Thursday, April 30, 2015

Recent Action - Nam Lee Metals

I have kept this counter in my watchlist for a long time now and I decide to enter into a position recently at a price of $0.29 for 70,000 shares. I have been sick recently because of the cold so didn't have time to write the report immediately.



Some of you may have heard of this stock before and there’s a couple of great written articles on this previously so I will not go into the details that have already been presented but more on what I think of the business. But let’s go through some basic findings about the company first. 


Business Overview 

The company designs, fabricates, supplies, and installs steel and aluminium products in Singapore and Malaysia. The core business operates through four segments: Aluminium, Mild Steel, Stainless Steel and Others. Its steel and aluminium products comprise of gates, door frames, staircase nosing, laundry racks, letter boxes, sliding windows, doors and curtain walls for construction flats and houses. The company also offers aluminium mainframes for container refrigeration units, grilles, drying racks, hoppers and other metal and steel based products. 

The company has a rather small market capitalization of around $70M and a free float of around 40%. 


Financials Overview

This is a company that is abounded by the various great looking metrics all around and I am pretty sure many investors are attracted by them to be invested in the company. But let me give some views to highlight both the positive and negative of that. 

The company is well known to be a great net-net example of what Benjamin Graham preach in his book. Great assets, mostly great income producing and working capital assets, good majority amount of cash, virtually no borrowings on the book and trading undervalued at good valuations. This is to a large extent true if we look them from a liquidation point of view as the current price is trading at a 42% discount (P/B = 0.58) to its NAV at 50 cents. A value investor would also see this gap as a margin of safety as it provide a buffer to the running operations of the business. 

However, there are still things that we should be taking note of more closely.

B's customized financial statements (2007 - 2015)

1.) Cash – The company used to own a larger majority of cash of over $50m at one point before they were reduced to where they are now at around $33m (latest balance sheet). Out of this, $6m belongs to long term bond investment which they were invested in maturing in 2020. 

The problem with holding so much cash on the books is first it erodes the return on equity the company is churning out and secondly it inflates expectations from retail investors to the management to distribute more dividends from its earnings and cash hoard. We know how hard that can be to explain to investors from the management point of view as we will see next.

2.) Cashflow – Due to the nature of its business, the company has often a long chain of working capital that it has to manage with, resulting in the need for cash on its books to make buffer for unexpected emergencies. Inventories and trade debtors are often associated with the product mix completion of certain construction projects which can be lumpy at times. This is probably why we are seeing a bumpy ride of years with great operating cash flow followed by years of negative operating cash flow next. 

Maintenance Capex is often in the range of $1 - 2m while the company had recently purchased a one-off acquisition of a factory in Malaysia which costs them around $8m, which will boost the scale of operations along with the other four operating facilities. This was funded via internal so cash decreased by around the same amount. 

Free cash flow is positive most of the times, except for recent years due to the purchase of operating facilities and changes in the product mix which increases the working capital inventories.

Often, people has this misconception to treating this as a weakness but I personally don't think too much into it, other than the fact that those cash we are seeing cannot be distributed to shareholders. As far as I am concerned, I only see this as a risk if we are seeing plenty of impairments to the inventories or an increase to the bad debt provision to the trade debtors. Other than that, this is simply a timing issue which will eventually goes back to company's pocket. Still, we want to see cashflow going back to the company as fast as possible.

3.) Return on Equity - The return on equity seems to go back in recent quarters and this is despite having such a humongous cash hoard that hurts their roe.

4.) Earnings Yield and Dividends Payout - The company has been consistently generating double digit earnings yield for the past 8 years. Even during the gfc crisis the company managed to churn out 10.1% yield. Recent quarters seem to suggest that the trend could be coming back, though we still need to look out for potential slowdown for the construction business.

The company has been paying out roughly less than 50% of the earnings as dividends and retained the other half. This come across to me as being reasonably conservative and I would rather they do it slow and grow the business rather than being aggressive and pay out higher dividends.

Segmental Business

There’s some sort of problem for investors trying to evaluate the company since they did not specifically state the segmental difference between their container and construction business. One of the reasons I could think of is due to competitiveness since they would have to bid for these businesses. This is rather similar to what Vicom did since 2011 when they stopped their segmental reporting. However, from the recent negative outlook surrounding housing flats, it appears that the majority of the revenues and profits come from the container segment. 

