Wednesday, December 31, 2008

December 2008 Portfolio Review and FY 2008 Year-End Summary

December 2008 was a very quiet month in terms of corporate activity as none of my companies announced any corporate developments or updates. Of course, the quiet was balanced by the continued turmoil in the financial markets and economy, which has threatened to blow up into the biggest financial crisis since the Great Depression. Japan, Germany, USA, Hong Kong and Singapore are now officially in recession, and many countries may be set to follow. Even giants like India and China are likely to report muted growth for 2009, way below originally projected targets, as the global financial maelstrom blows all over the world.

In terms of bailouts, the latest is by way of a capital injection of about US$5 billion into GMAC to ensure the auto-maker has enough liquidity to operate at least for the next 3 months. The term “bailout” is probably the most popular word for 2008 and has become almost synonymous with the current recession and economic malaise. Rumours are rife that the next wave of companies to ask for bailouts may be real estate companies, as sales of homes fall to new lows amidst the worst housing crisis USA has experienced since the 1930’s.

Amazingly, we have not even started talking about potential collapses of even more banks, as the global financial landscape is irreversibly changed. With more writedowns expected for credit card and student loans in the coming months, perhaps the crisis is still far from over ? With massive liquidity injections from the Fed and other central banks around the world, this has helped to prop up ailing sections of the economy for now. Whether these measures are sufficient to provide a fiscal boost remain to be seen. In Singapore, the Government has plans to boost infrastructure and construction spending by bringing forward deferred projects so as to ensure constant demand, and to ensure unemployment does not surge too high.

It’s been one piece of bad news after another, to add to the almost endless barrage of about 10 consecutive months of terrible, pessimistic news. Just flip open the nearest newspaper and be greeted by more doom and gloom, with doomsayers predicting anything from a total collapse in the economy to dire predictions of a Second Great Depression. So it’s no wonder that my general mood is that of extreme pessimism as I too have been affected by all this doom and gloom. Of course, this is the perfect environment to be purchasing shares of solid companies and part of my brain knows this, therefore I am trying to detach my objective brain from my emotional one. It’s not easy but in order to prosper in 4 to 5 years time, it has to be done.

The only significant update was Ezra’s AGM which I had already summarized in a previous post. Other than this, there is almost nothing to report for each of my companies. Therefore, I will not be doing a summary by company until the next month-end review in January 2009, as Ezra, FSL Trust and Suntec REIT should be releasing their results in the following month.

Portfolio Comments – December 2008

December 2008 saw a period of relative calm and stability in stock markets, which were devoid of wild swings and volatile periods. My portfolio improved from a total loss % of 34.5% as at end-November 2008 to 25.0% as at end-December 2008. Part of this loss was offset by additional dividend from Boustead.

There were no further purchases made this month either as market prices of the companies I am eyeing did not fall to sufficiently attractive levels to warrant purchases. I am also building up more cash reserves in view of the deepening recession and the threat of job cuts, pay freezes and pay cuts.

Portfolio Review for Financial Year 2008

During the entire year of 2008, I had made no sales of shares at all. Since Mr. Market was content to go on a manic-depressive roller-coaster ride, it made more sense to purchase from him rather than sell to him. A summary of purchases made for 2008 are as follows:-

i) January 2008 – Purchase of First Ship Lease Trust
ii) July 2008 – Purchase of more Pacific Andes
iii) September 2008 – Purchase of more China Fishery, also purchased Tat Hong
iv) October 2008 – Purchases of more Ezra, Swiber, China Fishery, Boustead and Tat Hong

A total of S$67.5K was pumped in to make the following purchases, with the effect of increasing my cost from S$58.3K (as at end-December 2007) to S$125.8K (as at end-December 2008). As a result of the global financial crisis causing severe depression of market prices, the year ended with a -33.5% unrealized loss to portfolio. This was partially offset by total cumulative dividend gains of S$10.7K, which resulted in total unrealized loss of -25%.

