Saturday, June 30, 2012

Should you practice Dollar Cost Averaging (DCA) Up?

Many people practice Dollar Cost Averaging (DCA) down, but do people practice averaging up?

To begin, DCA up is a practice to purchase share at a higher price than you already bought in order to achieve a larger position in your portfolio. Averaging up is a more sensitive issue which many people did not advocate because people simply doesn't like to pay for things which are higher than the price they bought earlier. Instead they want to wait till the time when the stock price goes below their buying price and in the face of doing so, they could be waiting for a possibly indefinite period of time, especially if the price they bought the stock was during recession period. So when is a good time you should enter again?

The answer could lie in whether you perceive the stock as undervalued or overvalued at the time when you are thinking of averaging up. If you think that the stock still has a margin of safety and more importantly still has legs to run up, then it would make sense to purchase more of the stock - even if that means you are averaging up. With that, the answer of averaging down or up is much of irrelevant in this case.

Saying so is easy but how many times have you done so? I've certainly average down myself more than I average up.

Friday, June 22, 2012

Initiating a commodites position - Boom or doom?

It was in the morning as I checked into my Singapore account. The previous night DJI slumped to 250 basis points as Moody downgrades the grades for up to 15 banks. How will STI perform today?

I believe everyone will agree that valuations for some of the blue chips that we have here is still expensive. Look at Keppel, Sembcorp, Telcos, Reits such as CMT, FCT, Cache, ....etc. As such, there's no point to enter at such valuations at these moments. The huge volume is currently at commodities play such as Noble, Sakari, Olam and Wilmar.

To date, my portfolios have mostly consist of dividend play which I will be looking to add more should the price gets attractive at valuation (currently eyeing CMT price in particular). Fortunately and unfortunately, the price has not gone down to my target price and as such, I decide to venture to a more risky investment into oil commodities play in the US market by initiating a small long position (will add further to average down when price falls further).

Two counters listed on the NYSE are Schlumberger (SLB) and Halliburton (HAL), which I thought at current price were severely beaten down and undervalued. Below are more details about the two companies which I have bought at US$62.50 and US$28.30 respectively (See "Recent Transactions")

1.) Schlumberger (SLB)

Company overview - SLB is a global provider of oilfield services company and the leading provider of exploration and production services, solutions and technology to the international petroleum industry.

Financial Performance - SLB reported EPS of $ 0.98/share for 1Q2012, which has increased 42% as compared to EPS of $ 0.69/share for 1Q2011.

1Q2012 1Q2011 % Change
Oilfield Services 9,918 8,122 22%
Distribution 693 594 17%

1Q2012 1Q2011 % Change
Oilfield Services
Reservoir Characterization 2,586 2,193 18%
Drilling 3,785 3,112 22%
Reservoir Production 3,539 2,808 26%
Eliminations & other 8 9 -11%
9,918 8,122 22%
Distribution 713 601 19%
Eliminations (20) (7) 186%
Total 10,611 8,716 22%

Outlook - The upstream CAPEX is expected to reach $1.23 trillion for 2012 and expected to rise to $1.64 trillion in 2016. Onshore CAPEX continues to have the largest share of CAPEX, but offshore CAPEX is expected to continue to outpace it in terms of growth and is expected to grow at a pace of 58% as compared to 39% for onshore drilling. It is also expected that exploration and drilling growth will be driven by interest in the Gulf of Mexico (U.S.), Brazil (Latin America), Saudi Arabia and Iraq (Middle East), Norway (Europe), Eastern Africa, and the Western Gulf of Guinea.

Summary: The company is financially strong at the moment and profitability of the company is expected to improve going further, based on technological improvements (IsoMetrix), superior service quality, increased CAPEX and OPEX by oil drilling companies, and a shift from gas to liquids-and-oil-shale production in the U.S. The stock is trading at a P/E ratio of 15.3x and offers a dividend yield of 1.68% (SLB increased a 10% dividend in early January 2012). The downside to the current price is due to the crisis in Europe and a fall in the oil prices, which I think has been severely priced in. With current valuation, the stock is trading at almost a 40% discount and while oil prices may fall further, current price is definitely too good to ignore - i.e given the risk vs reward.