However, the company did report a breakdown from a product categories level which we can infer from its recent annual report. According to the AR, Aluminium contributed the major share of turnover and profit contribution at 78.5% and 51.3% respectively. Mild Steel came in second with this category contributing 21.2% and 28.3% for revenue and profits respectively. 

The price shown below will have an impact to the profit margin of the company since they are dependent on the metal.


Aluminium Price (2005 - 2015)


Concentrated Risk


One problem that highlights the company's main operation risk is the customer concentration. It seems that a single major customer accounts for a substantial portion of its revenue and profits, which appears to be Carrier, a subsidiary from the big player United Technologies.




This is also the main reason why I decide to hold off my purchase because from the latest announcement, it seems that the company has just renewed its long term contract with the customer for another foreseeable future of 5 years or more. The company seems to have a long term relationship with the customer, so the renewal seems to confirm that both parties are happy with doing business with one another.


Valuations 

I didn’t want to really do a deep dive calculation based on discounted cash flow valuation this time round because I do not think that would be the most suitable valuation methodology to use for this company. 

Instead, I will be looking at it from two direct perspective. 

First, as mentioned above, the company is trading under great liquidation value so from the assets perspective, I am looking that as a base to protect any unexpected impairments or earnings downside.

Second, from the earnings perspective, the company is trading under a trailing earnings yield of 10.4% for FY14, a year which I thought they have bottomed out and done pretty poorly in terms of project cost overrun. Based on the first quarter results, it appears that margins are starting to improve and they are getting back on a better track, so I am expecting things to improve from here and the company to generate an earnings yield of at least around 12% for FY15. Do note in mind that this is based on a scenario where aluminium price was lower than average and demand for construction is low and they are still able to generate a strong earnings yield. Current EV/EBITDA is still only at 5x. Back then when things are booming, EV/EBITDA was at 2.7x, a fantastic position to be in.


Conclusion

Overall, I think that this is a good company with a great track record that is currently trading at a relatively good valuation. I do not look at the potential upside from an asset point of view because of the abovementioned reasons but rather as a good potential liquidation back up value with the strong cash and working capital assets they currently have on their books.

The dividend yield is pretty decent for the shareholders at around 5.2%. Unlike Reits which are structured to give out majority of its earnings as dividends, the strong earnings yield generating capability and a conservative payout suggest that the company is able to retain the same to further grow its assets. The increase in NAV every year would suggest to prove that's the case.

If you are looking to do a quick hit and run, I'll suggest you skip this stock and look for counters that tend to give out higher dividends payout. I blogged a few of these stocks in the past. But if you are looking for a slow and steady grow to the business that you intend to keep for long term, this could be one to look out for with a consistent payout and great track record.

Vested with 70,000 shares after recent buy.

What do you think of this stock? Does the numbers look conservative to you?




Tuesday, April 28, 2015

Child Portfolio - "Apr 15 - SG Transactions & Portfolio Update"

I haven't been doing this for a really long time since my son was born and turned a month's old.

Some of you might remember that I had used some of the "angbao" money given to him back then to purchase some stocks in the market for the long term. My wife and I topped up the majority of the part of course. You can view the original article here.




Our idea back then was to instill a habit and teach him the importance of investing from young which we will be grooming him as he gets older. Since it is evident that his time horizon is longer than us and it is his money that we are helping to invest, we think that it makes sense that the investment is made towards a blue chip stock. After all, when he gets older and started to understand basic things about investing, it's probably more prudent to start with blue chips than small caps. At least, when things get tough, we have a powerful backing behind some of these selected blue chips.

Anyway, my son just turned 1 year old this month and I decide to do the same for him to make this a regular annual exercise. Combining all his "angbao" received from his grandparents and family members, we decide to top up the rest by purchasing another lot of ST Engineering


Child Portfolio

No.
Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
ST Engineering
3,000
3.58
10,740.00
100.0%



The "purchase" was rather unique because it actually didn't quite involved purchasing from the open market. The move was made by transferring one lot of what I currently have in my portfolio to his. As a result of this move, I now own a lot lesser than what I had previously had in my current portfolio. The reason why I chose it this way is because I want to have more cash available in hand, which has now increased to above the 42% level.

In any case, I'll update the portfolio for the purpose of my own tracking for now and the future.


Sunday, April 26, 2015

Are You A Virgin Investor?

Having been invested in the market for the past 5 years, it seems too easy, at times falling a little complacent to extrapolate past performances to future returns. 5 years of experience in the market is not extremely long nor can it be considered short. The truth is there's plenty to learn from our own mistakes from the time we started investing to where we are at currently.

