Saturday, August 18, 2018

A Long Hiatus......

And so, I am back. Blogging again once more after an absence of 6.5 years, but it feels good to be able to express myself through writing once more. Much has happened in the intervening time - I obviously got much older (I am in my 40s now, and in danger of suffering from the dreaded "mid-life crisis" which everyone talks about), fatter (a consequence, no doubt of being married and corpulent) and hopefully, much wiser. At least the years have been kind enough to leave me with most of my hair, seeing many of my compatriots and peers with balding pates is enough to make me thank my lucky stars!

So what happened to me during the six and a half years? In a nutshell, I was recruited into the investment industry (yes, the day of my very last post was the day I started work) and was not allowed to blog due to conflict of interest, and also because of MAS requirements. While in the industry, I enhanced my knowledge significantly through on the job learning, training with financial modelling and meeting more companies than I could ever imagine. The experience has been humbling, to say the least, as I also encountered scores of very sharp and smart investors along the way. Networking events and many a cocktail have exposed me to the myriad ways in which one can invest, across all asset classes, and with many different strategies (some obviously worked better than others!).

My aim in joining the investment industry was to build up my knowledge to become a much better investor (OK, part of the reason was also because the money was more attractive than my previous role, but not a whole lot more). In the process, I found that even trained investment professionals suffer from the same biases and mental shortcuts which afflict retail investors; and that relationships matter more than performance alone when it comes to dealing with high net-worth clients. I also found out just how competitive the investment landscape was - everyone and anyone would start a Fund, attract around USD 10 million and then start marketing aggressively. I must have met at least more than a hundred Funds (some with very colourful names, no doubt) in my course of work, and also learnt from numerous fund managers and IR personnel on how they size positions, analyze companies and businesses, observe management, manage their cash positions (to avoid cash drag) and turn over their portfolio.

The really good funds are few and far between, and have a track record of >10 years (dating past the GFC) and returning low teens % every year, on average. Most Funds are new and the managers are excited to shout out their performance to the world, but these will tend to fall flat on their face amidst a crisis or fizzle out and under-perform their benchmark after a while. After a while, I learnt that those which stuck to a good, consistent and rigorous process tended to do well over time, and beat those with arcane strategies as well as those with more bluster than substance.

But even though much has changed, a lot has also stayed the same. I am still living in the same HDB flat (no "upgrade" to a condo), still do not own a car (yes, I still commute using BMW "C Series - Bus, MRT, Walk and Cycle) and my family still generally frequents the same cafes and restaurants over the years. My daughter is older now and attending a primary school instead of kindergarten but essentially our lives have stayed fairly constant - just the way I like it.

Portfolio Changes

As I have not been updating my blog for such a long time, readers would naturally be curious as to how my portfolio has changed. My philosophy remains the same as it has been before - I would even venture to say that it has even strengthened further over the years as I learn more and cultivate a stronger, more consistent mindset for value investing. Some friends whom I have been communicating with regularly in the investment blogosphere even think I am rather "staunch" as I strictly believe in a "no speculation" policy, refusing to do any short-term trades and also staying away from crypto-currencies (the current "hot" fad") and lottery (yes, including the recent World Cup, where I did not place a single bet). I guess I believe in being disciplined over the small stuff, so that I can remain disciplined on the big matters.

In a nutshell, my portfolio has changed quite a bit from my last update as at 31.01.2012. I will be revealing my latest July 2018 portfolio in the next post, but right here I would like to fill the gap by providing a list of what I had divested, along with reasons and with a summary of profit and loss numbers.

Below is a table showcasing each position, the divestment date and price, dividend received, adjusted gains/losses and also CAGR on the position. I had started measuring CAGR for each investment position in order to ascertain if each individual investment decision was made correctly and if it would yield a decent return. This would also be displayed in my first portfolio showcase since I stopped blogging, but subsequently will only be updated on an annual basis.


Explanations for the three divestments are as detailed below:-

SIA Engineering ("SIAEC") - A starting position was taken in this blue chip, large-cap company in 2010, with additional positions taken in 2011 to average down on the position. The original thesis can be found in the older posts within my blog and thus I will not repeat myself again. The position was divested in 2014 when the Company reported weaker earnings, and also lower cash flows from JV and associates. I did not merely act on one quarter's results, as this could have been a one-off event and an aberration or temporary phenomenon. A second quarter of weak results and also commentary from industry reports confirmed my suspicions though - aeroplane engines were becoming more efficient and newer models needed less checks, and checks may not have to be so comprehensive. This meant that the cycle for checks would lengthen, and this would have an impact on SIAEC's earnings and cash flows. In addition, there was also more competition as MRO players started to expand and muscle into SIAEC's turf and territory. These two phenomena were structural changes occurring within the MRO industry and did not seem like temporary cyclical headwinds. Hence, the decision was made to exit the position.

Including dividends received over the 3-4 years, a total gain of +38.4% was made on this position which represented a CAGR of 9.6% over the period of time I was vested.

MTQ Corporation - This can be considered a very "old" position as it was first taken in 2009. MTQ is an oil and gas services company which is servicing blow-out preventers from the oil and gas industry. It also has an Engine Systems division which supplies engines and turbochargers to the motoring industry. This position was divested in August 2015 as MTQ was severely affected by the downturn in the oil and gas industry when oil prices crashed from around USD 150/bbl to USD 20-25/bbl (at the nadir). Though the Company had good FCF and also a strong Balance Sheet, the downturn was very sharp and looked to be protracted, and their cost base was apparently too high to be able to sustain profitability. During good times, during my visits with Management at AGMs, it was mentioned that the Company could get orders and still be profitable if oil prices fell to USD 40. In hindsight, that was probably too optimistic a projection as the reality was that even when oil prices are hovering at USD 60/bbl, the Company is still making losses. Compounding the problem was also the purchase of Binder in Indonesia just before the oil price crash, and this proved to be a drag for Management. MTQ eventually sold off their Engine Systems division (something which I was lobbying for during many an AGM), but they still needed to announce a 2-for-5 rights issue at 20 cents/share to beef up their Balance Sheet. There were also free detachable warrants of 1 warrant for every 4 rights shares at an exercise price of $0.22/share as a method to potential raise more money for the Company. Needless to say, this corporate move was dilutive to earnings per share and the warrants would have also significantly increase the issued share capital base if fully exercised.

My action to divest MTQ was already considered belated, as I read the (bad) news on the sector at the time with growing consternation without taking any action, mistakenly thinking that the Company I invested in would be somewhat immune or protected from the troubles plaguing the industry. In hindsight, I was probably wrapped up in a cocoon of invulnerability and failed to see that the Company I owned was just another player suffering from the growing malaise afflicting the oil and gas industry. Lesson learnt here - don't be complacent and also don't behave like a rabbit caught in the headlights - freezing and not doing anything is not going to help when the business world is dynamic and ever-changing.

Fortunately, I managed to divest MTQ at a profit despite the thumb-sucking, netting a total gain of 52.8% after dividends which worked out to be a CAGR of around 8.64% over my holding period.

The Hour Glass - This one deserves a post on its own, and it will be detailed in a subsequent post as to the rationale for making the investment; as well as the reasons for the eventual divestment and recognition of the loss. This investment unfortunately generated a return of negative 8.35% over the holding period. The key, of course, is to learn from the mistakes and avoid a repeat of his sad situation.

