Wednesday, July 30, 2014

Pulled Up My Shorts

My crystal ball was definitely hazy for that reading. US Q2 GDP surged to 4%, smashing expectations, and of course dragging the usual suspects up and down the direction they "ought" to go.

I have to say that I am quite surprised. I thought the print was gonna be u-g-l-y, but I guess I was totally wrong for that. Too much of a pessimist I suppose.

Anyhow, I've covered my shorts for now. Don't get me wrong though, I still see giddy ride ahead of us! Until then, I actually feel kind of relieved that I am not very exposed in the market. I guess just that feeling itself speaks volume about how crazy I feel the markets is right now.

Oh well, who knows what tomorrow will bring!

Passed My CFA Level I!

Hey there everybody, I have some fantastic news! Remember back in June when I talked about finishing my CFA Level I exam? Well, the results are out, and I passed!


Business Insider reports that a whopping 42% of candidates passed the Level I exam and 46% passed the Level II exam, making this round of examinations one of few with such high passing rates. Yes, 42% passing the exam is considered a high passing rate for the cohort, and yet the majority of candidates will be disappointed with emails of failure. Congrats to all those out there who have also successfully passed these exams. And only words of encouragement for those who did not make it this time - the path to any place worth going to is never an easy one.

Personally, I am really surprised and happy about my results! I thought the exam was extremely challenging, and I scored really badly for the Kaplan mock exam that I attended. I guess that spurred me on to really study hard for the remaining time leading up to the actual exam.

Although I have very happy and pleased with myself that I passed the Level I exam, I do not think that I will be proceeding on to take the Level II exam - at least not yet. Maybe the following year, or the one after. Work is still not yet in auto-pilot mode, and I feel like there are tons of things on my plate still. I don't want to be that person that is so busy with everything that I am not enjoying my life.

Also, I think that in the coming year, things are going to get extremely exciting in the investment world, and I would rather be fully focused on proper investing and making money rather than increasing my paper qualifications, which I am actually pursuing only for personal enrichment.

Another reason why I am glad that I passed is because I've told quite a number of people that I am taking this exam, especially when they refuse to accept a simple "I'm busy" response that I usually gave as my excuse to avoid attending anything during my intensive study period. I wouldn't want to be that guy that talks so much about investing and finance, but ends up failing a related exam, you know? So, I'm glad that I passed because now it gives me some credibility amongst those who know me.

I also hope it gives me some credibility amongst my blog readers, that my fundamental knowledge about what I tend to talk about is not based on some strange hocus-pocus cult theory.

I know that I am not allowed to called myself a CFA charterholder yet until I pass the Level III exam, and I think that I am very far away from accomplishing that. However, as of now, I am rather satisfied telling people that I took the CFA Level I exam and I passed it on my first try!

Tuesday, July 29, 2014

"MAS to help consumers access lower-cost investment products"

Just saw this CNA article on my newsfeed, titled as above.

Honestly, they are absolutely correct. With the crazy expensive fees that are being charged in the market place today, investors are forced to assume higher risks taking activities to offset these expensive charges.

Interestingly, their focus is on insurance. I am not surprised, but I always thought it was the status-quo to let insurance agents suck out all the extra money from people that don't want to bother with investments themselves. Sometimes the touting they give to promote certain products are way over emphasized to be a sure thing.

Don't get me wrong, I believe in having insurance. But I think when you mix investments with insurance, and then put in a middle man who's job it is to sell you the worst product on the market, it is a recipe for disaster.

I am extremely excited about the possibility to directly buy term and life insurance directly with an insurer. I only hope that the pricing and terms are very transparent and easily comparable from insurer to insurer. As of now, it is not.

Access to fixed income products is also something I am quite looking forward to. As previously mentioned, the retail fixed income scene in Singapore is pretty... lame.

Gotta say, I'm excited at the prospect of more investment vehicles for us retail investors to choose from. Having more choice in this case is definitely better I think.

My personal wish is for SGX to reduce lot sizes, ideally to 100. They can even do it by tiers, like how they have adjusted the minimum bid and ask prices.

I also wish that more ETFs that are core products become available to trade on the SGX in SGD, either through one of the current ETF providers creating a good product, or by allowing big players to come in and set up shop (ie Vangaurd).

What other things would you like to see in our local investment scene that would help benefit the average retail investor?

Monday, July 28, 2014

Wait wait wait, a Money Market Fund... with Insurance?

I have to thank Mr. Lim for writing a blog posted titled "Do not sniff at Insurance Endowment Plans" that he just wrote recently.

In his post, he said that with a single-premium plan that he took for 5 years, the IRR of his investment was a rather decent 3.04%! The amazing thing about this plan is that it is provided Death and TPD insurance coverage.

The only thing that I am wondering about is what was the underlying investment, and what portion was guaranteed and non-guaranteed.

Doing a quick check on NTUC Income, I could find no product which is the same, though there are 2 similar suspects.

DreamSaver is a regular premium paying plan that you pay for 5 years and choose whether to have it mature in 8 or 10 years. You will get insurance coverage of 105% of premiums paid during the 8 or 10 year period for Death and TPD. From what I understand, the investment is linked to the performance of the Life Participating Fund.

Next is GrowthLink and FlexiLink, both are single premium plans which allows you choose which ILP sub-fund to invest in. The only difference? GrowthLink is for cash and SRS, while FlexiLink is for CPF money. GrowthLink only insures 105% while FlexiLink insures 125% of premiums for Death and TPD. The underlying ILP funds look expensive with their sales charge, but if you're the kind that is looking to beef up your insurance coverage but still have your money invested, this is an interesting product to consider.

I would personally just split up the portions and pay for insurance and pay for investments separately, but some people like to have everything rolled into one and do away with the hassle, so I can see how people might be interested in this product.

Anyway, the main point here is that nothing quite seems attractive at all for locking away your money for so long... or is there?

I have long thought that the Phillip Money Market Fund is one of the best MMFs available on the market. I know there are 3 other ones run by Legg Mason, Schroder and LionGlobal, but I think if I am not wrong, Phillip is just marginally behind LionGlobal while offering much easier access since idle cash in your Phillip account is automatically placed in the Phillip MMF.

However, I think it is rather safe to say that there is a hidden surprise contender with all the money market funds out there now. It is none other than the MMF being offered by NTUC Income through their FlexiCash plan!

The FlexiCash plan is pretty much a straight up money market fund, no withdrawal penalties or anything of that sort, but with 1 extra bonus, they offer Death and TPD insurance of 105% of premiums paid! And finally, they are covered by the SDIC scheme, so you can safely put up to $50,000 in this product with NTUC and know that you will be able to see at least your capital back.

There are only 2 minor issues that I see with this product:

1) Comparing the returns of the money market funds, NTUC is actually just narrowly underperforming Phillip. See their end May factsheets here for NTUC and Phillip.

2) One-off flat processing fee of $20. Since minimum investment amount is $5,000, the $20 fee is effectively 0.4% which is your entire expected returns for 1 year. A larger lump-sum would be more effective.

Conclusion
Personally, I am quite amazed that I managed to uncover this hidden gem! NTUC's MMF is actually quite a decent product (the $20 one-time charge is the only thing keeping it from being AMAZING), but I think the main draw of this product is essentially the "free" insurance coverage.

If you have decided that you want to allocate a portion of your cash into a money market fund, I think that NTUC is offering a very decent product to you to park your cash with them.

