Sunday, October 26, 2008

Staying Positive Amidst the Global "Meltdown"

The recent global stock market meltdown and the persistent and pervasive bad news in the media has made many of my peers and relatives worried and frazzled. Reading about retirees losing their life savings and people losing life fortunes to the stock market isn't exactly uplifting news - it all points to dark and dreary days coming up and probably a lot more pain and suffering for the man on the street. However, thinking about things in perspective, having such a deep recession may actually be a good thing (I will elaborate further) and that it may not affect me as much as I previously believed. These are some of my thoughts on how to stay positive and how to weather the economic storm.

In terms of my portfolio, assuming a worst case scenario whereby I lose ALL my money (erm, touch wood !) in "high-risk" and new companies such as Ezra, Swiber and Pacific Andes/China Fishery (high gearing); it will be about a 60% permanent capital loss in my portfolio. In case readers want to leave stinging, sarcastic comments again, let me remind that this is the WORST case envisaged scenario as I view these companies as the highest risk of all the companies I own. FSL Trust is likely to survive (in one way or another) unless very extreme adverse events such as invoking of market disruption clause becomes common, issuance of massive amounts of additional shares due to DRIP or the bankruptcy of one of the lessees. Boustead has a huge cash hoard which should tide it through the hard times - being a 180 year-old company which has seen countless recessions and even one Great Depression also help in coping with the current crisis ! Tat Hong has similarly been through recessions and so far has emerged stronger and is a force to be reckoned with in Asia and the World; thus not too much worries about them going under.

So, as mentioned, assuming the WORST, it will take me approximately 2 years to save and earn back all the capital which I had lost. I normally save 40% of my take-home salary but this recession has caused me to increase this to 50%. Assuming I still get a decent bonus this year and no bonus next year, I should be able to partially cover all debilitating losses in the event of collapse of one of my companies. Since I am still young (early-30's), I think 2 years is a short time frame to be able to earn back what I've lost. In the meantime, I will be:-

a) Cutting down all expenses relating to food (eat out less, less restaurants);

b) Continuing to use my trusty bicycle to get around nearer areas (no ERP and no petrol costs !); for further areas I will continue to use MRT and bus and try to transfer to take the 40c rebate into account to save costs. A car to me is totally unnecessary and will just serve as a burden to my plan to accumulate wealth;

c) Save more aggressively by chanelling more of my salary into a "don't touch this account" savings account with slightly higher interest rates. This account is liquid enough so that I can transfer monies to invest in the market when I see bargains, and I have been using it for 3-4 years;

d) Be more frugal when it comes to purchasing essential items such as clothing, shoes etc. Branded goods are shunned by me and I will usually get something unbranded, yet sturdy and good. That way, one can save about 50% on a pair of shoes (about S$40-S$50) instead of buying more expensive branded ones (usually around S$100-S$120);

e) Saving and reinvesting passive income - this is dividend income from my investments which I still expect to receive. Right now, I would expect dividends to continue to flow from FSL Trust, Tat Hong, Boustead, Suntec REIT and China Fishery, despite the challenging global conditions. I am prepared however, for a substantial cut in dividend or even no dividend in FY 2009 and FY 2010 should economic conditions deteriorate further, which is why point a) about saving aggressively is so important;

f) Work towards retaining my job and remaining "useful" - hopefully, the upcoming retrenchments and lay-offs will not affect me (touch wood again). The most important thing in a recession is to be able to hold on to your job so that you still have a steady income. I can accept pay freezes or even a pay cut but am praying that I can at least retain my job;

g) Look for alternative methods of earning side income - any suggestions will be appreciated from readers and I am willing to work long and hard to ensure financial stability for me and my family. Fortunately, I also have a comprehensive insurance policy which can protect me in terms of health and also has a savings plan component embedded in it.

I believe the above measures will ensure I can get through this recession, and hopefully relatively unscathed. As someone mentioned before, money can always be earned back, but your health and sanity and the love you get from your loved ones cannot be bought by money. My lifestyle and habits are not excessive and I shun conspicuous consumption, so I think after all is said and done, I should get by OK. In the meantime, I should continue to think more positively and not let the doom and gloom affect my mind. Christmas is coming up as well as Chinese New Year - perhaps we can look forward to the good times shared with loved ones instead of worrying about money all the time ? It's crises like these which make one understand the simple joys og being with loved ones and being content with what you have instead of always chasing for more.