Whatsapp Chat Groups - Boon and Bane

To end off this post, I would like to state a major difference between the way I was communicating prior to stopping the blog, versus currently. I started using Whatsapp to create chat groups for investment some time around 2015, and it has been both a boon and a bane, I would think. A boon in that it is now much easier to communicate ideas on investments to like-minded people, and also to receive interesting ideas with which I can act upon and do more intensive due diligence. The bane is when there is a lot of noise generated, short-term thinking along with a trading mentality (yes, stocks as inventory rather than assets) and also the problem with "Group-think" (which is much more pervasive than I had ever imagined).

So, sometimes it is better to distance yourself from groups and just have some quiet time to think over investment theses and ideas, and to make sure that the logic and reasoning and both sound and defensible. This is not to say that I eschew the idea of using chatgroups, it is just that I feel there are limits to sharing deep due diligence ideas through a chat platform (not efficient for typing and also somewhat too informal) and also that people do not tend to provide constructive criticism whenever I say something, probably either because they do not want to antagonize me or that they had not read deeply enough into a Company to be able to comment. I will probably say more on this in due course but will just end off here for now.

Tuesday, January 31, 2012

January 2012 Portfolio Review and Final Post

It is with some bittersweet feeling that I pen this last and final post, along with my portfolio review for January 2012. As mentioned in my previous portfolio review for 2011, heavier work commitments and a desire to spend more time with family and friends has resulted in my decision to stop blogging after this final post. However, please be assured that all historical posts and information will be left intact, so readers can continue to browse and access sections of my blog for information and learning.

For the month of January 2012, I added about $10,200 worth of SIA Engineering to my existing holdings, as I noted that there was quite a vicious and unexplained sell-down on one of the days of the month (I think it was January 13, 2012) which allowed me to comfortably pick up some lots. As a result of this, and interestingly, at the close of my blog today, my portfolio cost has hit the $250,000 mark (it stands at $252,000 to exact). More will be explained in the summary below the corporate summaries section.

Below please find my portfolio as well as corporate summaries for January 2012:-


1) Boustead Holdings Limited – There were a total of four announcements from Boustead for January 2012. Three were minor ones and I will not state them here, but the fourth one, on January 21, 2012, was that of an investment of S$23.3 million to purchase an 8.6% stake in an ASX-listed company called OM Holdings (“OMH”). Boustead will purchase 50 million shares of OMH at a price of A$0.35 per share, representing a discount of about 5.2% to the 30-day volume-weighted average price. The entire subscription will be satisfied in cash and funded by Boustead’s internal cash reserves.

OMH is a company dealing with metals trading which involves the sourcing and distribution of manganese ore products (which are used in the making of steel) and in processing ores into ferro-manganese intermediate products. OMH also operates commercial mining operations spanning Australia, China and Singapore and they are in advanced negotiations to kick-start an ambitious US$502 million smelting plant beside a hydro-electric power station. The rationale for the transaction was for Boustead to carve out a new business segment and to allow the Boustead Group to deploy its project management and engineering expertise to a new industry. Interestingly, Mr. FF Wong was until recently a non-executive director of OMH but had resigned on December 12, 2011.

2) Suntec REIT – On January 19, 2012, Suntec REIT announced its FY 2011 results. A DPU of 2.479 cents/share was declared for 4Q 2011, which was 7% higher year on year and 19.9% higher than forecast. The dividend will be paid on February 28, 2012.

3) MTQ Corporation Limited – There were no announcements from MTQ, other than the scrip dividend allotment of shares.

4) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen Creatives for the month of January 2012. The Company should be releasing its FY 2011 results in late Feb 2012.

5) SIA Engineering Company Limited – SIA Engineering released results on January 31, 2012. Revenue was 12.6% ($33.9 million) higher as compared to the same quarter last year, but operating profit for the quarter decreased 17.7% to $28.4 million due to higher sub-contractor and staff costs. Net profit attributable to shareholders for 3Q 2012 was 5.3% higher compared to last year, and the Cash Flow Statement continues to show healthy OCF of $40.4 million for 3Q, with FCF standing at $65.2 million. However, this was considerably lower than the same period last year ($110.7 million). I guess the probability of a good dividend may be lessened due to the lower cash inflows, but we will have to wait another three months to find out.

6) VICOM Limited – There was no news from VICOM for January 2012. VICOM will be releasing its FY 2011 results on February 9, 2012.

Portfolio Review – January 2012

Realized gains have increased slightly to $69,550 due dividend from Suntec REIT.

For the month of January 2012, the portfolio has increased by +1.1% (using XIRR in MS Excel to compute) against a +9.8% rise in the STI; thus my portfolio performance has severely under-performed the STI by -8.7 percentage points. This was an eye-opener for me in terms of seeing just how damaging a rally can be for my portfolio in terms of relative performance. However, keeping in mind that the principal aim of my investment philosophy is the preservation of capital and to obtain an adequate return, this has been achieved for this month as there was a slight gain on the portfolio, and as far as I can tell, the businesses are still running along fine.

My cost of investment has increased to S$252,800 as a result of a purchase made of shares in SIA Engineering on January 13, 2012 at a price of $3.38 per share (an increase of about $10,200) and unrealized gains stood at +4.3% (Portfolio Market Value of S$263,600). By factoring in a potential cut in dividends of about 20% from 20 cents (full-year) to 16 cents, yield at my purchase price would still be about 4.73% (acceptable for me as it close to current inflation rate of 5.5% which is an elevated rate). Assuming a more drastic cut of 40% to a full-year dividend of 12 cents/share (translating to only a 6 cent final dividend), the yield would be 3.55% at purchase price, which is still decent considering the business model of the company and that the long-term prospects for the airline and MRO industry are positive.

My latest purchase should adjust my projected full-year 2012 dividends to about $13,600 (assuming I accept all future MTQ dividends in CASH, not scrip), which translates to about $1,130 per month).

This being the final post on this blog, I wish to take the opportunity to wish all my faithful readers a very fruitful and successful investment journey, and good luck and good health to your good selves and your families!

Readers who wish to contact me may choose to do so by emailing me at musicwhiz55@gmail.com. Adios!

Thursday, January 26, 2012

My Value Investing Journey

It has been about 4.5 years since I first started serious blogging about investing and investment, and since then it has been a very steep learning curve for me in terms of acquiring knowledge, improving my analysis and sharpening my focus on companies. At the same time, I had also acquired important character traits and temperament which also aided in my journey to compound and grow my money. I guess this second-last post is to summarize my journey so far, and to collate all that I had learnt. I will also be penning down my plans in the medium-term, and how I plan to grow my portfolio; along the way I will also talk a bit about personal finance and its importance in helping one achieve one’s money goals.

Acquiring the right skill set and mind set for value investment

I guess you could say that I started out on the “right” path for investing by taking a Bachelor’s degree in Accountancy, for it laid down the basic foundation for me to read, understand and interpret financial statements, which are the language of business. Along the way, I also obtained my Masters in Business Administration (MBA), which further enhanced my knowledge and understanding of businesses and how they operate. I credit my alma mater with providing me with concrete, real-life examples of companies, their corporate strategies and business models for me to analyse as part of group projects and assignments. At the same time, I also took up many modules (as an elective) on marketing such as consumer behaviour and promotional marketing, and thus understand better how companies market and sell their products, target markets, market segmentation and product positioning strategies. All these constitute my “skill set” and competency for investing, which I feel is very important if one wishes to pursue value investing.

Additionally, reading up many good books on value investing and the value philosophy such as “The Intelligent Investor” also helped me to build up and solidify my framework for prudent and conservative investing. I guess my other name for value investing would be “sustainable investing” as it can take you through economic cycles relatively unscathed. While it is not a method which can grant you instant riches, it can help you to avoid crippling losses and prevent you from becoming poor. Therefore, it is a slow and steady way to wealth, which gels very much with my psychology as well – I was never a showy person who needed to fling my wealth around or to prove that I can earn lots of money.