There are some people who have been in the market for decades and more often than not, they are likely to be equally complacent and greedy and are likely to repeat their mistakes. We often hear how deep recessions in the economy put strains on the job market and provide a stern test to the investors' mettle. The weak investors are usually wiped out during these periods and they are the ones usually afraid to be further engaged in the stock market. New investors will come into the market and the cycle repeats until a bubble is formed and we are back to where we are.




William Bernstein has categorized these different groups of people discretionarily in his book Rational Expectations. He chose to focus on the important behavioral issues that are often the stumbling block for most investors.

Group 1: The average retail investor, who does not have a coherent asset allocation strategy and who owns a chaotic mix of mutual funds and/or individual securities, often recommended to him or her by a broker or advisor. He or she tends to buy near the bull market peaks and sell near bear market troughs.


Group 2: The more sophisticated investor, who does have a reasonable-seeming asset allocation strategy and who will buy when prices fall a bit ("buying the dips"), but who falls victim to the aircraft simulator/actual crash paradigm, loses his or her nerve, and bails when real trouble roils the markets. You may not think you belong in this group, but unless you've tested yourself and passed during the 2008-2009 bear market, you can't really tell whether you are an experienced or virgin investor.


Group 3: Those who do have a coherent strategy and can stick to it. Three things separate this group from Group 2. First, a realistic appraisal of their true, under fire risk tolerance. Second, an allocation to risky assets low enough, or a savings rate high enough to allow them to financially and emotionally weather a severe downturn. Third, an appreciation of market history, particularly the carnage inflicted by the 1929 - 1932 bear market. In other words, this elite group possesses not only patience, cash and courage, but also the historical knowledge informing them that at several points in their investing career, all three will prove necessary. Finally, they have the foresight to plan for those eventualities.




Group 1 is often the group of people we've seen appearing and very actively involved in the bull market. They do not usually employ an asset allocation or risk management strategy and have the tendency to panic for every single market movement across the index. When financial markets start to turn bearish, these are the same group of people who will lead the losses as they will panickedly sell off their holdings without much strategy in place. They tend to look for short term profits in nature and see the stock market as a function of casino alike. They are also emotionally and psychologically the weakest in times of both the bull and bear market. A good example of this is the herd mentality concept I've often talked about recently.

Group 2 is probably the hardest to disseminate and where everyone thinks they belong to in the category. These group of people are usually slightly more sophisticated than the previous group and think deeper before they made the decision to invest in the market. These group of people are also aware of the importance of a proper asset allocation but given their vastly lack of experience in the market cycle, they have not been seriously tested in terms of emotional and psychological investing. In his book, Bernstein mentioned: "If you began your investing journey after 2008, or haven't started yet, then you're an investment virgin."

Group 3 is defined as the ultimate of all the category. Having tons of experience in the market does not automatically qualify the investor to be in this category, but these group of people have usually plenty of experience dealing with the ups and downs of the full cycle of the market. The investor in this category is able to dissect the emotional factor from the investing and the willingness to take risks is paramount much more than the movements of the daily market volatility. There's a lot of psychological awareness that the previous 2 groups lack in terms of past historical incidents in the market and the three combinations of patience, courage and foresight are what that makes them stand out from the rest.

Now that you know, which category groups do you think you belong to?


Saturday, April 25, 2015

Recent Action - FraserCenterPoint Trust (FCT) (2)

It's been a pretty eventful week for me as I went on to take some time off away from work and the market to prepare some of the things required for my son's birthday celebration last Thursday.

I have previously been alerted of some of the reporting earnings season, which did happen for both of my Reits. I have studied them and analyzed them pretty thoroughly and I made the decision to proceed with my second partial divestment this week for FCT at a price of $2.15 for 14,000 shares. I have also previously partially divested the shares which you can view here.




A lot of the investment thesis regarding the decision to sell remains the same as the one I previously suggested. Since the company has since announced their 2nd Quarter results this week, maybe I'll take the time to also go through what I think of the results and outlook.


Financial Performance

I'm not going to go through the financial performance in depth since everyone would have an access to view the results directly from the website. 

I think it's been a pretty well executed textbook standard by now that FCT management is one of the best managers out there in managing the portfolio's malls and extracting the best out of the lease to improve distributable income for shareholders every single quarter and financial year.