Everyone should have some cash holdings with them, regardless of their situation. Other than simple working capital to have smooth cashflows in and out to operate your daily life, the emergency cash money should be tucked away separate from your easily accessible bank accounts to remove temptation, but also to yield higher interest - either in a fixed deposit or a higher yielding instrument such as this one.

Money market returns and basic insurance, what is there not to like about this product?

Nostramoney's Prediction For The Future


Of course, this is silly to begin with. No one can predict the future. If I could, I would be rich and I'll be blogging about how I spend all my money instead, haha! However, this is just an exercise for me to just put down to words some of the thoughts and scenarios that I can imagine happening in the future.

Firstly, I still think that the US markets are in a long grinding topping process, slowly killing the shorts and getting the retail bulls to get more excited. The market looks like a very interesting rising wedge and that is a bearish pattern. Just sayin'.

I think the most ridiculous of the indices is the Russell 2000. The ETF proxy for the Russell 2000 is the IWM by iShares. Now, why do I think it is ridiculous? Well, firstly, it's PE ratio was 30.22 based on end of June figures calculated by iShares. I know it doesn't seem that crazy, but iShares has a weird way of calculating PE ratios: Negative earnings are excluded, and PE ratios over 60 are set at 60. That means that the PE ratio would actually be much lower than what is stated on the iShares website. Well, I went to see what the Wall Street Journal had to say about that. And guess what? PE ratio is 73.84. Yeah, seriously. 73.84. Now, why is it trading as such ridiculous multiple is beyond me, but all I know is that I would not want to be long in that.

The other indices also look very toppy, but I think the best fundamental thesis is with shorting the small caps. When this start getting messy, the first things out of the portfolio are the less safe stocks and the overpriced ones, which now the Russell clearly fulfills. I would think that the Russell 2000 will lead the way down, followed by the rest of the market once people realizes that the game is up.

Q2 GDP is being released on Wednesday and I am very sure that the US is going to fall short of estimates and in fact print a much uglier number than they are expecting. Will Wed be the start of a trend reversal? We will see.

Equities in many markets don't look compelling to me, save for a few. I think China has potential if they can flush out all their nonsense out of the system and start fresh. For those with longer horizons, I think this is quite a compelling place to be allocating capital now.

Bonds seem like a tough bet. Most of the developed world have ridiculously low bond yields, so I think the margin of safety is not very good, although every mother-father-son are saying interest rates will HAVE to go up eventually. I'm not saying that it won't, I am absolutely sure it will, but the question is when? I am in the camp that I think interest rates will continue to stay low - at around the current levels - for at least another 2-3 years until the global economy really has recovered. However, since this is a "when" scenario rather than an "if" scenario, I also do not feel comfortable going long bonds and profiting while the yields drop. Like I said, I think the margin of safety is just not there.

However, I think emerging market bonds are actually a fantastic place to be. I will stalk this space a bit more, but I think I might want to put quite a nice portion of my bond allocation over to this space, where yields are healthy and the margin of safety seems rather reasonable. My EM bonds have been doing well and I am quite pleased so far.

Commodities to me actually seem like the best plays. The precious metals, needless to say, I am accumulating on every major dip. I have a feeling that the precious metals sector will be having a big smash soon. Based on CoT data, Silver went massively long just recently of the previous price spike. We shall see how precious metals go. The fundamentals for the monetary metals has not changed at all, perhaps only to make the thesis stronger as even more time goes by and more money printing has been taking place.

Other commodities are looking especially good. Corn and Soybeans are two of the examples that I have been watching. I just went long on Corn, it really looks so depressed. The best thing about commodities is that you know that the goods cant really go to zero, they have an intrinsic value.

I think the Singapore property market is very telling, showing signs of weak available credit and the greed of many "flippers" will be tested now as prices slowly head lower. All signs point towards a deeper correction in housing prices. I still maintain my thesis that Q4 2015 would probably be a good time to purchase property in Singapore. I am concerned about how we get there though. I think it is very unlikely that the property market will move independently of the stock market here, so that would mean that we should be expecting a market correction soon locally as well.

The current doomsday scenario that I am envisioning is a market correction, a property correction and also a property supply shock hitting the market all at the same time to create the perfect storm for the property market. All those property buyers will have then have no one to rent to (bad economy), as well as having to service their mortgages themselves in a cash-tight market. Ideally then, property owners will be flooding the market and trying to offload their property or else they will be stuck with months of negative cashflows.

Currently, I am shortlisting property that I would be interested in if there really is a market correction soon and it presents a good opportunity to purchase a place. I am considering getting either a 1 or 2 bedroom small condo, which is mainly depending on the place and of course the price. If the correction is not very deep, a well-located 1 bedroom condo would suit me just fine. A nice stepping stone for me to move out from my parent's place. If the correction is deep enough, then a 2 bedroom place would be a cherry on top. I'll have more space and hopefully I will be able to manage to second room, most likely by renting it out, or by maybe even listing it on Airbnb.

Anyway, this is all very hypothetical. However, my current investment strategy is actually taking this view. I am light on equities, with my only exposure being local SGX counters which I think provide me quite a decent margin of safety. Bonds have been outsourced to unit trusts that have had excellent track records. I have gone through their holdings to make sure that toxic holdings are minimal. I have been quite steadily a backer of commodities, but I can find no way to invest long term without incurring too much expenses except for precious metals, so I am no longer increasing my holdings for my diversified commodities. And on top of this, I am squeezing my cash hard to work for me while I continue to build up a sizeable war chest - either to deploy into my first physical property purchase, or to accumulate lots of quality stocks for the long run.

Anyone else wants to take a stab at what the future might hold?

Sunday, July 27, 2014

Why I Do Not Like Index Investing (Against All Conventional Wisdom)

The Cheerful Egg recently wrote a post about the main drawbacks of index investing. He is a HUGE fan of index investing though in case you didn't know, but let me see what points I can draw out from his post. He is trying to point of what is bad about index investing, so you can at least identify what are the bad points about it.

1) The market may not continue rising
2) Stocks may not be the best asset class
3) Everyone starts indexing
4) Lack of discipline to stick with it

His list of drawbacks are not really drawbacks of index investing specifically, they are drawbacks to investing in general. The only specific drawback of index investing that has a direct impact, rather than a secondary impact is point 3 - Everyone starts indexing.

Honestly, is that a problem? Yes, I think it is.

Indexing is the ultimate form of freeloading in a capitalist structure.

Don't believe me? The very same benefits of indexing are all the same benefits of freeloading!

"You don't have to think or spend a lot of money, you follow a simple plan and stick to it no matter what, and then ka-ching, you're rich."

Don't get me wrong, it works. Or shall I say, it has been working. And it probably still will work in the future to come. Which is absolutely why it is no wonder at all that ETFs (which primarily indexes benchmarks) are totally all the rage and have been growing to be an ever bigger monster.

My main points against index investing are:

1) Current indexing style is absolutely insane (market cap weighted)
2) Selling points of indexing fails to prepare the investor of the risks they are taking
3) Introducing weak hands to the world of investing can be more harmful than helpful
4) Everyone starts indexing

I urge anyone who owns an ETF or is a big fan of indexing to read that tiny short article that I posted up, as well as to look for interviews with Rob Arnott with him discussing his RAFI fundamental indices, so that you can know the beast that you are dealing with.