It's a dream to be rich and financially free, but that dream can wait. Now, it's time to survive. And survive I will, through my sheer hard work and determination !

Note: Part 4 of Tat Hong's analysis of purchase will be coming up in my next post. I apologize for the delay as there has really been many events happening in the last few weeks which had taken up my time and my thoughts, and I had to blog about those first.

62 comments:

Ricky said...

Hi MW,
Yes it is true, relationships and health are definitely more impt.
btw which industry do you work in? I think mine confirm bonus cut this year. But no matter, i've been saving every month...although not 50% la. I think max only 30% :)
And i think it is rather fortunate that for young investors, we didn't have that much to invest in the first place, so treat it as a lesson learnt, a feather in our cap. Afterall, it's amazing how bad the crisis has deteriorated. Even all the blue chips kena slamped badly.
How do you access the charts of the local blue chips since their IPO? I tried poems only shows up to 2004...
Thanks!

musicwhiz said...

Hey Ricky,

I work in the finance and investment industry; I would expect some cut in bonuses too, and possibly a round of layoffs in my firm. Oh well that's life - just hope for the best but expect the worst. :)

I would suggest trying Yahoo Finance ? They have detailed historical records.

Regards,
Musicwhiz

nhyone said...

Where did you read about people losing their life savings in stocks? Is it local news?

musicwhiz said...

Hi nhyone,

More of the cases in USA. But there are already cases of friends who lose a substantial amount in shares amongst my own peer group (and friends' friends). So it sounds like it's getting serious.

Regards,
Musicwhiz

Anonymous said...

Hi Muscwhiz,

I called myself maniac to remind myself that the market is a maniac.

You are doing exceptionally well in analysing the companies, management and buying them at sale price. Dont be affected by the price of the companies and other people comments, if you holding on to it for long term. Personally, the only "problem" I see is that you are buying into very "complicated" companies that seems to have high capex (maybe to me and normal retail investor, and not to you). It is very difficult to analyse and predict how these companies will be doing (esp in the current tight credit situation). Looking at the finanical reports are not sufficient (esp to a layman investor like me). With most of your companies in "cyclical" industry and contract-based companies(O and M), it will always come a day that the industry is down or when contracts winning can't grow anymore, therefore you must always keep a look out. For FSL, based on the report on the Noble-STX defualt, the price of charter has dropped more than 90% and the value of the asset is difficult to assess- so do take care.

With that, I really applaud what you are doing and keeping a frugal lifestyle in the earlier years to get more investment capital is one of the secret of success.

take care
maniac

Anonymous said...

Way to go, Musicwhiz! Even though, i don't like the companies you invest in.. but I like your gut because you choose all the high risk and complicated businesses.

One could invest in company with high capex requirements after the company had spent their monies in that and repay their capex. Then one could wait for its share price to drop until a point where one could get all their past capex for free. For example, the company Tat Hong you invest in, one could wait for $0.25-0.30 for maximum safety. At that point, the cranes will work for you free future. It's value investing with low risk and high return!


I recommend you to read this book: Dhando Investor - Low-risk value method to high returns.


Good luck and all the best,
Ryan

Ryan said...

Hi MW,

I have been following your blog for close to a year. I am only in my mid 20s and I am heavily invested for my age. My first foray into stocks resulted in me incurring $20k in realised losses. That was my darkest hour. I must say, I was a bit critical of your long term approach at first. However, I learnt a painful lesson with the $20k and I realise that I can't time the market. I only started a long term approach 2 months back. I have since accumulated a sizeable portfolio but it is currently down 20 to 30% in recent weeks as well. It has been a daunting past few weeks for most and even myself. I have friends whose porfolios are down 60 to 80%. Some of whom have unrecovered losses due to investments in companies like Ferro China. As I am young, and do not need the money now, I am not so worried as I can earn that 20k back in one year and I can wait out this recession for my portfolio to see gains again.

