UK, China, Australia, Malaysia, Ireland and Vietnam. If you had bought their shares in 2011 at the low of $1.10, now you would have made almost double your money. A $5000 investment in 2011 will become almost $10,000 in 2013. This $5000 profit would have more than offset the many fare increases over the years. Maybe if everyone had invested in the transport operator and got dividends as well as profits, they wouldn't have complaint on the fare increase.

Comfort Delgro Chart

Old Chang Kee

Who would have thought that a small store selling curry puffs can be so successful today? They are literally seen everywhere in Singapore now. Don't you agree? Its share price in 2011 was 19cents at the low. Now, its share price is worth 80cents. That's a 4 times increase in about 3 years. A $5000 invested in Old Chang Kee in 2011 will become $20,000 today. That's a profit of $15,000. Curry puffs getting more expensive? Not to worry, that $15,000 can buy you many many curry puffs for many years ahead. Not forgetting dividends are still paid every year which means more free curry puffs. 

Old Chang Kee Chart

Wing Tai

As stated earlier, Wing Tai owns G2000 and the Uniqlo retail outlets. To be exact, Wing Tai owns 45% of G2000 and 49% of Uniqlo. It's shares was trading at a low of 73cents in 2011. Currently the price is around $1.80. That's a 2.5 times increase. The profits from the investment can buy you lots of office wears for work, winter clothes for your holidays and even your everyday casual wears. 

Wing Tai Chart

The Stock that went up 50 times

Super Group

This is the company that made the 3 in 1 instant coffee. I've read their success story somewhere before. Maybe i'll write up on its success story in another blog post. Now, this stock went up 50 times which means a $5000 investment in 2011 would have become $250,000 now. Who says there are no 50 baggers among Singapore stocks? 

However, to realised the whole value of the 50 bagger, you'll have to wait for 10 years. If you did not have patience to wait through 10 years and sell beforehand, it would most probability be a 4 or 5 bagger only. Some people may say its already very good!

Super Group Chart

Is it that easy to make money?

The profits listed above are exaggerated. The truth is very few people are able to buy at the bottom and sell at the top. These are just some examples of everyday companies which would have made you lots of money even if you did not buy at the bottom or sell at the high. The fact is investors do not try to buy at the bottom. They accumulate along the way as long as the company's fundamentals remain intact and outlook remains positive. Any weakness in the market itself presents an opportunity to buy more.

We've discussed on how to pick the companies on the streets. We've discussed on the free stuffs you can potentially get. Now the most important question is when do i buy them? Once you discover the companies, you should not just buy them immediately at the current price. The key is in finding the value of the company and buy at a discount to its value. This is what we call the margin of safety(MOS). This I will discuss more in depth after the Chinese new year holidays.

Research is important in investing. I've written a series of post on how to analyse a company based on its economic moats and its profitability. You can read it here:

1. How to pick stocks (Part 1) - Economic Moats
2. How to pick stocks (Part 2) - The profitability of a business

I have also written on how to read and interpret company's financial statements. You can read it here:

1. Understanding financial statements (Part 1) - The income statement
2. Understanding Financial Statements (Part 2) - The Balance Sheet
3. Understanding Financial Statements (Part 3) - The Cash Flow Statement

In the next part of this series on buying the company on the streets, we'll evaluate how much a company is actually worth? Is it worthwhile to buy the company at the current price? How to buy the company at a discount? Stay tune!!

Read Part 2 of this series here: Buying the company on the streets (Part 2) - When to buy?

In the meantime, enjoy the Chinese New Year celebrations with good bonding time with your family and friends as well as all the good food. Here's wishing everyone a prosperous chinese new year ahead. May we HUAT(prosper) even more in the year of the horse!!


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A stock market bubble?