During 2008, total dividends received amounted to about S$6.5K. Taking this amount as a % of total cost as at year-end 2008, the dividend yield is approximately 5.16%, which arguably is still much better than leaving your money in a bank account or in fixed deposits ! My expectations for dividends in 2009 is somewhat tempered though, as companies are very likely to retain more cash as a result of the global financial crisis. Hence, I have factored in a 50% reduction in dividends received, for a total yield of about 2.58% for 2009 (still much better than a bank account !). Moving forward, dividends are expected to continue to form a critical role in providing passive income and for improving the overall performance of my portfolio.

My role as an investor is to continue to seek investments in solid companies at a margin of safety, for the long-term; and I will adhere to my value investing philosophy as we move into a possibly even more turbulent 2009.

My next portfolio review will be on Friday, January 30, 2009 after market close.

Wishing all readers a very Happy New Year and may 2009 bring good health, good fortune and greater prosperity !

Monday, December 29, 2008

Financial Resolutions for 2009

As 2008 draws to a close, the curtain is about to fall on one of the worst years in terms of economic growth and stock market performance. While economies around the world have been battered by one piece of bad news after another, individuals also have to contend with strange fluctuations such as high inflation in 1H 2008, then sagging economic indicators and widespread retrenchment in 2H 2008, flowing into 2009. These have the effect of making one feel extremely jittery, gloomy and pessimistic. That would aptly describe my feelings and emotions as we start to usher in a new year, and can be summarized in one succinct word - PESSIMISM.

I guess with all the "damage" that's been done to people's wealth on a global scale, I of course was not spared the carnage either. Suffice to say that the feeling is like trying to collect raindrops in a cup to fill the cup up, only to realize (after one year) that the cup actually had a hole at the bottom and the water was slowly draining away; thus the cup could never really get full ! Throughout 2008, I was quite intent on building my wealth and to ensure I kept expenses and my liabilities under control, but somehow the entire year felt like my wealth was draining away, slowly but surely. I kind of get the feeling that instead of advancing in terms of getting wealthier, I was actually retarding. Granted, most people would have felt this way in 2008 as the global financial maelstrom wiped out most traces of wealth accumulation in terms of equities investing and also fund performance.

Entering the new year with a somewhat heavy heart, I had already listed down some financial resolutions for the New Year which I hope (somehow) can be fulfilled. Perhaps some of these will sound familiar to you as well, dear reader.

1) Continue to save 40-50% of my take-home salary and build up my savings. This should continue to be done because of the recession and the threat of losing one's job anytime. With a comfortable savings "egg", this money can then be chanelled into worthwhile investments should opportunities arise.

2) Look out for good bargains in the stock market, and adhere to value investing guidelines and margin of safety principles. For 2008 I pumped in a total of about S$80K into equities as there were many bargains, but of course the cons of investing in a bear market is that somehow you feel that your money is disappearing into some sort of black hole. The key is to remain focused, keep up with my companies and adopt a long-term view. I would expect decent returns in about 4-5 years time, but definitely not in the immediate term. In the meantime, I shall steel my nerves and continue to invest whatever spare cash I have.

3) Perform better money management and do more budgeting for household essentials, in effect "tightening the purse" more whenever I can. This is due to the ongoing recession and economic crisis which is creating uncertainty with respect to jobs. A dollar saved could be an extra dollar available for emergencies in future.

4) Continue to use public transport and avoid committing to a car. Somehow 2008 was a year whereby I heard of many friends purchasing cars - this could be because of the sudden dip in COE close to year-end and also because many friends started having kids, and so they felt that a car would be necessary for mobility and convenience. Since I do not have children yet, there is no necessity for me to get a car which would impose an unncessary burden to my finances and crimp my ability to build wealth for 2009. Even if I have a kid, I will assess if a car is 100% necessary as I have seen many parents coping with young children on buses and MRT. Worse case scenario, there's always the taxi.

5) Continue to ensure adequate insurance coverage for me and my wife. Insurance is a very important form of protection against death and disability and my insurance also includes a savings plan which helps me to compound my money over the years, while making it available for withdrawals should the need arise (for emergency). Hence, I have ensured that I have reserved sufficient funds to pay all my insurance premiums.

