Let's look for treasure!

I happen to recall an episode on an adult cartoon about 2 foul characters known as “Terrence & Philip”.  But this is not a post about their cartoon, but rather to borrow a phrase from them that depicts their favorite game where one of them says “Let’s look for treasure!”.  Most often, this game was played in the oddest of places.

As I was browsing the stock market to hunt for bargains (did I mention that the stock market is now like a Great Singapore Sale?), I happened to notice the developments of M1.  Here is a brief take on the situation to help you decide if it is a true hidden treasure.

According to M1′s CEO Neil Montefiore in statement recently on its 3rd quarter results for 2008, there are some tidbits of information that he mentioned that are of particular interest to me as a share owner of the company:

1. The stock expects a single digit % drop in net profit earnings for 2008
2. M1 aims to pay 80% of net profits out as dividends

So what do these information tell me?  If all else remains constant, we can expect:

1. Net profit to be at S$154.17 million assuming a 10% drop in profits (yes, I am a pessimist!)
2. Expected dividends can be S$123.34 million
3. Current outstanding shares in market – 893.88 million shares
4. Dividend per share is then S$0.137 per share
5. Dividend payout of 7.4% against a valuation share price of S$1.85, or
6. Dividend payout of 8.5% against the current share price of S$1.61

Compared to the interest rates of what is available out there, is this a hidden treasure or what?

P.s.  Take note that the current price of M1 is at S$1.61 at the time of writing.

As most would know by now, the stock markets are going crazy!  The entire financial market is filled with panic and fear.  While everyone around you loose their heads and whines about their paper loses, keep your cool. It is times like these where bargains exists!

Under normal sane market conditions, the stocks would be priced rationally. When emotions like fear take charge, rational thinking goes right out of the window. It also means crazy prices will appear!  Compounded by the fact that the US markets will be closed for their weekends, it is quite usual to feel more gloom on Mondays in Singapore due to lack of direction of how stocks should price themselves.

This is a short entry hence I will not go into the details of how I derived at my calculations save the following ideal buying prices for me:

• Singpost at $0.75
• Mobile One at $1.84

I have factored a 30% discount from fair value as buffer and also studied some of the companies’ fundamental financials.  This is key to valuating any stock.  No hearsay involved. If you are seriously keen on how I derived the pricing to confirm your studies, drop me a comment on this blog.

Some of the stock price is already very near my target buy price, so I will be watching the market closely. I may be labelled as crazy, but let history be the judge of me! Have fun picking bargains!

Ps. If you happen to read the Straits Times over last weekend on their recommended bargain stocks and their supposed buy price, you may wonder how they picked this basket of stocks.  I did some checks on them and found them lacking in fundamentals and appalled at some of the recommendations (eg. SPH).  ou be the judge of that…just don’t loose your shirts (or dresses) along the way.

Money, Money, Money!

How is it possible that I can be so confident (some say silly) to afford giving away interest rates of 4% per annum to my parents when I pool funds together for investing in stocks?  Are there some uber secret techniques that I am using?  Or am I just plain crazy?  If it is true, then show me how to make MONEY, MONEY, MONEY!

Most folks do not realize the true returns and sources of revenues that a good stock is able to generate for you that does not require you breaking a sweat!  Here is the breakdown:

1. Capital Returns – Also refers to gain in share price.  This annual return is anywhere between 2% to 12% of purchase price in the Singapore markets.  Normally, the average benchmark for capital returns should be the same as the annual economy growth of Singapore.

2. Dividends – The average blue chip dividend should beat the average 2% fixed deposit interest rates of banks.  Else, most folks would rather put their money in banks than invest in companies.  Hence the annual return is approximately 2% to 7% of purchase price in Singapore.

3. Rental revenues- Most people did not know that they can rent out the shares they own.  However, the problem with this scheme offered by the Central Depository of Singapore (CDP) is that you need to hold at least 50,000 shares to participate.  However, the returns are very decent should anyone wants to borrow your shares.  It is currently priced at 4% of the prevailing price of your stock. So assuming that you manage to rent out your shares for only 3 months in an entire year, you could get about about 1% income.

So in a nutshell, if you stock is performing badly due to the market circumstance (and no fault of its own), you should be able to get at least 4% returns annually.  In a best case scenario where you could also rent out your stocks, you are possibly looking at returns of up to 20% per annum!

So if you pay out 4% interests to your parents in an average performing investment market, and assuming you are making 10% returns, you can effectively increase your returns by almost 6% using other people’s money!  This gives you a net return of 16% (if you include your own portion).

In the event that things do turn for the worse, and you do not make capital returns, the dividends and rental incomes can cushion the fall.  Hence this mindset of investing can allow you to take risks with good potential returns, but with controlled downside.

Hence, it is beginning to sound very true that money makes even more money!  Hence I do recommend kick-starting your efforts to raise capital to begin investment!