We've heard that there is a property bubble in Singapore as well as other parts of Asia like Hong Kong, China etc. How about the stock market? Is the stock market in a bubble too and where will the market head from now onwards? Last week, US markets declined greatly with the Dow Jones down more than 300 points on Friday. With this, Asian markets today also followed suit with major stock market indices on a decline. I have to ask myself this question:"Do i stay invested or do i sell away my stocks". Will the stock market crash? These are the questions which many people would ask.

For me, i cannot predict the market. I also do not care where the market will go from here. Trying to predict the next direction of the market is liken to fortune telling of a person's future. In other words, it is almost impossible. It is also worthless to always wanting to predict the future while you do not do anything to your current circumstances. It's like a poor man trying to predict if he will be rich in the future but does not do anything now. I hope you get what i mean.

I sense that the market sentiment now is still on a wait and see attitude. Many people want to invest only when everything is good and rosy. Among my friends and relatives, very few of them are in the market also. When there are discussions on the stock market, many are afraid of losing money and investing at the wrong time. To me, there is no perfect time and it is futile to time the market.

So if I do not care about the future direction of the market, what do i care about? As a shareholder of a company, i'm interested in the business prospect of the company. I want to see the management keeping their promise, managing the company well and increase shareholder's value. It doesn't matter if the stock price goes up or down unless the fundamentals of the company changes. This is the key point we must focus on.

Singapore has embarked on a series of major infrastructure projects among those are the on going new MRT lines which will continue till 2030, the new changi airport 4 & 5, the new marina bay CBD. Will Singapore stop all these infrastructure projects in the near future? The most probable answer is no. Investing in those companies might be a good choice.

US tapering and interest rates at record low? In the current situation, interest rates can only go up as it cannot go lower any more. The obvious choice is to stay away from interest rates driven sector like companies dealing with properties. The Singapore government really does seem determined to keep property prices stable. A correction is expected if not more people are going to complain that prices are too expensive.

Japan's government on the other hand is determined to inflate their prices with a 2% inflation target. With huge amount of capital injection into Japan's economy, we expect to see prices going up and hopefully this will end the decade long deflationary economy which they have experienced since the 1990s. To ride on this, investing into Japan's property might be a wise choice. Rental of retail spaces as well as residential spaces might also increase as the economy recovers.

Looking at individual company's business is a better choice than looking at their stock prices. Stock prices goes up and down and it doesn't matter as long as the value of the company doesn't change. If the stock price does decline while the company's value remains the same, it is a good chance to accumulate more. The important thing is to buy the company at reasonable value relative to its stock price. For example if i know the company has this amount of assets and cash and i can buy this company at a lower value than what it is actually worth, i would have found myself a good bargain. We all like discounts don't we? We do not have control over the stock price or market movements but what we can do is to use the bad mood swings of Mr Market to our advantage.

Not many people are investing in stocks now. I don't see the uncles and aunties at the coffee shop talking about the latest stock tips and sharing their experiences of making huge fortunes in the market. It doesn't seem like there is a stock market bubble at all when it's not hot at all. For the property market, it's another story. What once happened inside the showrooms was scary as people snap up units after units of million dollars condos. Perhaps some of you have experienced the euphoria of the crowded showrooms. This euphoria will come to an end soon. In fact, it might actually have ended.


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Related Posts:
1. Looking to invest in Japan's real estate
2. New year resolutions and investment strategies for 2014
3. How to pick stocks (Part 2) - The profitability of a business
4. HDB resale prices took 10 years to recover from a crash

Looking to invest in Japan's real estate

There has been much news about the economic reforms that the Japanese government is embarking on to revive its economy. Japanese prime minister Shinzō Abe has launched Abenomics which is a combination of measures such as quantitative easing, increased public infrastructure spending and the devaluation of the Yen. Maybe now its a good time to look into investing into the Japanese market as its economy sets to recover from the lost decade it has experienced.

Why is it worthwhile to look into investing into Japan's real estate? By this, i don't mean that you buy a property directly in Japan. Alternatively, you can invest into a variety of real estate investment trust and business trust which are already listed in the Singapore stock exchange. Let's look briefly into the history of Japan's economy to understand better why they are positioned for growth in the future.