I have an extremely strong dislike for market-cap indices, whereby my dislike of it is all based on academic research as well as prudence and common sense once you break it down. I am not against indexing, it is a cheap and easy way to get diversified. I am however, against the current style of indexing and how it is being promoted as the simple, every-man solution to safely investing in the market (both stock and bond) and making it rich. The gross flaws of market-cap indexing have been masked by the (so far) bigger contributions to overall returns that selecting stocks as an asset class have played.

The Cheerful Egg's counter argument is that indexers give up Alpha, which is true. My concern is not about the Alpha, which all indexers (should) know that they have absolutely none, but it is with the very essence of the Beta itself. If 99% of investors are indexers, then what? Who follows who? I see this as just 3 blind mice.

Just ask yourself, if everybody does indexing and there are billions of dollars in the market just running around and chasing momentum, how can things end well for these investors? There will be a point in time when the current style of indexing will get broken, and I am sure that I will live to see that day happen within my lifetime. Until it is broken though, I will still invest my money, some through indexing, some through other means, but at least I understand what is under the hood of my car, so I will be better able to fix it when it breaks, or to know it is totally trashed and I should move onto my next (investment) vehicle.

What about you? Thoughts on index investing?

Friday, July 25, 2014

Dump Me Your Silver! BUY MOAR!


Headlines read: Silver Tumbles Most In 6 Months.


How lovely is that? Silver dropped 2.8% for the day! I decided to pick some up at roughly USD 20.35.

"MH, that's crazy! You're buying something that just got smashed over 2% on the day! What have you been smoking?"

I always feel slightly insecure when people mock me for my precious metals investments, but I always think about what Jim Rogers consistently repeats on TV every time he talks about investing:

"Didn't your parents teach you about investing? You buy low and you sell high!"

I think as investors, if we had to simplify our art to it's simplest form, that is it. You buy low, and you sell it high. Once you start wrapping your head over what makes something cheap or expensive, you get lots of different dimensions of analysis, but at the end of the day, it really is the basics that matter.

As long as you buy things cheap, and later sell them high, how can you not make money?

I continue to accumulate my holdings through BullionStar. I am hoping for more massive downside pressure, followed by a steep plunge for the final shakeout. I am ready and waiting to deploy capital at every drop along the way, and perhaps request for some physical delivery for my new purchases instead of vaulting them. When the tide turns, it's going to be fast, violent and scare a lot of potential investors from investing after seeing such a big jump. I don't want to face that kind of psychological paralysis. I rather be a year earlier than 1 minute too late. Now, what about you?


Full disclosure: If you enter BullionStar through my site, and you buy anything, I get a small commission.

This is my main source of blog revenue. I prefer this to asking for "donations" because I rather you get something that you want as well, instead of a tip.

Whether you buy at BullionStar directly or enter from my site, the price you pay does not change.

My personal precious metals investments are stored with BullionStar and I pay the same fees as any other regular customer.

Thursday, July 24, 2014

Just some random thoughts while running

(By the way, this is just a random rant of all the thoughts that has been running around in my head while I was running around just now.)

Today, they announced that they are going to change the IPPT system and remove standing broad jump. THANK GOD. Honestly, I used to think I was a very fit individual in my younger days when I could easily do 20+ pull ups, but SBJ always dragged down my score. I am eager to hear more details of this new change when the details are released tomorrow.

Anyway, I have to clear my IPPT by the end of next month, so I decided that instead of sitting at home and watching my trading screen, I might as well go for a run instead. So I did.

While I was on my run, a lot of things ran through my mind.

First, I'm quite surprised how much risk tolerance I have lately. Perhaps it is because I know that my CFD account only is a tiny portion of my assets, but I like to think that I have become more hardened as a trader and I am able to tune out the noise a lot better.

I am pretty glad so far about how much I have been learning and sharing about personal finance and investing in Singapore. Ever since I decided to be part of the Sg Invest Bloggers blogroll, I find myself a lot more aware of the concerns and thoughts of similar and like-minded people. The only thing that I am afraid of is being within an echo-bubble, where all our thoughts and views are similar. However, so far, I can see that all these blog writers are very varied in their style and opinions, so there will never be every person on one side of the boat. I like that an alternative counter opinion can be found if looked for.

While running, I was also thinking about local REITs. Recently my friend shared with me some blog articles about how REITs can be very value destroying, especially if the managers do not deliver and return value to shareholders. I know that this is true, but it is not really an easy and quantifiable thing to measure... or is it?

I've been thinking of creating my own personal analysis checklist for REITs. I mean, I did something similar for the local bank stocks recently, where I researched what are likely to be the most valuable and important metrics to measure different things, and I think it was a good learning experience for me to see that not all stocks are created equally, so it is not easy to just apply a standard cookie-cutter screener to look for stocks. Different industries will have different kind of profiles, such as a consistently heavier debt ratio, or tight gross margins, or whatever.

Sure, there can be a simple stock screening metric to look for extremes. Value, Quality, Yield and Financial Strength are 4 things that I have previously talked about. I think that can be very roughly applied to all stocks to look for suspicious behaviour. However, if you use it as the iron fist decision making tool, most likely you would end up with a bunch of stocks of similar style and within the same industry.

Now, when I am thinking about REITs, I want to specifically tune out all the noise from the rest of the market and just focus on REITs. What are the useful metrics that are easily measurable for a retail investor like me? How many metrics should I have and what information do I want the metrics and their results to tell me?

I am currently reading the book, Investing In REITs by Ralph Block, and I like to refer to Green Street's pdf release for information and clues about what are the useful metrics when looking at REITs. I am only halfway done with the book and I haven't re-read Green Street's release in a while, so I can't come up with a list yet.

However, in the near future I would like to come up with the metrics that I am, and how I am going to use them. Most likely this would include things such as Management, Valuation, Quality, Financial Strength and Yield as well. I am not too sure on these yet, but hopefully soon I will be.

I hope to be able to slowly extract all the data from at least the past 3 years from all the different REITs so that I can see the evolution of the different metrics and see if future numbers look peculiar or out of place.

REITs talk aside, I also read an interesting post by the Humble Student Of The Markets. He highlighted the fact that HYG-TLT is having a divergence is simply due to an improper comparison of apples to pears. When he uses HYG-IEI we get a much better basis of comparison. I think it is pretty logical and straightforward that this should be the comparison instead of HYG-TLT, but I never really thought about it until he mentioned the fundamental differences in the portfolio's duration. This really makes you think what other blatantly obvious mistakes are we also making that might have an impact on our investment decisions?

I am going to try and finish my REITs book by the end of this weekend, and hopefully I can start on my next book while I write up what I think are the best metrics for REIT investors to zoom in on and look at!

Anyway, that's all for me today. I still have work tomorrow, it's going to be a long day.

Wednesday, July 23, 2014

Time For Some China in your Portfolio?

I just read a post by Chris Kimble. He showed this particular graphs, and I find them quite compelling. The first graph shows a purely technical chart, showing that a bullish breakout pattern is forming after a long coiling phase. If it turns bullish, that is quite a good sign for China stocks.


However, technicals are just technicals. One of the metrics that I like looking at is actually rolling performances over a period. Here, he gave a snapshot of the 5 year performance and compared Shanghai to the S&P500. Horrible -38% total returns after 5 years. That's an awful and terrible bear market that it has been through.


One, fine, statistically it looks good that Shanghai would start gaining soon. What else? Well, I have a picture comparing P/E ratios of many of the different market indices. This is taken from the iFast market valuation report posted on FundSuperMart.