For those who are born after the ABBA hit song – “Money, Money, Money”, here is the video clip to inspire you…less the gambling Monaco part.

Consider Ethics

My dear friends. I understand that some of you might have reservations about my previous article’s suggestion to raise capital for investments from family and close friends. Some voiced concerns that it is bothering on being unethical as we are placing our loved ones’ hard earned cash at risk at 0% interest rates.  Logically, compared to taking a loan from anyone to buy luxury items like a car or to go on a holiday, borrowing to invest is extremely ethical.

If this still bothers you, and that you strongly believe in no free lunches, here are some suggestions to structure a loan program from family and close friends that I am personally using.

1. Matching Funds – To build trust, place a dollar for every dollar you loan into a fund pool. The fund should then be used only for investments and not allowed to be withdrawn unless mutually agreed with your debtors.

2. Attractive Interest Rates – give interest rates better than any fixed deposit but lower than prevailing loan rates. For me, I figured I was able to give 4% interest based on amount invested with me.

3. Capital Guarantee – I guarantee the capital invested along with the interest rates agreed. So in the event my investments fair poorly, I am still obligated for my pay outs. Hence the burden to perform is on me.

4. Annual Cash Out – all who invested has a chance to cash out once a year with no questions asked. But only once a year. On the flip side, they must stay with the fund for at least 1 year minimum.

Having the loan approved is only the beginning. The following instructions are harder to manage with these family linked debtors. However, if you can adhere to them, you will go a long way:

1. Invest wisely- this is your responsibility given the generosity of your loved ones. This also imply taking it like a man and do the right thing! No lazy investor ever got rich. Do your homework and have loads of patience.

2. Report performance yearly and no sooner - While this seems to run contrary to point 1, this is not so. All good intentions are often ill timed. So you owe it to them to focus on your investments and not be distracted by constant nagging from them. While they may operate on herd mentality, you need to be Joe cool under all circumstance to see opportunities others missed.

3. Pay out what you promised promptly – You do not know what lengths your family may have gone through just to raise that capital for you. It should be up to them to decide if they want to re-invest or enjoy the dividends. This is also a matter of trust. Deal fairly.

Thus with this method, I managed to build a fund for investing with relatively cheap cost of money with a very clear responsibility structure that builds mutual trust and understanding.

Raising the Titanic

Somehow I get the feeling that raising capital is a serious barrier to getting into equity investments.  I calmly said it was never “Money No Enough”, but rather “Not Enough Effort”.  My friend then had a look on her face that implied that raising the Titanic was probably a much easier feat than raising capital!  In order to repay my friend for a cup of coffee she so generously paid for me, I decided to share how easy raising capital can be.

Here are some methods to consider:

Personal Savings (0% interest rate) – Take 10% of your current savings to invest.  It should be used rather than allowing it to sit idle in the banks drawing a miserable 0.2% annual interest rate and suffering losses from inflation.  Seriously, most folks can hardly notice a difference with 10% less in their cash savings
1. Father-Mother Loans (Usually 0% interest rate)- Seriously, most parents never ask their kids for interests on any loans (secured or otherwise).  The only thing is that you need to justify your investments and learn to be prudent.  These are afterall your loved ones hard earned cash.  Did I mention interest free?
2. Insurance Policy Loans (4% to 8% interest rate)- It is a capital raising tool that is frequently forgotten by most insured people.  Did you know that you can borrow up to 90% of the cash value of your insurance policies?  Hence, if you had a policy that is worth $10k in cash value (or otherwise known as surrender value), you can borrow up to $90k at 4% to 8% interest rate per annum.  The good part is that you are still insured by your policy as you take this loan from your cash value.  Superb!
3. Credit Card Loans  (Nett 4.5% interest rate) – There are cheap loans on credit cards available that allows borrowers to repay the loan in 24 months.  These loans can amount to 2 times your monthly drawn salary and usually come disguised as “Interest Free Loans”.  Just remember to read the font size 1 terms and conditions to calculate the nett interest rates.
4. Housing Loans (3% to 6% interest rate) - This is a rather complex, but interesting capital raising tool for people who owns property.  The key is to take a housing loan that is bigger than what you need.  The excess funds will then be available for us pegged at the housing loan rates, which are one of the most attractive interest rates in town.  While this sounds attractive compared to Lines of Credit loans or the complicated Car Loans, the complexity and paperwork is quite prohibitive for me.  Only recommended for home owners with huge properties or numerous properties.

The above is listed in the order of preference with the following criterias:

1. Low interest rates – the lower the better
2. Low consequences in the case of default
3. Long repayment period
4. Ease of approval

While the list I mentioned is not exhaustive, it should get most people started.

My friend then proceeded to look amazed and asked why would she get herself in debt to invest?  I then explained the reality.  There is good debt and bad bebt.