Both topline and bottomline have improved qoq and yoy, and the DPU for the quarter is the highest ever DPU for the Q2 reported by the company. Gearing level has also remained fairly low, which I will be touching on a little more later in details. Occupancy rate remains steady and high with top 3 malls contributing strongly to the results.




Debt Maturity

FCT gearing remained well managed at 28.6%, which allows them room for any sort of asset enhancement improvement in the near term should it be necessary.

The company's average costs of debt is at 2.79% but as we will see from the debt maturity profile below, it appears that they will need to refinance the majority of their borrowings in FY15 and FY16 at a higher costs due to rising interest rate environment. The costs of debt will increase though the same can be said for all the other Reits with short maturity profile and it is one risk that investors need to take note of as this will directly impacts the bottomline of the distribution. Interest coverage ratio remains very comfortable so there is unlikely to be a risk where they are unable to repay the latter, unlike scene we've seen back during the GFC.




Shopper's Traffic and Tenant Sales

I previously shared in one of AK's chit chat session which I was invited regarding the impact of shopper's traffic and tenant sales in negotiating deals for step up rent. I had previously worked at one of the retail Reits so this is something which I managed to pick up when I was working there.

The role of the asset managers is to engage and bring in more traffic into the malls. This can be done through engaging impact performances or attractive events to draw in the crowds. MGCCT management is extremely good at this and if you are interested you can look at the various activities done by them to draw in the crowds.

The role of the tenants is to convert those traffics drawn in into sales which makes the basis for negotiating the step up rents with the asset managers when the leases expiry.

As we can see below, shopper traffic remained steady year on year while the company did not report any tenant sales performance. My suspect could perhaps be that tenant sales have dipped and the company may want to exclude this information from the performance slide. For our comparison purpose, tenant sales have been up and down for CMT, so this is something that we can refer to for any sort of guide, though the latter has a different portfolio of malls located across Singapore.




Step-Up Rents

Step-up rents play an important role for any retail malls if we are going to see any increase in the distributable income for the foreseeable future.

As we can see from the table below, step-up rents are already under pressure as we see a lower trend of step-up rents across the years. This can also be seen from the various shutting down of brands in Singapore that have highlighted on the news for reasons cited as being expensive rental.

The FY15 highlighted below shows a clear decreasing trend now as we probably reach an inflexion point where the step up has to slow down, especially if traffic does not improve tremendously and tenants sales do not increase in tandem.

Having said that, I'm pretty sure the management is able to extract the best out of CWP and Northpoint since there are huge development being built over there in years to come.




Conclusion

FCT is a good company and recent price have somewhat rocketted upwards due to positive investor's sentiments about the overall market in general. 

The company is now yielding at around 5.4% and if we take out 2.5% as a benchmark for the risk free rate, we should be asking ourselves whether we are undertaking sufficient margin of safety for that additional 2.9% for the foreseeable risks they are facing in the next few quarters.

My take on the overall Reits sector is that it has been pushed up rather too bullish in recent months and I would like to cash in on these euphoria moments since the opportunity presents themselves with it.

Some of the recent excitement regarding investor's sentiment in purchasing some of the Reits such as CMT, CCT, Suntec, etc have baffled me very much. These people are buying in at such an excitement as if these Reits are yielding a high 8% to 9%. When I look closely at these Reits, they are having a forward yield of around 4.9% (that is less than 5%!!!). Although I concur that they have some of the best assets around in the portfolio, I just wonder if they are undertaking the risk too much right now by having those sort of returns these Reits are offering. Reits are afterall a vehicle that distributes more than 90% of their earnings, retaining very little for expansion and having debts on their balance sheet.

For investors going in at current price, I want to voice a concern to make sure that they know what they are getting into. The downside is obviously going to be much more likely than the potential upside so unless they have the mentality to hold through for a very long term, they might suffer some sort of up and down testing emotionally when interest rate starts to rise.

Vested in the remaining 10,000 shares for FCT.


Tuesday, April 21, 2015

Recent Action - Sembcorp Industries

A quick update on the latest transaction I've done since my last portfolio update:

As part of my ongoing resolution to rebalance my equities and cash allocation due to the recent market run-up, I have divested all my 10,000 shares for SCI at a price of $4.84 today. The counter will be going ex-dividend this Thursday so I will not be receiving the 11 cents/share dividends declared.



Some of you might remember that I did a few valuations on SCI a couple of months ago which you can refer to the original articles below.