6) Continue to seek ways to improve passive income sources. I am glad to say that my dividend income for 2008 hit about S$6K, thus this is about S$500 per month which is fairly decent. However, I hope that this can be at least sustained in 2009,if not then I hope the drop is not too drastic as I know the recession will make companies conserve more cash. I am exploring other ways of obtaining passive income such as rental or monetising my blog further, but these are all very preliminary. At most, I will seek out potential tutoring opportunities and use that as an alternative form of income (not passive but what the heck).

With the above resolutions in place, I hope that I can survive 2009 without the sinking feeling that I am getting no more richer than when I had started out the year.

In 2 days time, I will write my year-end summary and thoughts for 2008 with respect to my investment decisions, as well as give a brief summary of my investment portfolio and the companies I own. It will of course not look pretty, but I intend to make it a learning experience so that I can become a better investor, and enter 2009 with an improved value mindset to be able to tackle the unprecedented challenges to the value investing concept. Stay tuned for that !

Tuesday, December 23, 2008

Ezra - FY 2008 Annual General Meeting Highlights

After attending the AGM for Ezra and speaking with Finance Director Mr. Tay Chin Kwang, my feel is that Management is prudent and are treading cautiously into FY 2009 with a view to lower their capex commitments as well as conserve cash. Here are some of the issues asked about and Management's clarifications and replies. Note that this is typed purely from memory (I did not take any notes as it would be awkward) and so the writing may seem haphazard and disorganized, so please forgive this.

Question: Will lower oil prices have a significant impact on Ezra's operations and business outlook moving forward ? Note: As of this writing, oil prices are hovering at around US$40 per barrel.

Answer: There should be no significant impact of lower oil prices on current E&P activities and projects which have already started. The lower oil prices MAY affect decisions to invest in capex for deepwater E&P by oil majors, this is still quite fuzzy and unknown, but current projects which are ongoing will continue to generate oil, and cannot just be "switched off" this month and then "switched on" again when prices rebound. Currently, all of Ezra's vessels are on time charters which last 1-3 years and utilization rate is 100%, so there is no expected impact on the lower oil prices on current charter contracts.

Question: Are charter rates expected to ease off since there is an expected influx of new AHTS vessels for shallow waters ? How are charter rates holding up now ?

Answer: Management reiterated that there is no such thing as a published spot charter rate. These charter rates vary according to the period of charter, type of vessel and also the usage so it's almost impossible to determine the current rates as they depend on so many factors. Some rates may be mis-quoted as being very high because the charter term is only for a month, and the oil major may be desperate and willing to settle for supernormal rates. That said, the general trend of charter rates is still going up since Ezra's vessels are very specialized. However, Management does see a possible softening of charter rates once additional supply comes in for the shallow water division.

Question: Any updates on the proposed review of the MFSV in light of the economic crisis ? Are there plans to cancel these contracts, will there be penalties involved and moving forward, how will the Company resolve these difficulties ?

Answer: Ezra is currently reviewing 3 newbuilds, 2 are 27,000 bhp MSFV being built by Karmsund in Norway while the other is a MFSV built by Keppel Singmarine (recently announced). The remaining 2 30,000 bhp vessels being built by Dubai Drydocks (formerly known as Labroy Marine) will continue to be built. Ezra's 1Q 2009 results are expected to be announced some time in mid January 2009. By then, there may or may not be a decision on whether to pull the plug on these 3 newbuilds. However, the Management has said that they will respond latest by February 2009. As for the deposits paid to Karmsund, it is 20% and there is a clause for a full refund should construction not continue. It is Management's understanding that the company (Karmsund) may be running into financial difficulties and needs financial support from the Norwegian Government, which is why they decided to review the newbuilds. As for Keppel Singmarine, the deposit amount will probably be forfeited but this amount is small compared to the committed capex assuming the building had gone ahead.

Question: How are the yards progressing in Vietnam ? What is the status of Saigon Shipyard and the new yard at Vung Tau ?

Answer: Saigon Shipyard is fully operational and is taking on Fabrication and Construction jobs. In fact, capacity is getting quite constrained at this yard, but the Vung Tau yard is still in the intial stages of being developed and it not ready yet to take on any jobs or to ease the congestion at Saigon Shipyard. Gross margins for such projects are anticipated to be about 20%.