Looking at that chart, only 1 major market today is priced cheaper than Shanghai, and that is Russia. So based on this chart, only Russia, Hong Kong and China actually look like the best places to be precisely because they have been the worst places to be.

Personally, I think it's a pretty contrarian play. I am thinking of watching the indices closely and look for a confirm of that breakout, as well as clearing some classical resistance lines. Depending on how it feels to me, I might then decide to take a position.

My vehicle of choice will be the UOB ETF Shanghai Stock Exchange 50 listed on the SGX. Total expense ratio is 0.45% and the fund's base currency is in SGD. Each share is currently trading at $1.45 as of today's close, but the good news is that 1 lot is only 100 shares. That means minimum purchase is just 100 shares for a total of $145 + brokerage charges. That is an amazing deal for such a low capital outlay!

Current bid-ask spread is 2 cents, which translates to about 1.37%, which is not very good. However, I have seen the spread at 1 cent at many times, which makes it 0.68%. In fact, for stocks priced between $1 and $2, you can trade with half cents too, which means it is technically possible to close a trade at 0.34% spread if you can find someone to make the other trade. Volume is pretty good. I dare say that this ETF is the second best SGD offered ETF in terms of liquidity, after the STI ETF.

I sure wish that SGX could convince and advise their ETF providers to create more similar products that will be good for the market. I am thinking of taking up a few lots if it starts to look good to me.

What do you think about China stocks now? And what vehicle would you use to get exposure in China?

Tough Day for Ackman being Short Herbalife


Now, that is one ugly chart. One would think Herbalife just released some mega awesome earnings report, but oh contraire.

I just finished watching Bill Ackman with presentation live on why Herbalife is fraud and why he thinks they are running the world's biggest and most well managed pyramid scheme.

I like Bill, he's a pretty nice and smart guy. I even watched a video by him somewhere on the web before where he quite nicely explained the basics of investing in a simple yet rather detailed way. I learnt that day how private companies go public and how they raise funds and sell off their ownership. I think the biggest takeaway from me from that presentation, even though he clearly did not mention is, was to be wary when companies are offering an IPO. Unless their proceeds from their IPO is to fund and capitalize on some amazing opportunity, it's not something you want to be a part of. I think that reasoning has governed me quite well.

Anyway, enough with me fan gurlin' over Ackman. Sure, he's smooth talking and good looking, but he has just made himself the biggest target in the financial world. Everyone is out there giving him a nice long squeeze today. Up 15%, ouch.

Is Herbalife a sham? Personally, I don't know and I actually don't give much of a damn because I am not an owner, short-seller or a consumer. I think Bill has built himself a pretty good case against HLF and it really is up to all the victims in the pyramid scheme to realize that it's a scam, or for people in the middle to start getting scared and causing it to collapse from the middle. Either way, I see it unlikely that anything they uncover from the top up will shake this pyramid. It has to be from bottom up, or it has to be some mind blowing irrefutable proof.

While I was taking a piss while listening to his presentation (yes, rather crude, I know), something struck me. If Ackman is right and can cause Herbalife to really collapse, will it also bring the rest of the market to reality to look under the hood of their stocks and cause the next bear market?

Coincidentally, during the Q&A session, one guy rightly pointed out that Enron started the ball rolling for the first bear market of the new millennium while Madoff contributed to the GFC. Will HLF kill this current bull? Only time will tell, but I am hopeful.

I admire Ackman for his persistence and conviction though. He did quote Warren Buffet, although I'm probably going to butcher the quote by remembering it wrong, but it was something like:
Once the tide goes out, then you can see who's been swimming naked.
Personally, I hope he's right about HLF and the stock goes to zero. The worst thing that could happen is that he is right, but short squeezers massively manipulate the market and forces him out of his position so that he couldn't be solvent when it finally does prove him right.

Hang in there Ackman. The best bets are a "when" problem and not an "if" problem. The only problem with being short (and most likely levered) is that you only have so much holding power to wait for the time comes when you're eventually right. Being caught the other direction doesn't have this problem.

Kind of feel like my U.S. indices shorts. I feel ya bro.

Tuesday, July 22, 2014

Just Some Ramblings

Local stocks that are looking good to me are Hafary, Super Group and UOB Kay Hian. Of course, I would like to see even more weakness so that I can pick them up at good prices.

It is tough be patient these days. I am still holding on to my shorts in the US indices. Honestly, the news and the market reactions really don't make sense sometimes. I'm waiting for a clear signal of a trend reversal for me to cut my losses and attempt to short again from a better set-up. The Russell looks weak and ready for a massive short squeeze up. A higher high or high low will spook me so I'm not stuck on the pain train. The NASDAQ, DJIA and S&P looks ready to pay out though, on the downside. The only way my bet will work for me is if they all start heading lower together.

From what I see on the ground and from what I hear, most places around Asia does not seem to be doing well on the surface. Does that mean that things under the surface are even worse?

Waiting around for something to happen is the hardest part of being a trader. It is not so hard if I was an investor that had got in at a cheap price and is just waiting while collecting dividends.

I do smell a market correction soon, but somehow gravity just doesn't seem to be working so well lately.

By the way, does anyone know any cheap and easy way to get exposure into agricultural commodities? I think those look ripe to take a dive in.

[Book Review] The Nature of Risk by David X Martin



Truth be told, this is a razor thin book at just 67 pages. However, I must say that I thoroughly enjoyed this book.

Mr. Martin wrote this book specifically to help people understand the different kinds of risks present in our world, and how different people deal with them. Of course, in his book he tells us a story about how different animals deal with the different risks present in nature. It is supposed to be a reflection of us.

Even though he specifically mentions and links back to different risks with financial examples, the concept of identifying risks and how to deal with them are universal to all disciplines. It could be project management, studies, relationships, whatever! Everything we deal with in life come with their own sets of risks and it is up to us to identify what the risks are and how we deal with them.

This book is the simplest way of explaining the different kinds of risks investors will face in their lifetime. Although it is a small and simple book, this is definitely going to be a book that I will lend to friends or use to explain to people the simple concepts of the different kinds of risk out there.

I would recommend this to anyone that can is able to read through the lines and appreciate the deeper meanings of such a simple story.

Key takeaway: There are always risks to everything. The only thing that we can do is to choose which risks we are willing to take and take measures to manage those risks if they ever get out of control.

Monday, July 21, 2014

Why You Should Get DBS PayLah!


First off, let's me clear. I am a cynic of the DBS consumer banking arm. I find that they are lagging behind the curve in almost every aspect of consumer banking there is - base interest rates, fixed deposits, brokerage fees, credit cards.... there are probably more problems I can fault them for, but I don't want to spend my time and energy thinking about their products that I will NOT be using.

BUT TO BE FAIR, I must say that this PayLah! mobile payment app is pretty amazing.


They are currently running a promotion that the first 500 people to register for DBS PayLah! daily will get $5 in their PayLah! wallet.

Basically, PayLah! is the exclusive DBS solution for an e-wallet and a quick solution to transfer small amounts of money between people. Current competitors in the market are Dash by Standard Chartered and OCBC Pay Anyone.

See PayLah! in Action
Just as it happens to be, last Friday I went out with a group of friends and I ended up with the bill at the end of the night. No biggie though, I charged the bill to my OCBC Frank Card and now I'm pretty much done with my spending for the month to get my bonus interest and rebates, haha!