I really appreciate that you share with us so much insight into your investment philosophies and even details of your personal portfolio. It gives me comfort to know that we will ultimately reap good rewards if we take a long term view of 5 to 10 years. I was quite depressed for a period but now, like you, I am taking things positively. Like you, I have also started to increase my savings every month from 40 to 60% of my take home pay. I have zero liabilities (only my handphone bill and EZlink card)and I hope to save a sizeable amount in the next 2 years to ride this recession (hopefully no retrenchment). I appreciate your weekly posts and financial statement analysis as it has helped me to better enhance my stock selection as well.

Thank you very much Sir.

regards
Gori-kun

Peng said...

I stand the same view as yours, and do respect the efforts you placed in sharing the insights in growing personal wealth.

Really appreciate it.

Anonymous said...

I have also suffered during this big crash because of impatience in waiting for the capitulation, thus buying shares before the capitulation,even though i have taken profit last year before the crash.

But as value investor, we can't really time the market, thus this is a good humble pie to swallow.Next time,just don't make the same mistake.

Now is the time to buy great blue chips and hold for the long term. i just check the STI chart up till 1987. Can you imagine that the peak of 1987 is approx. equal to Friday's low? Of course the components of STI has changed but the banks are still here. Surely,21 years of GDP growth couldn't have been fake. To me, that is the most bullish sign of a market bottom soon. I expect a Democrat sweep of the white house,senate and congress to spark the 'animal spirits' alive just like Roosevelt did in 1933.

Anonymous said...

maybe you should switch to SMRT now

Ricky said...

Hi MW,

i've been using Yahoo finance but they do not have detailed records for local companies...

Anonymous said...

Dear Musicwhiz

I started investing in shares in my late 30s when everyone was talking about their exceptional gains last year. Before this, I was never interested in shares and I told myself I should have gone in earlier.

Alas, I invested most of my savings at the wrong time ie close to the peak of the stock market without any margin of safety. I had invested more than $350,000 of which 80% was paper loss.

I bought 7 lots of Keppelcorp at $12.70 within a week when it dropped from $14 in Aug 2007. I experienced my first paper loss when Keppelcorp declined to about $10 the next week and I told myself never to play shares anymore. However, when Keppelcorp went up to $15 a few weeks later, all my anguish was forgotten. I berated myself for not buying more and this led to subsequent leveraging.

Luckily, I have a steady income and regular bonus to pay off my debts. Since I have exhausted all my savings, I stopped expensive holidays with my family. One Star Cruise trip for 5 nights used to cost me $7,000.

Recently, one of my friend, an accountant bought 100 lots of Keppeland at $3.18 using his condomium as collateral thinking that the market had bottomed. When Keppeland dipped to $3, he bought another 100 lots to average down. Now Keppeland is about $1.60.

On hindsight, I should not have traded in shares at all. But through this experience, I have learnt many things especially from you.

I am only middle age and money can be earned back. Hopefully, I can become a better investor.

Regards

ROBERTAY

musicwhiz said...

Hi Maniac,

Thanks for your kind comments. I would say things got very unpredictable only recently due to the sudden credit freeze; before this everything was "normal" and one could count on using "normal" analysis to figure out the risks of a company. Sadly of course, things have changed and of course one's thinking must change too. The business itself is not "complex" as you put it; it's simply the environment which makes it seem more so right now than it used to be. Complications arise because so many spanners have been thrown into the works ! Haha.

By the way, not all the companies I own are cyclical. Boustead has their geo-spatial and water division which do not depend on cycles, and for China Fishery people need to eat fish even during a recession.

Of course, the day when contracts are not awarded anymore will indeed be the day of reckoning for me, in terms of being a shareholder. But I don't see that day coming anytime soon.

For FSL, I am closely monitoring the situation now and hopefully no more surprises are thrown up.

Regards,
Musicwhiz

musicwhiz said...

Hi Ryan,

Theoretically it would be perfect if one could purchase at a price which essentially guarantees the rest of the assets "for free". But in reality, sometimes this price may not arrive; thus I think as long as you have some margin of safety, you should be fine over the long-term.

Cheers,
Musicwhiz

musicwhiz said...

Hi Gori-Kun,

Thanks for sharing your experiences. It can be quite harrowing to hear of friends who lost a lot of money.

I am glad my post has helped throw some perspective on the situation and also helped you to save for the coming rainy days. With a positive attitude, I am sure we will survive through the recession.

Good luck and take care !

