Friday, September 26, 2014

Communicating the philosophy of life to your children

There's a quote by Warren Buffett that says:

"Give your kids enough so that they would feel they can do anything but not too much that they would feel like doing nothing"

For those of you who are parents (or becoming parents to be), you would probably agree once you have children, your emphasis on life would greatly shift from your once lofty ambitions of becoming the number one mountain hikers in Mount Everest or a singer at Singapore idol to raising your children via your own philosophy of life. Kids are greatly influenced in their early lives by the behaviour of the people around them. and so you put greater focus on how you would communicate your philosophy of life to your children. They almost become your everything in life and suddenly you have a task greater than anything you previously did to make them adapt to this world and be a successful person.

There's inevitably many varieties to one's philosophy of life depending on where and how you were brought up yourself or the belief that you have strongly behold. For example, are you the type that believe in a fabled lifetime shower of parental handouts and assistance such that whenever your children runs off a problem that you always bail out for them. Or are you the type that only provides assistance to an extent they needed to be bailed out when required. It is always easy to say but difficult to practice in real life. Their blood will become thicker and twice more important than your own. Whenever they wanted a toy out of no special event, and the moment you can financially afford it, you would usually more than not succumb to his crying request.

B's precious baby :)

The above quote by Warren Buffett probably resonates with what I am going to communicate to my children. I wanted my children to know that there are resources for them to start believing in the things they wanted to do yet not take it for granted that they do not have to lay a finger on anything to do nothing. I wanted to tell my children that going to University is one of the gateway to learn and obtain many resources but they are not the sole constraint of being successful in life. I do not want to be the dictator (liabilities) in their lives but rather an adviser (assets) that they can talk to whenever they needed a listening ear. 

Comparing luxuries with the Joneses and societies has also become the prominent topics that I would like to educate my children. Instead, focusing on one's needs about being frugal and teaching them about the holy grail of saving during their early years will play an important role especially after they entered the working force. Investing strategy may eventually differ from individuals but basic investing in general is probably required to keep up with the economic times of rising inflation. So while I have invested a meagre of stocks in ST Eng for him to begin with, he'll be free to do anything he want with the strategy he believes when he grows up.

What about you? Are there any philosophies in life that you would like to pass down to your children?

Child Portfolio

No. of Lots
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
ST Engineering

Thursday, September 25, 2014

"Sep 14" - SG Transactions & Portfolio Update"

No. of Lots
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
FraserCenter Point Trust
SembCorp Ind
China Merchant Pacific
Ascott Reit
Mapletree Greater China Commercial Trust
FraserCommercial Trust
ST Engineering
Ascendas Hosp. Trust
Stamford Land

Total SGD


The Portfolio is down of about 1% compared to previous month due to the drop in two of my biggest holdings in FCT and Vicom. I am really not too concerned with the drop as these are in relation to market sentiments which have seen more volatility this month.

The notable highlight for this month has been the divesting for First Reit as I look to pare down on my Reits holdings. It has seen a nice run-up since I last bought them in stages last year and the year before. The dividends received has been well taken as well. I would be interested to add this counter back to the portfolio should there be opportunities to do so. I have also divested all my holdings in Second Chance.

I have added some asset play in OUE and Stamford Land to the portfolio. You can see my previous posting for the review here on OUE. This is in line with the growth play that I would like to have on the portfolio other than pure dividend counters. Last but not least, I have accumulated further on China Merchant Pacific which makes them my 4th largest holdings in the portfolio.

Earnings season is up and coming for next month so we'll probably see some good opportunities abound and a nice round-up to the last 3 months of the year.

Wednesday, September 24, 2014

Recent Action - OUE Ltd

I have been watching out for a few lists of property stocks lately where they are trading at a discount to their book value. This is not surprising given the disappointing market sentiment towards various property curbs we have in Singapore such that companies are holding massive amount of property development in their books, and with prices going southwards, we have a discount to their book value. YTD the stock has been underperforming the STI index by returning about negative 10%.

OUE is one of the stocks that caught my attention given their attractive valuations (I will talk about it more in detail below). Because of this, I have initiated a small position of 5 lots at a price of $2.16.

