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.

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.

My Second Bear Market

As I write this post* to chronicle my continuing investment journey, the STI has just entered bear market territory, having fallen >20% from its peak close of 3,279.70 back on Jan 6, 2011. The reasons are obvious by now – Greece on the verge of a default which would send the whole Eurozone into a tailspin, and massive debt loads held by countries such as Portugal, Spain and Ireland. The crux of the issue is that a default would trigger bank runs all through Greece, and lead to a systematic collapse of confidence in the banking system throughout Europe. Ripples of these will then spread across the globe and drag the whole world into yet another global financial crisis, possibly eclipsing the previous one in 2008-2009.

*This post was written on October 4, 2011. At the time of publishing, the STI has still managed to avoid a bear market scenario with 4 successive days of rises.

Essentially, I realized that the roots of each crisis are pretty similar. While the 2008-2009 GFC was caused by sub-prime mortgages going bad in the USA and a collapse in confidence in banking giants Bear Stearnes and Lehman Brothers, this time the cause of the crisis is also due to excessive debt; and it belongs to a country not just a company. Thus, the solution may not be as apparent as it seems, and there may be no easy solution to this crisis of confidence. Therefore, as investors, we should prepare for a long and possibly arduous journey undertaken by the powers that may be to restore confidence and avert total economic collapse.

In the meantime, I thought I would do a quick comparison between my status during the previous bear market, and the current one; and highlight the changes between now and then and how I have grown and matured as an investor. I will also be providing some convenient numbers and statistics to be used as comparisons.

1. Portfolio Size – From my historical records (which I have kept religiously to remind myself of the previous downturn and bear market), my portfolio cost was $126,000 as at Oct 31, 2008 (during the period when the market plunged sharply) and STI closed at 1,794.20. Before the sharp plunge occurred, I was steadily accumulating shares up till the months of July through September 2008 (my portfolio cost increased from $80,000 to $125,000). As of Oct 31, 2008, the market value of my portfolio was $64,000 for a nearly 50% loss.

Fast forward to today, my portfolio size has grown to a cost base of $242,000 (inclusive of my recent purchase of Boustead on October 4, 2011), which is almost double of what it was during the dark days of Oct 2008. In fact, doing a same-level comparison when STI was hovering around 2,500 level back during September 22, 2008, my portfolio cost then was just $109,000.

Another important difference was that I only had a realized gain “buffer” of $9,500 as at Oct 31, 2008, while my current realized gains buffer stands at $67,400, which is nearly 7x the quantum three years ago. This indicates that at least it would be a lot tougher to experience a net combined loss (i.e. unrealized loss offsetting realized gains) as compared to the situation three years back.

Another interesting “fact” – my portfolio first went into the red back on Sep 11, 2008 when STI hit 2,541.15. As at the time of this writing (Oct 4, 2011), STI is hovering at 2,531.02 and my portfolio is up by +2.1%, so apparently my current portfolio is only marginally better than my previous one in terms of share price performance (but this is just for academic interest, of course).

2. Knowledge Base (of companies and how markets work) – Compared to 2008, my knowledge base with respect to companies and how they work has improve dramatically. Though I have to admit that I still have a long way to go to understand the fine inner workings of the operations of companies within certain industries, nevertheless I feel that I had gain much more in-depth knowledge as compared to three years ago. In addition, after observing a full bull-bear cycle in the stock markets, I also have a better understanding on how markets work and the sentiments and psychology which drive it; and these are all key to forming a more informed judgement on when and how to invest. Suffice to say the last three years have been “educational” – there is no better teacher than experience itself, and the months of ruminating over companies, their fundamentals, inner workings and plans/prospects have certainly equipped me with more maturity and also endowed me with a richer understanding of being a part-owner.

3. Investment Mistakes – During the transition from the previous bear market to the current downturn, I had the fortune (or some may call it “misfortune”) to make numerous mistakes, all of which have been meticulously documented along the way. Scattered across the pages of my blog were the mistakes committed for Ezra, Swiber, China Fishery and Tat Hong, just to name a few. These mistakes have since made me a much wiser investor and taught me what to look out for when it comes to assessing a potential investment, and I am thus thankful that I have made these mistakes and not suffered debilitating losses as a result.

4. Keener understanding and better awareness of behavioural finance – A key aspect which was missing from my knowledge base during the last bear market were the important concepts relating to the field of behavioural finance. I now enter this downturn and bear market armed with greater knowledge of the psychological biases which most investors (including myself) are afflicted with, including but not limited to expectation theory, loss aversion, over-confidence, over-reaction bias, confirmation bias, endowment effect, anchoring bias and other little tricks of the mind which are continually experienced by our brains (and detailed in a very good book by Jason Zweig called “Your Money and Your Brain”). But note that being armed with the knowledge is only the first step, the second is to conquer your innermost demons and be able to stand stoic in the face of great fear and unreasonable panic. As mentioned by Benjamin Graham, it requires great fortitude and confidence for an investor to trust in his own objective research and to ignore the madness of crowds. Certainly, I hope that with this knowledge into biases which investors are prone to make, I can avoid more of the pitfalls and perils which bedevil investors in general.

5. Portfolio Composition – A quick comparison between my portfolio composition back in Oct 2008 and now reveals many glaring differences. Back then, I entered the bear market owning companies such as Ezra, Swiber and China Fishery, companies which had significant amounts of debt in their Balance Sheets and which did not generate FCF. Their capex requirements were also very high and this meant raising funds continually from either bonds/banks (debt) or the market (secondary offerings and/or dual listings). Currently, the companies in my portfolio consist of companies which have strong free-cash-flows and balance sheets with either low debt or no debt (with the exception of MTQ). The only company which is the same in both my portfolios then and now is Boustead (not counting Suntec REIT as it is a REIT). I guess you can say that in essence, I had almost completely switched out of my weaker portfolio into my current stronger one, and the cash flows and dividend history should be able to sustain me should this bear market turn out to be protracted.

6. HDB Mortgage Loan Quantum – This may seem like a minor point, but the balance of my HDB mortgage loan does also have a psychological impact on my psyche and affect my moods and behaviour as I sit through a bear market. As a comparison, I entered the Oct 2008 bear market with a balance mortgage loan of $135,000. As at the date of this posting, the outstanding loan amount has been reduced to $75,000, for a reduction of $60,000 principal over three years. This fact, coupled with the knowledge that my portfolio size has grown significantly over the years (along with the quantum of realized gain acting as a “cushion”), has made me more relaxed and less prone to behaving like a nervous wreck. I am still on target to clear off the loan in the next 5 years by the time I hit age 40.