In the valuations, I input a few assumptions into the model and came up to an intrinsic value of $5.16. You can view the assumptions in the original article and tweak around as you deem fit. At a price of $4.84 which I divested today, it came up to a rough discount of 6% from the intrinsic value I calculated. Pretty fair more or less if you ask me. The stock valuation was much more attractiveback then when they were at the bottom $4 than now. Having said that, there are a few updates related to SCI since my last report in Feb which I have not factored in:

  • Risks in SMM in regards to cancellations of orders, delivery delays and margin pressure from the Brazil drillship project.
  • Oil seems to have bounce back from their recent low. Whether or not we'll see another trough will be for the future to predict.
  • Sale of municipal water assets in UK. The company will record a one-time gain of $50m from the sale. However, the recurring utilities segment will be impacted at around 2% of the utilities earnings. Do note that UK remains the fifth biggest geographical segmental contributor after Singapore, China, Middle East and Rest of Asia. The water contribution meanwhile remains the lower end of the contributor to the utilities segment after energy power and energy gas & steam.




As far as price to earnings valuation is concerned, the company is now trading at a multiple of 10.8x which is in line with the long term average mean for the past 7 years. EV/EBITDA has gone up to around 7.9x which is slightly higher due to the weaker balance sheet and more borrowings on the books, mainly due to expansion from the marine and utilities segment which has not crystallised. Having said that, capital expenditure expansion should subdue in the next few quarters so we'll probably see more borrowings being repaid off.

The above capital reallocation has now increased the warchest portion to around 30%, which is at a much more comfortable level.


What about you? Still buying at this price?


Sunday, April 19, 2015

"Apr 15" - SG Transactions & Portfolio Update"

 No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
China Merchant Pacific
69,000
1.16
80,040.00
26.0%
2.
FraserCenter Point Trust
24,000
2.06
49,440.00
16.0%
3.
SembCorp Industries
10,000
4.71
47,100.00
15.0%
4.
Vicom
6,000
6.70
40,200.00
13.0%
5.
FraserCommercial Trust
11,000
1.52
16,720.00
5.0%
6.
ST Engineering
4,000
3.81
15,240.00
5.0%
7.
Stamford Land
10,000
0.58
  5,800.00
2.0%
8.
Noel Gifts
18,900
0.30
  5,670.00
2.0%
8.
King Wan
5,000
0.31
  1,550.00
1.0%
9.
Warchest*
45,000.00
14.0%

Total SGD


306,760.00
 100.00%

*Does not include emergency, social security (CPF), insurance endowment, and short term (1 month) funds for immediate working capital.




There's a couple of changes made to the portfolio since the last Mar update here which was roughly more than a month ago. I've added new counters into the portfolio for Noel Gifts which I blogged at over here and divested part of the stake in FCT which I also blogged here.

I have not made any transaction yet for the month of Apr but there's a few more days to go before the end so we'll see if that works out well in the end. I have been researching for at least two of the counters which attracted my attention and I may go for them depending on the market conditions. I'll blog about it should I be able to get them.

There's a flurry of good news for the month of April which I am very fortunate to be part of it and would like to share with fellow friends and readers. They are not entirely financial related, but to a large extent a big part of my life which I hope to do well in.

The first is the extended bull run which we've seen over the past few weeks and being heavily vested in equities, I've managed to participate in a lot of the recent run-up which pushes the market valuation of the counters rather high. I've considered the options about locking in some of the gains to some extent and I'll be honest to say that I've thoroughly looked at the counters in my portfolio and doing review after review to each and every one of them but have yet to come up to a decision. In the previous post, I've blogged much about finding the right conviction to sell and I certainly do not want to end up having to liquidate because of fear in the market for the short term. If I decide to sell, it'll probably mostly because of the right reasons I believe in - either an asset allocation rebalancing or valuations for stocks which I think has been overvalued.

The second good news is about the performance bonus which was distributed based on past year performance. Due to moving out to another company in the middle of last year which I blogged here and then going back halfway, the amount of bonus was pro-rated. Although the amount isn't anywhere significant, the timing of the bonus was perfect as I am in the midst of increasing cash as part of overall portfolio allocation. The recent run up has allowed equities to gain much and the cash portion would come in really handy to balance the increase value in the equities. I'm also glad that I am able to use part of the cash from the bonus to top up $7,000 for my special account which I have blogged about here.