Of course, collecting the money is always never an easy task. The next day I calculated everyone's share and told them my bank details. Only 1 person out of 7 paid me back, haha.

However, today I decided to try PayLah! just for the heck of it and see how convenient it really is, and whether this $5 is really a big gimmick or not. To my surprise the registration process was a breeze and I managed to register within a few minutes. The best part? Immediately after registering, I sent my free $5 straight to my DBS savings account!

Now, I was thoroughly impressed by how fast and easy it was to register and claim the free $5 from PayLah! I told all my friends about this $5 promotion, and guess what? Within 2 hours later, 3 people immediately registered for it and paid me back!

Conclusion
PayLah! isn't a gimmick, and it really is quite fast, easy and convenient. I am surprised myself to say that this new innovation by DBS has got me really impressed.

The registration process was fast and easy, the user interface is clean and intuitive and finally, it does what it is supposed to do - make it easier for your friends to send you money.

The best part about DBS PayLah! is that you can set your PayLah! wallet to automatically send any money that you receive to go directly into your designated bank account. Of course, this means that if you want to send money to someone else through PayLah!, you will have a small hassle of downloading money to your PayLah! wallet and sending it off. I think it is a small inconvenience to bear knowing that money sent to you sleeps peacefully in your bank account rather than your PayLah! wallet!

Most likely, I will now be less likely to want to run away from the bill, since I can now force most of my friends to immediately send me money, haha! Or perhaps I won't have to force them to do it, since it really is quite a simple task once you've done it a few times.

Unlike OCBC Pay Anyone, you do not have to remember your account details because it is already noted during registration. The downside is that OCBC Pay Anyone can send money to anyone who is a client from any bank, and the recipient does not need an app. DBS PayLah! requires you to have the app.

SCB's Dash is offering $10, but it looks to me that it does not seem to be attracting many curious bites. The registration process includes a savings account, so the process becomes a lot more tedious. The initial energy to overcome inertia is too much, so even the $10 is not that enticing. No one I know uses Dash as well, so I think they have to be more aggressive with their marketing to reach a sustainable critical mass to compete with DBS PayLah!

Evaluating Bank Stocks (First Try)

Of course, there are the 3 local stalwarts in Singapore, which are DBS, OCBC and UOB.However, I also want to compare the smaller banks as well, such as Hong Leong Finance, Singapura Finance and Sing Investments and Finance. (clicking on the links would bring you to their annual reports)

I know that bank stocks are not really like normal stocks, and therefore they cannot be valued in the same way. After googling around and looking for what are the common metrics that people use, I made a list of them and trawled through their annual reports to pluck out all the data. I have to admit, it was rather easy to find and pluck out the data, almost no calculations was necessary.

I used FT to calculate their P/E and P/B ratios and pebbles to get their dividend yield for 2013. Not the most scientific and accurate way, but I'm lazy to calculate dividends as of now.

And in the end, here is the table that I got:


From the 3 stalwarts of the left, we can see that there is a clear difference from the 3 chilli-padis on the right. The stalwarts are on the whole much better looking fundamentally compared to the 3 chilli-padis.

Between the 3 stalwarts, I would dare to say that OCBC looks the best to me. If I had to only own 1 bank stock, it would be OCBC. Funny how it is also the local bank that I do most of my banking with. A clear case of personal experience directing me to the best company?

That might also be the case, because I still use DBS and I have no connections with UOB. As based on the table, UOB looks the most richly valued by the market now compared to the other 2, who are almost neck and neck, but with DBS winning marginally based on valuations.

Between the 3 chilli-padis I think Sing Fin & Invest looks the best to me. Not only is it the cheapest based on valuation, but it also seems the safest in terms of risks to the banking system. Hong Leong looks more squeezed based on interest margins, but it seems healthier in terms of risk and valuation, which puts it in second place for the little league competition. Unfortunately, Singapura Finance looks quite shakey to me.

Not the best way of evaluation, but I think it paints a decent picture of the 6 stocks as of today. Any recommendations for other useful metrics to include that would be meaningful?

Friday, July 18, 2014

Is the New I-REIT IPO for U? Not For Me.

Simply, I don't think that it is right for me, and I will proceed to explain why.

A recent article by Finance Asia yesterday released plenty of information regarding the details of the new I-REIT IPO that is due to list on the SGX early next month. Institutional orders are coming in until the end of the month, followed by the retail segment, and then it goes live.

The article itself does miss out quite a bit of information, but going slightly back, they did post a previous article covering quite a fair bit of useful information about I-REIT.

Summary of the facts:
  • $400 mil SGD market cap
  • Assets are 4 office blocks in 4 German cities (Munich, Bonn, Darmstadt and Munster)
  • Gearing is 33%
  • 40% of the shares sold to the public
  • 60% of the shares to their strategic investor, Shanghai Summit Holings
  • Sponsor retains 35% in the REIT management 
  • Strategic investor is locked in 100% for first 6 months, and 50% for the next 6 months
  • First Right of Refusal (FROR) from both its sponsor and strategic investor

Those are the facts regarding the REIT. Comparatively to other REITs available locally, the yield for an office building is very attractive and they have big tenants with long leases, which I think is good. Also, this is the first REIT that gives a pure-play exposure to European properties.

However, I am slightly taken aback by this IPO. When a company goes IPO, it is usually because it is strategically the best time for them to sell off their assets, which in this case are the 4 office buildings in question. So, although the IPO price seems fair valued now, it may be only so because we are comparing the value now to commercial property prices in Germany (which may be "optimistic").

The questions we must ask ourselves are these: Is German commercial property expensive now, or is it cheap? It this IPO at the peak of a property cycle or the trough? 

With that, I refer to an official statistics website that track property prices, and that is the Deutsche Bundesbank on commercial property prices, their German Property Index (GPI). And here is their graph below.


Commercial property prices have been on a tear, steadily going up without much hiccups. What goes up, must come down?

Based on this report just 2 days ago, I think the consensus may already be out there. The report is based on the actual pdf report released earlier by the research company (found here), and even the title does not look like good news. "GPI Forecast Signals Market Slowdown"

The report said that total returns from German property has likely peaked last year in 2013, and they are forecasting lower total returns in the future. The lower total returns is a function of largely dividends and no capital gains growth.


The graph above shows the Y-o-Y total return of German real estate since back to the mid-90s and their forecast of the future shaded in grey. The Office segment is predicted to be the worse performing segment, with all 3 other segments of Residential, Industrial and Retail outperforming Office.

Essentially, they are forecasting returns only from dividends, and zero capital gains growth. Now, look at the first chart again. Do you see any periods of flat horizontal lines when capital prices remained constant? No, neither do I. If it is not going up, it is going down. Very few things go sideways. I think that the report by the German research team might be a bit too optimistic regarding the future returns of German property.

*of course, these are the views of a research team. The economy relies on economic forecasts, just like how the weather relies on weather forecasts. They don't.

Regardless, it is my personal view from a macro perspective, that foraying into the unknown, uncharted and unfamiliar land of German office properties is equally exciting, as it is risky. Nothing goes up forever, and I do think that the odds are in my favour that we instead see at least a stall in property prices, if not an outright fall in prices. Either way, it gives me plenty of time to wait and see how it pans outs before deciding to go in.

