Portfolio Update September 2008

Portfolio Return YTD : -2.51%

What we can learnt from this market downturn

Image via Wikipedia Hope everyone have taken a lesson from this market downturn.

The Key takeaway :-
1) Diversify your investment. Don't put all into 1 or 2 stocks. Why risk it all on 1 or 2 stocks you can't even control. The management can do stupid things and its beyond your control. Whoever tells you to concentrate your investment and get rich? Warren Buffett? But he did mentioned that when he buys into a company, the first objective is to gain control and if not, he will get a significant stake enough to exercise pressure on the management. So, he had eliminated the factor that we small investors can't - direct/indirect influence on the management thru' his significant holdings.

2) Don't speculate, don't do short-term trading... but do monitor your investment at least monthly and rebalance quarterly or less frequently as necessary. In effect, this forces you to sell stocks that have run very high and buy into companies or assets that are underperforming but with potential to gain.

3) Please go and attend a course on understanding financial statements and buy some management books to read. Try to understand the management considerations of CEOs and you will know whether the company is operating good or not. Also, read up on management strategy ... at least try to understand what makes up competitive advantage, whether it is sustainable.

4) Debt level - this one is a killer for all companies (big or small). It is leverage and when times are good, it will be performing. But when times are bad, it will be disastrous.. So, monitor this one... In good times, when u see debt level too high... u will have to start thinking about what happens if the company cannot service or refinance its debt. Look at its interest cover, debt to equity ratio. Look at the annual cashflow and see whether the company is expending a significant of it on debt.

To Diversify or Not?

Image by Getty Images via Daylife I have been emphasizing the need to diversify your investments and not to concentrate most of it on just one single investment.

Yes, there will be investors who quote wisdom from warrent buffett or other stock gurus on the merits of concentrated investment and knowing your investment real well. That diversification is actually an excuse for ignorance.

But how many of these so called amateur investors think they are really in the class of the gurus? Unless they have proven themselves using a diversified portfolio that they have a knack for picking good companies (in which case, the overall stock portfolio would rise in value as well), they should not attempt to do concentrated investment.

Also, there have been numerous studies by private banks that a lot of entrepreneurs and CEOs have a bulk of their wealth tied to the fortunes of their companies (in the form of shares & options). As can be seen during the past few crisis, a concentrated holding (even for CEOs and chairman who knows their company and industry inside out) could not prevent the erosion of their wealth. In some cases, the company going bust (some internet companies, some banks) have allowed their employees to go from millionaires to zero-aire.

So, before you start having this fantasy that you are in the league of the investment gurus, please validate that statement first. Are you in that league yet?

For myself, I admit I'm not in the league of the gurus and to know I am not and to implement a safer risk-managed investment strategy will lead me to multiply my investment portfolio slowly but steadily.

Optimal Leveraged not Over-leveraged

Image via Wikipedia If you looked at most of the recent financial crisis (LTCM, Asian Financial Crisis, Subprime), they were all started because of shaken confidence in the financial system. What followed were the credit problems appearing as companies or individuals who over-leveraged began having problem servicing their loan repayment obligation. Firms/individuals who have strong cashflow/income ability were able to survive but there were also numerous cases of bankruptcies or firesales for entities with weak cashflow.

Recently, Peace Mark of HK over-leveraged by pledging their shares in Sincere Watch to get a bridging loan to finance its takeover of Sincere Watch. No doubt the payoff would be great if it was done successfully. However, there were doubts over its ability to service the loans and since then, several banks have applied for a provisional liquidator to restructure the company with an objective to fufil Peace Mark's financial obligation to the creditors.

For individual investors, we hear cases of investors over-leveraging especially on property purchases as property loans are the easiest to obtain and most leveraged at 80% of property value. In good times, you would no doubt be rewarded as rising property prices will magnify your gains. However, when you are caught off-guard by the turn of economic events. You will be stuck with the financial obligations with the bank and might need to suffer huge losses if you do not have the cashflow to service the repayments.

What is an optimal level of leverage then?

The optimal leverage is to always assume a worst case scenario in your leveraged investments and determine whether you have the financial ability to service the repayments. In the case of property, the more prudent means might be your ability to service the repayments with your current income for a year if the rent income is not available for 1 full year.

So, as investors, we need to always keep in mind that while leverage is a good tool to accumulate more wealth, it can also destroy wealth fast. What we need to aim for then is to have an optimal level of leverage. No leverage is the safest but you will not be as effective in creating wealth as a investor who is leveraged prudently.

In my case, the investment portfolio generates dividends & bond payments and I used re-invest a percentage of it into my investment portfolio and another portion to service repayment of leveraged investments in properties.

Warren Buffett's Letters to Berkshire Shareholders

Image via Wikipedia If you want to know more about value investing but are often put off by most books out there that tries to explain investing in such a boring manner, Warren Buffett's letters to Berkshire's shareholders are easy read.

It is easy read as it is not very technical but it gives you a good grasp of what to look out for in a business.
http://www.berkshirehathaway.com/letters/letters.html

Along similar veins would be Peter Lynch's books.

So go ahead and pick up the letters or the book and start your journey into value investing. I am primarily a fundamental investor but rely on simple technical analysis to know the trend of the stock. Conflicting ain't it?

Get Rick Quick Scam Exposed!

Here is a link to an Australian Get Rick Quick Scam.
http://www.getrichslowly.org/blog/2007/06/11/get-rich-quack-david-schirmer-of-the-secret/

As mentioned previously in my blog, be critical of what is told to you when attending investment seminar.

Gold Coast LifeStyle and Aussie Dollar

Gold Coast lifestyle from Brett Clements on Vimeo.