I would say that this second bear market is indeed going to be even more insightful for me, as I will be able to further refine my value investing techniques and my understanding of companies. As to whether I will be able to weather the storm successfully, my answer will probably be the same as when I encountered my first bear market – I do not know for sure. But what I do know is that I will continue to stick to my core principles of sound investment and continue to manage my affairs and personal finances prudently and conservatively.

Investment Thoughts Four Years On

OK, I know this is probably another lousy title, but it was tough for me to think of what to call this post, which basically sums up my reflections and thoughts as an investor after blogging for 4 years. I guess you can call it an “investment style update”, one of many which I have over the months (the last one was in Nov 2010 in this post). Every now and then, I take the opportunity to crystallize my thoughts on investments, businesses and personal finance as part of my journey (the blog is, after all, “Musicwhiz’s Journey”) towards financial freedom. For now, it remains decidedly elusive, but that does not detract me from my eventual goal of reaching this summit. Many will remark that goalposts may change as you age and your personal circumstances change, and I do agree; but as times change, my investment style and knowledge has also evolved to prepare myself for the next 10-20 years, and hopefully my experience, reading, analysis and research can put me in good standing to tackle these challenges in life.

This blog actually acts as an investment diary and journal, as I use it to collect my thoughts and opinions in one central location. I formally started blogging back in 2006, though that was an on “immature” basis if you check out the posts back then. I only started blogging about investing and personal finance more seriously in May 2007. Since then, it has been four years and I never would have expected (back then) to be able to achieve the level of portfolio that I had achieved now, or the passive income generation. It is indeed a pleasant surprise to me to know that even though I may not be hugely successful (i.e. joining the ranks of a millionaire or the financially free), I had indeed improved my passive income generation ability and also greatly matured as an investor. This alone gives me a profound sense of satisfaction, even though it may not translate into tangible financial results. Remember: it is the process as much as the results which I enjoy, so for detractors who may remark that I am spending way too much time generating way too little returns, I must emphasize that investing is more than just a hobby – it is the passion of discovering how companies are run, what makes them tick and also how fascinating it can be to dissect numbers and make sense of them.

I usually must stop myself before I get too carried away and end up being long-winded again, so here are some of the lessons learnt since my post last November. Note that this list is far from exhaustive:-

1) Avoiding dud and mediocre companies is as important as finding undervalued gems – Interestingly, many people tend to talk about finding “The Next Google” or “The Next Facebook”, symbolic of the next great investment idea which could reap them tons of (seemingly effortless) money. Much attention is focused on finding great companies even before they become great, and funds tend to flow towards the next big idea (Artivision, it seems, as I type this). But the true essence of investing is not just about finding a great undervalued company with all the right characteristics for investment; it is also about learning to avoid the mediocre companies and the dud companies. Over these 4 years, it has become somewhat easier to identify the duds almost immediately, as I have developed automatic mental screens when I look at the financials of a company and study its business model. The greater danger, however, is in finding so-called “Value Traps”, companies which seem great but turn out to be painfully mediocre. These companies attempt to “ensnare” you with good numbers and a (seemingly) strong business model and competitive moat, but if one is not careful, they may see these “strengths” being rapidly eroded away as competitors flood in, regulations change and the industry evolves. Therefore, one has to be ever vigilant on the risks such companies may harbor, in the knowledge that it is better to avoid such companies before they turn out be a major pain in the ass.

2) The Erosion of Gross Margins – This was meant to take up a whole separate post, but I thought there would probably not be enough content so decided to slot it in here instead. While thinking through various companies’ business models, operating environment and unique characteristics, one metric which stood out is how often the gross margin can foretell things to come. Gross margin, for the uninitiated, simply means the gross profit (revenues less cost to acquire these goods) divided by revenue; and this measures how much profit you obtain from each dollar of sales, before factoring in expenses such as depreciation, staff costs and marketing/distribution costs. A careful study of gross margins for the last 5-8 years of any company can throw up some very interesting insights, and this is what I have been doing for quite a while on my investment journey. Erosion of gross margin is often the first tell-tale sign that something bad is going to happen, sort of like the first sign of trouble before the true rot causes a massive cave-in. Companies in industries which compete on prices normally experience a steady decline in gross margin, while other companies may suffer from stronger competitive forces which push down gross margins. One recent example was Tat Hong (which I divested about 3 months back). Their gross margins were steadily declining over the years, and this signaled that competitive forces were making it difficult for the Company to price its products as profitably as before, resulting in not just lower gross profits but also a lower market share over time. Companies which suffer from constant and chronic gross margin erosion should be avoided or sold off because it is often an early sign of deteriorating fundamentals. Well, seeing that I do have quite a bit to say on this, perhaps in future (if readers request it) I may do a full posting (along with examples) on this topic.

3) The importance of Purchasing Insurance – I know this is unrelated to investing per se, but since insurance is an important aspect of personal finance, I have decided to talk a bit about this. Recently, my daughter was admitted to hospital for about 17 days, and the significance of purchasing not just insurance, but the right insurance with the proper coverage, hit me hard. Fortunately for me, I had my daughter fully covered for all classes of wards up to private hospitals, which meant I could let her stay in a single room in a private hospital. The bill came up to close to $20,000 including medications, procedures and doctors’ visits; and fortunately this was fully reimbursable (though you have to pay upfront first then claim back later from Great Eastern – my insurer). In addition, there is also a clause which says that any hospital stay past 8 days entitles me to an additional claim of $500. If I had not purchased insurance, I would be staring at a massive financial hole of $20,000 which would seriously drain my reserves. So for all readers out there, do review your family’s insurance plans and coverage and make sure you are adequately covered for H&S and other emergencies (including Accident, Disability Income if necessary).