Regards,
Musicwhiz

musicwhiz said...

Hi Peng,

You are most welcome. Thanks for dropping by !

Musicwhiz

musicwhiz said...

Hi Anonymous (yes, both of you),

Let's wait and see what happens. I'm not really concerned about timing market bottoms; am more curious as to how much sharper the sell down can get. I am using this to incorporate into my investing experience as it is my first true blue bear market as a value investor.

As for SMRT, I am not considering it as yet.

Thanks,
Musicwhiz

musicwhiz said...

Hi Ricky,

Oh I see. Sorry then I am not sure liao. Perhaps you can call up the companies to ask ?

Musicwhiz

musicwhiz said...

Hi ROBERTAY,

Sorry to hear of your situation. It would seem that when everyone's talking about how much money they make in the stock market, that is a good indication prices are peaking and a bubble is forming. Usually we only realize on hindsight (myself included).

I think leverage is truly a dangerous thing when it comes to the stock market, especially if the bear market is an extended one. Your friend who used his condominium as collateral may also be in trouble if the shares do not recover, as they may repossess his condo to pay for his losses on his shares. It was a risky and foolish thing for your accountant friend to do (and I thought accountants were supposed to be conservative).

Don't feel disheartened by this experience. Everyone right now is losing money. Owning companies can be a wonderful way to grow your wealth and ensure passive income; however we need to understand what we invest in as well as valuations before we plunge in. I am sure that after this experience, you will be much wiser. So will I in fact !

Take care, money can be earned back. As long as you have your family, their love and your good health, all is not lost.

Regards,
Musicwhiz

Anonymous said...

Hi MW and all,

First of all MW, keep up the excellent job and your chin up. You're doing fine and you'll someday be someone and I'll be cheering for you!!

In this all this madness Mr Market is throwing out...please have faith. The STI is really cheap and it may even get cheaper.

I am now even eying property counters as the pricing has been beaten down to discount severe recession and we all know that S'pore will come back with a huge bang.

I am presently vested in FSL at 0.40 but I do take into account the real possiblity of permanent loss of capital but who could resist the 40%+ dividend if FSL manage to pull through.

I have always been a saver but to save to the kind of magnitute to the paper losses I'm sitting on would take me 10 years minimum...so MW you're sitting pretty. I would encourage you to continue dipping in regularly as this for me is really a once in a lifetime (our life at least) that stocks have become so cheap...and yes it may become cheaper...where is the bottom...who knows but it darn close.

Gary Teh.

Disclosure: Vested in FSL, MIIF, FSL, GIL and many others on other exchanges.

Losses: greater than ROBERTAY

Anonymous said...

Hi MW,

During prolonged market downturns, would it not be prudent to have a stop-loss embedded into each value investment (say 15 %) to minimize loss of capital and risk? Especially when the country is in recession, it is doubtful that any stock can quickly recover the 30-50% losses even if the company has sound fundamentals. Cash is usually king in these times imo.

Joe

Anonymous said...

Hi MW,

With your analysis, u are able to get 5-10 baggers during this downturn if u buy in periodically. You will be surprised by your networth at the end of this period. (200kx5!) 3-5 yrs?

I have confident in you just as many of the forumers here! Don't lose heart! Keep investing in good companies at amazing valuation.

Blessings for you and your family,
HH

Ricky said...

Thanks MW, will do that.

Anonymous said...

you are right man, you have to tighten your belt for 2 years... and think carefully that nothing is impossible.. during the market turnmoil, it is merciless, regardless of your company fundamental.. chart tell you the story... stay tune, the worst just started, not trying to scare people but hey, we haven't even tasted the economic recesstion yet... better make sure you have a solid stable job, and crawl through the crisis... don't worry 2011 will be a brighter year.. cheers.

Brendan Lee said...

Hi MW,

I am also saving 50% of my income now and I do not own a car.

But whenever I go for reservist, and I see that people with much lower education and salary are owning a decent car, this tempts me to buy a car (Honda Civics or Toyota Vios).

Wonder if you have this thoughts are well.

equity said...

Hi Musicwhiz,

Thank you for always sharing your view with us. We hope that our companies will survive the crisis. Currently, I am holding OCBC,comfortdelgro,Ezra,Swiber and Asia Enterprises. I think that it is really depends on skill of the management of the company now.