From a micro perspective, I think that the underlying assets are small and undiversified. I would feel a lot more comfortable if there was more assets of varying types and in more locations. Locking up the strategic investor would help with its price stability in the short run. But after 6 months or 1 year, what would happen? Things might get a lot more rocky. I think a telling sign of what can be expected in the medium term of this REIT can be subtly inferred by monitoring the actions of the strategic investor after the 6 month and 1 year period. That is yet another reason to hold the horses.

However, I do think that with the above average yields projected, investors are provided with a buffer of safety, even if the unit price does fall. If you aren't hung up about the short or medium term and are really in it for the long haul and the income yield, then now would be a good as ever.

I am taking a step back from this situation and looking at it from a big picture perspective. With the current situation set up as such, this does not seem like a great opportunity for me. I am willing to take my chances with a REIT like this, but not with all the headwinds that it will have to potentially deal with. I will be sitting this IPO out and instead watch it from the sidelines and periodically reassess opportunities in it.

What do you think? Will you be applying for this IPO and why? I would love to hear your thoughts.

Thursday, July 17, 2014

Different Brokers, Different Uses

As a Singaporean living in Singapore, I must admit that there are a really wide range of financial institutions, which in turn provide many financial products and services.

This can be a good thing, but it can also be a bad thing. With the range of options to choose from, it is easier to find things that more specifically meet your requirements. However, I realized that for most people, a variety of options instead induces fear and paralysis of choice.

That aside, I am quite proud of myself for being gung-ho and heading straight into the barrage of offers, promotions and products throw at me by the general media and advertising. Rather than just sit down and wait for something to happen (something WON'T happen), I decided to systematically sort through all the noise and fish out exactly what I need.

So, I'll be sharing what I personally use for each of my financial goals. It is a good exercise also for me to re-evaluate pledging my loyalty and business to them.

Traditional Bank Services: Currently I use OCBC for all my general daily banking needs. Their interface is nice and sleek, though I have to admit it is sluggish at times. They offer everything that I need from a basic bank, which is just a custodian of my money and providing me with easy access to move my money around. This is my command centre where all my inflows enter into, before I decide to shuffle them around for different purposes. I do have DBS account, but I am neglecting it, just leaving a nominal token sum since they do have the best ATM network.

Buying Unit Trust: Hands down, Phillip has got to be the best. On top of having a huge variety of funds, their sales charge is only 0.75%. It gets even better! Many times there are promotions which offer 0% sales charge, which is just crazy! If you don't want to pick individual securities and instead have a more hands-off, long-term view to investing, I would strongly recommending look at the different funds of asset classes that Phillip offers to help you to do that.

Buying Local Stocks: Standard Chartered Bank wins in this department hands down. With their ridiculously low brokerage charges (0.25%) and no minimum commission, it is nigh impossible for any other broker to even compete with them in the local scene. The fact that they don't have a minimum commission allows me to buy small lots of small-cap and mid-cap stocks without worrying about an overweight allocation or expensive brokerage charges. Many of these names are also thinly traded and illiquid, so the ability to trade in small lots without worry is just fantastic.

Buying Overseas Stocks: I have to disclaim that I have not bought any overseas stocks yet. I am a real hater of the having unmanaged currency risks introduced to my portfolio. However, I already concluded that DBS would be my choice if I was going to purchase stocks or ETFs overseas. I did a small review here. The main reason for this is the transparency and low FX conversion costs offered by DBS.

Buying Preferences Shares and Bonds: Again, I have to disclaim that I have not bought any of these instruments yet. Unfortunately for Standard Chartered, they online equity trading platform really is only restricted to equities. Therefore, I think that the next best option is still DBS.

Speculative CFD: I personally use CMC Markets. Other people use Oanda or IG, which I can't personally speak for, but I have heard good things about them. For CMC, think that their platform is very nice and sleek, with quite a lot of options to make personal customization. It is nice that they also have a mobile app. I think the best thing about them is that their customer service is speedy and fast, as well as crediting in money. It usually takes within a few hours from transfer to credit money to your account, which makes sure that you don't miss out on too many opportunities.

Precious Metals: I find that BullionStar is great and I really enjoy their service. I wrote a full review about them in a post here.

So far, I am very pleased with how I am managing my finances with all the different financial institutions providing me with different services based on their advantages. Any suggestions or improvements for me to make?

Wednesday, July 16, 2014

Some Fresh Long Ideas For July

It's been a while since I've posted on some of the stocks that I have been stalking, so I thought now might be a good time to look at things and see how the market is doing. The STI itself seems lofty, as with many other stocks, but the index is not representative of the whole stock market universe in Singapore. If you look hard enough, there should always usually be something promising lying around unloved (for now).

CSE Global: Looking ready for a pull back soon hopefully. $0.58 would be a nice area I would consider buying at. 5% dividend yield, not bad.

Low Keng Huat: If LKH heads down again, $0.65 could be a support that I find enticing. 4.6% yields at that price is quite decent.

UOB Kay Hian: Seems to be basing out, I'll consider at $1.61 which would be looking at 4% dividend yield.

SPH: Not yet quite ripe, but I can reasonably see it slide under $4, and that might seem like a good area to buy. I don't think I can spare the capital to do that though. Yields of about 3.5% seems pretty enticing though.

In general, I think the majority of the stocks on the SGX will be due for a nice sustained pullback in the next few weeks. I am still awaiting a good entry point to initiate longer term longs.

On a side note, I have picked up Singapore Shipping Corp. A bird on the street told me it would be a good long term buy and a decent place to park my capital while I wait for opportunities. Support looks to be at $0.22, which represents a maximum of 17% downside from here, but I find that quite unlikely. I will be looking forward to about 3.7% of dividends for sitting on it and waiting. This is my first stock buy which is not a net-net value buy because I realized that I don't really have a good style mix. Anyway, this is just a test with a small amount of capital, we shall if it turns out well!

Tuesday, July 15, 2014

Blue Chips At Cheap(er) Prices?

Even though I have been investing for quite some time, I have been a more macro guy, going with asset allocation and global trends (using unit trusts with a medium term buy-and-hold mentality) rather than focus on individual stock securities. However, in the past few weeks, I have warmed up much more to stocks, so I've been having a look around.

Today I realized that there are 2 counters that were of particular interest to me. They were SIA 200 and Singtel 10. What do the numbers behind them mean?

Well, SIA 200 means that you can buy shares of SIA in batches of 200 shares, instead of a standard lot of 1,000 shares.

Same thing for Singtel 10, you can buy shares of Singtel in batches of 10 shares, instead of the usual 1,000.

Now, don't get me wrong, when I said cheaper, I meant less total capital outlay. SIA current traded at $10.52 at the end of today. A standard 1,000 share lot would cost an investor a massive $10,520 investment! Conversely, if an investor decided to buy the SIA 200 instead, his capital investment would only be $2,104!

Same thing for Singtel. Singtel currently traded at $3.91 at the end of today. That means a standard lot would cost $3,910 to an investor. Trading the Singtel 10 would only require a minimum investment of $39.10!

This is exactly almost the same thing as the SPDR STI ETF and the newer Nikko AM STI ETF 100. Capital outlay for the Nikko AM version is about 10 times less, so investors with $350 can start investing in a diversified portfolio already!

Pros
Lower capital investments
Less emotional committment
Easier to tweak investment amounts (less lumpy investments)

Cons
"Liquidity risk"

The reason why I said "liquidity risk" instead of just plain liquidity risk is because it is actually quite subjective. Singtel 10 usually trades with a minimum daily volume of about 20,000. That is equivalent to $60,000. Of course, that is just a tiny drop in the ocean which is Singtel itself, which moved $63 million today.