Acquiring the right mind set for investing took a little more time, and was noticeably tougher because after all, this is psychology and emotions we are talking about (mentioned in detail in my previous post), which is not something you can easily imbibe into your life. It was only through reading books like “Your Money and Your Brain” and going through a real-life (harrowing) experience of a full bull-bear cycle (while being fully vested all the way) did I manage to cultivate the necessary tolerance to pain, discipline, patience and calmness in order to survive the emotional ups and downs thrown out by Mr. Market. So for those who are working on the psychological aspect of investing, do not be discouraged – continue to read and learn about your own psychological and emotional make-up, while at the same time testing your reactions in real-life investing situations (by analysing and putting real money down, not phantom funds). Please understand that the process of acquiring the right mind set will take time, and one should not rush the process.

Improving savings rate and embarking on lessons in personal finance

Over the years, as I learnt and read up more on personal finance, I also began to improve my own tracking and monitoring (and control) of my own finances. Blogging about it also helps, as it crystallizes my thoughts and embeds the concepts deep within my cranium. Over the years, I can boldly declare that my income had not risen as much as I had hoped for (sadly), but as a result of living a relatively simple lifestyle, I have been able to save (on average) about 45% to 50% of my take-home salary (after deductions for CPF). The same is also done for my wife, who lets me manage her finances on her behalf. With this savings habit, it has translated into a lot of buffer and financial security, even during periods of sudden distress (such as the hospitalization of my daughter middle of last year). I am glad that this habit of “paying myself first” has afforded me the luxury of having a cash hoard with which to tap in case of emergencies, and it also acts as a good source of funds for investments into equities should juicy opportunities come by.

Besides the afore-mentioned savings habit and prudent spending, I had also, over the years, begun to meticulously track various aspects of my finances, which was detailed in a previous post. Whether it be my mortgage loan, equity portfolio, passive income, cash flow or CPF Balances, I have spreadsheets for them and can monitor the balances at any time, instead of waiting for the official statement to arrive from the relevant Government bodies (HDB, CPF, MND). These have helped me to gain a better grasp of various financial aspects of my life and made it easier for me and my wife to understand our financial situation at any point in time.

In keeping with a prudent (and healthy) lifestyle, I have avoided purchasing a car during my entire adult working life; and instead choose to take public transport, walk or cycle to my destinations. This is not only a good method of conserving the environment (greenhouse gas emissions are on the rise globally), but it also allows me to enjoy more of Singapore. Cycling allows you to go to places seldom accessible by car, while public transport allows one to see a microcosm of life in our hectic and frenetic little Red Dot. Of course, most times I see people absorbed in their iPhones and Blackberrys, but observing people has been one of my little hobbies and public transport allows me to do so, while cutting costs as well.

Along the way, I have also avoided being trapped by materialism – I have no branded items myself.

Gaining a better understanding of behavioural finance

From my very first bad trade and mistake made in Yellow Pages (panicking and selling at a loss), to my current situation in handling potential bad news coming from my companies, I have realized and been aware of the importance of emotional control and psychology in investing. This is why I had starting reading up fervently on a new branch of economics and finance called Behavioural Finance as early as 2008, and picked up books such as Your Money and Your Brain by Jason Zweig, and also wrote many posts on aspects of behaviour, emotions and psychology. Value investing is not complete without the proper temperament and emotional framework, no matter how expert an analyst you are. There are people around me who I would proclaim to be much better at analysis, discounted cash flow and other arcane methods of valuing companies; but they love the thrill of speculation and therefore may be ill-suited for the value investing process.

Behavioural Finance also exposes our weaknesses and frailties when it comes to making decisions involving money, and how humans love to sabotage themselves when it comes to financial decision-making. A thorough understanding of heuristics, biases, fallacies and illusions can help us to better control our base instincts in order to make more rational choices which would benefit us in the long-run (though it may cause severe pain in the short-term). Humans also prefer certainty and this is why we read about so many “predictions” and “forecasts” once the Year of the Water Dragon arrives. I also read about many people flocking to fortune-tellers to find out what they should do in the coming year. Ultimately, the choices you make will influence the outcome of your investments, and uncertainty is actually the friend of the rational buyer because it creates situations in which pricing of the security is below intrinsic value (discounted for an unknown future).

Thus, I am glad to have been endowed with knowledge on behavioural finance and feel that as a result of this knowledge, I have also become a more calm and objective investor.

Acquiring knowledge on alternative investments – Bonds and RCPS

Through the years, and after countless conversations on value forums regarding investments, I had also picked up considerable knowledge on other forms of investments such as RCPS (Redeemable Convertible Preference Shares) and bonds (fixed income instruments). Healthy and constructive debates over the months and years have provided me with a good foundation of knowledge which I am actively and rapidly building on. Knowing about such investments gives greater breadth to my own portfolio and allows me to include other asset classes in order to buffer the portfolio in case of any extreme and adverse events. Also, as one ages, one should shift their portfolio towards a mix of equity and bonds as an old investor may not have the luxury of time to sit out a protracted and prolonged bear market. Therefore, knowledge of alternative investments is important to have in our arsenal should we decide to deploy our monies. (I do not consider Gold and Silver as investments as they do not generate cash flows for the investor – it is essential a buy higher, sell higher mentality which I classify as speculation).

Learning about portfolio management, asset allocation and portfolio rebalancing

The important aspects of portfolio management (monitoring my companies, and adding shares to more promising ones), asset allocation (to equity and fixed income components, in the future perhaps) and portfolio rebalancing (switching out of a lousy investment in favour of a better one) are all essential skills which an investor needs to have in order to ensure a consistent decent long-term return on his portfolio.

Investing for Growth and Yield – A Potent Combination

Over the years, I have learnt the power of investing for both growth and yield; and the combination can grow one’s wealth over time above the rate of inflation. Of course, the balance between growth and yield is a delicate one, but the companies within my portfolio all have some measure of growth even as they pay half-yearly dividends. The key to sustainable growth is to ensure the Company has a competitive edge, honed either through years of experience in serving customers or else through the build up of strong customer relationships or a wide network of branches and client locations. Not to be forgotten is also the concept that growth should not be too fast and furious, but should be steady and well-paced. An organization which focuses too much on top-line growth, for example, may end up being too aggressive and would fizzle out over time, destroying shareholder value in the process.

The secret to being able to sustain a decent yield yet offer growth is in the cash flow statement. As they say, the devil is in the details and it pays for the investor to closely study the cash flow statement in detail; not just for two consecutive years in comparison but to do a ten-year historical study if possible. This is to glean information about the Company’s ability to generate strong, consistent and healthy FCF and if they are more than sufficient to cover average capex required to keep the Company up to speed in terms of technology and knowledge acquisition. For companies which can generate excess cash flow, this means that they have sufficient resources to plough some of that cash back to grow the operations and ROE, while also afford to pay out some of the cash as dividends as a reward to shareholders. It is my job to search for more of such companies which are being sold by Mr. Market at a decent discount to intrinsic value.

Imbibing good lessons and practices from other esteemed value investors

I would like to take this opportunity to thank the many value investors and bloggers over the years who have contributed to my knowledge base and also injected in me a healthy scepticism regarding companies and corporate announcements. There are also people who provided constructive criticism and allowed me to rethink on my choices and decisions, and have ultimately steered me towards the correct path in terms of thinking about investing. Some of these people have also advised on aspects of personal finance which have helped to guide me to build up my savings and war chest.

These people are (in no particular order of merit): d.o.g., dydx, donmihaihai, Nick, Drizzt, cookieguy, la Papillion, tvf, dantzig, notti_boi and Munger (nicknames). For those I had inadvertently left out, please be assured that all of you had some part to play in making me a better investor, and ultimately a better person as well. Thank you very much.