OUE Limited is an investment holding company which have operations in the Hospitality, Commercial and Residential development. They have recently found ways to unlock shareholder’s value by incorporating two Reits wings under them - OUE Hospitality Trust and OUE Commercial Trust. The thing I like about the incorporations of these Reits is it allows the company to work on the financial engineering part where you have sort of a dumping ground to sell the companies at valuation price and the capital can be recycled. For example, before Mandarin Orchard and Gallery were injected into the Trust, these assets were valued at their cost value where it sits under the PPE statement of the balance sheet and they cannot be revalued upwards (accounting treatment for PPE are depreciated instead). By disposing these assets to the Trust and OUE becomes the associated partner stake, the assets can be revalued upwards and thus NAV has improved now to $4.04 from $3.1 previously. 

I predict it will only be a matter of time before they start disposing their other assets into the Trust. A quick look at their current property holdings and Crowne Plaza Changi Airport looks most likely next to be disposed to OUEHT. The current carrying amount for the property is carried at cost value at $229M in their books while the latest market appraisal is valuing the property at $291M. That’s a valuation surplus of $61M they would record in their books should the asset be disposed. Potential NAV could rise to $4.55 as a result of this, assuming everything else remains the same. This is financial engineering at their best. 

There could also be opportunities in the future to dispose other assets such as OUE Downtown and US Bank Tower into the OUECT. These assets of course are already valued at their fair value figure since these are property investment assets, so the current NAV would have already accounted for it.

Since I am buying at $2.16, and the NAV is currently at $4.04, this represents a P/BV of 0.53 – which means that I am buying the stock at a 47% discount to their book value. I thought that was pretty decent given the level of margin of safety against their book value. If we exclude the portion of the cash and include 100% of the total liabilities in the computation to be very conservative, $2.16 essentially means I am buying the rest of the other assets at a 0.63x to its stated value. That’s real bargains there. 

Going back to the past 10 years of data, we see that the current P/BV of 0.53 today is the lowest ever in the past 10 years of history. Even during the GFC, its P/BV is at 0.75x while during the Euro crisis it was at 0.56x. Again, this is another factor for buying something which is value that the market is not pricing in.

I think this stock will take time to evolve. By having two wings under their reits management, it is a matter of time before the management unlock the assets under their books and inject them into the reits. By buying the stock at a P/BV of 0.53x, I think the level of margin of safety is there and it is now just a waiting time for the management to do their job.

Sunday, September 21, 2014

Attended Value Investing Mastery Course - by Bigfatpurse

Coming from a back to back 6 hours examination for Investment Banking and Private Equity I took on Saturday, I attended the course on Value Investing Mastery Course (VIMC) on Sunday organized by Bigfatpurse, made up of Alvin, Louis, Jon and Alex. I need to thank Alvin and the team for inviting me to the course as I was much geared up to attend this than some of the MBA classes I took at SMU. For some reason, I've always been interested to learn something which I can apply to directly rather than learning some theories which I know wasn't going to be practical. Hint: During schooldays, I knew I wasn't going to use the concept on integrating Logx or anything in life that resembles like anything I learnt in A Maths.

What is the Course about?

This course isn't about teaching you the Warren Buffett's way of valuing a company through earnings or cash flow. This course is about teaching you the Walter Schloss' way of valuing companies through net asset value. Unlike Buffett, Schloss does not invest based on earnings as they are harder to estimate over time and they tend to fluctuate more than the value of an asset.

The Bigfatpurse team further breaks it down into what they called as CNAV (Conservative Net Asset Value). I do not want to spill too much into the detail of how they calculate the CNAV but what they are taking with this is basically the different percentage allocation of certain asset categories which weigh more importance than the others. Think intangible and cash for example. By differentiating the lesser value asset categories, you are able to take a more conservative stance in computing your NAV. The lower your buying price relative to the CNAV you have computed, the better it is for you.