SIA 200 is not as rosy, but $20,000 did change hands today, which represents about 20 trades today. Usual volume seems to be around 10 trades a day. Definitely not as big of a pool as people might expect.

Nikko 100 is likely the worst in terms of volume. Today's volume was 6.6k, which represents just $20,000 as well. For an ETF with 37 million units running around, you might expect it to be more liquid. It's SPDR competitor with the standard 1 lot requirement is only 4 times bigger, but seems to command a lot more liquidity.

Summary
Personally, I think that these instruments are great. They allow the small investors to slowly participate in the stock market without having to fork out such a large sum of money. I think that the Nikko 100 is just an amazing tool which more people should consider and look at as an investment tool.

Although I cannot say about the fundamentals of both Singtel or SIA, I think just having a reasonable level of accessibility to them has made me more open to the idea of investing an amount with them. Most likely it would be with the Singtel 10, since the SIA 200 still seems too "lumpy" for my portfolio since it is still small. Perhaps when my portfolio grows to be $50k or bigger, I could consider some of SIA.

On a final note, these smaller lot trades are ONLY feasible if you have a Standard Chartered account, where there is no minimum commission. Don't even think of investing small amounts if you do not have a Standard Chartered account!

What do you guys think? Have you invested any of these counters I mentioned?

Monday, July 14, 2014

Precious Metals Smashed Down 2.5%: MY VERSION OF THE GREAT SINGAPORE SALE!



AMAZING! In the past 15 hours or so since the market opened from the weekend, both Gold and Silver has been steadily declining until about just a few hours ago where they have gotten monkey hammered so bad!

Both Gold and Silver and down about 2.5%, which is a massive down move for 1 day. This has been the biggest 1 day drop in the metals since Dec 2013.

Ironically, while I was watching the price plunge lower and lower, I was listening to a podcast by Barry Ritholtz and Jeff Gundlach and there was talking about gold and gold miners, about how their sentiment has been so bad in the recent few years. I have MASSIVE respect for Mr. Gundlach.

Earlier in the afternoon, I was a bit happy to see prices drop - things I like are getting even cheaper! So I went to take a small little position. I have been restraining myself from buying all the mini-dips on the hourly charts because I smelt a bigger move in the daily cycle coming along to knock gold down. I must admit, I did not think that it would be so massive and deep. A $30 USD drop in gold in a single day is rather significant!

From what I hear, it is because of massive futures dumping. The notational amounts was $1,370,000,000 USD. Yup. $1.37 Billion USD worth of gold contracts dumped. Now, in ounces, thats about maybe a million ounces! Oh well, if people are selling, then I guess I am the poor sucker buying.

I took a significant position and managed to get in and buy gold at $1303.60 USD, which is pretty much as close as it was to the low-of-the-day as of currently. Can gold go lower? Sure, of course it can. What would I do? I guess I would probably double down my holdings!

Probably many people are confused with my conviction to gold and silver. I'm not a "prepper" or some crazy person, but I do have my reasons behind my thought process of accumulating these assets. It is a mix of sentiment, fundamentals, history and also prudence. I think the main things that have made me even more appreciative of gold is a presentation by Santiago Capital and a report by Incrementum Liechtenstein which I have so painstakingly added here below.





Since 1971 when all currencies became fiat, a whole generation of investors have been brought up overlooking the function and importance of both Gold and Silver as investments. Many people don't even have the faintest clue about what are the drivers of pricing in these markets, and I don't blame them. I have devoured so much information, yet I think I have barely skimmed the surface and I surely don't have the entire picture nailed down. But from the bits I do know, I am quite convinced.

As Brent Johnson mentioned in his presentation, I am owning precious metals mainly for wealth insurance. Sure, my portfolio suffers a minor performance drag by not being fully invested in "productive" assets, but I honestly really sleep a lot better at night. My physical gold and silver holdings are with BullionStar, and I urge anyone interested in a low-cost way of investing in the physical precious metals to check them out and their Vault Gram product. Maybe a 1 oz Gold coin is too expensive for you to invest in, but surely you can spend less than a dollar to get a gram of Silver?

I'm not saying that the sky is falling down (though it just so happens that my mix of assets would strongly appreciate in those circumstances). I am also not saying to convert your whole portfolio to precious metals and wear a tin foil hat and hope for the world to come crashing down. I am merely saying that there are certain (tail-end) risks in the market, and perhaps you should consider some of these risks and how your portfolio would hold up in such scenarios, that's all.

I have done it, and like I said, I sleep very well at night.


Full disclosure: If you enter BullionStar through my site, and you buy anything, I get a small commission.

This is my main source of blog revenue. I prefer this to asking for "donations" because I rather you get something that you want as well, instead of a tip.

Whether you buy at BullionStar directly or enter from my site, the price you pay does not change.

My personal precious metals investments are stored with BullionStar and I pay the same fees as any other regular customer.

Sunday, July 13, 2014

Investing In Myself



Cost of books: $143.60

Cost of shipping back books: $37.79

Value of knowledge gained: Priceless

Okay. so that feels like a cheesy commercial rip-off from MasterCard. I just wanted to let people know that I went to Amazon and purchased a few books from there! I ordered them from Amazon and I got it shipped back by vPost, it only took about 2 weeks for it to arrive after ordering!

I spent about 2 weeks reading up about book reviews for personal finance and investing, and after going through a massive amount of a choices, I narrowed down my choices to just these few books. Sure, there are a ton of "must-read" books out there, but I think that after already reading some of the basics (of course, Ben Graham), I wanted to learn specialised knowledge on certain topics. Hence, I decided NOT to get all the typical books that tell you the plain conventional wisdom over and over again.

Why don't I just read about information I want to know online? I already do! But I want to be specialized in a few topics and know them also from the perspective of experts in the real world. An article does not give you the similar kind of depth of knowledge, and also does not give you a feel of the important points that an author is trying to stress. Reading it in a book, it is usually easier to spot the emphasis.

Why don't I just buy and read the e-book instead? Well, I know that quite a few of these books should be coming with graphs and tables, and I have encountered layout problems when reading them in the e-book form. In that sense, I prefer to only read storybooks with my Kindle!

Why don't I just go to a local store and buy the books there? That did cross my mind, and I did check out some of the local stores, but honestly, the range of titles were not good and the prices weren't good either. The REIT book alone would've cost $50!

Over the next few weeks, I will slowly devour each book and write a small review of the book, as well as my personal takeaways from the book. At the end of the day, I hope I can slowly collect a good range of books that are timeless classics, which I can point friends towards if they seek sound financial advice.

Will this be a good $180 investment in myself? Only time will tell!

With that, I will end of with a quote before I head back to my books!
"It is what you read when you don't have to, that determines what you will be when you can't help it" - Oscar Wilde

All About EV/EBITDA Today

I'm going to make this a short post for today, since I just received a nice big shipment of books that I bought from Amazon and I am excited to read them all! I will probably write a post later tonight or tomorrow and show all the books that I bought, which would be the book reviews that I will be writing in the future!

But for today, I want to just mention about EV/EBITDA. What is EV/EBITDA? Well, this article gives a good short summary about what it is.

I like to simplify the way of explaining EV/EBITDA to people. If you don't want to know how to calculate or what it means, all you have to know is that it is the improved P/E ratio.