4) The Curious Case of the Disappearing Cash (for S-Chips) – I guess enough has probably been said in the newspapers about the status and reputation of S-Chips in general, so I will try to be brief. You would think that cash was one of the harder things to fake on a Balance Sheet, but so many S-Chips have done a “Satyam” that it really seems as if Chinese companies have an inherent knack for doctoring the cash numbers. After a particularly damning report issued by KPMG for China Milk Products (which has been suspended since 2009), it has brought to light exactly how onerous it is for special auditors (and forensic auditors) to gather sufficient relevant information on the financial activities of such dubious companies. Past cases with China Sun Bio-Chem and Sino-Environment have been equally daunting for the auditors, and shareholders can more or less kiss their entire investment goodbye as the Management and associated rogues have probably absconded with the money a long time ago! While the most recent cases still fresh in people’s minds were those of China Hongxing, Hongwei Technologies and Sino Techfibre (all still suspended pending further news and updates), there have been other suspicious S-Chips which seem to be sending out signals that something is wrong, yet no full-blown investigation has been conducted into their affairs. A case in point is Dapai Holdings, a backpack and luggage manufacturer. Despite having RMB 539 million (S$102.87 million) cash in its books as at March 31, 2011, the Company has announced a rights issue of 1 for 4 shares at $0.08 per share (a heavy discount to last done share price of 14 cents) to raise a paltry sum of S$19.3 million. This is purportedly for an acquisition but if the acquisition does not go through then the money will be used for “general working capital purposes”. It is quite inconceivable for a Company to raise such little money using such an EPS-dilutive method when it has a large cash hoard sitting around. Unless they have massive capex plans for that S$102.87 million which I am unaware of, I would say this exercise seems highly suspicious.

5) Reading up on Bond Investing – This is one of the more interesting major topics which I have been reading up on, and at the same time, I am also studying and observing what is happening in the real world of bond issues. Bonds are fixed income instruments which has a role to play in balancing one’s portfolio as one ages, and from my readings on portfolio re-balancing, I know that bonds are a security which one should start to introduce into one’s portfolio as one gets older. Though equities are known to trump bonds hands down in terms of long-term returns, the issue here is whether one can outlast a long bear market if one is at a more advanced age. Bonds (especially blue-chip, high-quality ones) provide good protection against downside as coupons are a compulsory feature, unlike dividends which can be (severely) cut in times of recession or economic upheaval. There is some argument over whether bonds should be a staple in an investors’ portfolio, it’s just the percentage allocation which should be tweaked. The Intelligent Investor by Benjamin Graham recommends that when one is young, it should be 25% bonds to 75% equities; but he also mentions that this proportion can be adjusted according to bullish or bearish markets, though it’s far from easy to be able to do it with ease. Considering the amount of information on bonds alone, I guess I will have to dedicate a separate post on this as well another time. In the meantime, I will continue to look for sources of reliable and dependable information on bonds and how to invest in them, in order to broaden my investment sphere.

That about summarizes my thoughts on investing at the moment, and covers some of the more current topics on my mind as I seek to better myself as an investor. It takes a lot more knowledge, reading and experience before I can say I am an all-rounded, confident investor. Considering my investment history is only about 6.5 years old (since Dec 2004), and the fact that I have not had a very consistent track record until I embraced value investing in late 2007, I think there is a ton more to learn and absorb in order to improve myself. Keeping humble is also an important attribute as I feel humility lets you have a better feel of your mistakes and prevents you from getting swell-headed and complacent. A ten-year track record of consistent returns would be something I can look forward to, and if you take end-2007 as the starting point, then I am not even halfway there!

Financial Resolutions for 2011

The time of the year has come again for us to take stock of our lives and look back on what had transpired in the past year. As I celebrate Christmas and the upcoming New Year, I am reminded of my financial commitments and my promise to steer myself towards financial freedom. 2010 has been a somewhat turbulent year for me in terms of my personal life (I will not elaborate), and my finances have also been somewhat strained even though I have managed to maintain my saving habit. As the year draws to a close, I find myself heaving an unconscious sigh of relief now that I can look forward to a brand new year. Hopefully, it is a better one financially and also for me on a personal front.

Here are some of the financial resolutions which I have set down as part of my investment and personal finance review. Some of these resolutions will probably span more than one year, but it is good to write them down now and monitor them as I go along, as distractions and busy-ness may cause me to lose track and forget some of them. Here they are (in no particular order of importance):-

1) Review and fine-tune me and my wife’s insurance policies – After some soul searching and also by reading some good quality posts on Value Buddies forum on insurance policies, I had decided to do a thorough review of mine and make some drastic changes. I met my financial planner in mid-Dec 2010 and decided to surrender some whole life policies, to be replaced with Term policies and a Disability Income policy. Suffice to say that this decision results in short-term pain (there is a loss realized as some of the policies have yet to compound) but would result in a long-term savings (term policies are cheaper and can allow me to invest the difference). Plus, disability income insurance ensures I get a payout should I be unable to perform my job roles and duties and acts as a protection for my wife and child should something impair my ability to work. Some of the changes only take effect next year (as I will be paying the premiums next year), and it is my resolution to get my insurance coverage right once and for all so as to enjoy future peace of mind.

2) Improve budgeting techniques and track cash flows more rigorously – Normally, I prepare a rudimentary budget at the start of every new month in order to budget for any one-off expenses, and to ensure my account has sufficient cash to handle all my GIRO expenses. The payment dates and amounts are fixed and they are all keyed into a spreadsheet to simulate expenses for the entire month. I had discovered in 2010 though, that there were still some months where my credit card bill was higher than expected; though with my current “Pay Myself First” policy this has not affected my savings adversely. However, this means that I will have to be more stringent in reviewing my expenditures and ensuring I do not rack up a bill larger than what I budgeted for. I had thought of implementing a rolling budget for 3 months but will see how tedious this can be before deciding.

3) Increase savings rate from current 50% - My current lifestyle allows me and my wife to save 50% of our take-home salary, and thus far I am pleased with the progress though I must admit that some months are pretty tight when it comes to ad-hoc expenses (e.g. weddings, medical bills, capital expenditure with regards to my child), and have to be supplemented by dividend income. The aim for 2011 is to be able to raise my savings rate from 50% to 55%, and this should be possible if I assume my lifestyle remains unchanged (i.e. simple living without a car) and me and my wife’s salary increases through normal increments. Admittedly, this may be tough but if it cannot be achieved at least the retention of the 50% mark with an increase in salary translates into higher absolute amounts being saved per month.

4) Devote time to researching investment ideas and reading good investment books – This resolution is going to be tough as I am more and more occupied with work commitments as well as family commitments. Family commitments would include, of course, interactions with my family members as well as my in-laws, as well as spending sufficient quality time with my daughter, who is getting more precocious by the day! I realize that serious investment research is not so much difficult to do as it is tedious, and it is a task which consumes copious amounts of time as one needs to pore through annual reports, quarterly filings (financial statements) and corporate announcements. Compiling spreadsheets and adding annotations and footnotes is also very time-consuming, and writing the report from a quantitative and qualitative perspective in order to either justify the purchase or reject the thesis is also another tedious task in itself. My last report on SIAEC stretched up to 40 pages including diagrams, charts and tables; and I believe that if I do undertake extensive and detailed research on another SGX-listed company it may also take up the same amount of time and effort. But I shall endeavour to channel more time to such constructive activities, and I am also prone to using time on the bus or MRT to think through investment issues and gather my thoughts on potential companies to invest in. As for good books, I shall resolve to visit the library more often to borrow books which enhance my knowledge of investing and which can also teach me lessons on stock market lore and history.