Plans and Strategies for the Future (three to five years later)

With portfolio rebalancing and management already explained in a previous section, I guess the question would be – what will I be doing with my portfolio and how do I intend to grow it and nurture it to achieve my personal goals? My current portfolio stands at about $250,000 in cost and $259,000 in market value. Assuming a 5% yield (conservative), that would generate an average of $12,500 a year in dividends, meaning around $1,000 monthly. My target and goal would be to increase this to $2,000 per month of passive income, which translates to about $24,000 per annum. For this to happen, either yield has to increase or else if yield remains constant, then the portfolio size has to at least double to $500,000.

I plan to go about this in two ways – organic growth of the portfolio through an increase in the share prices of the underlying securities; as well as additions to the portfolio from time to time through savings and bonuses obtained from my profession (i.e. day job). The organic growth aspect will come about through time as my companies grow their business operations and also their top and bottom line. As for regular additions to the portfolio, these will be made at opportune times when Mr. Market is absolutely manic and pessimistic, in order to achieve an adequate margin of safety. The plan is to add at least $50,000 on average to the portfolio per year, to scale up the portfolio to a cost of $500,000 within 5 years (when I hit age 40). By then, I anticipate that the market value of the portfolio could see a 10% gain over cost, or be about $550,000. Assuming a constant yield of 5%, annual passive income would then hit my target of $25,000 per year.

The reason for this rather lofty target is to ensure that as I grow older and am faced with more responsibilities (e.g. kids’ education) and more chances of being laid off, I also grow my asset base and passive income source so as to reduce reliance on my active income from my day job. This also will eventually free me up to do what I really want in my life- whether it be starting my own business (dealing with music and CDs no doubt!) or travel around the world. Financial Freedom can be achieved in my lifetime with discipline and patience, and for myself, without the use of leverage.

Friday, January 20, 2012

Value Investing Recap Part 2 – Psychology and Temperament

Part 2 of my investing recap will focus on the psychological, mental and emotional aspects of investing, which are arguably just as important (if not more) than the quantitative and qualitative aspects of analysis into a Company and its business model. This is because having the wrong psychology can often scuttle an investor’s best intentions, even if he is a certified expert in analysis. The inability to control and master destructive emotions can cause significant losses for an investor and result in him not being able to preserve capital. Behavioural Finance is a very new field which combines finance theories with psychology to come up with models of investor behaviour which deviate from the rational and logical “standard” model. I will be touching on aspects of behavioural finance research with quotes and simple examples from the book “Investing and the Irrational Mind” by Robert Koppel. At the same time, I will also elaborate on some of the emotional and psychological attributes necessary for an investor to be successful in achieving a decent long-run return.

Patience, Discipline and Fortitude

The above attributes relate to the mental state of the investor as he observes Mr. Market’s erratic price fluctuations. It also embodies the attitude an investor should have when confronting investments which may look attractive from an analytical standpoint, but unattractive from a valuation standpoint. Patience is a key trait which investors should have, as there is always the temptation to swing for the fences even though one may not be prepared. Impetuous behaviour often leads to grief, and the ability to stand still while others are moving like whirling dervishes shows the strength of one’s conviction.

Discipline is needed to ensure that one stays true to investment principles and philosophies, and does not stray off the well-trodden path. Often, Mr. Market’s exciting gyrations will entice the unwary investor to cross over to the gilded path of speculation, wherein he may feel that it is harmless enough to commit a small portion of his wealth to speculative activities; all in the name of feeling the pulse of the market and to experience the adrenaline rush which comes from placing a gamble. In order to cultivate discipline, one must shut out the noise and “advice” which comes daily in the form of recommendations, exhortations and forecasts. To be disciplined also means strictly following your original plan for investment and not deviating from it, as this may mean an erosion of capital.

Fortitude is defined as the “mental and emotional strength in facing difficulty, adversity, danger or temptation”. This is probably the hardest mental and emotional quality to have as a paper loss can feel extremely painful due to the human tendency for loss aversion. Having fortitude means being able to overcome the mental anguish that you may have made a bad decision and to soldier on even though the odds seem against you. It is a character trait which is honed through many years of being in the market and getting used to Mr. Market’s manic mood swings. By focusing on the business of the Company, one can build up fortitude and be more emotionally resistant to such adversities and difficulties.

Calm, Rational and Realistic

An investor needs to maintain a calm attitude when approaching investing, and not get unduly excited, panicky or exuberant. Calmness helps one to think more objectively and to evaluate possible courses of action in a rational manner. This trait also means that one should logically think through all potential outcomes, including the so-called “Black Swan” ones, and be mentally prepared for significant losses should these events come to pass. If one is certain of committing capital, then the calm investor should proceed to do so only after considering all the possibilities.

A rational investor is more likely to react more calmly should any unexpected events occur, as he can maintain his sense of balance amid turbulence and uncertainty. In order to remain rational and objective, it is necessary to cultivate a mindset which does not react adversely to sporadic and unexpected events which most certainly will crop up in an investor’s lifetime, be they a sudden terror attack, a large drop in earnings or a natural disaster just to name a few.

Finally, an investor must learn to be realistic about companies. In the world of business, nothing is certain and sometimes the best laid plans and strategies may be fruitless if a new competitor or complementary technology/product is introduced. Hence, an investor must learn not to be too optimistic – according higher valuations to a company which is supposedly the next big growth engine or with the next new groundbreaking product or technology. Neither should the investor be unduly pessimistic and see only dark clouds ahead, which may cause him to unnecessarily divest of his holdings when the setback may just be temporary or transitional. These extreme emotions should be tempered by realism and business sense, which would allow an investor to logically and rationally assess the business prospects of the companies within his portfolio.

Behavioural Finance – Heuristics, Biases, Fallacies and Illusions

Now we come to the area of behavioural finance, which in recent years has been the subject of extensive and groundbreaking research. This is because it is a new field which can determine investors’ behaviour outside of the standard economic model of rational behaviour and profit maximization. Apparently, a lot of what we do actually runs counter to common sense and some of it even actively destroys our wealth! I shall not go in depth into the above four aspects but will just touch briefly on them. My reference is Robert Koppel’s book “Investing and The Irrational Mind”.

Heuristics simply refers to rules of thumb – shortcuts which our mind uses to arrive at conclusions. In any activity (investing included), our brains are hardwired to look for shortcuts which would make like easier and make decision-making quicker (though not necessarily more efficient!). For investing, we need to ensure that we rely on the correct and accurate heuristics in order to support our conclusions, and must actively avoid shortcuts which may results in flawed decisions.

Biases are cognitive and psychological in nature, and refer to a particular form of behaviour which arises due to personality traits inherent in human beings. Examples are over-reaction bias, endowment effects, hindsight bias and anchoring bias just to name a few. Over-reaction bias exaggerates the effects of bad news and makes us over-react to events, thus bad news is magnified in terms of emotional impact while the effects of positive news is muted. Endowment effects make it seem like what we own is more valuable than what we do not own, and is usually used to describe the fact that once one owns shares in a company, they would seem more valuable to him than an outsider viewing the same shares. Hindsight bias is one of the most pernicious and common biases and relates to people thinking that they would know what was going to happen, after the fact! This fools people into believing that they could predict what was going to occur. Finally, anchoring bias causes our minds to anchor on a specific price or event and we tend to use this as a benchmark even after it is long obsolete or irrelevant. For more info, please borrow or buy Robert Koppel’s book.