Question: Any updates on EOC's proposed bidding for their second FPSO contract to be awarded in Vietnam ? This was reported some time back.

Answer: EOC is still finalizing the details for this FPSO contract and there is no news of them being awarded it yet. The main issue to be resolved is the funding for this US$1.2 billion (sufficiently massive !) FPSO deal, which involves a charter period of 9+7 years (total 16 years) ! Currently, Lewek Arunothai is only contracted for 3+2 year term. If EOC manages to secure the funding and clinches this project, it will be a massive boost for earnings to the Group. But I would rather the company settle all the issues surrounding the technically complex FPSO deal before it announces any firm contract award. Though gearing for EOC is high (currently), these FPSO deals bring in very steady and predictable cash inflows which should ease the gearing level over time as long as the company (EOC) has no other capex requirements.

Question: How are cashflows likely to be for the Company assuming it cancels 3 of the newbuild MSFV ? What does Management intend to do with any excess cash ? Would it be more economical to purchase growth (i.e. assets) rather than build ?

Answer: Considering the company has already secured the necessary funding (via bank loans) for the newbuilds, cancelling them simply frees up the cash commitment. However, for the bank loans, since they were earmarked for the capex, they will have to be sought again should the Company undertake another capex exercise in future. Internal funds would not need to be used though and can be saved for better opportunities. Management is currently NOT looking at acquiring assets and are adopting a wait and see attitude to determine if good assets or companies can be acquired at fire-sale prices. Especially vulnerable are those companies which had leveraged heavily to grow during the boom years of 2006 and 2007 - these will be ripe for the picking should they need to sell themselves off to pay their creditors.

Question: Will the company really be privatized ? Wasn't that what the MD mentioned during a recent Bloomberg interview ?

Answer: The MD was mis-quoted and was quoted entirely out of context, and the Company has released a statement to clarify this.

Question: What is the purpose of the 66.7% acquisition of Telemark and how does it gel with the Group's business ?

Answer: Telemark is a company which deals with engineering design and they are the ones who measure and calculate the engineering specs for oil and gas projects (the technical stuff la). Currently, the company is engaged to provide the design work and specs to Saigon Shipyard for the fabrication of say, turrets for oil and gas projects. These are then built by the shipyard and then sold to final customers at a mark-up. Thus, Telemark's end customers include oil majors as well as contractors who work on behalf of the oil majors to supply equipment to them.

Question: Page 66 of the Annual Report states a loss of US$2.152 million relating to the disposal of 5 vessels in FY 2008. What has caused this loss ? Was it because of a drop in market value of the vessels to be disposed of ?

Answer: No, the loss on disposal was a result of unfavourable exchange rates causing a realized exchange loss. The sale and leaseback for the 5 vessels was settled at a fixed price 2 years ago, but part of the contracted sum was denominated in local currency. As the USD weakened, the conversion from SGD to USD led to this exchange loss being realized in the books.

Question: Note 15 states an increase in the provision for Trade Receivables of USD 7.239 million during FY 2008. What is this for and are there any issues with collectibility from customers ? What is the customer mix like ?

Answer: Ezra's major customer is Shell currently, and the Company is doing work for Shell at 4 different locations now, taking up about 30% of total revenues. Other customers would include National Oil Companies and other oil majors and small independent oil companies only constitute about 5-10% of Ezra's revenue base. This provision relates to a project loss suffered by Samsung Heavy Industries, for which they are attempting to counter-claim against Ezra. Ezra has, for prudence, included this amount as a potential liability but Management asserts that their claim is baseless and there is a good chance of this amount being written back in subsequent periods.

Question: What is a conservative estimate of the company's growth for FY 2009 ? Is the company expected to grow at all or remain stagnant ?

Answer: The Company took delivery of 5 new vessels in FY 2008 which were only chartered for several months for FY 2008, so for FY 2009 they will be chartered for a full financial year so there should be positive impact there. Also, core earnings are expected to grow at double digits though Management could not elaborate more due to market sensitivity of the information.

Question: Energy Services division contributed their maiden revenue stream in FY 2008. What are the prospects like for this division ?