At this situation, I find it difficult to make a decision if it is ok to average down as some people predict that the crisis will prolong for years...Using safety margin to make purchase decision looks not really work. I tried to average down Ezra at 0.9, but it goes down below 0.5 now :-(. However, I am still sure that as long as the company can go through the crisis, it should be ok. Are you going to average down further too?

Anyway, here is article about finding company during this crisis.

http://www.asianinvestor.net/article.aspx?CIaNID=86813&eid=13&edate=20082810

For Ricky,
For the historical price, you can try below link and change the stock code to the company that you want to check. Below link is for OCBC (stock symbol is O39.SI).

http://sg.finance.yahoo.com/q/hp?s=O39.SI

Take care,

equity said...

Hi Ricky,

For the symbol of the companies, you can search it at yahoo's site as well.

Best regards,

Ricky said...

Hi equity,

what i wanted to find was the entire chart of the companies since their IPOs but yahoo finance doesn't track that far back. Only to about 2004/5 yrs.

THeng said...

MW,
What happen to Tat Hong? dropping 21.4 percent today and care to share what is it so although today market bounced back?

thanks,

musicwhiz said...

Hi Gary Teh,

Oh, sorry to hear of your situation. Mr. Market can get really irrational pessimistic and manic, but in time he will appreciate the underlying value of the companies which he shuns now. Haha, I don't really think I will end up "being someone"; I am content with being just a retail investor who earns a decent return on my investment.

I think for FSLT, it's an unfortunate victim of the global credit crunch and the sharp downturn in shipping. On hindsight, I guess it was a bad idea to go into this sector but I did not anticipate such a huge collapse in the shipping demand to be able to cause the Trust to trade at 40% yield. I am prepared to write off this investment at significant loss, assuming conditions get much worse.

Yeah, well I try to save aggressively, and hope to be able to accumulate a sizeable chunk of cash during this recession so that I feel more secure. Don't worry you will be able to do it too, just perservere !

Regards,
Musicwhiz

musicwhiz said...

Hi Joe,

I don't implement stop losses as I am not using a trader's technique. I invest based on the business and I believe my companies have the ability to weather the storm. Whether this is true remains to be seen.

Cash is king only if you know how and when to deploy it.

Cheers,
Musicwhiz

musicwhiz said...

Hi fungisg,

Not sure if you are serious as your tone sounds tongue-in-cheek, but I don't believe in cut loss rules; just margin of safety concept.

Thanks though,
Musicwhiz

musicwhiz said...

Hello HH,

Thanks for visiting. You really seem to have a lot of faith in me. I certainly hope it's not misplaced ! Haha. Whether or not these companies turn out to be "good" will depend on the next 3-5 years. I am not too confident of 5-baggers as you mentioned. Just earning a decent return on my investment in line with market returns should satisfy me.

Kind Regards,
Musicwhiz

musicwhiz said...

Hi Brenden Lee,

Well, don't envy those with a car, that's my philosophy. If they can afford one with their salary and lifestyle, then so be it. For myself, I do not want to stretch myself financially in order to purchase a car, when I am satisfied with public transport. A car is definitely good for comfort and convenient (and some say for ego too !), but I am not ready for the financial burden of about S$1.2K per month. I would rather save and invest this money.

Cheers,
Musicwhiz

musicwhiz said...

Hi Equity,

Yes, I agree. It depends on the Management now to skillfully navigate the trecherious waters of this credit crisis and steer the company into safe harbours. Their quality will show up during such crises.

I do plan to average down some more, but am in no hurry. My current plan is to build up some cash reserves first, as the recession may hit Main Street by early 2009.

Thanks for the link to the article ! It's a very wel-written article.

Regards,
Musicwhiz

musicwhiz said...

Hi goodstuff,

Please do whatever you wish. This blog just serves as a place for information; the ultimate decision is yours and I still advocate your own independent research into the facts and figures before you commit your capital.

Cheers,
Musicwhiz

musicwhiz said...

Hi THENG,

You will have to ask Mr. Market about Tat Hong. Perhaps he got hung up on one of their cranes ?

Regards,
Musicwhiz

troy said...