The third good news is still somewhat related to my corporate role. I am extremely fortunate to be promoted within my organization this month which rather comes at a surprise. I wasn't definitely expecting any promotion to come so this is definitely a bonus for me. Human assets in an organization play a very important role in the capital I've managed to put in so far so this is something that I think many active workers out there have to fight for especially in the first few years in the corporate role. Even though my aspirations to quit the corporate world one day may resemble across many other aspiring financial independence bloggers out there, we still need to make it count for as much as we can. Just like dividend investing, the more we get out of our active income early in our life, the faster the compounding effect will kick in once you get to the 30s.

The fourth good news is probably by far the biggest impact I have for the month. My baby son is finally turning 1 year old this month and as a parent, I must say that I am delighted to be able to watch him grow and by his side every single day after my working hours and weekends. To make it more pleasing, the first word that he can mutter out of his mouth was "Daddy", which really makes it count for the amount of quality time I have been able to spend with him and my wife all these long. I thank every part of my lucky stars, including my wife for that to happen and probably what makes Financial Independence really about one day.

Last but not least, the final good news is my portfolio has finally been able to breach across the $300K for the first time ever. This is a great milestone I have been patiently waiting since my last milestone at $250K which was exactly a year ago (original post here) and even though the market run-up has been the major culprit, I must thank the spirit of continuous perseverance and persistence which have somewhat paid off rather nicely.




So that's it for the month of April. 

Having recounted all the positive news that has happened this month, I just want to thank a lot of these things to my families, friends and fellow bloggers who have supported me and make me who I am today. I know I can count on them for almost anything that happened in my life and I am so grateful to have them in my life.

Next month will be huge in terms of dividends. A lot of companies will be going ex-dividend in May and with market volatility as high as we are seeing right now, it's probably prudent to keep our eyes close for our investment.

Thanks for reading.

What about you? How did you do for your April month?


Thursday, April 16, 2015

The Beauty & Beast of Selling Stocks

Imagine yourself as an investor holding shares in ABC company at an average price of $10, which you have bought at a reasonably fair price based on your conviction. You see the stock price slide downwards to $9.50 in the short term and you managed to convince yourself that you are a long term investor. A couple of months later, the stock price trend upwards (and above the entry price) to $11. You pulled out your spreadsheet and a 10% gain is staring right in front of you. You hesitate a while and look out for news around to see the outlook of the economy. Heck, there is going to be some projected problems in the next few months ahead, let me lock in the gains first, keep them in my watchlist and re-enter them again when the price has gone down lower.


 
 
This post is about finding out the beast-art of selling stocks and the right convictions or reasons to selling. This is not a debate about whether you have made the right choice to sell because this can only be proven on hindsight and there is no way anyone can tell you it's right or wrong to do so unless things have happened.
 
A lot of books and value investing courses are focused on the art of buying but seldom do you see anyone touches on the action on selling. To me, I am not delusional to only buying. As an investor, I believe that we act as a business owner and every business has a valuation where there will be a point where the price is attractive enough to sell. It does not matter whether our term of valuation is subjective as long as our conviction to selling has led to the right justification to it.


 
 
Yesterday, I casually posted a question to one of my circle of close financial bloggers friends in the chatgroup. I just wanted to see the perception of what the majority of investors are thinking. I posted a question to see which of the following is the hardest as an investor:
 
1.) Entering into a position when everyone is selling and there's blood on the street.
 
2.) Building up a core position based on conviction within a portfolio.
 
3.) Sitting on a fundamentally unchanged business fundamentals and seeing a rising share price.
 
 
Majority of the choices led to choice number 3 because the temptation to take profits is there, akin to putting a gambler who has promised to quit gambling in front of the gambling table and do nothing. There's a reason why many investors sold their winners too early while holding on to the losers too long.



 
The recent market surge has provided a very good opporunity for investors to exit positions at a gains to lock in profits. I've written about the "half-half philosophy" in my previous post (here) to substantiate this point. The decision to sell should ultimately be wrapped upon your end goals, not for short term gains. This is the reason why we need to have a clear investment thesis when buying and that is to ensure that we do not engage in emotional trading in the short term. Sell only when these investment thesis are broken, either because the fundamentals are weakening or valuations are too high.
 