Answer: Energy services are expected to remain flat for FY 2009 but growth is expected from FY 2010 onwards as more oil rigs come onstream and also the large deepwater vessels.

Overall, the mood was light and cordial and Management was friendly and approachable. There were the usual questions about why a dividend was not paid but these were tactfully handled by the Management Team. When asked if a rights issue was possible (like what DBS recently announced), Management affirmed that no further fund-raising was required as they do NOT intend to grow further as visibility into the future was too poor. If they were to order vessels now, they would have to see beyond 2010 and right now the future outlook is very murky and uncertain.

I trust that the best move now is to conserve resources and allow cash to build up, and wait for good opportunities to deploy them productively. In this, I have faith that Management can continue to deliver as we move in a new calender year 2009.

Thursday, December 18, 2008

Bernard Madoff - Where Integrity crumbled in the Face of Greed

Most readers here should be familiar with the case of the rogue hedge fund manager Bernard Madoff, who appeared in the news after admitting to running a Ponzi scheme of unprecedented scale. He is allegedly the mastermind of the world's largest Ponzi scheme (valued at US$50 billion and counting) and who had been duping investors for quite some years before everything began falling apart like a house of cards. Much has been reported in the news (CNN, CNBC, Time, Reuters and Forbes), each with their own views on the case and also different commentaries about what happened and why it happened. Perhaps I can take the time to dissect some aspects of the case so that we can all learn a lesson about honesty, integrity and greed.

Leaving aside the details of how Madoff managed to fool investors (and amazingly, the SEC) for so long, we delve into the fundamental reason for his deviant behaviour. It all simply boils down to - GREED. Greed of course is simplifying the whole issue, since arrogance, failure to accept losses and probably even self-denial came into the picture somewhere along the way, but the penultimate driving force should have been greed (for money and reputation) because it is like lifeblood for some people - it keeps them going and it fills them with a sense of self-importance. Were investors to know that Madoff had lost money in certain years and opened his fund more judiciously to outsiders, he would then have lost that "awe" which he commanded in his loyal followers. It was precisely because of this hero-worshipping that got so many "sophisticated" investors into deep trouble. Madoff was a man hungry for power and status, and the recognition which came with it. If he had admitted being anything less than infallible, his demi-god status in the hedge fund circles would have been instantly shattered.

The most important thing in investing (and, in fact, all other aspects of life too), I feel, is to have integrity and honesty. Warren Buffett did mention that it takes almost a lifetime to build up a solid reputation but just 5 minutes to ruin it totally, and this is oddly reflected in the way Madoff totally blew everything in just under 3 minutes by confessing to his sons that he was "finished" and had been running a massive Ponzi Scheme all these years. I value integrity more than making money, and would gladly admit to all my investment mistakes, missteps and failures rather than delude myself and others that I am always doing well (and making money). Because once people lose that trust (and consequently, their respect for you), it can almost never be recovered and it's like tying a noose round your neck and releasing the trap door.

Another point I would like to grouse about is the apparent lack of controls and procedures in regulating these hedge funds. The SEC was given ample warnings over the years over Madoff's operations, yet chose not to pursue these leads further. This makes one wonder if the current body in charge of oversight and policing these funds is sufficiently equipped to handle their role competently; or has there been a conflict of interest in allowing Madoff to get too close to them; such that independence has been compromised, allowing familiarity to breed into complacency which then led to the loss of the life savings of so many individuals and retirees. The SEC is probably in need of some soul-searching and after this scandal has been fully investigated, needs to undergo a radical overhaul to ensure this kind of nonsense does not occur again. If necessary, President-Elect Obama could even suggest the setting up of a separate body to regulate the SEC, so that the 2 bodies act as counter-balancing weights such that neither gets too cosy or dominant in terms of influencing decisions which could have a life-changing consequence.

The promise of 1% returns per month consistently through good times and bad stinks of impossibility, as even Warren Buffett (arguably the greatest investor who ever lived) had periods of severe under-performance as the economy and stock market went into periods of extreme volatility. One would have suspected that if something is indeed too good to be true, it sometimes isn't ! Ponzi schemes are perpetuated on the fact that human beings are gullible and will let their guard down when they are greedy for supernormal returns. This also applies to expert investors as much as novices, because we are all subject to human emotions which can cause us to make flawed investment decisions.