5) Finding more ways to increase passive and active income (and sources) – With me and my wife’s jobs being our main source of active income, it is my desire to actively search for other avenues which will bring in cash. Currently, I have a tenant and am drawing some rental income monthly, and am also giving tuition to one student (another source of active income). From my blogging, I am also deriving some minor income from Nuffnang. I resolve to try to look for ways to enhance my active income sources, such as taking on another student (if time permits and does not violate my apportionment of time for my family) and to seek out business opportunities to be a sleeping partner in a business with a robust business model. For passive income, I will endeavour to increase my equity investments’ cost and enhance my yield so as to increase the passive income cash inflows from current levels. As of now, my estimated dividend yield for 2011 is 6% and will bring in about $12,000 of passive income purely through dividends (assuming all dividends remain the same for 2011 as for 2010). However, this increase in yield shall NOT be at the expense of margin of safety, in other words capital preservation shall always be paramount, and will rank ahead of superior yields.

6) Seek out methods to lower expenses and costs – With the impending re-structuring of my insurance policies and the lowering of premiums, this is also one source of cost-cutting for me moving into 2011. Other methods I can think of include looking into ways to reduce tax payable (SRS is not applicable to me as I have not hit 40), reducing unnecessary expenses on dining and leisure, using more discount coupons, bringing my own water out for lunch daily instead of purchasing drinks; and other such small habits which will add up. I also plan to clear up the clutter in my house and uncover any objects which I thought I may have lost, so that I do not have to spend money replacing what I already have. All capital commitments shall be reviewed and unless absolutely necessary, I will not upgrade or replace any items (yes, this includes my 5.5 year old trusty phone which still works very well). If an item can be repaired or re-conditioned, it shall be done instead of buying a new item to replace it. After all, the motto our government likes to promote is reduce, reuse and recycle, right?

7) Reducing my HDB Mortgage Loan – Even though it has been reiterated time and again that an HDB loan is one of the cheapest loans around (at 2.6% per annum interest rate), the fact is that I am still servicing this loan using my CPA OA funds (which accrue interest at 2.5% per annum). This means that technically, I lose out on 0.1% per annum every year. With the new CPF rules stipulating an additional 1% interest on OA balances up to S$20,000, this means that the amount is now accruing interest in excess of 0.9% over my loan interest rate. Therefore, technically, I should retain the loan as long as possible. However, factoring in the low amount of my CPF OA (which has mostly been used for loan servicing with only a 6-month buffer) and the fact that I want to use my higher contribution (I am still below 36) to clear off as much loan as possible, I will be exploring methods to reduce the loan through higher loan instalment payments or lump sum one-off repayments.

8) Seeking higher interest rates on my emergency and opportunity funds – With interest rates hovering at a dismal 0.125% per annum at most major banks for savings accounts, my funds are being eroded at a rate of about -3.275% per annum (with inflation raging at 3.4%). I will thus seek out banks offering more attractive interest rates, such as the CIMB Starsaver Account. Please note that I am NOT advertising for the bank and will receive no commission whatsoever from promoting this account. The account has no minimum fees and as long as you contribute S$500 per month in increments, they will pay 0.8% per annum interest on your balance. The catch is that the account must be open for at least 6 months (or there will be a penalty fee) and the minimum initial deposit is S$5,000. Another issue is that CIMB Bank currently has only two outlets in Singapore – Knightsbridge and Raffles Place; and ATMs are also severely limited in number. However, as I plan to operate this as an Internet-only account using GIRO transfers to effect fund movements, this should not be a problem.

I guess there are probably going to be more “resolutions” which pop up as the year goes by, but I think for now that’s a good laundry list. Part of me was also afraid to get too long-winded, as I know I have the ability to just ramble on (and bore the reader). Perhaps readers can share some of your financial resolutions as well?

My year-end portfolio review and special review will be out either on December 31, 2010 or January 1, 2011 as I still have to crystallize my thoughts and put them on paper. It’s going to be rather lengthy but I hope to be able to explain my own performance to myself so that I can (hopefully) suggest improvements for the new year.

Maturing as an Investor

As the months go by, our experience as a human being continues to build up; whether it be with work, relationships or, investing! Every now and then, I will take a step back and reflect on what I had learnt in the past few months as a result of either reading, observation, thinking or analysis. On this occasion, I realized with a start that I had matured a lot as an investor compared to the “Dark Ages” back in 2005 to 2006 when I was still fumbling around for directions. It turned out that value investing became the framework with which I would build my investing foundation, and over the years I have moulded this discipline to fit my own personal character and competence.

So to summarize the lessons learnt, here is a simple laundry list (not in order of significance):-

1) Understanding Valuations and Emotions – After reading many books on behavioural finance, I finally learnt the effects of over-confidence and loss aversion and how it could devastate one’s portfolio. Throw in patience and discipline and you would have a very robust philosophy on how one should approach investing, and I am currently putting that into practice. Value investing also would not be complete without an understanding of human psychology in the stock market and the factors which drive sentiment. At the same time, I was also refining my valuation techniques (still currently a work in progress) and striving to improve to become a better investor.

2) Avoidance of Scams – Not to sound too caustic or cynical here, but the recent proliferation of scams in the news has caused me to be extra wary of the numerous “get-rich quick” schemes out there. As a mature investor, one should be very aware of the long-term average which the stock market can return (roughly 8-10% including dividends) and how even the best investor in the world, Warren Buffett, achieved compounding of about 22% over 25 years. Yet, many of these so-called “seminars” promise quick and easy gains through forex trading, options trading and technical analysis. One may be quick to point out that these are not “scams” per se as they simply contain a promise and the participant is free to choose not to pay to attend. However, some of the claims are nothing short of preposterous! Any investor worth his salt would be quick to steer clear of such talks which promise fast and easy money. In my world, there’s only hard-earned money; and when one invests properly one has to put in the hard work, diligence and patience to sift out bargains. There are no short-cuts to becoming rich (unless you win the lottery!).