Fallacies are misconceptions resulting from incorrect reasoning that often triggers an emotional response (Koppel, 2011). Some of those discussed in the book include the Fallacy of Accident (Black Swan Theory), Gambler’s Fallacy and Psychologist’s Fallacy. The Fallacy of Accident is a fallacy based on the faulty logic of a generalization that disregards exceptions, thus this applies to assessment of companies without considering scenarios which seem too “impossible” to occur, even though there may be a reasonable chance of it occurring. Gambler’s Fallacy was discussed before in one of my posts, and I shall not dwell on this further. Psychologists Fallacy is interesting because it is the case where the observer assumes that others have the same information and perceptions of the world as he does, and thus he bases his assumptions and logic based on this.

Illusions are pretty interesting phenomena, and this was the first time I had stumbled upon such an extensive array of illusions which can play tricks on our minds. Basically, an illusion is defined as perceptions which differ from objective reality. There are several discussed in the book, but the two worth mentioning (in my opinion) are “jumping to conclusions” and “clustering illusion”. Jumping to conclusions is a case where one believes they possess superior knowledge, therefore they take shortcuts with respect to decision-making, which may end up costing them an arm and a leg. Clustering illusion is the belief in the existence of patterns where none exist, and can usually be found among chart readers who swear by a certain pattern, though nothing may actually exist. I liken this to seeing picture of animals or familiar shapes in clouds, whereas everyone knows clouds are just random collections of water droplets.

Conclusion

The above is a very summarized list of the psychological and mental attributes which an investor should strive to possess in order to manage the “softer” aspects of investing. While having a firm foundation for analysis is important, it is also equally important that the investor does not neglect the emotional aspect of investing. This is because as humans, we do not always behave rationally and with cold logic (like a computer), therefore it is important to understand these emotions and harness them to make better investment decisions.

My next post (my second-last post) will focus on my four and a half year investment journey, and what I had learnt along the way, mistakes made and lessons learnt. I will also pay tribute to value investors who had inspired me as well as people (including bloggers) who had taught me about life, personal finance, wealth building and money management.

Saturday, January 14, 2012

Value Investing Recap Part 1 – Research and Analysis

As part of my concluding posts for this month, I shall be doing two major recaps on value investing and will be focusing on two major aspects which I feel are equally important if an investor wishes to obtain a successful, consistent and decent return on investment. These two sections shall be split into “Research and Analysis” which gives a revision on what one should focus on with regards to the numbers, financials and operating statistics; and “Behavioural Finance and Temperament” which sums up the emotional fortitude and attitude an investor should have when he approaches investing and the stock market. I guess readers can take these two posts as a final culmination of my 4.5 years of blogging and intensive thinking and analysis on various companies. I shall give my best attempt to distil my current knowledge and understanding of the proper concepts of investing into these two posts.

Note that following these two posts, there will be another final post on my investment journey and (this) journal, which will essentially sum up my personal thoughts and feelings on my investment journey through these years, and how I have grown and matured as an investor. No doubt the input of many other esteemed value investors was also taken into consideration in making me who I am today, as well as a list of very established authors and articles which I had read (and absorbed) over the years. I wish to thank these people in advance for enriching my life and journey and making it more meaningful and fruitful.

The Research Process

This involves preliminary research and gathering relevant and useful information about a potential investment opportunity. The research process is often rather time-consuming and tedious as multiple sources of information would have to be found in order to move on to the next stage – the Compilation Stage. An investor can usually start out with the most basic source – the Company’s Annual Reports for the last ten years. This should be followed up by recent corporate announcements, and then any industry reports if applicable.

Research should attempt to be as broad-based as possible, and to include all pertinent and relevant sources of information which may assist in the decision-making process. Most of the information obtained will be from public sources, but it does not hurt to go direct to the source if possible and set up and interview with either the Operations Manager, CFO or even CEO. This is truly a case of Phil Fisher’s “Scuttlebutt” technique, where the investor “gets his hands dirty” in gathering information directly from the Management themselves. Of course, such information is necessarily biased, and the investor should objectively assess the information to ensure he is not unduly influenced by Management’s expected optimism.

The Compilation Process

Compilation is a process which collates and aggregates the information, either on a Word document or an Excel spreadsheet. This enables the investor to better make sense of the huge influx of information which he must have obtained from the previous process of research, and also to summarize and make sense of the information in a meaningful manner. Compilation may take quite some time as the facts need to be arranged in a logical sequence, which could includes (but is not limited to) chronological sequence of events, arrangement of inter-connected facts and figures (examples, setup of new business divisions and their associated operating margins) and year-on-year comparisons of key ratios and metrics (like ROE, margins etc).

At this juncture, perhaps I should mention that the way the information and data is compiled has quite a heavy bearing on the next process, which is analysis. If the information is not compiled in a logical manner which makes it easy for the investor to trace the fortunes of the Company over the years, then he is likely to be either unable to make a conclusion on the investment worthiness of the Company, or worse still, may make an erroneous conclusion which may result in permanent loss of capital. Generally, the “proper” and sound way of compiling information is to ensure that one moves through the Company logically, from quantitative to qualitative; from business divisions to strategy, and so on. It can be argued that the substance of what is compiled is more important than the form, but I would insist that the presentation of the information also be coherent to an outside reader such that the investor and him would be able to glean the same insights using the same sets of data.

The Analysis Process

The analysis process can be described as the most difficult aspect of investing as everyone may look at the same data or information, yet come up with completely different conclusions. This is where the “skill set” of the investor comes into play, as he must draw on multiple disciplines (as mentioned by Charlie Munger, Warren Buffett’s business partner) in order to form a mental model of whether an investment looks attractive. Numerical and quantitative data must be assessed and analyzed to identify trends or spots of competitive advantage which differentiate one company from another; and the same investor must also be alert to potential danger signals or “red flags” within the numbers (e.g. inventory levels, receivables days, declining gross margins) in order to identify potential weaknesses. Suffice to say that the investor requires a very keen eye and an even sharper mind in order to make sense of the voluminous amount of information and draw meaningful and logical conclusions.

Numbers aside, analysis also involves areas of business analysis (as shares are, after all, part-ownership of a business) such as marketing, corporate strategy, management, human resource (staffing), operations and administration. Obviously, one cannot be knowledgeable in all aspects of a business, but it is important to at least have some awareness of how major decisions in these key areas influence a company and affect its competitive advantage, growth prospects and stakeholders. Porter’s Five Forces come in handy and some investors also take it upon themselves to do a SWOT analysis to enhance their understanding of where a Company stands. Other types of analysis which may be employed would also include (but is not limited to) a PEST analysis.

The final and possibly most important (yet somewhat nebulous) aspect of analysis is that of the integrity and character of key Management personnel and Directors. This aspect can only be independently assessed if the investor undertakes to personally visit and interview the Management and/or Directors. A very good opportunity usually arises by attending the AGM or EGM of the Company, whether as a minor shareholder (e.g. buy 1 lot to be invited to the AGM) or as an observer. Subtle cues can be picked up to see if Management is evasive, upfront, candid or simply cannot resist the so-called “institutional imperative”.

The Decision Process

The decision process would immediately follow the analysis phase, and is a validation of the analysis process. Once the all-clear is given in terms of the analysis portion, meaning there is green light to go ahead, the only “hurdle” left would be to determine a suitable valuation to purchase. This is the tricky part where one has to assess metrics such as P/B, PER or use a rudimentary form of DCF analysis with assumptions in order to “model” a fair value for the Company. While Buffett uses “intrinsic value” to encompass the entire business and its characteristics (including intangibles such as goodwill, patents and trademarks), this concept would imply a value which is in excess of the sum total of the net assets on the Balance Sheet, and therefore is difficult to pinpoint with precision. Hence, being approximately right in obtaining a value and purchasing at a margin of safety is much better than being precisely wrong.