I like the fact that the team went further into evaluating some of the other financial indicators through their POF score - Profitability, Operating Efficiency and Financial Leverage. Again, I do not want to spill too much information in my writing at this point in time regarding the concept. In the MBA class I attended, we were taught to use the extended Dupont RoE to account for this financial indicators, so the same concept with Profitability (Profit Margins), Operating Efficiency (Assets Turnover) and Financial Leverage (Debt to Equity) are there.

The course also teaches you the point of entry and exit with clear strict indication, so the directions are given and it is up to the retail investors to be diligent enough to do it.

My Thoughts

I thought the course was well delivered by Alvin and Louis.

The content was simple to understand for most of the crowd and various accounting terms were explained in a simple and clear manner. There was also a formula sheet that allows you to calculate the CNAV of a company in about 15 minutes (or less once you are more familiar). I get the impression that most investors are now quite confident in calculating the formula but there are one or two that gets rather lost with all the computation.

Regarding the POF, I would personally like to use the Profitability margins instead of the Price to Earnings Ratio in measuring the Profitability indicators, but that is just my personal preference. I also spoke to Alvin regarding the use of Free Cash Flow to replace the Operating Cash Flow method in measuring the Operating Efficiency as it is more conservative but we agreed that it would make the calculation much more complex than it seemed to be. Maybe this would make a great learning tools for a more advance classes if they decide to have it one day.

Last but not least, I think the breakout for the investment game was very fun and entertaining and it shows how difficult it can be when it comes to investing. My team unfortunately came in 4th so we did not manage to get the prize money.

$98 and $1888

I thought for $98, it was one of the cheapest course you will ever get in the market out there with the amount of knowledge you bring home. The team also has a list of CNAV databases and lifetime coaching regarding portfolio management etc valued at $1,888 which I thought was very reasonable. If you believe in the strategy, I thought it is a no brainer to get the whole package as the team has a wealth of knowledge that you can tap on other than just the CNAV. For example, I have a 70 year old retiree in my team and portfolio management would become one of the more important factors in his investing decision.

Overall, I really enjoyed the session and I have learned a great deal from the course in just one single day.

Once again, I would like to thank the BFP team and should you too be interested in this course, you can check out their link VIMC.

P.s: This is not a paid advertisement and everything written is purely my own personal opinion about the course.

Saturday, September 20, 2014

Understanding a little bit more on debt and gearing

There has been a decent number of going concern recently from fellow bloggers that taking on debt is seen as a no go and some even try to completely avoid them as they are seen as a bad apple. Similarly, the approach these very same people take when it comes to investing is to filter off companies whose debt or gearing ratio reaches a certain threshold, say above 50% or 70%, depending on one threshold.

While the above imposes certain sense of prudent investing, my purpose of writing today is to open up an explorable idea that undertaking certain kind of debts need not inherently be a bad idea and if you are one of those who filter off these companies completely just because they are laden with debt, you may be missing out on some good companies out there.

Just like how using credit card prudently can be beneficial to most of us, a company that uses debt need not be inherently bad. As a matter of fact, debt is almost always a much cheaper form of financing than equity. Take MGCCT for instance, their current gearing stands at 38.6% and costs of debt is at 2% due to their ability to obtain financing during the period of low interest rate environment for their strong sponsor. If you are one of those investors who have strict criteria in your investment to filter off companies with gearing more than 35%, then you would inherently miss out on this counter. In fact, MGCCT is one of the few reits with the one of the lowest costs of debt out there and yielding pretty decent returns for the shareholders. Their ability to cover these interest costs are also pretty decent with coverage ratio at 4.8x.

Secondly, debt can also be a form of tool to boost the company's Return on Equity (RoE), especially when their other levers such as operating and asset efficiency are not performing well. Ironically, I have encountered a blogger who avoided investing in Reits because of the high leverage but choose to invest in Starhub instead. I'm unsure if he realises that Starhub has a pretty high debt/equity ratio, coming down from as high as 16x to the current of 8x.

Third, gearing of a company is often a function of both the numerator and denominator - liabilities over equities or assets. But many investors look at gearing as a form of control only on the liabilities side and often the other part was neglected. Take SPH for instance, when they spin off their Paragon and Clementi mall into the SPH Reit, their gearing falls from 40.6% to somewhere around 8%. The immediate reaction from the crowd was the amount of debt goes down but that is not the case. Apparently, gearing goes down because equities have now risen resulting from the sale of those assets. Similarly, most assets are revalued at least once a year so this will also affect the nature of the gearing.