I am taking the below graph from my good fellow blogger, Jason (who blogged here) who illustrate this point. This is not to point out that divesting shares at a 20% or whatever it is is not fantastic, but to have a clear investment thesis and effective investing strategy because you never know if the fundamentally great stock you are selling will ever go back to a price lower than what you are selling at. If so, are you saying that you forego a fundamentally great business and start to look on for a new business with the same level of fundamentals but undervalued? A wonderful business with strong economic moat is usually very rare to come by, so I wouldn't be sure if I am willing to divest that for a mere 20% profits or so. Think yourself as a business owner and you get a better picture.
 
I've been a victim more than once now caught in this situation when I sell a fundamentally good stock in Boustead at a sub-par of $1+ and it has gone up ever since. This is not to say that it won't go back to where it was but the chances are highly unlikely unless the fundamentals dropped massively or the economy is tanking because of severe depression. Even so, my investment thesis for the stock would have changed too.
 
 
 

Questionnaire

I've been thinking of coming up with an informal sort of questionnaire for myself whenever I contemplate to sell something. This may not be comprehensive but I think these 10 questions allow us as investors to think through the whole end to end processes from buying to selling.
 
1.) What is the rationale behind the reason to sell?
2.) Are the fundamentals weakening? Has the fundamentals changed?
3.) Are the valuations too high compared to peers or historical average?
4.) Would I be a buyer at current price?
5.) Are there better alternative investments I can allocate the capital to?
6.) Was it driven by fear of the market/economy/news?
7.) Are the companies exposed to product or market cycle upturn and downturn?
8.) Are the companies still responding to positive catalyst news?
9.) Are the companies or management doing share buyback?
10.) Am I selling (not selling) because my average entry price is low (high)?


Final Thoughts
 
Just like buying, the decision to sell is ultimately personal.
 
As long as we've think it through and the decision doesn't get emotional, we should be able to make a more rationale decision than we would have if otherwise.
 
As you might probably realized by now, our behaviors and decisions drive whether we ultimately end up with a great investments or not. We'll be far more successful investing in stocks generating average returns than we will with the highest potential returns but with bad investing habits and behaviors.

What do you think? Do you agree or disagree? Which of the 3 choices you think would have been the hardest for you as an investor?

Wednesday, April 15, 2015

Different Stakeholders Different Priorities

It should not be a coincidence to know that different stakeholders play different roles in a business organization and each stakeholder hold different objectives and priorities.

Many of us who are financial bloggers are mostly undertaking two different stakeholders role at the same time. We are either mostly employees in an organization or shareholders/business owners of an organization. We probably already pre-divulge the answer to ourselves unknowingly by having different expectations as an employee or shareholder. But let's go to that.


As an Employee

Employees are a very important part of a business organization that are much underrated by the key stakeholders of the company. We will see about this later.

Aligning employees with the organization's strategic goals has become increasingly important (and difficult) as organizations struggle to promote retention, ensure productivity and gain competitive advantage. This is probably why you see companies hiring on human resources to do all of these. They are not just there to do the administrative stuff you think they are doing.




The first thing we would not want to see ourselves fall short as an employee is in terms of our compensation and benefit. Before we commence our employment, we would usually consider thoroughly and compare the payscale throughout the different choices we may have to ensure that we are kept as competitive as we could in terms of pay.

As an employee, we'd also like to see that the management is competent enough to drive the company forward. This is more than just because we are able to receive higher bonus but more because our efforts have paid off to yield results over time. Most employees also feel proud working for an uprising organization than a sinking ship anyway.

Many companies have implemented a cost controlling activities in terms of hiring and increasing productivity. As an employee, it's usually difficult to understand the consequences underlying the actions taken by the management even if there are headcount crunch to churn out the work required to be done. This usually quickly backfired and resulted in resentment and unhappiness and retention becomes even more difficult to do so.


As a Shareholder

A shareholder can be considered as similar to a business owner, and we can see how quickly the perception difference in the priorities changes from the previous.

Similar to an employee mindset, I'd like to see a competent management driving the company forward by increasing shareholder's value over time.




However, as a shareholder, the difference now lies in the bottom-line profits of the company. I don't know about you but when I analyze financial statements of the company I am vested in, I'd like to see overhead costs, in particular salaries and administrative costs down due to increasing productivity. Take a friend of mine who is working for ST Engineering for example, a company I am vested in. I often get to hear him complaining about the bonus or increment the employees are getting but as a vested shareholder, I am actually smiling behind my back. Okay, I am not a pervert and I was joking about the last part but you get the idea. 


Final Thoughts

I never thought of financial independence to being in two different selections of stakeholders.

