Wednesday, July 29, 2015

Developing The 5 Whys Technique In Investing

I came across this technique when I was studying for my MBA last year and has found them to be very useful when it comes to investing. 

Many times, we as investors, have failed to ask relevant pertinent questions causing the underlying reasons for the companies we are interested or vested in. Even though it appears that most investors have done the first level of due diligence by screening check the financial numbers, many failed to consider the underlying root cause that explains why the share price of the company may be languishing where they are at the moment. 

This is where the 5 Whys Technique might prove to be useful in investing. Mathematicians called this the power of second derivative thinking. In simple terms, it means going beyond the first level screening where everyone is able to see or figure out. This makes sense because in investing, you need to be able to think and prospect ahead of the pack (mostly retail investors or research brokerage analysts) and take action before they do in order to earn higher than average returns. Otherwise, you’ll be better off investing in an ETF index fund for longer sustainable returns. 

The 5 Whys technique was formally developed by Sakichi Toyoda and first used within the Toyota Motor Corporation during the manufacturing evolution decades ago. They are an iterative question-asking technique used to explore the cause and effect relationship, each depth going deep and deeper to uncover and determine the underlying root cause of the problem. They are important in investing because for most of the times, the underlying root cause to the problems are not so formally evident at an investor’s eyeball level. They require the tenacity of the investor’s persistence in asking the right questions and the ability to see what is ahead in order to make a calculated risk return assessment on whether the investor should buy the share at present

Let’s take a look at an example: 

1st Why - Q: Why do you write a blog? 
                A: Because I want to document my journey towards financial independence. 

2nd Why – Q: Why are you seeking financial independence? 
                   A: Because I want the freedom to do things that I love. 

3rd Why – Q: Why do you want the freedom to do things that you love? 
                  A: Because my current job does not satisfy me, but money is an issue. 

4th Why - Q: Why is money an issue? 
                 A: Because my current expenses are exceeding my current income. 

5th Why - Q: Why are your expenses higher than your income? 
                 A: Because I have a family of 6 to feed and I am the sole breadwinner of the family. 

This is just a very simple example but you can see how each questioning uncovers the underlying root cause of the problem as the question moves along. We can also apply the same to investing. 

1st Why – Q: Why are you interested in Keppel Corp? 
                 A: Because they are trading at an "attractive" low P/E valuation. 

2nd Why – Q: Why are they trading at such valuation? 
                  A: Because the share price has gone down more than the drop in earnings. 

3rd Why – Q: Why did earnings (and share price) goes down? 
                  A: Because their O&G segments are dependent upon the oil price. 

4th Why – Q: Why did oil price drop? 
                  A: Because there is an oversupply and alternative replacement of shale gas. 

5th Why - Q: What is the tolerance level of sensitivity of oil price the business can take the hit? Can oil goes back to pre-crisis level?, etc etc...

I think by now you should get the idea of how you can use the 5 Whys technique. You can modify or customize it to your liking, but the idea is to get a deeper understanding of the underlying root cause before you decide to action.

What do you think? Is this useful to you? Do you conduct second derivative thinking when analysing companies?

Sunday, July 26, 2015

The Temptation To Invest Without Research‏ing

A few months ago, I divested my position in one of the counters I used to be vested in - Sembcorp Industries (Link Here). Back then, I remember receiving a few criticism coming in from a few readers. 

One of the criticism which I remember vividly was from a reader that commented I was doing plenty of research, analysis and valuation runs on the company, but only to end up in a loss upon the divestment at the end of the day. On the other hand, the reader commented that he did not have to do much research on the company but yet was making a profit. He questioned the need to undergo such a detailed process when investing doesn't seem difficult to him.

I digested his words and compiled a few learning points from the incident. 

The thing about doing homework on companies before you invest is this. I do not mind doing a lot of homework and analysis on companies and still made a loss at the end of the day. From my view, I will know that I have learnt something from my mistakes and probably there are many more instances like this in my investing journey. After all, we are all vulnerable to making mistakes in our lives.

I replied to the reader that I am happy because he has made a profit but I am more worried for him because he has not done his homework but yet made a profit out of it. I hope he understands what I was trying to say.

Temptation To Invest Without Research

Investing is a tricky and risky thing to begin with. 

You would not necessarily ended up going into profits immediately, even if you are already putting so much effort in researching the companies. There are the other market forces you have to contend with, for instance recession cycle – things like this that are out of our control. 

On the opposite end, you can make profits just by randomly picking the stocks that you think would outperform, but you will never know if it is attributable to luck or skills at the end of the day. The question to ask is if you are making sustainable profit calls in the long run. If the answer is a resounding yes, then by all means go ahead with your strategy.

