Friday, November 28, 2014

How to begin learning stocks from SCRATCH

Just had a meet up with someone new to investing. I totally understand how hard it is to read up all the jargons and finance related stuff when I started long time ago. It's like this big mountain of jargons in front of you, and in order to hold an intelligent conversation, you first have to learn the language and what those terms mean. That's one of the main purpose of this blog - to help newbies go through this path that I once walked alone.

The very first thing I did was to print out all those investing basic articles from investopedia. They changed their site, and I'm not used to it, so had a little bit of difficult finding the articles that I wanted to read. This is what I'll read first:

1. Stocks Basics: Introduction

Basically these are just very basic things like what are stocks, what's a bull and a bear, and how to buy and sell stocks.

2. Investing 101: Introduction

Here, we go deeper into the different types of investment vehicles, the concept of compounding and portfolio diversification

3. Introduction to Stock Trader Types 

You'll learn about different kind of market participant (they call it trader here). Generally you can break up into two branches - Technical analysis (TA) and Fundamental analysis (FA). There's a lot of sub groups under these two categories...good to know about them.

4. Fundamental analysis

Here you'll learn about the terminology of FA. To really do well, you need to learn the language of business, which is accounting. So here's a few branch off from Fundamental analysis:

A. Accounting

We're not trying to be accountants, but we have to know enough to be able to derive useful information from the financial statements of a company. I'll pay attention to the 3 statements - cash flow statements, income statements and balance sheet and how they interact with each other.

B. Value investing

What's this about? The most famous follower of value investing, Warren Buffett, made this method both highly lucrative and difficult to follow. He's not really a true value investor, but let's just say he is at this point in time. Benjamin Graham is the father of value investing. Don't you want to find out how Buffett make his fortune using this methodology?

Update: 16-Dec-2014

Here's a very good video site by BuffettsBooks. It shows you several videos in a very structured course, guiding your through stocks, bonds, and the various financial ratios and a bit of accountings. From the namesake, this is slightly biased towards fundamental analysis, specifically Warren Buffett's 'way' (he never actually declared his method).

5. How to start trading

This is for the other big umbrella under TA. It's a little bit more detailed about the different kinds of traders. They participate in the market in ways that are vastly different from those from the FA side.

Important downloads (free!):

If you're interested in charts (basically TA requires you to read charts and draw squiggly lines in it), there's a free chart program (but have data for past 1 yr free only) called chartnexus that I've been using since forever. You can get it here.

6. Financial concepts

Still around? Haha, then it's time to re-look in a little bit more detail on some financial concepts like risk/return, diversification, dollar cost averaging, asset allocation etc..This is the big picture view of your portfolio, whereas how you construct your portfolio is based on whether you're more from the FA or TA side.

Read and read and read and read. Or you can always lose $ and learn the hard way.

Alright, if you've survived all the reading, then it's time to get real dirty! You can start reading up on proper books on the 3 separate themes: Accounting, FA and TA. Only the first theme (accounting), you can just read enough to understand what you need to know. For the FA and TA themes, you probably need a few years (hopefully not inclusive of a few $xx,xxx of 'tuition' fees) to form your own opinion and your preferred methodology. I've written a post on the recommended reading list here so I won't repeat it again. But I found that all these books are catered to the US market, so some of the things are not relevant here. That's why there's always a need to contextualise some stuff here.

So here's my sites to read:

1. Bullythebear newbie's FAQ (if the links failed, here's another one straight from my blog, here)

2. SIAS Beginner's guide to investing

You probably want to revisit some of the things you've read. If neither FA or TA interest you because you really can't be bothered with investing and would very much prefer to have a life instead of reading all these stuff, you can read 1, 2, 6 and go straight to this:

7. Exchange traded funds 

Most unit trusts and personal portfolio try to beat the market returns. By that, they usually benchmark themselves with STI (for our case) or DJ / SP500. You can buy the overall market instead of trying to beat it, so here's some info regarding ETFs. This is a passive kind of investing. Read up a bit more about dollar cost averaging (google it if you forgot what that means) and you can heck care about all these funny terminologies for good. Just put in a sum every now and then and get market returns. Minimum effort from your side.