Finally, I am writing this post not to debate whether taking on debt is a good or bad thing but rather hoping to open up how people can view debt in a different light. Just as Howard Marks view risk differently than the traditional with higher risks not necessarily equal to higher returns, the same view can be said with taking debt and they are often not necessarily a bad thing to have in your balance sheet.


Saturday, September 13, 2014

Are you prepared for the next equity stock market crash?

First of all, apologies for the lack of postings in the last couple of days as I was busy preparing for both work and school projects due.

Being as busy ever, I still kept a look out everyday on the macroeconomic front news to keep up with the latest news on what is happening around the world.

Recently, as the stock market hits a new high in the US, there's been a growing feeling that some investors have been looking for an exit opportunity before the "potential" stock market crash that no one really knows when will it be coming.

Some big players like Soros, for example, have been preparing for the crash by accumulating a huge long position in Gold, where he believes acts as a proxy to safe haven when the stock market crash is on the horizon. Another big player, Icahn, increased his holdings in energy stocks to hedge against a stock market crash.

There are fellow bloggers I know that kept their eye solely on the business and valuation of the company without accounting for any noises from the market. And then there are other bloggers who kept their current holdings without selling but increase their allocation of investment warchests to prepare for the next crash.

I think it is fair to say that different investors have different types of strategies to prepare for the next market crash. For myself, there's really a couple of things I would like to do personally:

1.) I am open to selling my current positions if I feel they are somewhat fairly or overly valued. I always feel that if the price of a stock is not what you would like to buy, then it would be the price you would like to sell. So while the buy and hold strategy still holds true, I do take into account its price multiple valuations closely, i.e how much price relative to earnings it has run up.

2.) I see gold as having a unique feature to outperform as speculative assets when there are uncertainties that might threaten our currency fiat system. I currently hold some physical bullion that makes up about 4% of my overall portfolio allocation, so I think it should be fine for now. I would like to build up this position up to 10% eventually, so we'll see what happens.

3.) I would also be building up my investment warchest somewhat aggressively from now on, so I would not expect too much action on the buying front for the next couple of months, unless something becomes a value buy.

What about you? What kind of strategies do you employ when preparing for a market crash?

Thursday, September 4, 2014

Jeremy Grantham - Market will crash badly after S&P tops 2,250

The week has been really productive for me as I've managed to stay at home and read a few good articles and understand a bit on the valuation theories by various asset fund managers, one of which is Jeremy Grantham whose articles have been published a few times by fellow blogger Drizzt.

For those who are not familiar on the guy, he is the asset fund owner of asset management firm, GMO who has correctly predicted the dotcom market bubbles in 2000 and the housing market bubbles in 2008 based on his theory which I thought was interesting to share.

To him, a bubble is indicated by a 2-sigma event using Tobin's Q indicator and when that happens, he believes the market will eventually corrected itself by reversing to the mean. Past market bubbles, including the dotcom bubble in 2000, have exceeded the 3.2-sigma before imploding while the 2008 GFC crisis was a >2-sigma event. The U.S Housing market in 2008 was an incredible 3.5-sigma event.

*Tobin's Q is an indicator developed by Nobelate prize winner James Tobin that measures the market value over the replacement value of a company. A 1.0 indicates that the market value correctly reflects the book value of the company.

In 2014, the US stock market are currently a 1.4 sigma event as of 31 Mar 2014 when the S&P was at 1,880. Today, the S&P have breached the 2,000 point which indicates that it's probably gone higher and closer to the bubble. According to Grantham, a 2-sigma event is when the S&P hits 2,250, so that's just another 10% more from current levels.

The thing about this Tobin's Q indicator is it measures a long time horizon and not short term. So an overvaluation sigma event can remain high for a number of years before eventually reverting to its mean and vice versa. As and when the market hits new high, it is always prudent to look at some indications and justify whether you are able to stomach the risk for a given level of returns for your portfolio.