3) Absolute Returns versus Relative Returns – This was actually mentioned in Sham Gad’s book “The Business of Value Investing”, which I am currently still reading. In it, he mentions that value investing itself is a framework and philosophy which emphasizes on consistent and steady gains through both bull and bear markets, as one focuses on the business rather than the stock market. Therefore, it makes sense that returns should NOT be benchmarked to an index; as the main objective of an investor is to get a consistent return on investment, regardless of market conditions. If one uses relative returns as a yardstick, then one would have “out-performed” the index assuming one’s portfolio dipped 8% while the index dipped 15%, for example. But absolute returns focus on getting a steady and consistent return from investing in well-run companies with a stable business and competitive moat; hence one should not stress too much on relative performance.

4) The Importance of always having cash – OK, I guess this is more of a personal finance topic, but then again I have learnt that having constant opportunity fund means that one is poised to take advantage of favourable situations as and when they arise; for example when attractive valuations emerge all of a sudden due to an unjustified sell-down in the stock market. Therefore, it is important to have free cash flows in one’s personal life too, in that spending must always be less than earnings.

5) Avoiding Mistakes previously made by myself, as well as others’ mistakes – I have spent the last 12 months continually reading through the mistakes I had made with regards to China Fishery, Swiber and Ezra and sought to avoid making the same errors of judgment. At the same time, I have also studied mistakes made by other astute investors by reading books and noted down exactly what to look out for and what to avoid, as part of my continuous learning process to become a better investor. Moving forward, I am sure I will still make mistakes, as I am only human, but the aim to avoid major mistakes which will derail my wealth-growing path and to keep the mistakes small and manageable.

There is still much more room for me to grow and mature as a value investor; as my journey is still young at just slightly over 3 years. As I am constantly reading, observing, analyzing and learning, I can feel my knowledge base increasing as the months pass, and my analysis time is also lessened as I am more aware of what to look out for; and to ignore the irrelevant or unimportant. There is still so much more I have to learn as an investor, and I look forward to many more years ahead to hone my skills as an investor and to achieve much better returns.

Readers can expect another update perhaps 6 to 9 months later as part of my update on my investment journey.

My Learning Curve In Value Investing

This post is a somewhat reflective one as I mull over my investing journey after switching over to value investing in late 2007. So far, it’s been a rough ride over the last two and a half years with turbulence rocking stock markets and a “lost decade” appearing for many countries, thus shaking the core of beliefs which many had on the stock market always giving a positive return over time.

For me, this journey is poignant as I slowly but surely learn more about investing, understanding companies, applying lessons learnt, reviewing mistakes and improving my fundamental analysis skills. Somehow, at this point in time, I still feel that I have so much more to learn from many veterans in the field of value investing about how to select good companies which are being offered by Mr. Market at reasonable prices. I have had my share of “hits” and also the painful “misses”, to illustrate to me that there is an almost infinite number of companies out there and one can only do so much with the amount of time he has on his hands. There is always going to be a constant trade-off between quality time with family and loved ones, and time being devoted to the careful and thorough analysis of companies and one’s shareholders and portfolio. It is a delicate balance which I do not wish to disrupt, as the dangers of getting too absorbed in analysis and investing can take a toll on one’s social life and psychological well-being. Life is more than just about making money!

Gentler Learning Curve

Over these 2 years, I have noticed that my learning curve for investing has become less steep, and knowledge acquisition is also less rapid. When I first started out on my journey, my mind was like a sponge and was eagerly soaking up all pertinent and relevant information about value investing. I had a voracious appetite for books on Warren Buffett beliefs and techniques, Benjamin Graham’s margin of safety, Peter Lynch’s classification of companies, Charlie Munger’s thought processes and frameworks and Phillip Fisher’s scuttlebutt, and would also trawl the Internet for bits of information to enhance my critical thinking and analytical skills.

However, as my knowledge base increased, the learning curve also became gentler and I now have the inherent knowledge on valuing companies, understanding their business model and knowing where and what to look for. It has become so much easier and less tedious for me as I acquire more experience and practice in sieving out relevant information and zooming in on important ratios or numbers, and this all helps to reduce the amount of time spent on research and the efforts put into churning up a valid assessment of companies. Back in late 2008, I was struggling with my analysis of Tat Hong and took a whole two months to put together a rational analysis comprising tables with numbers and an analysis of the business (of course, there was much procrastination in between as well!). In 2009 the amount of time required for analysis was narrowed down to a few weeks, and for the most recent Kingsmen analysis it took about a week or so to compile all the numbers, obtain all the facts and put them in my head for churning and analysis. Part of the reason for the faster analysis time is also because I have all the spreadsheet templates ready on Excel to plug in the relevant numbers, and discussions on value investing forums have taught me how to make use of other important metrics and ratios to enhance my understanding of the Company.

Inclusion of Competitive Analysis

One major flaw in my previous analyses of Tat Hong, MTQ and GRP was the lack of a suitable framework and information for analysing competitors, which are a very important aspect of any investment thesis. Previously, I used the Porter’s 5-Forces model and the trend in revenues and numbers to justify a case for a strong competitive moat which was unlikely to be assailed by competitors. This has turned out to be both flawed and also insufficient as I have since found out that Tat Hong does not have such high barriers to entry after all (i.e. there are many smaller crane companies around which can be easily set up to buy/sell/rent cranes and heavy equipment) and that the industry itself is fragmented with no major players. If I had insisted on doing a proper competitive analysis framework back in 2008, I might have weighed the company differently on “cons” and may have been more cautious in my decision to invest in it.

For MTQ and GRP, I had used the stability in revenues and long-term trend of net profits and dividend history to assure myself that both companies had a competitive moat and that they were operating in a niche industry for which their products/services would be in consistent demand. This was also not an ideal analytical scenario to be used as the historical stability of revenues may not indicate future stability, and that I should have instead probed further into each company’s competitors to see how they were doing, and what plans they had for growing their own businesses. In short, I failed the “scuttlebutt” test which Phil Fisher proposed, which is to actively seek out competitors to the companies you wish to invest in and interview THEM on how they view the industry and competition. Admittedly, this would be time-consuming for someone like me with a full-time job.

Some suggestions I received for improving on my competitive analysis was to obtain extract competitor information from analyst reports, and surprisingly this turned out to be a very good source as analysts would normally use peer comparisons to justify their PER ratings. I realized that analyst reports would give a good laundry list of competitors which one could then focus on and drill down further to analyze and compare them on their strengths and weaknesses (thanks for cif5000 for this information). Another area was to do some independent research on the Internet for competitors or to use basic reasoning, observation and common sense to identify competitors. For example, for Kingsmen’s case I had already known about Cityneon being a credible competitor; while Pico Far East’s name can be seen on most major events as I walk around town. So it pays to keep one’s eyes and ears peeled all the time!