Conclusion

The above pointers are just a brief summary of the research, compilation, analysis and decision-making process which has now become an integral part of my stock selection process. My criteria has been mentioned before in previous posts and I will not repeat them here again, but this post is just to collate my final thoughts on this topic and to provide a summary of how to go about the often tedious, but ultimately rewarding process of finding and purchasing an excellent company.

In my next post (third-last post), I shall weigh in on the psychological, mental and emotional aspects of investing, which I feel are as important as the business analysis portion.

Saturday, December 31, 2011

December 2011 Portfolio Review and FY 2011 Year-End Review

For this year-end review, I will be doing a comprehensive review of various aspects of my portfolio, covering cost, yield and also benchmarking against the STI during various months of the year. The reason for this is to get a better understanding of how my portfolio has been growing to date and over a period of two years, and how my returns have been affected (if at all) by the recent crisis. Another aspect which I will be looking at is the benchmarking as it would indicate whether I should simply stick to index funds or whether I should doggedly continue my pursuit of analysing individual companies and investing in them. Obviously, if my stock-picking skills are so bad that they stink, I would be better off saving my own time buying into ETFs than wasting it on futile analysis. At the same time, at the end of each section, I will also include my 2012 plans and aspirations.

Portfolio Growth


Portfolio growth tracks the growth in my portfolio over the last two years, and it was interesting to compile this to see how I had injected money and taken money out during this period. I started the year 2010 with a portfolio cost of about $151,000, and at the time the market value of the portfolio stood at about $160,000, with a gain of 5.9%. A total of about $51,000 was injected into the portfolio during 2010, and though it looks like there were no withdrawals, a quick glance at last year’s portfolio summary actually showed two divestments – one of FSL Trust and another of China Fishery (for a loss and a gain respectively). The proceeds were immediately reinvested into other promising companies, and 2010 actually ended with a portfolio cost of about $202,000 and an unrealized gain of 20.2% translating into a portfolio market value of $243,000 as at end 2010.

Looking back on hindsight, the performance for 2010 was way better than for 2011, largely due to the Europe Crisis which broke out in 2011 and caused a sharp fall in overall market prices. If we just base on share prices alone, the performance of the portfolio would definitely pale in comparison for 2011 compared to 2010, as the average gain was 13.7% for 2010 across twelve months, while for 2011 it is a mere 8.8%. But note that the money injected into the market amounted to about $40,000, which was comparable to 2010 if you factor in the turbulence in my personal life during 2011, as compared to a relatively calmer 2010. Of course, looking at the market value of the portfolio as at year-end 2011, it was severely affected by the economic turbulence and political uncertainty in Europe, and therefore just registered a gain of 3.2%, for a market value of $250,476.

Moving forward, the aim for 2012 is to at least maintain the capital injections (of around $50,000) as per 2010 and 2011, accelerating only if markets fall substantially, akin to the doomsday scenario of October 2008. From the lessons learnt from the last bear market, I have positioned myself to be always prepared for a major crisis with sufficient cash to take advantage of opportunities. At the same time, as an investor I have to continually keep a watchful eye on the performance of the businesses of the companies in which I own shares. Assuming I inject a decent amount into my portfolio, the cost by the end of 2012 should be around $300,000.

Realized Gains, Full-Year Dividends and Dividend Yield


From the above table, it can be seen that 2011 registered an overall realized gain of $5,600 from the divestment of Tat Hong and GRP. Recall that 2010 also saw a net realized gain of $9,400 but this was due to a larger gain offsetting a smaller loss (gains from China Fishery offsetting losses in FSL Trust); therefore I do consider this an “improvement” of sorts as both divestments resulted in gains, albeit much smaller in quantum as compared to last year. However, readers should note that both divestments this year have been classified as “investment mistakes”, and those who wish to know more details can visit the relevant posts under this category to read up.

As for scrip dividend, thus far only MTQ is offering this scheme among the six companies within my portfolio. For 2011, a total of 2,206 shares were received as a result of me choosing full scrip over cash dividend, and a further 1,000+ shares will be received by me on January 6, 2012 when MTQ’s interim dividend of 2 cents/share is credited to my CDP account in scrip. The scrip price determined for this round is 73 cents/share.

For the entire year of 2011, a total of $14,744 in dividends was received. Note that this does include special dividends from three companies – SIA Engineering (10 cents/share), Boustead (3 cents/share) and Kingsmen Creatives (0.5 cents/share); thus it should not be taken as an “indicative” year. If the special dividends were stripped out, total dividends would fall to $11,540. Based on a monthly average of $1,229, the blended yield is about 6.08%, slightly higher than the recently reported benchmark inflation rate of 5.7% for November 2011. If I assume all dividends revert back to base case (i.e. no change from 2011 for next year, just based on interim and final dividends), then yield may fall to somewhere around 5%+ of cost. Though this will be lower than inflation, it is still quite a respectable long-term yield as headline inflation is not expected to remain above 5% for an extended period of time (historically, it has hovered around 2-3% per annum).

The target for 2012 is to at least maintain the dividend yield, as it is expected that it would be a rougher and more uncertain year. Absolute dividends are expected to remain fairly constant (minus the special dividends), so cash flows should be relatively stable. Depending on whether additions can be made to the portfolio, it may help to bump up the dollar-value of dividends somewhat.

Benchmarking Against STI


The table above is a pretty new one in the sense that I had never before compared my monthly performance against the index before. Since 2011 I have been posting up my monthly XIRR performance against the index’s performance, and obtained a difference which represents whether I had outperformed the index (+) or underperformed it (-). A very interesting observation arose from the above table – for a value portfolio which I am maintaining, apparently the out-performance increases when the index is plunging, rather than rising. Notice that when the index had dipped below the 3,000 mark from August 2011 onwards due to the onset of the Europe Debt Crisis, that was when the portfolio had its best out-performance against the index. The second-widest margin of out-performance was in September 2011, when the portfolio registered a +11.6% gain over the STI, due to the share price resilience of companies such as Boustead, MTQ and Kingsmen Creatives. Amazingly, the largest gap thus far has been achieved at this point in time, with a +12% gain of my portfolio (-5%) over the index (-17%). I am not sure if this out-performance can be maintained in 2012.

One should also note that share price resilience is also a direct result of business resilience, meaning businesses which are adequately capitalized and enjoying steady business even amid hard times can qualify to be considered as “stable” and thus act as suitable investments through good times and bad. Companies which generate consistent free cash flows and which have a strong balance sheet will also see less share price volatility in general, except for the occasional desperate seller who will cause prices to move erratically due to the low liquidity. It is my intention to seek out more of such stable businesses which embody both growth and yield characteristics for my portfolio in future, and which are trading at undemanding valuations vis a vis their future prospects and cash flow generation capability.

Below please find my portfolio as well as corporate summaries for December 2011:-


1) Boustead Holdings Limited – There was no news from Boustead for December 2011. The interim dividend of 2 cent/share was received on December 16, 2011.

2) Suntec REIT – There was no news relating to Suntec REIT for December 2011.

3) MTQ Corporation Limited – There was a minor announcement from MTQ on December 15, 2011 about the liquidation of a subsidiary, MTQ Subsea Technology Pte Ltd, which has been dormant since 2008. Other than this, there was no news from MTQ for December 2011.

4) Kingsmen Creatives Holdings Limited – There was only a minor announcement on December 12, 2011 of a change in shareholder in Kingsmen Korea as a result of the issuance of 7,500 new shares to Mr. Daechul Lee as part of alignment of his interests with the Group’s.