Sunday, December 14, 2008

What is the purpose of a Stock Exchange ?

It seems with the daily barrage of news, forecasts, predictions and commentaries by pundits, professionals and "sooth-sayers", perhaps no one has really realized the purpose of having a stock exchange in the first place ! The way the newspapers and publications go about it, you would not be blamed for mistaking the stock market as some national lottery game or gambling den, or even some fast-paced high-octane game where "The Winner Takes It All" (as ABBA sang it so succinctly some 30 years ago).

Nothing could be further from the truth though. The stock exchange's true purpose is for purely business reasons and it is merely one method which companies can use to raise funds for business expansion. Let's examine the main reasons in more detail:-

1) Private Companies sell shares to the public to raise funds for business expansion, using the stock exchange as a platform. They thus become "public" or "listed" companies from then on.

The main purpose of the stock market is to let aspiring companies sell shares to the general public in order to raise funds to expand their business. These are also known as "Initial Public Offerings" or IPO. A company needs to have some track record usually (3 years of consecutive revenue and profit growth) as well as fulfill several other conditions before it is allowed to list. Note that this is just ONE of the methods which a company can utilize to raise funds, others will include bank borrowings or issuance of debentures (bonds or notes) which are a form of debt. Listing on an exchange is a way of raising funds through equity, and it involves an expansion of a company's share capital. In a way, one can argue that it dilutes the stakes of existing owners but it also makes the company's shares liquid, thereby ascribing a market value to them almost as soon as the shares begin to trade.

2) Secondary Offering - Additional funds raised through a secondary offering of shares using the stock exchange as a medium

Even after being listed, companies can utilize the stock exchange (called the "capital markets") to issue more shares to raise even more funds for future business expansion, assuming there are buyers to take up the additional shares. This is known as a secondary offering and is most popular when share prices are HIGH, therefore this method is very common during a bull market. When share prices are high, companies can raise higher amounts of money through the issuance of less shares, thereby raising more capital with less dilution to existing shareholders. Notice now in the current bear market, no company is using a secondary offering to raise funds ? At the most, we hear of companies doing rights issues which ensures proportional participation in the company's fund raising and ownership.

3) A listing status may raise the profile of companies which may enable them to widen their scope of business expansion and get better recognition from suppliers/banks.

An intangible benefit of being listed (on the Singapore Stock Exchange at least) is that it confers to companies a certain status which is recognized by suppliers, customers, banks and other stakeholders. Knowing that the requirements for being listed are pretty stringent, this would imply that the company has "what it takes" to make it as a listed entity, and thus it would accorded a fair amount of respect. This would enable it to raise its profile and use its listed status as a "marketing" tool to reach out to more potential customers and to expand its business. Of course, one must also recognize that the quality of listing aspirants drops drastically as the market goes on a bull run, up to the point where the quality of those listed just at the apex of the bull market really gets very questionable ! I won't pinpoint names but suffice to say that certain China companies (S-Shares) fall under this dubious category.

4) A stock exchange gives the intelligent investor the opportunity to be a part-owner of companies.

This is the part I love best about the stock exchange. Aside from the hullabaloo and nonsense being spouted daily about the stock market and whether it is going up or down, the intelligent investor need only be concerned about one thing - the ownership of good companies at reasonable prices for the long-term. The stock exchange is a medium which makes this possible, as it allows sellers and buyers to transact. Without this medium, investors would not be able to partake in the profits and growth of companies (which is actually partaking in the growth of a slice of the economy). Provided one researches companies well and does not overpay for a piece of a wonderful business, one can enjoy many good long years of fabulous returns (much higher than the bank FD rate, trust me !) with little or no risk. One may argue that blue chips are a sure way of achieving this, but be aware that in the current economic crisis, the USA has proven that even blue chips may not be that "blue" after all and can be prone to total collapse (like AIG, Fannie Mae, Lehman Brothers). Thus, it is always prudent to do a thorough analysis of any investment before purchasing it, whether it is small-cap, mid-cap or blue chip.