Re-defining the Concept of a Good Business

As I scour through the universe of companies listed only on SGX to find those of investment quality, it has also made me slowly change my views on what constitutes an investment-grade business; and what makes up a mediocre business. My original view of good businesses were those with so-called high and unscalable moats as they had high barriers to entry. I was looking for companies which were growing profits quickly and had high profit margins, and did not mind such companies taking on massive debts to fuel their growth. This explains my original investments back in 2005-207 of Ezra, Swiber, Pacific Andes and China Fishery.

That view has been seriously challenged not just by the theory to be found in value investing tomes, but also real-life experiences in observing companies with high debt and supposedly high profit margins come under attack, some either falling by the wayside while others imploded quite spectacularly. I have come to realize that businesses with high capital requirements tend to have less free cash flow available, and that internal cash flows are the best for use in growing the business. Growing through M&A should only be done if a Company has exhausted all its organic growth potential. Also, a business which requires light working capital and yet is able to grow and generate FCF may also qualify as a viable investment-grade business; as opposed to a high profit margin business which requires constant large sums of capex.

Over the years, my focus has also shifted from focusing excessively on the Income Statement, to now focusing more on Balance Sheet strength and Cash Flow quality. This is where my knowledge base as a trained accountant comes in handy in reading and interpreting the financial statements!

More Room for Improvement

To sum up, there is still much room for improvement in my techniques and skills. The mistakes I made over the past few years only serves to emphasize how vulnerable I am, and also to reveal how flawed my original techniques were. Luckily, I am happy to say that I am eager to learn and I am not afraid of mistakes, as long as I do not repeat them! Hopefully, in a few more years, I can look back and report that I made major improvements to my investment style and enjoyed much better success.

Ezra – FY2009 Financial Analysis and Review Part 2

This is part 2 of my analysis and will focus on dicussions on EOC, shipyard, fleet management contracts and other salient aspects. Note that there are many facets to a company and I choose to cover those which I feel are more impactful in terms of the long-term prospects of the Company, and I may leave out minor aspects this time around if they do have any significance in this discussion.

EOC and Shipyard Updates

It was recently announced on October 12, 2009 that EOC’s Lewek Champion was awarded a contract worth US$11.2 million by NuCoastal, and this was confirmed to be a bridging contract as the vessel is now between projects, and is under negotiation for more long-term charters to ensure cash flow stability. The other two vessels Lewek Conqueror and Lewek Chancellor are both chartered out to Brunei, though the charter for Chancellor is ending in Nov 2009 and it under negotiation now. Lewek Conqueror has the longest firm charter extending till March 2014, but for the other two vessels (excluding the FPSO Lewek Arunothai), the contracts are shorter and have to be renewed.

Another issue is that 48.5%-owned EOC has very high debt-equity ratio of 2.31x (up from 2.12x as at August 31, 2008) and it was NOT mentioned on how EOC planned to reduce this gearing. If this gearing was added to Ezra’s gearing, it would present a significantly different picture as the overall gearing of the Group would be substantially higher. Recall that Ezra managed to hive off EOC in a separate listing on Oslo Bors in 2008, freeing up cash in the process and also removing a large chunk of their (then) debt. But the debt cannot be wished away, and it now resides on EOC’s Balance Sheet instead. This could be a major risk moving forward as EOC owes a sum of US$32.8 million to Ezra and as yet will be unable to pay up unless they find a way to reduce their gearing. The good news is that EOC have positive operating cash inflows but also has high capex requirements (op cash inflow +US$37.8 million for FY 2009 but invest cash outflow US$107 million). Thus, most of the cash still has to come from financing activities (+US$68.7 million for FY 2009) to finance this growth.

As for Saigon Shipyard, according to Management it is now operating at full capacity and they see the potential for more fabrication and construction contracts in the near future. Note too that the yard will be used to construct the new ice-class vessel Ice Maiden and this will require more cash outlay. At this point in time, not much else is known about how much time, effort, resources and cash is needed for this project. Management also mentioned scaling down the development of their second yard at Vung Tau for now and it remains a Greenfield project.

Fleet Management Contracts

Ezra recently announced a fleet management contract whereby they get to provide expertise to manage 4 AHTS owned by a specialized fund, in return for a 50% share of the profits. From my conversations with Management at the EGM, it seems that this Fund had been one of many which tried to “flip” vessels during the boom years in 2007, buying and selling quickly to make instant gains. Unfortunately, it got caught by the financial crisis and could not sell off its vessels at a profit (their value had since gone down) and these vessels are now being constructed and will be chartered out to clients once completed. Since the specialist fund has no idea how to operate these vessels (as they were just an opportunistic bunch) and has no manpower available, they engaged Ezra who will provide the manpower and the expertise. Thus, this represents a fixed cost to Ezra (to deploy any excess capacity to man these 4 vessels) and can be viewed as pure profit as no capex is required. However, I also get the impression that such deals are ad-hoc in nature as it’s not every day that you see Funds sitting high and dry with assets lying idle. Hence, this may be one of the methods Ezra uses to grow without capex but I do not think it can be done so consistently enough.

Purchase of ROV (Remotely Operated Vehicles)

Ezra also recently announced the purchase of 5 ROVs for US$23 million from Triton, in order to install them onto their own vessels to enhance operational capabilities. Further clarification at the EGM told me that these ROVs would actually be installed onto the vessels itself (instead of being used independently) to conduct deep-sea operations and this can significantly enhance the operating flexibility of each vessel, which is in line with Ezra’s commitment to providing more value-added services to customers.

FPSO Matters

It has been reported that EOC is the front-runner for the Chim Sao FPSO Project in Vietnam, but that due to financing issues, EOC could not successfully bid for the project. This is quite a pity because it EOC can secure this second FPSO it would really be able to showcase their talents and put them on the global stage against major FPSO competitors. As such, its gearing level is simply too high to take on more debt at this point, and I feel a share placement or some other form of innovative financing may be required for it to secure the Chim Sao Project.

Meanwhile, Lewek Arunothai has also encountered teething problems in drawing first gas and the delay has been extending since 2Q 2009. Management has said that the gas is not yet commercially recognized by the client and they hope revenues will be able to flow in to EOC from 1Q 2010 onwards. Otherwise, since the announcement of the FPSO contract in 2006, it has been about 3 long years with still no revenue contribution from this FPSO.