5) SIA Engineering Company Limited – There was no news from SIA Engineering for December 2011.

6) VICOM Limited – There was no news from VICOM for December 2011.

Portfolio Review – December 2011

Realized gains have remained at $69,500 due to an absence of any dividends in December 2011.

For the month of December 2011, the portfolio has decreased by -5.0% (using XIRR in MS Excel to compute) against a -17.0% fall in the STI; thus my portfolio performance has outperformed the STI by +12 percentage points. This was a better performance compared to November 2011, when the portfolio out-performed the STI by +10.7%. Cost of investment has remained at S$242,600 and unrealized gains stood at +3.2% (Portfolio Market Value of S$250,500).

As mentioned previously, January 2012 shall be my last month of blogging, as the intention is to shut down the blog as my workload increases and I increasingly look to more time with my family and friends. I shall probably do a post reviewing and summarizing my investment journey these last 4.5 to 5 years in the middle of January, and my final post on this blog shall be my Jan 2012 portfolio review and summary. Be assured, however, that historical entries will still be preserved and accessible to all, and that this link will still remain active even if no new posts are made.

My final portfolio review (and post) will be on January 31, 2012 (Tuesday).

Monday, December 26, 2011

Boustead Singapore Limited – 1H FY 2012 Analysis Part 3

Part 3 will be interesting, as I delve into Boustead’s leasehold property portfolio and also its dividend history. I guess I had already mentioned quite a bit about Boustead’s prospects based on its divisions in prior reviews and analyses, therefore I shall not dwell too much on the same facts again in case I start putting readers to sleep! Basically, the underlying thrust of the Group’s strategy is still the same, though of course they are shifting their focus to earn more recurring income from their real-estate portfolio rather than endure the lumpiness from their Water and Oil and Gas divisions. This will be a slow and ongoing process and I am willing to wait as “Rome was not Built In A Day” to use the popular phrase.

Boustead Leasehold Property Portfolio


As can be seen in the table above, Boustead currently has nine leasehold properties in its portfolio, and this is set to rise further next year if it manages to clinch more of such deals. Note that as at 1H FY 2012, six are already completed and thus should be contributing rental income to Boustead’s top and bottom line from 3Q 2012 onwards. Another fact is that their clients are all heavyweights and multi-nationals, therefore the risk of default or late payment is also significantly reduced. Most, if not all, of them are in the technology, aerospace or logistics industries, and attests to Boustead Projects’ reputation as a design specialist which can customize facilities to meet international clients’ needs. Though this may seem like a niche market, remember that there are still many companies which are eager to enter and set up base in Singapore, as we are a very business-friendly country (with tax rates at 17%). Recent news also mentioned Rolls Royce (one of the largest engine producers in the world) setting up shop here at Seletar Aerospace Park, and looking to hire 500 staff to work in its new production facility. With the Government thrust to develop more areas of Singapore and add in hotels, entertainment and industrial sectors, this trend looks set to continue into the foreseeable future. Some examples which immediately come to mind are the Kallang Riverside Project and Jurong Lake District Rejuvenation Project, both of which have been envisioned and are in the pipeline for development in the next five years.

The remaining three properties will be completed in 2012, with the latest being June 2012 (1Q FY 2013). Therefore, the financial impact of the entire portfolio will only be felt in late FY 2013, and this does not include possible additions to the portfolio during the first six months of 2012. The total square metres of the properties has exceeded 90,000, and it is Boustead’s aim to grow it to 200,000 to 300,000 sqm before the entire portfolio can be considered for sale to an industrial REIT. I had attempted to compute a blended rental income per square metre using information from CommerciaGuru dot com, but apparently different areas of the industrial park can command different rental rates, and the variance can be rather pronounced as it is also tied to the age of the building. Therefore, I have not been able to pin down a rate which is “reasonable” and which I can use to forecast rental income for each property. Rather than use an estimate which may be way off the mark, I will just leave it as it is and wait for the Group to state the amount of recurring income it receives from its properties, or perhaps I can drop an email to the IR for more clarifications.

Dividends


In the interest of brevity, I shall not discuss too much about dividends as I believe the above table already summarizes most of what I have to say regarding dividend history. Boustead supplements a lot of their recent dividends with special dividends, and FF Wong repeatedly makes it clear that these should be labelled “special” and thus one-off, and shareholders should not expect something of an SPH-type “special” dividend situation which seems to repeat every year (then why call it “special” in the first place??). One can notice that except for FY 2006 and FY 2007 (where there was a dividend in specie of Easycall shares and a booster final dividend respectively), dividends have trended up quite smoothly over the years.

Interestingly, dividend payments only started back in 2003 when the Group turned around under FF Wong’s leadership and overhaul. Previously, there was a lot of deadwood and the Group had many unrelated businesses which were dragging down the bottom line and consuming unnecessary resources (sounds somewhat similar to MTQ in this respect, though MTQ has since taken on a lot more leverage than Boustead). FF Wong streamlined all the businesses and divested the under-performing ones, and it was only in FY 2009 that Salcon turned around (there were too many legacy issues relating to it). Note that interim dividend payments commenced in FY 2005, and interim dividend has steadily climbed from just 0.5 cents/share in FY 2005 (split-adjusted) to 2 cents/share in FY 2012. Final dividend has been a little more erratic, with FY 2011 seeing a drop in final which was “replaced” by a very high special dividend of 3 cents/share.

However, from a total dividend per financial year perspective, it has been steadily rising except for a minor “blip” from FY 2008-2009 (drop of 1 cent/share). Therefore, I feel that shareholders can reasonably expect another 2 cents/share final dividend and also perhaps another special dividend to equal last year’s payout.

Another possible scenario (which I had mentioned that I will talk about during Part 1) is that Boustead may require more upfront capex investment into its three leasehold properties, as well as set aside additional cash for any planned upcoming projects, and so has less to pay out in the form of dividends for FY 2012. Therefore, dividend per share may fall to perhaps a total of 5.5 cents to 6 cents/share; but unless the cash is being earmarked for a major M&A, I feel that the payout should be quite similar to the previous year.

Conclusion

This analysis may be the last which I will post on my blog, for reasons which I will explain in a later post next month. Typing out and posting analyses on my blog is very stimulating for the mind, but unfortunately is also very time-consuming and tedious as I have to collate the necessary information in Excel sheets and also write out everything in a Word doc. Plus, I have to proofread every line for grammatical errors (I hate those) and punctuation errors. Considering the New Year is coming and I may be busier than ever, I may have to take a back seat on these detailed analyses. Anyway, I also realize that hardly anyone comments on them (unlike the more popular personal finance series), so I assume no one will miss them!

For Boustead, the Group may yet be on the cusp of something big, as long as FF Wong and his team can remain focused on the Group’s core competence and channel its resources into value-added activities. Though Boustead is sitting on a large cash hoard which is being eroded by inflation, it allows them to be ready to pounce on any opportunities which may be thrown up by the ongoing European crisis. Their well-managed Cash Management Program also means that at least some of the cash is earning higher rates of returns as provided by blue-chip corporate bonds, while an increasing amount of cash is also funnelled into their growing leasehold property portfolio. This will, in time, increase their ROE and allow for better returns. Considering the Group is already achieving admirable rates of return despite having a huge cash hoard and negligible leverage, I guess with proper Management and direction, this can only improve in future. I am happy to have been a shareholder of Boustead for the past five years, and if the business continues to remain resilient, I may remain a shareholder for very much longer.