Since it appears that the outcome comes across as multi-dimension matrix, many investors chose the easy way and go for the short cut by investing without preparing sufficiently in trying to understand the company better. There are also other investors who have “done” their homework by reading multiple brokerage analyst’ reports and/or blogger’s opinions. No strategy is wrong of course, until hindsight proves otherwise. 

Temptation To Invest Before Research

This is a trickier one to be honest. 

Some investors tried to invest before researching sufficiently on the companies. The key word to look out here is before. By the time they are vested, they would then spent their time looking for positive news surrounding the companies that made them believe they have made the right decision. This is called confirmation bias. Confirmation bias is harmful because your brain is wired only to take in positive information, and filter out everything that might come across as negative.

It’s actually pretty difficult to set this straight in our brains because I remember making the same fallacy of errors when I started my investing many years ago. I think this is a pretty common fallacy committed by many investors because as human beings, it is only natural that we see what we wanted to see and it is made even harder through the widespread coverage of the media which is deemed as noise and are often no much use to any investing decision made.

Final Thoughts

Investing is easy but successful investing takes a lot more effort than that.

Often, it requires many than simply the first level of screening, and even more so, it requires a lot of disciplinary strategies such as proper asset allocation and emotional investing. For many, it can take a heavy toll on the health and family relationship when things doesn't work out properly.

For investors who are not prepared to do spend too much time monitoring the market or picking individual stocks, but would like to participate, they can do so by investing in an ETF index fund which has proven to be much simpler and outperforming many other average investors. At the end of the day, what are we looking for when we are investing? What are our objective of investing? Isn't not losing money our main objective or are we looking for more beyond that?

What are your thoughts on this? Let me know.

Thursday, July 23, 2015

"Jul 15" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
China Merchant Pacific
Nam Lee Metals
Silverlake Axis
Accordia Golf Trust
ST Engineering
Stamford Land
Noel Gifts
King Wan

Total SGD


There's a couple of changes that I have made into the portfolio as I continue to seek and incorporate highly qualified businesses which meet my criteria that I feel will present a sustainable long term returns as the businesses continue to grow.

For the month of Jul, I have divested both FCT (Link Here) and FCOT (Link Here) which I thought was overvalued in terms of valuation. I like the way the management has operated for both companies but the steep price makes it as such that they will be prone to a much larger fall should the market heads downwards. I will continue to monitor their situation including their recent quarterly performance which they did well as expected.

I also added Kingsmen and Accordia into the portfolio which I have blogged on my thoughts here and here. On top of that, I have also added a small position for an O&G play in MTQ which I did not post a blog on but have exhibited the same strong characteristics of strong operating cash flow, increasing free cash flow, strong balance sheet and a reasonable valuation. I am closely monitoring the O&G situation so the amount I've nibbled is really small but will increase over time as and when I think is wise to do so. You can view here under the "Recent Transactions" for the details.

The amount of warchest currently stands at 31% of the overall portfolio, a position which I am comfortable to hold at the moment while waiting for the right opportunity to come by. I wouldn't want to rush utilizing these amount of warchest even though they yield really low returns because you never know when you are going to get your opportunity of a lifetime in the market. In any case, these will be utilized if the right opportunities came by, and not a matter of when.

The equity networth has increased for this month to $310,219, mostly due to the divestment mentioned earlier as well as some improved performance from the portfolio and bonus shares received for CMPH and Silverlake.

The projection target is to reach the end year networth of $333,105 (Link Here), which I have revised back in November last year due to certain circumstances. With Aug and Nov being a strong dividend month, and December having an AWS to cater to, I am silently confident that I can hit the goal by year end. In addition, online income has recently came in rather unexpectedly strong as well which has definitely helped to push on. For this, I'd like to thank everyone who has supported the blog.

Projected dividends based on the current portfolio stands at $12,232 per annum, which translates into about $1k/month, and they are not as high as I would like mostly due to the amount of warchest which I have accounted for zero dividends. I guess this just reinforce the idea that it takes years to build an arsenal of solid dividend paying portfolios, and it requires years of perseverance to see it out. I know it will pay off one day so I'll just have to keep the motivations high, and keep it going.

For now, we'll just have to see where the market is going and an important factor which I can't control. One thing for sure, I don't mind having more opportunities presented even if it means not hitting the goal by year end. So that's it from me for now and I hope everyone has a solid month in the month of July as well.

How did you fare for the month of July?