Queensland, Australia - Seeing this clip reminds me of my fond memories there...
Really a wonderful place to stay for extended periods.

Oh yes, which brings me to my opinion of the Aussie Dollar. It has depreciated a lot against the USD ('coz of the USD dollar strength, the impending economic global slow down). Since SGD is pegged against a basket of currencies including USD. AUD have also depreciated quite a bit to SGD. The current price of around $1.17 is within the 5 year low of $1.15.

Assuming you have some cash for Fixed Deposit, you could place it in australian dollar to earn a higher interest rates than SGD deposit. If you have a timeframe of 2-3years, you can also enjoy the potential appreciation of the AUD against SGD when the global economy demands commodities for their growth again. It is a safe bet as economy cycle exists. Further, SGD is unlikely to appreciate so much against AUD or any other currencies as a bulk of our economy is export-related and MAS moderates our currency band to maintain the competitiveness of our export trades.

Warren Buffett's Investing Checklist

Image by Getty Images via Daylife

Warren Buffett's Investing Questions

Before Warren Buffett invests a dime, he asks:

• Is the company in an industry with good economics? That is, is it not in an industry competing on price?
  
  
• Does the company have a consumer monopoly or brand name that commands loyalty?
  
  
• Can anyone with an abundance of resources compete successfully with the company?
  
  
• Are the earnings on an upward trend with good and consistent profit margins?
  
  
• Is the debt-to-equity ratio low, or is the earnings-to-debt ratio high? Can the company repay debt even in years when earnings are lower than average?
  
  
• Does the company have high and consistent returns on invested capital?
  
  
• Does the company retain earnings for growth?
  
  
• Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that's not good.)
  
  
• Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
  
  
• Is the company free to adjust prices for inflation?

In short, he makes companies jump through a lot of hoops before he considers putting them in his portfolio.

Source : InvestmentU

Investments That Gives Dividends!

Image via Wikipedia When you buy into an equity investment (stocks or funds), you are mainly buying into the potential for capital appreciation and not so much for its dividend. However, when choosing an investment, a safer bet would be to go with the one with a consistent and sustainable dividend policy. Studies have shown this is a good barometer of future capital appreciation of an investment.

Dividends: Between 1872 and 2002, stocks returned an average compound rate of 9%. Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested stock dividends contributed 4.8% - more than half of the total return. Favor a stock with dividends for this very reason. You'll get paid to hold a stock while the market takes time to recognize its value

Further, to accelerate your capital appreciation, you should re-invest the dividends. Buying into more shares of the investment using the dividends received will enable you to receive more dividends in future. This is how compounding works. This also utilizes Dollar-Cost Averaging(DCA) as you are buying into the investment at different prices.

This should be the strategy for anyone who is between 20-50 years old as you have time on your side for your investments to do its compounding magic.

The end goal would be to create a dividend revenue stream from the investments that you can live on by 60years old.

If you do not intend to pass all of your wealth to the next generation, then you could also opt to liquidate part of your investment as and when needed for high-ticket purchases or lifestyle aspirations. Though you will need to plan properly as this will reduce your cashflow from the dividends.

Uniqlo - Very Addictive Commercial

Don't take stock analysts call on stock seriously.

Have you ever read analyst report recommending a certain stock and putting it at "Outperform/overweight" and have a Target Price(TP) or Sum of the parts (SOTP) at $4.20?

You bought into their story and buy thinking it's a steal. Only to have the very same analyst "downgrade/underperformed/underweight" the same stock a month later with a TP or SOTP of $2?

All I can say is "DO NOT TAKE THE REPORTS SERIOUSLY". The analysts with their CFAs and what have you are only as good as you and me. Their estimates are as good as yours or mine. Their ratings and price targets are moving targets.

So, what should you be trying to get from the reports? Well, they did their research and often have access to more in-depth information than us. So, they have nicely summarized their findings and present it with their point of view. What you need to do is ignored their point of view and take the FACTS and form your own judgement and price.

At the end of the day, you might be as "right" as them. But hey, at least you learn something and will progress your investment skills/experience rather than relying totally on analysts ratings/price targets.

So instead of listening to analysts, do your own research and ask the right questions, like these:

• Can the company rebound to its historic price-to-earnings ratio?
• Is the market undervaluing a company?
• Can it continue to generate healthy cash flow and earnings?
• Will it be able to pay dividends and interest payments on debt?

The Joseph Cycle - Simon Sim

Image by alemdag via Flickr A nice quote I got from "The Joseph Cycle" by Simon Sim.

The more you save, the more you will have. Saving creates wealth; wealth attracts more wealth. Thus, it is said, "Money makes money!".

Anyway, the Joseph Cycle is a good read for people who are interested in economic cycles and how it can help in stock investment. For those in a hurry, the gist of the book is in credentialing and validating the Biblical Joseph Cycle of 7 Fat years and 7 lean years. The Joseph Cycle equates to a 7 year bull and 7 year bear in the stock market. After which, Simon mentions that for most, we have only 2 opportunities within our lifetime to take advantage of these cycles. The beginning of the last bull started in 2001 and will end somewhere inside 2008. After which, there will be the 7 years bear from 2009-2015. Thus, the year 2015 will be the bottom as well as the next start of a bull and if we believe in the Joseph Cycle, we will do well to invest during the start of the bull and hold on till the end of the cycle, ignoring most crisis along the way. But he does mentioned that you can still invest even if it's a bear cycle as long as the stock is undervalued or a crisis present an opportunity.

My conclusion? Well, it means that life carries on and we still will have to stick to our usual investment philosophy of asset allocation. For stocks, buying quality companies at fair prices giving fair dividends. For mutual funds, just let it grow thru' the dividends reinvested (since the fund manager is supposed to be doing the stock picking for you).