Wednesday, December 21, 2011

Property Chilling Measures

Readers would know that I seldom blog about property (there are only five posts on this in the last four years!), as I am generally not very good in this area and am still experiencing my steep (and extended) learning curve. There are so many aspects to consider when it comes to investment property that it would take many years to really understand how things work, including the witnessing of the entire bull-bear cycle which is far more drawn out as compared to a full stock market cycle. My last post on property in June 2011 centred mainly on expectations and the so-called “Perfect Storm” (record supply of land, falling demand and rising interest rates). Note that about 6 months since then, all these have yet to come to pass, which is why I feel the Government has suddenly introduced another set of harsh (some even say draconian) measures to curb speculative demand once again; with this latest set of measures targeting mainly foreigner demand. Let’s look at the various aspects which I talked about previously to see if they may still constitute the “Perfect Storm”.

Before I go on, the reason for the title is because the phrase “cooling measures” has been rather over-used, and I was just discussing this with a friend the other day on whether the measures are designed to chill and freeze, rather than merely cool. Of course, it remains to be seen if such measures would eventually be effective, but a peek into history and also a review of what experts and analysts are saying may shed some light on what may transpire and also give some insights as to how property may behave. Crystal-ball gazing is not my strong point – therefore readers will have to understand that this commentary is typed out based on my (rather limited) understanding of the property market and perhaps may even make me sound like a “newbie”, but please bear with me as I feel that expressing my views on the subject can enhance my overall learning experience and hopefully hasten the learning curve effects.

A Fifth Round of Chilling Measures


I guess most analysts and even the newspapers would have discussed the latest measures (announced on December 7, 2011 and implemented from December 8) almost to death, but the above table provides a good summary of the effects and is taken courtesy from a DBS Vickers analyst report. To summarize, foreigners and non-individuals (i.e. companies) need to pay an additional buyer’s stamp duty (known affectionately as ABSD) of 10% for all residential property; while for PRs and Singaporeans, they need to pay an additional 3% ABSD for their second property and third property onwards, respectively. Two interesting “exceptions” are offered – citizens from five nations which include America, Switzerland, Liechtenstein (a country located in Western Europe, bordered by Switzerland and Austria), Norway and Iceland would be treated as Singaporeans and would thus be able to avoid paying the 10% ABSD, while for corporations who bought and sold fully-developed properties (including collective sale properties) within 5 years from December 8 would be exempted from paying the 10% ABSD too.

It is immediately clear that the measures are targeted at foreign buyer of residential property, as the proportion of foreigners buying high-end property here has been increasing as more “hot” money has been flowing from countries like USA and China to seek more safe havens. Property curbs in Hong Kong (which has seen property prices fall to a six-month low) and China are also driving more and more wealthy individuals to channel their wealth into properties in Singapore, thus pushing up prices of private properties (and hence HDB resale flats as well). There is, however, a growing debate on whether the latest measures would be effective in bringing prices down, and some have criticized the measures as being too harsh, as the global economy is still reeling from the effects of the Euro Zone debt crisis and economic growth in Singapore is expected to be anaemic. My personal view is that prices may not moderate much, as foreigners may have deep enough pockets to withstand the 10% ABSD, and interest rates still remain at record lows.

Previous Cooling Measures


Looking at the above table (courtesy of OCBC Research), one can trace the history of the last four sets of cooling measures implemented by the Government. The first round can be seen as being relatively mild, with the Govt removing the IAS and the IOL, effectively ensuring that buyers must pay down the principal cum interest and not just servicing the interest alone. Sep 2009 was the first indication of an increase in supply as the Govt reinstated the 1H 2010 confirmed list of GLS sites.

Round Two, implemented just six months later, saw the first sign of some clamping down of speculative fervour, with a SSD implemented for flippers who turned a unit within a year, as well as lowering the LTV ration to 80% (this meant buyers had to cough up more cash – 20%). Another six months later, when prices still went up relentlessly, the Govt introduced SSD for properties sold within three years instead of just one year, while lowering LTV to 70% from 80%. They also raised the household income level for purchase of DBSS, which I think was a wise (though long overdue) move, as it meant more people could afford “public” housing rather than go for overly expensive private condominiums. HDB supply was further ramped up to 22,000 units for 2011, compared with “just” 16,000 units for 2010. Another shrewd move was to disallow HDB owners to concurrently own private property, in order to reduce speculation and “flipping”. When it seemed that all these measures were futile, a fourth round was introduced in Jan 2011, where the LTV was further reduced to just 60% for individuals with more than 1 housing loan, and 50% for corporations. Harsher SSD rates were also introduced and tiered as shown in the above table, but apparently these still did not work well enough as many of the buyers/speculators were cash-rich and remained unruffled by these four rounds of measures.

And so the Government implemented the fifth round, which consists of the ABSD.

Latest Measures on Increasing land Supply

The Government has also released, on December 7, 2011, the 1H 2012 GLS list of sites. On the list are new land sites for 7,020 housing units in the confirmed list and another 7,120 homes, 4,857 hotel rooms and 218 sq km of commercial space on the Reserve List. Although this supply is lower than the 2H 2011 planned new inventory, it is still a relatively high figure and analysts are saying that the market will soon be flooded with ample supply. It is actually arguable whether the Government is finally releasing sufficient land to absorb the huge influx of foreigners in recent years, as well as to cater to the numerous couples aspiring to get married and “own” their first flat. Assuming market prices do fall and people hold back from transacting, this means that there may be more vacant units left over from the recent glut of new private housing released by developers, which would snowball into an even larger looming supply in say two to three years time. Another possibility is that foreigners, spooked by the draconian measures and the economic uncertainty, may leave our shores and create a vacuum in terms of demand, which I feel is unlikely to occur.

Sentiment-Driven “Perfect Storm”

The Singapore Government (like its counterparts in China and Hong Kong) exerts significant control and influence over the property market, as can be seen in the last 2.5 years where five rounds of property curbs were introduced in rapid succession. Thus, investing in property companies which develop residential property makes for a difficult proposition as the industry is continually “rocked” by changes in regulation and laws, not unlike the notoriously tightly-regulated airline industry.

The question now is, of course, whether sentiment will play a bigger role in creating the perfect storm, rather than people actually having no cash to stump up (I tend to believe foreigners and locals are a wealthy bunch of people who will not let a simple ABSD stop them in their tracks). If people feel hesitant, or are certain that prices will drop, then it becomes a self-fulfilling prophecy and the vicious cycle of falling asset prices may ensue. When Khaw Boon Wan (Minister for National Development) first mentioned about a Perfect Storm when he took office after the May 2011 Elections, I was wondering if this would really come to pass. A quick check with some older colleagues who remember the dark days of 1996-1997 has led me to the conclusion that once prices fall, they will literally plunge. Crisis can hit us so quickly that volumes almost completely dry up, and knowing how illiquid the property market is (compared to equities), the bid-ask spread may also widen considerably and this is when you read about a lot of “fire-sale” in the newspapers. In short, many people will get severely burnt.

Conclusion – Prudence Wins the Day

I guess I run the risk (again) of sounding like a stuck record when I caution all readers to be prudent and conservative in their finances, and to ensure they have sufficient cash buffer should they choose to leverage to invest in property. Though interest rates may be hovering at record lows, no one knows how the current situation in Europe will pan out and assuming something severe occurs in the global arena which somehow shocks the system, it may lead to some sudden, unexpected and very drastic changes which may leave one with precious little time to react.

If one lives their life in a frugal manner and takes up only very basic (not excessive) debt which is necessary to service their live-in residence, then you would not have much to worry about. But for those who are juggling with three or more mortgages and using one property as collateral of multiple loans, perhaps you should take a step back and ask – even though this may seem safe right now, could it be just a fragile house of cards which may collapse at any moment?