Hi mw, I used to be a purist value investor. However, my emotional profile is such that I cannot take a portfolio drop of 50% without getting jittery. Perhaps it is an issue of confidence. As a retail investor how much can we know about the business, since we do not have full access to management?

I have two anecdotes to tell. I had held on to shares of what I felt were sound businesses over the years. One company was doing very well, however the market did not recognise its value. After 1 year, the price was still 10% below my purchase price. At that point I sold off at a loss. In the next two years the price more than doubled, and I of course kicked myself.

Another company was also doing well for a while, but the industry was facing great challenges. The price fell as its profits dipped quarter to quarter. I convinced myself (on hindsight, wrongly) that management would overcome the problems, based on their assurances. So I held on and on. The profits turned to losses, and the share price dropped to 10% of my purchase price. Upon a review I realised that it was not worth keeping as the chances for recovery were slim to none. I exited at a moderate loss (good thing it was a small fraction of my portfolio).

Conversely, my biggest profits have been realised when the market was manic about good companies. I have never regretted "taking profit" when the price is overvalued, as the opportunity to buy back at lower prices has presented itself time and again.

My approach now is to have a core portfolio of the few companies I like (fundamental analysis). Out of which, when market opportunities present themselves, I will sell and buy 25-50% of the holdings to add to the stake or take profit. A bit of "timing" if you call it, but I prefer to see it as simply "buying low, selling high". Another view is "buying at discount, selling when overvalued"

In this bear market, I have also mentioned that I try to protect core portfolio by buying puts. This has worked ok for me by reducing losses. I am also reviewing all my companies in holding and watchlist, as I see some real bargains emerging. However I am timing the purchases over the next one year, as I will also monitor the macro conditions that will affect my companies.

The main drawback about value investing for me is that you don't know if you are right or wrong until 5, 10 years down the road. For new investors who don't have that much experience and confidence, that is a very long feedback loop. And if you find that you are wrong, you have lost 5, 10 years. That I cannot accept.

ghchua said...

Hi troy,

Maybe you can change your "timing" method of investing a bit. Instead of always trying to buy low and sell high, what I suggest is to hold a diversified portfolio of stocks. Invest consistently regardless of market conditions. In this way, you avoid getting hit big time by company failures. At the same time, you won't be tempted to sell out a stock when it hits your "profit taking" level.

troy said...

thanks ghchua, i am still doing dollar cost averaging with my unit trust postfolio.

one company I have held onto for many years is Dairy Farm. One of my multibaggers, Dairy Farm pays good dividends and is still growing year on year. They have repeat business that is recession proof, and they have strong brand equity in their markets.

When I bought it at 1.80, it had been rising from 0.80 and people said I overpaid. Then when it went up to 5.55 I sold off some of my holdings. Now it's back down to 3.80-3.90.

I suppose everyone has to find their own investment style and strategy that works for them.

Ricky said...

is dairy farm the one that produce goats' milk?

musicwhiz said...

Hi Troy,

To be very honest, I don't think many people in this world can claim to feel comfortable when their portfolio is down 50% or more. It's human nature to feel despondent and/or depressed due to our tendency for loss aversion (being more than twice the amount of pain experienced compared to a financial gain). As an investor, I try to manage the emotional aspect and do succeed most of the time; though I admit it does take some getting used to.

I think your two anecdotes demonstrate that some businesses have the ability to survive, while others simply cannot manage after a while. I suspect of the 6-7 businesses I own, probably about half may fall by the wayside, 2 will be mediocre and only 1 may turn out to be truly outstanding. If I base on low valuations and margin of safety to purchase, eventually the value should be recognized when the bear turns into a normal market (normal valuations, not depressed valuations).

That said, I do agree that one should sell if the company is over-valued, though it's hard to put a finger on that sometimes. Perhaps I will think through my SELL strategies again in order to improve on them.

As for buying PUTS as a hedge, I have never been comfortable with derivatives and so will avoid them for now. I still have a lot of time to learn and may delve into those in future.

The 5-10 year time frame is necessary for sustainable returns, I feel. Using a shorter time period means one cannot accurately assess oneself, unless you happen to be extremely skillful (in trading) or very lucky. As an investor, I have no choice but to allocate a suitably long time frame in order to judge myself.

Regards,
Musicwhiz

musicwhiz said...