Okay great, once you've done reading up all these stuff, you're at Primary 1 of the great stock market education. Sit for your PSLE, then O'lvls, then A'lvls, then degree, then masters, and finally pHd. Good luck and most importantly, work hard at your craft!

(Don't berate me for oversimplifying's necessary to see the big picture here and understand that there's a lot of stuff to read and understand and you'll have to start from someone. This is at best a guide to start somewhere, nothing more.)

Thursday, November 27, 2014

I've Zero networth!

I've finally reached zero! But what's the big deal? Zero is not a big deal, right? Well, not if you begin with positive, became negative, and then back to zero again. Reaching zero means you've erased the negative and now you're on a fresh start to begin being positive again.

What am I talking about? It's my net worth!

I still owe HDB $440k now. I halve this to take into account the portion shared by my wife, so that's $220k. The last I've checked, my current networth is $226k.

This is how I calculated my networth. It's just Assets minus Liabilities.

My assets are: (all $226k of it)

1) Whatever I have in wallet, drawers, mattresses, tin cans
2) All my bank accounts combined
3) Money market fund
3) Paypal and other online cash accounts that have some digital cash inside
4) All my investments holdings, marked to market
5) All my whole life policies surrender value
6) All the amount in my CPF (less than 40k overall, which isn't much)

(Take note that I did not include the market value of my HDB flat)

My liabilities are: (all $220k of it)

1) Credit card bills
2) Car loan (left about 5k)
3) And the biggest meanest of them all, HDB loan of 226k after taking into account my wife's 'portion'

And I'm positive by 6k!

Well, actually there's nothing much to shout about, it's just another day actually and I don't even feel particularly happy. It's a milestone that tells me I'm on the right track. Personally, I think cash flow is more important than networth. I can't just throw in all I've got and sell of half my stake of my HDB to my wife and declare myself free, can I? Of course not. So, this is at best one indicator of my financial health.

To borrow from someone, the best has yet to come.

Saturday, November 22, 2014

Low hanging fruits season

POSB is giving another low hanging fruit for us to pick again.

I've blogged about a previous exercise here and here where POSB celebrates National Day with a 1.5% pa bonus if you put in fresh funds for 3 months, up to a cap of 10k. Well, it must have been hugely successful and drawing a lot of new funds for POSB, because they are doing it again with some conditions upsized.

This new exercise that POSB is doing is a little different. It gives 1.5% pa interest for a period of 6 months, up to a cap of 20k. To qualify, you must:

1) Register here by 22nd Dec 2014 (inclusive of that day)

Take note that the sequence is a bit different from the last exercise. In the last one, you have to deposit your funds first THEN register. For the current one, you have to register first, THEN deposit in your fresh funds. So don't screw up!

2) Complete a one time top up by 31st Dec 2014.

Put in fresh funds between $1k to $20k, in multiples of 1k into any existing DBS/POSB bank account by 31st Dec 2014. Do note the definition of 'fresh funds' cannot include those that are transferred intrabank from one DBS/POSB account to another. But the mode of transfer can be through cheque, cashier's order, demand drafts, cash deposit, FAST. For more details, do read the terms and conditions.

3) Maintain top up amount for a period of 6 months.

This is an example quoted in the terms and conditions.

Customer A registers via online through DBS’ website during the Promotion Period and successfully top-up a lump-sum of SGD 20,000 to a CASA by 31 December 2014.

Cash Gift earned by Customer A under the Promotion as follow:
SGD 20,000*1.5%p.a.*181/365 days = SGD 148.77

(Note: 6 months period is from 1 January 2015 to 30 June 2015 = 181 days)

4) Wait to get your 'cash gift', up to a maximum amount of $148.77, which will be transferred to your registered DBS/POSB account between 1st June 2015 to 30th June 2015.

I know it's might not be much, but hey, it's not hard to do this also. I still have 10k locked up until 30th Nov 2014 from the last exercise. I'll see if they are 'smelly' or not by looking at whether they will pay up. By then, I'll still have more than enough time to put in 20k to get this extra interest.