BAD DEBT

Most folks can easily find money to buy cars that depreciate 30% in value the moment you drive out of the showroom, or fund holiday trips to exotic destinations only to be miserable for months to pay off the hotel bills.  So anything debt that does not generate a positive return of cash to you can be considered bad debt.

GOOD DEBT

Taking a small loan/debt as a form of raising capital for good investments can be considered good debt.  This is because a wise investment can bring additional cash into your pockets and increase your individual net worth.  Hence a prudent investment can generate yearly returns from 10% to 20% from buying these investments!  This is a trick used by the rich.  Borrowing money to make even more money…

The assumption here is that she has the capacity (like a day job) to pay off the loan via installments over a 6 to 24 months period.  Thus she would be taking a loan to invest.  While she is paying off the loan, the investment would immediately start making money for her.  So in a scenario where she makes 12% returns on the investment and she had to pay an average of 6% on interest due to the loan, she would have a nett a respectable income of 6% on her investment.  This is in addition to the fact that she now owns a financial vehicle that will generate more returns in the years to come without having to lift another tiny finger.

Even in the event of the possible loss of value of the initial capital invested in a well chosen stock, the dividend should buffer the fluctuations, and also since you own the stock after 6 to 24 months, you do have long term holding power to wait for the value to rise to acceptable range again.

Stay tuned on what can potentially be a wise and prudent investment…

Anyways, I have promised that whatever stocks I am currently investing, I will share them with my readers.  As such, here is one such entry.  My current research revolved around the Straits Times Index Exchange Tracked Fund (or STI ETF for short).  This fund actually tracks the Straits Times Index.  Hence it is actually a fund that buys the blue chip shares in the Singapore Stock Exchange that closely maps the component stocks of the STI.  These component stocks represents over 60% of the total Singapore Stock Exchange value!  Hence, does it surprise you that you can actually own portfolio of blue chip shares at approximately S$3,000!?  Moreover, the fund trades like a stock, and even gives out dividend like a stock. 

So besides the benefits I listed abover, why should I be looking at this right now?  Historically, the STI had a conservative trend of funneling towards a range of about 12 to 15 PE ratio for the past 8 years according to sources like Fundsupermart.  If that is the case, that means that if the STI, admist all the gloom and doom, is still hovering at 12 PE ratio, it is worth a second look, yes?  So that’s what I did.

As of now, I am looking at the STI at approximately 2,899 on 7th July 2008.  The STI ETF is priced at S$3.01 (which is quite close to the STI).  At this level, the PE ratio is approximately 12.9.  It is hence on a lower end of the PE ratio funnel.  It is likely that the price may go lower, but remains to be seen.  It is an attractive buy, and I would personally invest a small portion of my portfolio to the STI ETF at this point just to capture the current reasonable pricing.  So if the price goes significantlyl lower, I am not too exposed, and can take the opportunity to invest a little more as it becomes a rather significant bargain.  But it the price turns for the better, I have the higher priced stock to be happy with.

So as with my stand in all writings, I only write about stocks that I am willing to invest with my own money.  Hence today I happily invested in some STI ETF shares.  However, do take note, investment is never a get rich quick scheme.  Rather, it is a method to invest in the long term where you get to pick (and buy) stocks at a reasonable or bargain price.  Afterwhich, we can sit back, relax, and wait for the marketing to become sane again.

Lastly, for privacy issues, I can only say I bought the STI ETF at S$3.01 per share, but I will not disclose how many shares I bought.  That part is up to you to decide.  The point is that I am putting my money where my mouth is. 

Have fun, invest wisely and grow rich!

I come from a school of thought that follows Warren Buffett – there’s no quick and easy money. Day trading is like a driver engaging in frequent over-taking attempts on a crowded highway at high speeds. Yes you can definitely reach your destination faster, provided nothing goes wrong. But something always go wrong. Eventually the odds will be stacked against you and it is likely fatal. I personally do not recommend day trading for beginners.

However, having said that, day trading can be very seductive, powerful, enticing and exhilarating to the unsuspecting investors. Lucky for us, Darth Vader was not a stock broker or the famous scene on Cloud City from Star Wars will play out very differently:

Vader: Luke! Join me and I will complete your training with my technical analysis charts! With our combined strength, we can take over the stock markets by reaping indecent profits from quick and frequent trades!

Luke: I’ll never join you!

Vader: If you only knew the power of the dark side of day trading!

Luke: Yoda told me you will ruin my financial returns and fortunes!

Vader: Luke! I am your broker!

Luke: No…no…it’s not true! That’s impossible. I know each time I trade, I would incur a fee of approximately 2% of the total transacted value. Trade 10 times in a month, and I would lose 20% in transaction fees! Look, it already cost me a hand!