2.) Halliburton (HAL)

Company Overview - HAL provides a variety of services, equipment, maintenance, and engineering and construction to energy, industrial and governmental customers. The company is made up of the following three business segments: Energy Services Group, Engineering and Construction Group, and Dresser Equipment Group.

Financial Performance - The EPS of $0.89/share for 1Q2012 has increased 46% as compared to EPS of $0.61/share reported in 1Q2011.

Total revenue has increased 30% from $5.2 billion in 1Q2011 to $6.8 billion in 1Q2012, which was primarily attributable to increased activity in North America, as the demand for production enhancement and cementing work continued to rise.

The cash flow from operations of $734 million improved by 30% as compared to $565 million for 1Q2011. The CAPEX of $782 million for 1Q2012 increased 11%, as compared to $704 million for 1Q2011.

Outlook - It is anticipated that the industry will witness volume increases since improved macroeconomic trends support positive upstream spending outlook and new rigs are expected to enter the market due to the prevailing international oil and natural gas prices. These trends will lead to increased demand for service equipment. It is expected that international pricing will remain competitive due to over capacity, and that the Oil Service Industry will witness increased unconventional oil and gas projects.

Summary: The financial position of the company is strong at the moment, though in the short term they may face some challenging profit margin. Based on the shift from gas to liquids-and-oil in the U.S., that the profitability of the company will improve, putting it at an advantage since it is a dominant service company in this field. It is currently trading at a P/E and P/B ratio of 8.69x and 1.88x, and offering a dividend yield of 1.28. It is currently trading at a 40% discount too and at current price, it is a good start to long.

Sunday, June 17, 2012

Dividend - Your Crossover Point

Are you a dividend investor? If so, what is the desired outcome that you wish to achieve at the end of the journey?
The goal of every dividend investor is to accumulate a portfolio of dividend income producing stocks, mostly defensive in nature - which would in turn give out dividend income to investors. The goal of living off your dividend income to pay your expenses is an achievable objective, though it often takes a lot of capital, a lot of time, probably some skills and also luck in order to get to the crossover point.

For dividend investor like you and myself, the crossover point is the point that is synonymous with financial independence, i.e the ability to be free from a nine to five corporate office type of job. In order to reach that magical point however, a lot of work needs to be done. Investors need to design an investment strategy and then stick to it through thick and thin, while also improving along the way. Some of the biggest dangers to successful dividend investing are not market volatility, dividend cuts or recessions, but investor psychology. The process of accumulating a viable dividend stream will take anywhere from several years for those who are starting out with a large amount to several decades for young investors who are just starting out in their professional careers. Along the way, many investors will lose track of the goal due to sheer boredom or due to lack of patience. Unfortunately, investors who enter dividend investing for the sheer excitement often do not stick to it and will give up halfway. On the other hand, investors who attempt to find shortcuts to speed up the process of capital accumulation by using options and futures, risky growth stocks or massive leverage will likely be disappointed along the way.
The key ingredient to accumulating a sufficient dividend income stream include time, DRIPS (Dividend Reinvestment Plan) and regular contributions to your portfolio. The power of regular contributions is important, because this ensures that investors consciously keep working towards their goal of dividend independence by investing in dividend stocks every month. And last but not least, investors need time to let the magic of compunding works to its great effect.
Dividend investing takes time, before the amount of distributions reaches its decent levels. Imagine a person who manages to save $2000/month for investment. At the end of the year, the portfolio cost will amount to be $24,000. If the average yield were 5%, this portfolio will generate $1,200/year in dividends, which accounts for $100/month. On the positive side, you can either use the dividends to pay off some of your daily expenses (utilites, phone, internet bills) or simply reinvest it into your portfolio. Once they are there however, and their portfolios consist of wide-moat dividend champions with sustainable distributions, investors will be able to live off dividends.
I am now about over a year into investing and every month it gets closer and closer to my target dividend income goal. In fact, I have felt the effects of my dividend, especially the last month in May where I received approximately $2000 in dividends alone. Over the next few months until the year end, i hope that my dividend portfolio is sufficient enough to pay my basic daily expenses.