Japan's real estate prices were rising tremendously from 1986 to 1991. This formed an asset price bubble and the bubble burst in 1991 sending real estate prices down into negative territory. Japanese Yen was appreciating a lot due to the Plaza Accord. This was an agreement to depreciate the US dollar in relation to Japanese Yen and German Deutsche Mark. Both these 2 events lead to the Japanese economy suffering and ended up in deflation. I will leave out the finer details of what happened exactly but i hope you got a rough idea.

Japan's government has set an inflation target of 2% to reach by 2015. Prior to that, Japan has been in a deflation state for many years. As prices keep dropping, Japanese people defer their buying in the hopes that they can buy it at a cheaper price later. This is completely opposite from our current state in Singapore where people rush to buy properties because they are afraid that prices will keep going up. It's the thought that if i don't buy it now, it's going to get more expensive.

So with prices set to rise in Japan, it's timely to consider investing into Japan's real estate and ride the growth that is about to happen.

Let's look at some of the companies that we can consider investing into that are listed in Singapore.

Saizen Reit
Saizen Reit has a portfolio of income producing real estate. These properties are mostly residential properties. To date, it has 139 properties spread across 14 cities in Japan. Occupancy rate is at 91.9% on average in FY2013. As home ownership is low at about 60% in Japan, rental properties are still in strong demand there. Rental prices are set to rise as the Japan's economy recover.

One of the residential properties owned by Saizen Reit

Stock price for Saizen reit is currently at 0.93. Net asset value is $1.22 as presented in their recent november 2013 presentation. Thus, it is trading at a discount to NAV of 23.7% . Gearing level is around 34.7% which is quite normal for a Reit. Distribution yield for the whole of 2013 was about 5.2% which is fairly attractive.

For those investors who're interested in having a part in Japan's residential real estate, you can consider Saizen Reit.

Croesus Retail Trust
This is a business trust engaging in retail properties. It currently owns 4 shopping centres in Japan. This company just IPO in Singapore on 10 May 2013 this year. IPO price was 0.93 per unit. On first trading day, the stock opened at 1.12 and was at a high of 1.18 before tumbling down to 0.875 currently. This is already a 22% drop from opening to now. This fall in price presents investors an opportunity to buy the stock at a cheaper price.

One of the malls under the management of the trust, called Luz Shinsaibashi

Fundamental wise, NAV is calculated to be at 0.90 per share. Thus, the current price of 0.875 is trading at a slight discount to NAV. The company has promised to payout 100% of its income to shareholders for the first 2 years. Thereafter, a 90% payout ratio can be expected. The forecast dividend yield will be around 8.5% if you bought at current price. This is quite an attractive yield. However, gearing level is quite high at 43.7%. I guess with high yield comes higher gearing level too. But i think Japan's interest rate will remain low for quite sometime thus it won't affect its loan tenure too much. The weighted average debt maturity for them is around 5 years. The only thing we can hope for is the management use the debt wisely to acquire more assets and enhance shareholder's value.

This is a chance to invest into Japan's retail property market. Investor's who're keen in it can consider Croesus retail trust.

*I do not hold any shares in the above companies as of now. But i'll be looking into accumulating some soon.

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Understanding Financial Statements (Part 3) - The Cash Flow Statement

The cash flow statement is the 3rd and the last of financial statements you can find in a company's annual report. The other 2 statements are The Income Statement and The Balance Sheet which we have discussed earlier.

The cash flow statement is one of the most important among the 3 financial statements. It shows the actual cash the company has generated and removes all the non cash items which you see in the income statement such as depreciation.

The Cash Flow Statement

The cash flow statement is divided into 3 parts:

1) Cash Flow from operating activities / Cash from operations
2) Cash Flow from investing activities / Cash from investing
3) Cash Flow from financing activities / Cash from financing

You can access a sample of Singtel's Cash Flow statement here. You can refer to this as we go through the cash flow statement line by line. Let's start.