Low hanging fruits? I'll grab it.

Friday, November 21, 2014

The 10 functions of money

What's money good for? From Richard Templar's book, "The Rules of Money", money is good for 10 things. I found the list quite exhaustively, though some points are really be lumped together as a single point. But here it is:

1. Security

I think money provides a huge security for me. I need to have a certain amount in my bank before I can feel safe that I can tide through the month. I also need to save up a certain amount for my future retirement, and also a bit at hand to tide through life's emergency. I guess this is my number 1 priority in wanting to get more. It could be more psychological, I understand.

2. Comfort

Money can't buy everything, but for the things that it can buy, it does it really well. Don't think of just big cars and huge condominiums to stay in, it can also be a comfortable and good medical facilities for your loved ones and a warm bed and food for your children. I realised I don't need too many comfort items, but money does what it's supposed to do - to satisfy those creature needs. Like a really nice bed to sleep in, and a warm and tasty food afterwards, haha

3. Luxuries

I find that this point is the same as point 2, just on a different scale. It can be grouped together as one single point. Fine wines, good meals at top-notch restaurants, a good relaxing holiday overseas, a branded bag etc...these are what money can buy that you may want, but not necessarily need. Still, life is not meant to be survived - it's meant to be lived. So indulge yourself in such things, especially if it creates an experience that you'll remember for a long time.

4. Mobility

The author put first-class trains seats and plane tickets, as well as trips on cruise ships and chauffer driven cars in this point. Hmm, somewhat like point 3 to me as well - good to have but not necessary. For all purpose, I'll treat this as a luxury items. But money does buy you mobility. I've a student whose parents are very very wealthy. She practically flies in and out of Singapore maybe every 2 weeks or so - sometimes as short as a weekend trip, sometimes as long as a month long holiday. It's disruptive to my lessons scheduling, but hey, I can't help but be a little envious when the furthest country I've ever been is Australia on a NS month long war exercise! With enough money, you can book a ship to Antartica (I heard it's about 16k for a month long journey) and even a space flight. Of course, once Richard Branson's company settled the underlying issues with his space shuttles first.

5. Status

Rich people will have different status, that's for sure. You'll get invited to special occasions and exclusive clubs. But these are none of my concerns. However, money does get you special status - I'm just not sure that status will still be there when your money is no longer around. I highly suspect that acquired status will be gone too. This is never my priority in wanting to get more money, but I think some people might see this as quite a motivation.

6. Influence

Money can buy you influence. Influence will get you power. It's a little more subtle than the previous point of money giving you certain status. A lot of powerful rich people get pull enough strings to make even government bend to their request. America history of wall street is full of such people. A few big names comes to mind - Rothschild, Rockefeller, Astor, Vanderbilt and so on.

7. Freedom

This is what most people want to acquire enough money for. Once you have the capital, you get generate enough passive income so that it will exceed or match your expenses, so you won't have to work for money again. Financial freedom - that journey that begins all journey.

8. Leisure

I think this point is tied to the previous point on freedom. With freedom, you will have leisure time, so in effect, your money buys you time instead of paying time to get money in your earlier part of your life. My take is, don't wait till you are financially free before you start enjoying your leisure time. Hedge your life by taking small leisure with your loved ones every now and then, just like you are hedging your future life by saving up in the present.

9. Popularity

Money can buy popularity, but I doubt the kind of acquaintances and friends are the kind that you really wish to associate yourself with. Still, money does its job of making you more popular - you just have to exercise your own judgement to see who will still be around when you have no more money.

10. Philanthropy

Money enables you to give more. It's strange, isn't it? Spending time and effort to get more money, so that you can give to more people. I think money makes you more of who you are. If you're a jerk without money, you're a bigger jerk with money. Likewise, if you're a generous person without money, you'll be even more generous with more money.

Is there any more uses or functions that money can serve as?