Friday, June 8, 2012

Oil Price Down = Buying Opportunity for Transportation?

Commodity Oil has been pushed lower in May due to weak market sentiment of the economy, sending the price from 100+ level to around 90. With oil beginning to show some kind of weakness, we might see a buying opportunity in transportation related stocks such as SIA, Tiger and Comfort.

SIA closed at 10.10 today, and is making a 52 week lows. The airline has been facing with challenging business environment, in particular cargo passenger count against the lower budget airlines. However, it seems to me that the stock might have seen its low and it doesnt drop much lower anymore even when the market seems to weaken. However, the weak dividend payout deters me to enter this counter, though I believe it could easily goes up to 12 dollars when market improves its condition.

I would have preferred ComfortDelgro, which has been hovering at around 1.44 - 1.50 for the last couple of months. I have added 3 lots of CD recently in view of the lower oil prices and dividend payout in August. The stock is also resilient from the market turbulence and I would look to add should there be further drops in the stock.

Saturday, June 2, 2012

The Richest Man in Babylon ~ Verdict

The richest man in Babylon

I was reading an article by Dennis Ng on "The Richest Man in Babylon" and some of his thoughts and while I thought some of the strategies were pretty obvious to everyone, it is still a good refresher even for myself from time to time.

1st Strategy —Save at least 10% of your income

In the book The Richest Man in Babylon, Arkad shared that when an individual's income increases, his or her expenses would also typically increase. As a result, this individual would fail to accumulate any savings or wealth. In light of this, Arkad says that the first step to riches is to cultivate the good habit of saving. And by this, I suggest that the simplest way is to save at least 10% of your income.
Such is the importance of cultivating this habit that when I started working in 1993, I have been following Arkad's recommendation to save money religiously. In which case, I saved 20% of my income monthly then. To make this saving process more effortless, you can arrange for your bank to automatically channel a specified percentage of your income into a separate savings account using GIRO. By doing so, you separate your savings from the bank account meant for your day-to-day expenses and better set the perimeter for what can be spent and what cannot be spent for the nitty gritty. If you can save 10% of your monthly income, you would have saved more than a year's worth of income after a decade!

My Verdict - Fair enough I think this is the basic of all financial freedom strategy and one that everyone must start off with. I Conquered this.

2nd Strategy - Control your expenses

Our desires and wants are unlimited but our financial resources are limited. As such, we need to differentiate our needs and wants. When learning how to manage your money wisely, you have to first prioritise what needs to be bought versus what you would want to buy. Only after you have purchased what you need, should you contemplate buying things that you want with the leftover. In which case, your total expenditure should not exceed 90% of your income. By doing so, you can satisfy your desires and wants without exhausting the amount that you earn.

My Verdict - I Conquered this as well. Managing well my expenses is something that I get used to improving it from time to time and it'll become a sort of a habit. One important note to take from this is to spend well on necessary things but not on luxury and "wants" items. You get what I mean.

3rd Strategy - Learn to grow your money

Most people only know how to save, but do not know how to grow their money. If the interest that you earn from bank deposits is only 1%, while inflation rate is at 3%, you are effectively losing 2% every year! Instead of becoming richer, you are in actual fact, become poorer and poorer over time.
As a result of inflation, where the value of a dollar drops over time, we need to do more than just save—we need to learn how to grow our money. Metaphorically speaking, we need to learn how to convert our "golden eggs" into a "golden goose", so as to help lay us more golden eggs (money making money). Over time, when the income from your golden goose, or various investments, exceeds your expenses, you would have achieved financial freedom. By then, you can choose to stop working and yet keep up your current lifestyle.