And so I hope that the rationale for a stock exchange has been adequately explained in the above 4 points. Anyone who has more to add, please feel free to use the comments box or to discuss/debate over the 4 points which I brought up.

Tuesday, December 09, 2008

Personal Finance Part 10 - Creating a Personal Budget for 2009

As the year-end approaches and a new year beckons, it's time for the common man on the street (i.e. you and me) to plan and budget for the new year and the challenges it may bring. Next year is particularly important for this budgeting exercise as it has been widely tipped to be a "recession year" in which growth will slow across all sectors. This makes one's job more vulnerable than ever as well as one's income stream too, which may be subject to (touch wood !) pay cuts or pay freezes. Already, many firms in Singapore are retrenching (mainly banks) or cutting pay (e.g. SPH) and many more will probably do so in the first half of 2009.

So what exactly goes into a Budget ? One can do a detailed spreadsheet for this or one may just keep a rough hand-written guide; but it must consist of your probable cash inflows (through salaries and/or bonuses and expected dividends) as well as your major expenses. At this point, I would like to remind readers of several "one-off" expenses which are payable for the year. This may or may not be applicable to you, depending on your financial circumstances:-

1) Property Tax - Usually a notice is sent in December or January the next year, and IRAS will assess the property tax payable based on the Annual Value of your house. Incidentally, for 2008 and 2009 the Government has granted a S$100 tax rebate for most HDB flats, to be offset against their property tax bill. The (apparent) joke is that the Annual Value of most HDB flats has been raised since 2008, so the effects of this rebate are hardly felt at all !

2) Income Taxes - Usually arrives around the middle of the year, but the deadline for submission is April 30, 2009 which is the close of the government's financial year-end. Remember to set aside some cash to pay for income taxes, and if you had donated money to charities in the last year, you can claim double deduction for the donations.

3) Subscriptions - Most subscriptions are renewable after 12 months, which means one has to be prepared to cough up a lump sum payment to maintain any subscriptions they have, be they magazine ones, or club memberships.

4) Insurance Premiums (Annual) - If you were in my situation, you would have to make a lump sum insurance premium payment for annual coverage. I prefer this to monthly premium payments because annual premiums tend to give you a slight discount, and it also ensures you don't have regular cash outflows throughout the year. So you justhave to set aside cash for that one lump sum payment and forget about it till next year, while enjoying coverage all the way.

5) Discretionary Items - This of course varies from person to person, but will include items which form part of capex such as a new wardrobe, fridge or perhaps (if a new baby is coming) new clothes and a crib/stroller. Each person has their own priorities and items to buy for the new year, so make sure you set aside the cash for that extra something.

Once the Budget is essentially complete, it should be able to tell you if you have surplus funds to last you through the year. Remember to set aside about 6-9 months of cash for emergency or contingency expenses (those things we wished never happened though there is always a remote possibility).

One should note that every month, there should be positive cash flow arising from the Budget. This ensures that some of your income is put aside as savings every month BEFORE it is spent, as I strongly believe in "paying yourself first". For lump sum payments, ensure that the cash set aside is really used for that purpose and not for some other sudden indulgence or impulse purchase, as this may derail your plans for retirement savings and building your nest egg. Since dividends are an uncertain portion of my cash inflows, I usually do not budget for them or else just use a more conservative number (e.g. instead of assuming 3 cents per share which may have been the historical payout rate, I will use 1 cent per share instead). It's always better to budget less money coming in than more, as it will ensure you tighten your belt further. If more money happens to flow in, then all the better as you would end up with "extra" savings.

Perhaps readers can share their experiences in creating and following through a budget which they have prepared, and what goes into it. This would make a more interesting and dynamic discussion rather than me just listing generic items which goes into everyone's Budget.

Wishing everyone a Happy New Year in advance ! And may all your companies do well and may your dividends continue to flow in !

Wednesday, December 03, 2008

Investment Sins Part 6 - Anger/Wrath

In this sixth installment of my investment sins series, let's explore the emotion of anger (sometimes also known as "wrath") and how it can screw up our investments. As the saying goes, don't get angry, get even ! There is some truth to this statement as it is basically trying to tell us to calm down and think through the situation in order to identify the optimal solution to be implemented. Anger is an emotion which clouds our judgement and causes us to do impulsive things which we may later regret.