Friday, November 14, 2014

The role of parents in an uncertain world

The hardest thing about bringing up a kid is the values that you want him to inculcate. It's never a straightforward equation, where you put in the right input and you get the right output. Different kids respond differently to the same input and produce vastly different outputs.

Take for example a parent who always tries to teach his kid to save up and be frugal. He did it in a way that forces his kid to scrimp and save and the kid grew up having the mindset that money is very important. Here's two diverging paths that might happen; extreme but entirely in the realm of possibilities. The kid either grows up spending crazily to 'make up' for his lost childhood and his whole adult life will be about reclaiming some parts of his life that he didn't experience but other kids did. Or, he will continue to save and scrimp like his parents did, perhaps to gain their approval and therefore their affection. It's hard to tell in advance which paths the kid will take. It's like the Schrodinger's cat phenomenon where both outcomes are possible but it'll be determined only when it's determined.

Extrapolating this idea, a frugal parent might or might not come from extravagant grandparents. But folklore always mention about having a generation of alternating characteristics. For example, you have a grandparent generation who are frugal, then a parent generation who are extravagant (to make up for their frugal upbringing), then a current generation of kids who are frugal again. This, of course, is not fixed in stone, and the unpredictability of the next generation to follow what the previous generation values are, is what I'm talking about here in the first place.

Given this, can we really engineer the kind of values that we want out kids to have? I guess we can only try our best. This is important because trying our best is the only thing we can do. In light of this, it's also important not to blame our parents for whatever ills that this current generation is suffering. More likely than not, when it's time for you to become a parent, who knows, maybe your kids will also blame you for whatever nonsense you've taught them that works for you but utterly failed on them.

A good example will be the "study hard then you'll be settled for life" myth. I use the word myth because it's a socialised fact; everyone knows it and follows it, but nobody really question why or how effective it is. Until now. Parents growing up without much education, and thereupon seeing their peers who are fortunate enough to study and landing well-paying office jobs, are the ones perpetuating this myth. It's the right thing for their generation because having a O'lvl cert back then is as good as having a degree in university. If you had a university degree back then, you must be the top 1% of the most highly educated, and by extension, the most sought after job seeker in that generation. Is it going to work for this generation now? I doubt so.

Going forward, what other values or ideas have you tried teaching your child that works for you by might not work for them? Who can tell? It takes a rather long time for the kid to grow up before you can say for certain what works and what doesn't. By then, it's too late. It's like you bought into a share to hold it for the long term and looking at it after 20 yrs, you realised it's a dud. By then, the period of remediation is long gone and you have a kid who might have blamed you for what you've taught eons ago.

The physical part of parenting is never easy, but it can be easily outsourced. The ideological part of parenting is the tricky part. Firstly, you don't know whether what you taught them is still going to be helpful for them in their future that you no longer belong to. Second, even if you know for sure, whatever you try to inculcate in them might turn out to be quite opposite to what you intended. Thirdly, it's not like you have many chances to go through trial and error. Unless you have a kid now and after 20-30 yrs you have another kid, you pretty much only have 1 chance. Given the circumstances, how can someone ever say that they are ready to be a parent, don't even talk about being a good one?

Still, in the light of all the uncertainty, we have to make a choice:

1. It's important to teach your kids adaptability and resilience. How? I don't know. I just know that it's important to prepare them for the future they are going to inherit, not yours.

2. Don't blame yourself as a parent if things don't go right. Don't blame your parents if things don't go right for you. Nobody knows what is happening and in the thick of the battle where there's a concealing fog of war, you can only do the best you can taking into account all the information available to you at that moment. Point 1 comes in mind - adaptability and be resilience.

3. Beware of unintended consequences. Beware of it, but ultimately what else can you do?

4. Be prepared to fail as a parent. Be prepared to fail as a person growing up in this world. There's no perfection to be attained, only improvements. In spite of all this, love yourself, love your parents.

After this internal dialogue, I end up still being uncertain. I know nothing but I have a feeling being uncertain and knowing that you know nothing is the destination of our journey.