My Verdict - I Conquered this but still in the midst of acquiring more "Golden Goose" that can lay golden eggs for me from time to time. In fact, the recent golden eggs (dividends) which I receive in the month of May is enough for me to save up to 100% of my monthly income for the month of May, and possibly June.

4th Strategy - Protect your capital from losses

Warren Buffett, the richest investor in the world, said that the first rule of investing is that we do not lose our money. By that, he means that when investing, we should always protect our capital from losses. But how do we protect our capital in an investment?
Before you place your money into any investment, you need to work out the worst case scenario—the amount that you can stand to lose from the investment. To safeguard your capital, do not place all your eggs into one basket. Instead, you should diversify your savings into different investments. This way, even if some of the investments incur losses, you might still be able to keep your capital intact when you make gains in other investments.

My Verdict - This is the hardest among the all strategies and something which I intend to keep improving from time to time. Risk begets rewards. The higher the risk, the more rewards you get and vice versa. For me, I intend to stay safe and steady over time to time.

5th Strategy - Buy a house instead of renting one

Everyone needs a roof above their head. If you are to rent a house, the incurred monthly rental snowballs into a significant amount over time. On the other hand, if you are to buy a house, you would have to pay monthly housing loan installments, but have a house to keep when you eventually pay off the loan.
The thought of owning your house outright might also be the source of impetus that drives you towards working harder so as to finance the loan accrued.
In 1995, I bought a HDB resale flat when property prices were high. Despite weathering a couple of economic downturns in 1998's Asian Financial Crisis and 2003's SARS Crisis, the market value of this HDB flat is still 50% higher than the transacted amount paid for nearly two decades ago. Today, this HDB flat is very much a valuable asset.

My Verdict - I Conquered this. A house is one asset that will generally increase its value over time so always start early to buy. Buying a property also allows you to tap onto the leveraging advantage portion that if you succeed, it will sail you for life.

6th Strategy - Transfer risks through insurance

In life, there could be the occurrence of accidents and events that could potentially wipe out our accumulated assets and income, therein putting an abrupt stop to all our financial aspirations.
By obtaining suitable insurance plans, we can transfer this risk to insurance companies. Such plans include term insurance, comprehensive medical insurance plans, critical illness plans or accident plans, just to name a few. By acquiring such plans, you ensure that no matter what happens, the financial well-being of your family and yourself is being taken care of.

My Verdict - I Conquered this. I have a life and hospitalization insurance which I bought not long ago considering the importance of this. The thing with insurance is that it is seen by many as a waste of money and something that you will never ever have to benefit from unless something happens. The thing is you can never know what happens tomorrow, don't you?

7th Strategy - Increase your earning capacity

If your income is limited, your savings is also naturally limited. Thus, in order to increase your savings, you can either cut down on our expenses, or increase your income. And since there is a limit to how much you can cut down on your expenses, you should really aim towards increasing your income to better grow your wealth.
But how can one go about increasing his or her income? You can do so when you expand your earning capacity by upgrading yourself through courses and further training. With more knowledge or greater skills, you put yourself in a better position to increase your income.
As it is, you should strive towards lifelong learning and continuous growth. With the world moving at a quick pace, you need to be constantly learning and improving so that you do not fall behind others. By adding more value to the work that you do, you can most definitely increase your income and fatten your purse in due time.

My Verdict - My working income increases for more than 20% when I change my job recently. Having said that, this will be one strategy which I do not intend to develop moving forward, the reason being the more you are earning, the more time you are probably consuming on your work. And this is not the intent of my financial freedom strategy in the first place.

OVERALL VERDICT - I've seen many people complaining time and time again, whether the fact that they have to raise their elderly or the increasing costs such as the increasing COE and HDB prices or even the fact that they are not educated enough to command a higher job to get a higher pay. The same people who complain yesterday is the same people who complain today and will be the same people who complain tomorrow. The common thing with these people is that they never put the blame on themselves. It is like two teams competing for a football match and the team that loses blame their losses due to the refereeing decision.