Deepwater Subsea Division

Management has come up with a comprehensive set of presentation slides for the formation of their new deepwater subsea division and they have plans to package complete solutions for clients so that they can become a “one-stop solution” for customers. This will make Ezra a more attractive service provider and also mitigate risks for customers as they will have to deal with just 1 party instead of more than 1, and with vessels ready to be deployed at many stages in the O&G cycle. I hope that this division can improve its gross margins from the current 13% and also garner higher value contracts since Ezra will be offering packaged solutions. It remains to be seen if more significant capex is needed but from the way Ezra’s business model has worked in the past, I suspect this trend will continue at least until 2015 (which is the time they projected till).

The “Ice Maiden” – An Ice-Class Vessel

If one looks closely at the share placement fund proceeds utilization, Ezra had spent about US$6.15 million purchasing the shipset of a vessel called “Ice Maiden” from Silters & Co. This is an ice-class vessel which is capable of working in harsh Arctic waters and was part of a high-profile Shell contract back in 2007 before it was abandoned in 2008 due to cost overruns. Ezra has mentioned that they bought the vessel at “distressed” prices and that such vessels, being rare, can command premium charter rates. Ezra’s shipyard will build the vessel and it is expected to be completed around FY 2011/2012; so not much will be known about this until then, and whether or not it can be chartered out (and at what rates). In terms of expanding their deepwater subsea offerings, this represents a maiden (but tentative) step in the right direction but I would caution that it is premature to be too optimistic at this point as there are still many unknowns and uncertainties surrounding this latest acquisition, even though the press release is worded with a very positive slant.

Partial Divestment of Ezra – Rationale and Reasons

As a departure from my usual investment philosophy of buying and holding, I had decided to divest a portion of my holdings in Ezra at a price of S$2.01 last Friday October 16, 2009. This divestment has wholly covered my entire cost of investing in Ezra and my remaining stake in Ezra represents pure profit. I will account for the partial divestment by using weighted average costing (i.e. S$0.629 as my purchase price), thus recognizing a gain of about 220% on my investment. This is due to the “Matching” concept used in accounting whereby the revenues generated from partial divestment must be matched to the exact costs relating to the revenues; so even though the total proceeds represent a return of my full cost I still have to account for it as such. The reasons for the divestment have been stated all over my analysis, but I will summarize them here (and add a few more) for simplicity and convenience:-

1) Valuations are high at about 13x and a lot of positives, optimism and expectations have been factored in. In short, Ezra is probably trading at a premium to intrinsic value based on valuations alone, and other factors I had mentioned in my analysis has also heightened the risk in the Company;

2) Weak and leveraged Balance Sheet as shown by gearing rising and debt levels increasing,

3) Cash Flow Statement shows negative operating cash flows and most of Ezra’s cash is coming in through financing (i.e. bank loans, bills and share issuance),

4) A certain amount of uncertainty and risk lies ahead in its venture to expand their deepwater sub-sea segment, and I have no doubt it will be capital-intensive, which implies more fund-raising in the future either through dilutive share placements or perhaps even issuance of convertible bonds.

5) Ezra’s business model entails growth through expansion of their asset base, and these assets are costly and specialized. Thus, they always have to incur capex on expensive assets in order to deploy them for cash flows. I have asked and confirmed that the payback period for a vessel is about 4 years; but that is assuming charter rates stay at current levels and that the vessel can be utilized all the while (i.e. no down time or idle time).

6) Risks would include delays in delivering vessels on time, thus incurring penalty charges from the client which could wipe out a significant portion of their profits (due to high fixed costs and depreciation per day); as well as the risks of managing a more complex corporate structure as a result of rapid expansion.

Evolution of my Value Investment Philosophy

Admittedly, the partial profit-taking on Ezra represents a fundamental shift in my investment philosophy, and is a result of modifications and evolution from reading up and thinking on various issues. I was reading up a lot on when a company was considered over-valued, how to hedge my risks, when to sell as well as portfolio management techniques. I have realized that portfolio management is a necessary part of being an investor, and even value investors need to know when to divest (whether partially or completely). Warren Buffett continually divests if he sees better opportunities, if a company has exceeded his computation of intrinsic value or if the original intention to invest has changed.

Selling off an investment which is trading at 13x and perhaps deploying the proceeds to another company which is trading at 4-5x is a more efficient way of allocating capital, as Mr. Market may have realized the value of certain companies much faster than I had anticipated. Note that I have not totally exited this investment as I believe there is still potential for growth in Ezra; but for now my risks have been mitigated and the rest of my stake represents pure profits. Based on my holding period of 4 years and a gain of 220%, this translates into an average annual gain of 55% (not accounting for compounding effects). The gains will be reflected as an addition to “realized gains” in my next portfolio update on October 31, 2009, and my portfolio cost will also be adjusted accordingly.

A Review of Past Divestments

I had mentioned in one of my previous posts about reviewing past divestments in order to ascertain if they were indeed good choices or bad decisions. This is because the measure of an investor is not only in the performance of the companies he currently owns, but also the decisions he had made in the past with regards to companies which he felt did not fit his criteria. Measured as such, one can safely conclude that certain decisions should have or should not have been made. Of course, there may be other extenuating factors involved in each decision, but let’s keep the analysis simple for now in order to avoid confusing parallel possibilities which may open up further complex debates. Luckily, I had kept very meticulous records since I started investing in Dec 2004, and I have the exact details (down to the dollar) of each trade and divestment gain/loss, which is why I can compile a very accurate portfolio summary of realized gains to date.

Below is a table in which I have detailed the companies I used to own (all the way since I started investing in the stock market, to date) and the original rationale for divestment. These are also chronicled under my “Investment Mistakes” section which you are free to access to read on more details on why I sold each company, and to be truthful many were divested before I adopted value investing (except, of course, for the more recent ones). The next table then shows the difference between my original cost, my divested price and the last done market price. The simple table does not account for dividends along the way, but seeks to determine if a decision was, on hindsight, a good or poor one based on current information about the company and also how it has been doing since I divested it. Admittedly, a full and detailed analysis would take up a lot more space (and probably more posts) than this, so I am keeping it simple just to illustrate the principle of reflection on one’s decision and how it can help improve one’s thought process and investment philosophy.