Vader: Search your feeling and you know it’s true…Luke! We can beat the stock market and rule the financial world…It is your destiny. Join me and we will rule as broker and investor!

At this point, much to the credit of Luke, he resisted the temptation to join his broker and escaped.

While I understand that you can reach your financial goals through day trading, buying and selling often, but the risks of failing far outweighs the potential gains. So choose wisely and stay invested for a long period of time without fattening the wallets of your favourite trading house. Instead, make yourself rich the slow and steady way.

ps. For those not familiar to the scene from Star Wars above, see the video below…

The moral of the story is that devastating effects come in small packages spread across a period of time.  I can think of several famous analogies such as ”death by a thousand cuts” or “cooking a frog slowly“.  All describing a smiliar experience of suffering a slow agonising death without the victim realizing until it is too late.

So what do all these have to do with savings for investments?  The major problem with most of us is that we are oblivious about our normal spending patterns.  Small savings in our daily spending routines means more money saved for investments.  Take the following example:

Starbucks Latte versus Kopi

A posh cafe latte costs about S$3.50 with tax.   Prepared by happy looking baristers (coffee makers), it makes you feel like the most important person in the world!  The courteous baristers smile and ask about your day.  They almost seem to actually care about your day.  This coffee boosts your ego as it tickles your taste buds.

Consider the alternative – Kopi.  This coffee costs only S$0.70 without tax.  This raw unadulterated heartland coffee is brewed from the hot stuffy depths of any nearby coffeeshop.  The brewer is normally an old uncle who does not give a damn about you or your day.  There are only 2 versions available – with or without milk.  The coffee does nothing for your ego and often leaves you in perspiration.

Both types of coffee will satisfy the daily caffeine addiction of most folks. However, the Latte costs almost 700% more than a simple Kopi just to massage your ego at the expense of your wallet!  The cost of a Latte is able to fuel your caffeine needs for an entire week in the form of a Kopi.  On an annual scale, you will save approximately S$1,022 just by drinking Kopi instead of Latte.  Hence, a great way to savings is to start taking stock of your spending by cutting down on unnecessary costs. 

So should we ever pay for a more expensive Latte?  Does it mean that we should deprive ourselves from the luxurious coffee that life has to offer?  The best approach is enjoy luxury in moderation.  Spoil yourself occassionaly instead of making it a daily habit.  Always remember not to take cost cutting into the other extreme.  You would never get wealthy being stingy either!

As my favorite phrase goes, “Patience young Jedi“.  The foundation building of any great investor is the most critical stage of any investment education.  Imagine building an inverted pyramid. While it may still stand upright, any slight rumble will cause the entire structure to collapse.  Hence the bigger and wider the base foundation, the more stable your wealth can be built upon it.

Do or do not, there is no try…

As he traveled in the safety of his truck sending him home, he opened and read the ancient book in 4 seconds. Subsequently, he tossed the book out of the truck thinking that even if the Nazis were to find this book, they would do the same.

As we now know, Indiana Jones did not take the advise in the book as he had to subsequently come out of retirement just to make more movies to earn more money to sustain his lavish lifestyle. Poor guy…

Was he really loosing his nuts to have tossed that valuable ancient book? We can decide for ourselves. Shortly after, this book was discovered and found to contain only 4 pages. It was publicly examined, but “experts” found so much common sense in them (though uncommonly applied) that it was not deemed worthy of a place in any museum!

Here are the FULL contents of the 4 pages in big bold letters:

1. Earn More
2. Spend Less
3. Grow Savings
4. Protect Savings
   

Would you have done the same as Indiana Jones and suffer the same fate?

Let us examine each point accordingly:

1. Earn More – Every rich person has good earning capacity. They earn the money and riches they have. So if you are lazy, and not even bothering to earn your riches, you can never be rich or wealthy. You would be very lucky not to be poor at all! What about those who inherited their fortunes? Well, unless they learn their earning skills from their parents of benefactors fast, they too will loose their wealth just as fast!

 

2. Spend Less – Accumulation of wealth simply means earning more than you spend. Notice that it refers to everyone, and not just to the rich. So that means that even when you are earning a modest salary, you too can begin accumulating wealth just be spending less than you earn! The general rule of thumb is to have the discipline to save 10% of your earnings every time. nothing more, nothing less. This applies even in debt, which I will talk about in another time.

 

3. Grow Savings – When you have saved enough money, it would mean that you should use this sum of money to grow it rather than letting it stay dormant. So use money to earn more money! So the rich do get richer!

 

4. Protect Savings – Set aside 6 months of your salary savings in cash. This is an emergency fund that should always be protected and never touched. All excess cash should be invested wisely to bring about accelerated returns. The key word is “wisely” so as to never lose money in all investments. Hence we need to always be cautious and careful. More of that topic later.

 

There is true wisdom in uncommonly applied common sense…