Cash from Operations
First up is the cash from operations section. This section shows you how much cash the company has generated from its business. This is an area you will focus on more when evaluating a company as it will tell you how effective the company is in terms of generating cash from its business operations

Net Income
Firstly, on the top line of the cash from operations section, we have the net income. This figure is simply taken from the income statement.

Depreciation & Amortization
Next we have the depreciation & amortization. Depreciation is the drop in value of assets of the company over time. However, just because the assets drop in value doesn't mean the company pays for the loses. No cash is being transferred out. Thus, this is added back to net income.

Changes in working capital
The next few items we see are all part of changes to working capital. The first 4 items are quite straight forward which i will not discuss here. The 2 important ones here are changes in accounts receivables and changes in accounts payable. Recall that this 2 items are found in the balance sheet also. Accounts receivables is what the company expects to receive which it hasn't collected yet. Accounts payable is what the company owes to others.

If accounts receivables is lesser this year compared to the previous year, it will be a positive figure in this years cash flow statement. This means that less people are owing the company thus the company receives more cash this year. Remember, only real cash items are recorded in the cash flow statement. This is the actual cash which the company receives.

For accounts payable, it is the other way round. The more you owe to others, the less cash you have to pay up this year. This means that you have more cash stored up for this year and it will be a positive figure in your cash flow statement.

Cash from operations
Adding up and subtracting all the items above, you get your final figure of cash the company has generated from its operations. This is an important figure to note.


Cash from investing
Let's move on to the second portion of the cash flow statement. These are activities which involve the acquiring or disposing of property, plant and equipment (PPE), corporate acquisitions and any sales or purchase of investments.

Capital Expenditure
The first entry is the capital expenditure. This is the expenditure on property, plant and equipment. Basically any expenditure to keep the business running. Cash from operations minus capital expenditure will give you what is known as free cash flow(FCF). FCF is the amount of cash the company generates after investing in its business.

Investments
Other entries inside are some investments the company has made for example cash acquisitions of other companies, investments gains or losses from bonds or equities etc. Adding and subtracting the above items you'll get the final figure of cash from investing.


Cash from financing
This is the final portion in the cash flow statement. This part records any transactions between the company's owners or creditors.

Issuance & repayment of debts
The company can borrow money by issuing debt in the form of bonds. This portion shows you whether the company has borrowed more money or repaid debts it previously borrowed.

Issuance & purchase of common stock
This is an important number to note also. Companies can issue more stocks to raise capital for expansions. However, issuing more stocks/shares can dilute the existing shareholders worth in the company.

On the other hands, companies which has cash and are slower in expansion, can buy back shares and minimize the dilution for existing shareholders.

Dividends paid
This is straight forward. It just shows the amount of dividends the company has paid.


Conclusion
The cash flow statement is one of the most important of all the 3 financial statements. It shows the amount of cash the company has generated for that financial year. Cash that constantly flows into a company, provides life for it to survive. Thus, the phrase: "Cash Flow is the life blood of any business".

We have concluded this series on understanding financial statements. Knowing how to interpret these 3 financial statements is crucial for your investment decisions. If you know how a company generates its cash and where it makes its money, you'll be clearer on whether is it a good company to invest in?

Of course, the evaluation of a company's business doesn't stop here. After knowing whether it is a good or bad company, we have to know whether the price of the stock of the company which we are buying now is under priced, at the right price or over priced. When we buy things, we like to buy at a discount. For stocks, it is the same concept. We also want to buy a company at a discount relative to its actual price. How to evaluate whether the price of a company is fairly valued is another skill to learn.

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Related Posts:

1.  Understanding Financial Statements (Part 2) - The Balance Sheet

2.  Understanding financial statements (Part 1) - The income statement

3.  How to pick stocks (Part 1) - Economic Moats

4.  How to pick stocks (Part 2) - The profitability of a business