Tuesday, November 11, 2014

Valuation of ST Eng based on order book

ST engineering had been dropping like crazy the last few weeks, and very recently in the last few days, the sell down persisted at a much greater pace. I know that they had a weak quarter, and possibly they will end this financial year with similar revenue but weaker net profits. My class got cancelled, so I had some time to crunch some numbers.

Here's a fancy 5 yr key financial data taken from their site:

A few things to take note:

1. The net profit margin (Net profit/Revenue) hovers around 8% in 2009 to 9% in 2012.

2. The number of shares taken to calculate the earnings per share (EPS) increases from around 30 units to around 31 units.

(What units? EPS is net profit over shares, so if you manipulate the formula you'll get shares = net profit/EPS. And that's what I did. I took the net profit for each year divided by the EPS to get the shares, but I can't be bothered to convert to the proper units. Not that it mattered later on when I use it for calculations.)

The 10 yr order book is provided in the annual report 2013 too. Here it is:

Since the share price of a company should be forward looking, knowing the current order book for the next 10 yrs should determine the current price of the shares now. What I wanted to find out whether I can use the order book to guestimate future revenue booked. Since I know the historical net profit margins, I can guestimate the future net profits. If I divide this by the number of shares unit by the company, I'll have the future EPS. Multiply EPS by the historical PE ratio, I'll have the future price range, and I can decide from there what to do with this garbage-in-garbage-out number so expertly calculated.

Let's go.

First, a little back testing. Since they have the 10 yr order book data for 2003 and 2008, I can use it to see if this is even worth the bandwidth posting. Here it goes:

1. Share units of 31 (more conservative than 30)
2. Net profit margins of 8% (more conservative than 9%)
3. PE range from 10 to 20 (theoretically it should be 10 yrs, isn't it, since it's a 10 yr order book)

10 yr order book for 2003: $4.6b
Net profit for 2013: $368 mil (4.6*1000*0.08)
EPS for 2013: 11.9 cts/shares (368/31)

Using PE of 10, share price = $1.19
Using PE of 15, share price = $1.78
Using PE of 20, share price = $2.37

So, based on this order book estimation model, I get around the price range of 1.78 to 2.37. Let's tally it with the historical share price around mid 2002 to mid 2005. You can see that from mid 2002 to end of 2003, the price hovers around a range of 1.6 to about 2. Alright lah.

Let's try for order book for 2008.

10 yr order book for 2008: $10.6b
Net profit for 2018: $848 mil (10.6*1000*0.08)
EPS for 2013: 27.3 cts/shares (848/31)

Using PE of 10, share price = $2.73
Using PE of 15, share price = $4.10
Using PE of 20, share price = $5.47

I attach the historical share price from 2007 to 2009 here. Price ranged from about 2 to 4. A little unfair cos it's the global financial crisis, so the PE is depressed by that event. I leave it to you to decide if you can use the order book as a suitable model of valuation based on this 2 samples.

Ah ha, here's what we've been waiting for. Let's try for order book 2013.

10 yr order book for 2013: $13.2b
Net profit for 2023: $1056 mil (13.2*1000*0.08)
EPS for 2023: 34.1 cts/shares (1056/31)

Using PE of 10, share price = $3.41
Using PE of 15, share price = $5.11
Using PE of 20, share price = $6.81

A big caveat here here is that this is of course a simplified model. I'm using net margin of 8% on any revenue booked, but it will change when the composition of the revenue is changed. It could be higher or lower. There's also another consideration - the dividend. Let's say the dividend, which is 15 cts now, will drop to 14 cts in the future. Based on 10 times PE, the yield will be a reasonable 4.1%, with the possibility of the share price 'upgrading' to a PE of 15, possibly booking another 50% capital gain.

My second tranche of averaging down will be a little more pessimistic. Here's a chart that I did quite some time ago before all the plunging of the share price recently.

3.3+ to 3.22 will be where my bullet is aiming. I'll see how it reacts around 3.3+ first before deciding further. And how did I react to the falling share price? Nothing. Unlike the past, I didn't put in more than what I can afford to lose, and this is not an s-chip like longcheer or china milk or ferrochina.

What a journey it had been from then and now lol!