P/E ratios are one of the most common ratios used today in the financial world. I personally have used it as a metric, but I have come to realized that EV/EBITDA is a much better metric, which much better implications. Replacing P/E with EV/EBITDA improves the quality of your stock screening regarding valuation.

This article shows the difference in using the different valuation methods, which I think is quite a good and fair example of why EV/EBITDA is a better metric to use. Interestingly though, they recommend using P/CI for evaluating financial companies. I have to do more research about this. Of course, in the ideal world, we would have have ONE single awesome metric that tells us to buy and sell, but alas, investing is not so easy.

Since my previous post about me thinking of better ways of stock picking (part 1) and (part 2), I have been reading and thinking about what are good and useful valuation metrics that can be used. I will have to think about quality and financial strength. Shareholder yield is quite straightforward, with only 2 variants - including debt repayment or not. I would prefer to include debt repayment since it would be more comprehensive.

For the real hard-core, here is a good reading about why EV/EBITDA matters (and doesn't) depending on your investing style. I'm not too sure if I agree with the author that EV/EBITDA doesn't matter if you're buying and holding, because he doesn't make it clear that buying purely based on low EV/EBITDA can cause you to own plenty of value traps.

What valuation metric do you use in your analysis and why? If not, why don't you use valuation metrics at all? Valuation helps us realize when things are cheap (time to buy) and when things are expensive (time to sell), and I think that they should be one of the most important inclusions in considering an investment.

Saturday, July 12, 2014

The Best Recession Indicator is Broken?

So, what do you know about the yield curve?

I just read an interesting article by the Acting Man about "The Yield Curve and Recessions". As the title suggests, when a yield curve inversion happens, usually recessions will occur.

A yield curve inversion happens when the interest rates for the shorter duration bonds becomes higher than the interest rates for the longer duration bonds.

I think this video sums it up quite well. I wrote about it in a previous post too.



Here are some quick links to yield curve graphs that she mentioned in the video.


I just want to pull out and highlight a particular thing that she said, which I now find a bit strange after reading the Acting Man's article.

4.02: "Where are we are right now, we are actually on a very steep curve. So there is no threat to the stock market right now from the bond market."

Really now? We are quite safe? Well, as the Acting Man points out, maybe not so. Look at this chart from Japan.


With weird and unconventional monetary policies, you can see how broken this traditional indicator is. In case you're wondering, before the Fed in the US decided to engage in ZIRP, the yield curve inversion predicted a recession 7 out of 7 times. We might as well take it is a given if it's so damn accurate!

Anyway, my whole point of this post is this: With the Fed keeping short term interest rates near zero through policy, the bond market is not a free market and it will not give us the usual recession signal. As shown by Japan, you do NOT need a yield curve inversion to have a recession. But if you do have one, well, you're still probably going to have a recession.

Stay safe out there, things are looking messy! Return of capital is more important than return on capital!

Friday, July 11, 2014

Lessons from Every Investment Discipline

Ben Carlson just wrote an interesting piece, titled above. In it, he took the best lessons that he found from each investment discipline and adapted it to how it can be used for all types of investors, whether you believe and use that discipline.

"...each form of investing has lessons that can be used regardless of how you choose to invest.
While I think there are certain investment strategies that increase your probability for success, different styles suit different personality types. And if you think about it, if every investor used the same exact process the markets wouldn’t function very well.
Even if you don’t use or agree with other investment philosophies, each one has characteristics that can be applied to anyone’s portfolio no matter how its structured.
What follows are some of the most well-known investment disciplines along with a lesson or two from each that every investor should be able to use in their own strategy.
Focused Value Investing: Buying stocks that are underpriced in relation to their intrinsic value.
Lesson(s): It’s important to invest from the perspective that stocks represent an ownership interest in a business. You get your share of corporate profits from the stocks you own and over the long-term the value of the business should be reflected in the stock price.
Quantitative Investing: Using a systematic, mathematical approach to make buy and sell decisions within a portfolio.
Lesson(s): A rules-based, objective approach to investing is a great way to take out the emotions which can trip up so many investors and introduce biases into the investment process. Automating good decisions can reduce costly mistakes.
Technical Analysis: Studying charts, past prices and volume for security and market analysis by using patterns.
Lesson(s): An understanding of the history of the financial markets is extremely important to be able to define your tolerance for risk and gain the correct perspective on what couldhappen in terms of gains and losses. And at the end of the day markets rise and fall because of supply and demand.
Index Investing: Owning the entire market/index at a low cost.
Lesson(s): Beating the market is hard. Keeping your expenses, activity and turnover to a minimum is a prudent way to earn your fair share of the market’s return over time.
Asset Allocation: Investing in a diverse set of asset classes, markets and sub-strategies within each asset class through different portfolio tilts.
Lesson(s): It’s impossible to predict the best performing asset class over shorter time frames so it makes sense to diversify, own them all and periodically rebalance by selling some of your winners and buying some of your losers.
Trend Following: Using the direction of the markets to make buy or sell decisions by entering when an uptrend is established and exiting when that trend is broken.
Lesson(s): There will always be a market, sector or asset class that is performing well and some that are performing poorly. Also, risk management is one of the keys to your long-term survival in the markets.
Risk Parity: Ray Dalio’s diversified approach of allocating investments by risk (defined as volatility) to account for different economic scenarios.
Lesson(s): It’s impossible to predict which type of environment we will be in with regards to growth, inflation and interest rates so it makes sense to own different investments that each perform well depending on the economic situation.
Trading: Making short-term bets on the direction of the markets and individual securities.
Lesson(s): Defining your threshold for for losses helps set the proper expectations for downside performance (most traders set acceptable levels of loss in their holdings). Plus, an understanding of the fact that markets can be extremely volatile, as traders try to take advantage of short-term volatility, is something every investor must be aware of to keep their composure.
- Ben Carlson"
Anyway, this is just some quite general and reasonable thinking that most investors can apply to their investment philosophy. Buy low, sell high. Diversify for safety. Don't be emotional. History gives guidance.

Good luck out there guys.

Thursday, July 10, 2014

Measuring Quality?

Some people use Return on Equity (ROE), others use Return on Invested Capital (ROIC) and there are still tons more of different metrics to use to measure "quality" in a company.

First, Quality as understood by me is not the financial strength or value of a company. Many people relate Quality to the balance sheet and solvency of a company. I see Quality as the ability of the company to generate large and consistent earnings. A good quality company is able to sell products with high margins.

To simplify is, Quality is the overall demand and price premium associated with its product.

Anyway, here are some interesting things about Quality that I found surfing the net.

Fidelity used ROA to measure Quality, while they acknowledge ROE and ROIC and alternative metrics as well. Their conclusion is that a quality-value metric is superior to either metric used alone.

Robert Novy-Marx wrote an interesting paper called "Value Investing". If you don't have the stomach and willpower to read the paper, that's okay. Greenbackd wrote a fantastic summary piece of it that recaps the basic message of the original paper - adding in quality helps value metrics.

The hardcore may want to read another paper written by Robert Novy-Marx called "The Quality Dimension of Value Investing". In it, he breaks down and elaborates further about adding the quality factor and the rationale for using Gross Profitability %. The Gross Profitability seems to be a very good measure of quality, despite it's simple calculation being (Revenue - COGS)/Total Assets.

The graphs, tables and results are really quite remarkable. I don't know about you, but I am definitely now a much bigger fan of incorporating such metrics into my stock selection toolkit.