Hi ghchua,

That sounds a little like dollar cost averaging, but more applied to companies which you understand well and are eyeing to enter at good valuations.

Cheers,
Musicwhiz

musicwhiz said...

Ricky and Troy,

Yes I believe Dairy Farm is the onw which produces milk and dairy products. Don't know too much about the company though....

By the way, Troy, how long have you been investing as a value investor ? Just curious, thanks.

Regards,
Musicwhiz

Ricky said...

Thanks MW,

i visited the goats' farm before and absolutely hated the milk. Was just wondering how many ppl actually drink that for the share price to rise so much...

troy said...

ha ha ha. Dairy Farm International is not in the business of goats' milk. For that matter, it is not even a farming company. It is a retail company that holds the 3 major supermarkets in Singapore - Shop'n'Save, Cold Storage and Giant. It is also owns 7-11, Guardian Pharmacy, and Photo Finish. In Indonesia it own PT Hero supermarket, and in HongKong/Taiwan, it owns Wellcome and Ikea. Among many others. All strong brands with big moats, repeat business, easy to understand business models, dominant market share. You can google it, or check out this URL:

www.dairyfarmgroup.com/shareholder/reports/ir2007.pdf

I started value investing in 2003, and largely underperformed the market due to many beginners' mistakes, such as those I mentioned in the earlier post.

troy said...

btw, i'm surprised a group of value investors have not heard of Dairy Farm. It's been on my radar since I started investing in 2003, and walked into a Shop n Save outlet. (Peter Lynch's scuttlebutt). Look at the numbers, it's never disappointed me. And also btw, it's part of the Jardine group of companies (JMH, JSH, C&C).

So if you make money from DF, remember to buy me a cup of coffee! Ha ha ha.

Ricky said...

LOL! Sorry to make such a silly mistake! I really have never heard of dairy farm before. Oh, so it's like Wal-Mart?
Why does it seem like our local market (and other foreign markets) is doing worse than US despite them being the epicentre of this crisis? The situation seems to be getting worse for the other countries rather than the US...

cif5000 said...

On Dairy Farm:

As investors, we should read widely, be observant and be willing to learn new things. We should not take comfort by denying things outside our so-called "Circle of Competence", if we had it at all in the first place.

Although WB said that it is important to stay within the CoC, it is as important to grow this CoC, especially we are still infants from a long term perspective. Having a CoC that is not growing is just plain lazy in my opinion.

CM recommends using different mental models. If I were to recommend, it would be to look at the different industries and see how the companies in the different industries operate. Some are just more difficult and unpredictable than the others. It is good to know these when choosing investment. Limited knowledge is like, again CM, "one legged man in an ass-kicking competition".

1. Things you know you know. (CoC)
2. Things you know you don't know. (Task: learn)
3. Things you don't know you know.
(a bonus)
4. Things you don't know you don't know. (the black swan)

Offering an exercise. The next time you walk into a shopping mall, identify the holding companies that own the businesses you see. The passing score is 80%. If you passed, then next test is to answer the question: "How can these businesses earn money doing that?"

Nah...just sprouting nonsense here. Have a good day.

Brendan Lee said...

Thank you MW for your reply.

musicwhiz said...

Hi Troy,

Haha ok thanks for the info, now I remember Dairy Farm Group ! Yeah I heard of them but they slipped my mind for quite some time as I was not interested in the retail sector. I feel competition may be very keen and margins thin and it's not within my circle of competence. However, a strong brand name is very important and perhaps they have that which allows them to survive for so long.

oh you started value investing in 2003 ? For myself, though I started investing per se in 2004, it was only in 2006 that I "switched" to value investing as I had no one to guide me. Relied totally on books and mu knowledge of accounting to steer me to use my current value investing technique - I've yet to be able to determine if my method works fine. I'll need another 3-5 years. :)

Regards,
Musicwhiz

musicwhiz said...

Hi cif5000,

Very true indeed, we should seek to expand Circle of Competence over time. But I feel that the economics of some businesses are harder for me to understand compared with others, so even though I can learn gradually, it's not easy.

Yep I remember CM recommending using a multi-disciplinary functional model to look at businesses, not just financial aspects. He's quite chim la to be truthful so it's easy to say, difficult to follow.