Some people like to work being an employee for as long as they would like while some wished they could be a business owner or shareholders.

I'd preferred to be in the quadrant of a shareholder or business owner one day when I finally achieve financial independence but I'll leave it to that when it comes to that stage.

For now, I'll just have to know that different stakeholders different priorities. 


Sunday, April 12, 2015

Where Market Valuation Is At Right Now? (2)

Back in February, I posted an article about the current state of market valuation at that point in time. You can read the article here. Given that we are now 2 months ahead, maybe we should take a quick revisit at where the market valuation is at right now.

As an investor, I think it is prudent knowing what and where the current market valuation is heading as a source of information, even if you do not intend to use them for decision making purpose. I've received a few emails in recent weeks asking me whether I'm starting to turn bearish on the stock market. I think the answer to what I think is pretty irrelevant. What is important is knowing and understanding your own position in the market justifying instead of deluding yourself into believing that you are "investing" when you are or actually not.




With that, let's see if there are any changes to the market valuation from where it were back then in February. I am going to use the same valuation metrics for easy comparison purpose.


1.) Market Capitalization to GDP (Buffett Valuation Indicator)

The market cap to GDP ratio, also dubbed the Buffett valuation indicator, is a long term ratio used to determine whether an overall market conditions is undervalued or overvalued. As the ratio suggests, a result that is greater than 100% is known to be overvalued while a value below 100% is know to be undervalued.

The ratio suggests 123.1% back then in the last quarter, and now it has increased slightly to 127.4% in this quarter. This simply implies that the valuation in this indicator is in bubble territory and the bubble is expanding in this quarter. The ratio is now above +2 SD and this is the first time that it happens over the last 50 years or so, only to be eclipsed by the great bubble in 2000.




2.) Q-Ratio (developed by Nobel Laureate James Tobin)

The Q Ratio is an indicator of the total market value divided by the replacement cost of the overall market. This is a little bit like measuring the Price to Book where the earlier was like the Price to Earnings. Again, anything above 100% represents overvaluation while anything below represents undervaluation.

No changes to this quarter from previous quarter. The current situation represents a ratio of 1.11 which indicates that the market is overvalued in terms of its replacement value, a concept that is almost similar to the book value.




3.) Regression To Trend

The regression trendline drawn through clarifies the secular pattern of a variance from the trend. Where the market is trending above the regression slope, they are known to be overvaluation while the converse is true.

The data shows that the inflation adjusted S&P Index price was 93% above its long term trend, down from 96% we've seen in the previous quarter. Nevertheless, there's no doubt that the trend suggests overvaluation above the long term average mean.



Half-Half Philosophy

In the previous article, I suggested that there may be a hype of speculating from the opening of the new accounts especially in the China and HK market.

Similarly, I've also seen many new investors coming into the market at this moment with the intention of investing for the longest term, but because for some reason they've landed in the market in the current situation, they have a "tendency need" to invest right now not bothering about timing the market consistently because a lot of proverbs have been saying that no one has the ability to do so. 

But contrary, some of the decisions I've seen in recent times suggest that these are the same group of people that are not investing consistently based on their own earlier philosophy because they are partly afraid of being caught in the situations of a correction. In other words, these people entered into a position with the intention of holding for a long term but because recent market surge has a potential to earn them a 5% realized gain, they decide to sell first in favor of the gain and redeploy the cash to some other counters, using similar method.

I called this the half-half philosophy because I've been caught in the same position many times, and many more so when I first started investing. The thought of investing for the long term seems pretty cool to many investors out there but when there are unrealized gains staring right in front of your screen, it seems pretty foolish not to be locking in those profits when you can.

To me, this is outright speculation and I've done it many rounds previously and and even now. Notice just how many times the word price is being mentioned and nothing about the fundamentals of the business or valuation is being mentioned. This strategy is definitely not wrong but just don't confuse them with investing.


Final Thoughts

In one of the books I'm reading right now in the "Intelligent Investor", Benjamin Graham defined the difference between investing and speculating this way:

"An Investment Operation is one in which, upon through fundamental analysis, promises the boundary of where valuations are defined, safety of principal is compromised and an adequate return is projected. Operations not meeting these requirements are speculative in nature."

Most of us are probably grown up to be able to make our own decisions. We can choose to play any strategy or games we like and that is our prerogative rights to do so. But having said that, we should do so with our eyes fully open and knowing the truth of the consequences. That is probably what investing in realities is all about.


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