As can be seen above, much of my 2005 record consisted of various IPO “stags” (i.e. selling IPO shares on the first day of trading to make an immediate profit), short-term trading positions and one lousy contra loss. Most of these were totally clueless bets based more on sentiment and price action than fundamentals. Even up till mid to late 2007, most of the companies I bought were purely speculative, and this was partly due to the irrational exuberance in 2006 through late 2007 which infected penny stocks as well, causing them to rise along with the tide. Only my last two divestments were of a purely investment nature based on my value investing philosophy; I can safely say that before mid-2007 I was a trader and one of my trades even used rudimentary Technical Analysis methods which a friend had taught me (UTAC).



The above table shows the effects of divestment when comparing against the last done share price (or for the delisted companies, against the exit offer price). It can actually be seen that for the trading positions, I might have done way better in hanging on to those positions, especially in fundamentally sound companies which grew over time. But if you note, the “duds” can fall as much as 80-90%, and one of them (Celestial) was even suspended due to some issues with convertible bonds. Thus, a meaningful comparison of whether it was wise to divest can only come from my latter decisions which were more geared towards investment, rather than mindless speculation. On the whole, it can be summarized that for companies with viable business models and growing earnings, it would have been much wiser to buy and hold (i.e. invest) rather than trade them for short-term gains.

If I view the divestments relating to Trek, Global Voice and C&O Pharmaceutical, it would be apparent that the decision to divest early and quickly upon first signs of trouble were wise, and have led to the successful deployment of the funds to more worthy investments. This is because these companies did not have an enduring economic moat or high barriers to entry, and thus were prone to loss in market share. Global Voice was one of the consistent loss-makers back from 2005, and even with a slew of marketing-style press releases and even the CEO voicing support for the share price (then at 6.5 cents), it could not stop the inevitable tumble to the current 2.5-3 cents. An EBITDA profit (as always mentioned by the company) does not count – in fact cash flows and net profit are far more important measures of business success than simply using EBITDA (which conveniently removes the effects of depreciation and amortization) and revenues.

To conclude, this rather academic exercise is just to show how holding on to good companies can result in very massive gains over the years, as demonstrated by Pearl Energy, Labroy Marine and even Olam (though now I argue that gearing is too high for this to be a good investment). Conversely, one should also bail out the moment an investment does not stand up to scrutiny, otherwise it may end up as another Global Voice or worse still, get suspended like Celestial Nutrifoods.

Passive Investing Versus Active Investing

As one grows older, one’s financial needs change and evolve. Many financial experts and planners have advocated different allocations for one’s funds according to one’s age bracket, and this post is to discuss the options available to one as one ages and nears retirement (assuming this word actually exists in Singapore !). My thoughts had centred on the concept of passive investing, as defined by Benjamin Graham as the “defensive” investor; versus active investing, or the “enterprising” investor. I shall elaborate on the two concepts below and discuss the salient points for each as well as deliberate on the pros and cons.

Passive investing involves methods such as purchasing into index funds or buying blue chips which are “guaranteed” to survive recessions, and in Singapore’s context some examples would be SingTel, DBS and UOB. There is a lot less thought and analysis to be put into such decisions and in effect you are just “buying the market”, or coming close to that effect. Passive investors do not have to take the time and effort to devote to careful analysis of individual companies, and they also do not need to bother about under or over-valuation as they simply need to pick an index fund which tracks the long-term returns offered by being vested in equities. The idea of “passivity” is further extended to not really needing to keep track of one’s portfolio as one should be reasonably certain of favourable long-term returns, assuming one has not committed oneself during periods of irrational exuberance. Perhaps there ought to be a disclaimer here: one can only be reasonably assured of a decent return on investment through the passive method if one purchases during a recession or sharp downturn (as we are in now), where general price levels and valuations are low. If one makes the mistake of buying into index funds during periods of irrational exuberance, then it may still take many years before one can break even on their investment; passive though this strategy may be. Therefore, it is critically important for a passive investor to have some rudimentary knowledge of economics and stock market dynamics; as well as some general feel of market psychology, in order to ascertain a proper and conservative entry point. Perhaps some indications can be derived from the sentiments of the general public, where the herd normally stampedes, one may find it wise to act in a contrarian fashion. Note though that this method does not necessarily work for the active investor, as I shall elaborate below.

Active investing, as the name implies, literally means one has to get low-down and dirty in dissecting the numbers and analysing the facts, in order to delve deeper into the investment merits of individual companies. It’s a lot of hard work involving blood, sweat and tears; and the problem is after all the effort, one may still not be able to beat the indices and trump the “passive” method of investing. Thus, many argue – why bother to do all the analysis yourself when one can just get a market rate of return from buying an index fund ? Several reasons are offered for this:-

1) One’s age profile and time constraints - Index investing is suitable for those without too many family or personal commitments and who have time to visit companies to attend AGM, and also to pore through thick and boring annual reports to spot little known facts. If one has a family with 3 kids, suffice to say it may be better to rely on passive investing.

2) Knowledge and Analytical Skill – Let’s face it, some basic accounting knowledge is required to analyze financial statements; as well as skill in interpreting the numbers and having a holistic view of a company. Some people may not be properly equipped with such skills to undertake a rigorous study of a company; so they let analysts do this job. Passive investing may be more suitable if one does not have the proper skills.

3) Psychological Strain – Passive investing removes the emotions from investing as you just buy into an index fund or several well-established blue chip companies. Active investing requires some monitoring of the stock market to ensure one has a decent margin of safety and does not over-pay, and one also has to monitor in case one’s company becomes too over-valued, such that one may be compelled to sell and switch into another under-valued company. Such stock market monitoring would inadvertently place psychological strain on the active investor, and even though Benjamin Graham’s advice is to ignore Mr. Market, part of us which is human would still be unable to be completely detached from his emotional mood swings.

4) Satisfied with Market Return – For investors who are content with achieving a market rate of return, then they should be contented with passive investing as it achieves just that. Someone did mention that for an active investor, the reason why he is into active investing in the first place is the belief that he can achieve returns which are better than market averages. Otherwise, why bother?

With the arguments for and against passive and active investing, the question now is to ask oneself which method suits your skills, knowledge and temperament more. There is definitely no right or wrong and one has to select the style which suits him best. But please note that this discussion is just confined to investment in equities; I have not included other forms of investment such as unit trusts, bonds and derivatives.

For myself, as an active investor, it’s not just a matter of getting better returns than the market which drives me (and I have yet to demonstrably achieve this, by the way), it’s also the passion for analysis and my interest in reading up on companies which spurs me on. Investing is a constant journey of learning and it never stops till the day you pass on, which is why it makes for such an intruiging journey filled with ups and downs. Since I took up the value investing mantle, I have learnt so much more about companies and have increased my knowledge many times over compared to when I first started out in 2004 as a “newbie”.