Basically, the book by Maury Fertig talks firstly about the targets of wrath, which is where we, as investors, like to target our anger when something goes wrong. During bear markets (such as the current one) where everyone sees falling prices and gets a sense of helplessness about their investments tanking daily, anger can be a particularly powerful emotion. The problem is that investors generally do not know where to channel this anger constructively and end up blaming i) The Media (for dispensing an endless barrage of bad news which makes markets tank) ii) CEOs (for not managing their companies properly) iii) Financial Analysts (for downgrading their favourite stock) or iv) a Group with a Vested Interest (such as the Federal Reserve which is responsible for the mega bailout plan for auto-makers and financial institutions). Whatever the case, anger which is misplaced often has negative effects for the investor, as it causes him to lose focus and make bad investment decisions.

Next, Mr. Fertig talks about being "normally angry" and being "sinfully angry". Confused ? He goes on to explain the differences between these two terms.

Sinfully Angry

1) Never blames himself for an investment which has gone wrong
2) Always looks for scapegoats to vent his anger upon
3) Makes inpulsive investment decisions (in the heat of the moment)
4) Finds the stock market more stressful and aggravating than other aspects of his life
5) Is only able to relieve angry feelings by making another (impulsive) investment
6) Major investment decisions are often preceded by a bout of anger
7) Views investing as a macho competition where aggressive, instinctive behaviour is rewarded

Normally Angry

1) Upset with himself when he makes an investment loss
2) Avoids blaming others or making excuses when an investment does not work out
3) Allows anger to dissipate before making an investment decision
4) Becomes upset about news and investments, but no more than other aspects of his life which may also be upsetting
5) No correlation or pattern between anger and making an investment
6) Sees investing as a cerebral (thinking) activity which rewards analysis and objectivity and tries to avoid strong emotions such as anger to cloud the decision-making process

The last traits in both sinfully and normally angry should be of note. If one treats investing as a competition or a war, then aggression and anger would probably dominate your thought processes and not allow you to think clearly. By using objective analysis to guide your investment decisions, we can start off from a clear base of thinking and proceed to justify why we should be investing. Even if something goes wrong (and inevitably it does some time in our lives), at least the anger we feel is "normal" and not "sinful".

Although the chapter has other aspects of anger and discuss other important stuff, I will not attempt to "lift" too much from the book, but instead just highlight the more important sections. The final portion I would like to discuss is how we can keep anger out of our investing lives and stay cool. Here are a few suggestions/tips:-

A) Force yourself to take breaks from the investment world and your portfolio

It is good to "take a breather" sometimes and not be overly obsessed with one's investments or the stock market. When things go wrong, we minimize the probability of getting sinfully angry which may occur if we were too emotionally drawn into our investments.

B) Remind yourself that it's business, not personal

We must remember that investing should be done in a business-like manner, with careful thought and analysis. The stock market is not a living breathing person who is "out to get you". So one should avoid feeling as though we need to "take revenge" on the market for playing you out or to settle some personal grudge, because when we take things too personally, we tend to lose sight of the big picture - which is to get a decent return on our investment by owning good companies over the long-term (as a business owner).

C) Keep an Investment Journal

Make a record of all your investments, whether good or bad (a blog is also a good way to do this !). You can track investments you had made and whether they were a result of emotion or a careful thought process. One can also learn from mistakes and prevent anger from building up over "wrong" decisions if one has a good historical record of all decisions made (with supporting reasons of course).

D) Vent your anger productively

Yeah I know this sounds like what psychologists would say ! But the point to note is we can help the anger and frustration to dissipate if we channeled it properly, for example playing a game of football or squash (whack the ball hard !); or perhaps talking/confiding to a friend or loved one about how one feels.

To conclude, anger is a very destructive emotion - just look at how flaring tempers have destroyed families and caused crimes to be committed. The same goes for your investment performance, do NOT let anger destroy your investments - keep a cool head and always be logical and rational.