As for the asking of how businesses can survive when I walk in malls, I've been doing that for the last 5-8 years and I've always wondered aloud about how a store can survive/grow. I think it helps to keep my mind active, though it tires me out at the end of the day ! Haha.

Cheers,
Musicwhiz

Ricky said...

Actually when i walk the malls, i think more abt the mall owners who rents out the place. Like CapitaMall. I like most of their malls and it's mostly strategically located @ the major interchanges.

musicwhiz said...

Hi Ricky,

Mall owners are the ones making money when rental rates are rising. When rental rates fall, they also suffer. Worse still if there is a recession which means many tenants will simply move out as they close down or cannot afford the rent, thus leaving that space devoid of rental income. In serious cases, the landlord may have a lot of empty space which he cannot rent out, yet has to incur overheads on the property.

Cheers,
Musicwhiz

Ricky said...

Hi MW,

i've thought about that too and have checked back on their rental rates and occupancy rates during 97/98 period. The rental's approximately 1/4 of the value. And most of the time, it's the office spaces that suffers more compared to retail. Can't really find the occupancy rates yet. For many of these malls, they're actually rather new and so it remains to be seen if the tenants will close down in the case of a protracted recession. CapitaMalls do have a good ratio of tenants committed til at least 2010 before renewal. But then again, if it's really bad, they might just move out. I haven't bought anything yet, gonna just use the Peter Lynch method and walk around the malls next year before committing.

musicwhiz said...

Hi Ricky,

Thanks for the info, I am not too good with property market stuff, still learning.

Yep good to use the scuttlebutt approach to learn more before committing your capital. Good luck !

Musicwhiz

Ricky said...

Hi MW,

You're most welcome, i've learnt a lot of things from here also. Somemore got insider comments :)

troy said...

For retail, indeed it is a case of thin margins and keen competition. You cannot sell a loaf of Sunshine bread for 10 cents more than your competitor. So Dairy Farm (as a group)'s margins have been between 5-7%.

But within retail there are also different sectors. This is supermarket retail, which is characterised by:
1) Economies of scale. Especially for fresh produce, the business is one of distribution rather than trading. When you have large chains, you lower the transportation overheads. You in fact will see very often the same products sold in Giant, Cold Storage and Shop n Save. So when they move goods from the warehouse or port, they can maximise their lorry trips. What this also means is effectively they have bigger market share than NTUC, although individually they are smaller than NTUC. This market share also helps in lowering production costs, especially for their house brand, First Choice, which covers everything from tissue paper to ice cream. So as an example instead of selling Sunshine bread at 10cents more, they make their own First Choice bread for 10 cents less, thus bumping up profits.
2) Recession proof. People still need to buy rice and fish even in a recession.
3) Brand loyalty. SnS offers the 5% discount if you spend $180 in a month, through their sticker cards. This has been quite successful from my scuttlebutt (and observations of my family's behaviour in saving the stickers). They have also influenced the auntie sector with Xiang Yun and the "mother knows best" advertising campaign. Cold Storage targets expats with "you've got the whole world in your hands", meaning they stock German, Japanese, American products. In contrast, NTUC's points system is abit more complicated in that you don't see the benefits until year end, and you don't know how much exactly you save.

As a side note, DF owns Ikea, which is a business I've always wanted to own. I love their business model and concept.

troy said...

On malls, I like Capitamall's malls because they actively add value to the malls. They do this by regular renovations, maixmising floor area, holding promotions, and even upgrading the carparks with the greenlight "vacant lot" indicators, which make shopping there a more pleasant experience. They also do very good tenant mixing.

That is not to say I like the industry at the moment. In a recession typically retail is the first and (one of the) worst to suffer. As a long term (>10 yrs) income strategy it is okay.

cif5000 said...

Dairyfarm does not own Ikea. Ikea is a privately owned company (i.e. not listed on any stock exchange).

They are merely the franchisee for HK and TW.

troy said...

hi cif5000,
you are right, I was rather loose in my phrasing of "DF owns Ikea". My point is that DF has a share of the profits of this very successful business.

musicwhiz said...

Thanks Troy and cif5000 for the informative comments on Dairy Farm and malls (including IKEA too). I am sure all readers have benefitted from your sharing.

Cheers,
Musicwhiz