Friday, July 17, 2015

Recent Action - Accordia Golf Trust

I made a recent purchase of 17,000 shares of Accordia Golf Trust at a price of 64.5 cents

As far as I can remember, I do not have a very good impression of trust that are listed here in SGX. I have made my fair share of loss when I balloted for the IPO for Ascendas Hospitality Trust (AHT) which I then subsequently sold at a loss (link here). Other trusts such as Asian TV have not been performing since its debut as well. For Accordia, they have lost nearly 32% of their value since their IPO at 97 cents. But I will elaborate later on why I think they might represent a value for turnaround play.

Back to the earlier, there are a few common reasons why I think the share price for these trusts have been lingering low since their debut. 

First, most of these trusts have underperformed against the prospectus they have set during the IPO. When the actual performance does not corresponds to the expectations they have set out in the prospectus, there are usually a spiral down of pessimism that kicks in that brings the share price down. Management needs to be aware that they need to set out a realistic prospectus even if the original intention of the underwriter is to raise funds. This includes requisiting for sufficient margin of safety, especially if there are currency and market risks that their assets are exposed to. In this case, AHT, Accordia, FEHT, APPT have all failed to do so in this aspect, which explains the low hanging share price. 

Second, most of these trusts (or Reits) that have been performing poorly have been mostly tied to the economic risk of the country their assets or borrowings are tied to. We have the Accordia from Japan, AHT from Australia, LMIR from Indonesia and Ireit from Germany. These countries have not enjoyed the best of economy in recent times and as a result, their respective central government are utilizing monetary stance that weakens its currency.

As with all companies, the share price might go down to a point which might represent value. I think this case applies to Accordia and the reason why I am now vested in the shares. Here are also some of the other reasons that propel me to invest in the shares:

1.) Freehold Title Deed of the Golf Land Course

This is pretty straightforward. 

If the land title is freehold, then the trusts will theoretically be able to utilize them to infinity. This is favourable to leasehold properties tied to industrial or commercial, who has only 30 to 40 years of lease life. Theoretically speaking, Reits whose assets have a limited number of life will have to constantly source for new assets in order to lengthen their WALE life concession. This is partly the reason why most Reit managers are constantly looking for new assets or extend their current lease concession when it is nearer to maturity. 

If you have a freehold land, then the title will always be yours, perhaps subject to constant maintenance to ensure the stability for use.

2.) Juicy Dividend Yield

I have to be honest that for the most part I am interested in this business mainly for its high dividend yield they are currently offering. I have my reasons though, and I don’t try to do that blindly. 

First, the normalized DPU for the full year excluding the one off is coming in at 6.07 cents/share, which is about 12% off target from the prospectus. This is based on the assumption that the exchange rate from SGD to YEN is at about SGD1: JPY 90.61. 

Assuming the Yen continues to weaken, we might see the JPY coming in at SGD1: JPY100. Should that happens, you can be sure that performance and DPU are going to be impacted. My guestimate is that it will probably happen and DPU will come in nearer to the 5.5 cents/share, which translates into 8.6% based on my purchase price. That is still a very respectable amount of yield we are talking about, given that there isn't any hidden agenda tricks such as the income support other reits are currently using. There is also a high probability that the yield would be boosted given their acquisition agenda which I will talk more in detail below.

3.) Low debt Gearing 

The trusts have a rather conservative gearing rate at around an Loan-To-Value (LTV) of 30.1% (debt/appraisal value). This is rather conservative considering that many other trusts and/or reits have gearing in excess of 40%.

Based on the latest AR, management has guided that they would like to gear up to around 40% to 50% and it even has a plan to acquire up to JPY 50 billion by end of Mar 2017. They also mentioned that in the interests of unitholders, they would only acquire golf course which will boost the trust DPU growth. This is not difficult at the moment as we will see later most of the NOI (Net Operating Income after deducting all maintenance and related expenses) for the existing golf courses are yielding in excess of 10%. 

Gearing of up to an LTV of 40% would mean that the trust can undertake a further debt of JPY 25 billion. This means that the trust can swallow almost 4 times of Daiatsugi Country Club Course, which is the number one highest appraised golf course the trust currently have at JPY 6.6 billion or 6 times of Izumisano Country Club, which is the number two highest appraised golf course the trust currently have at JPY 4.8 billion.

Gearing of up to an LTV of 50% would mean that the trust can undertake a further debt of JPY 40 billion. This means that the trust can swallow almost 6 times of Daiatsugi Country Club Course, which is the number one highest appraised golf course the trust currently have at JPY 6.6 billion or 9 times of Izumisano Country Club, which is the number two highest appraised golf course the trust currently have at JPY 4.8 billion.

4.) Inorganic Growth 

The plans from the management for the next 2 years are crystal clear. 

The trusts have sufficient debt headroom (see above) for further acquisitions and they will add another JPY 50 billion assets injected into the portfolio. Given how the existing assets capitalization capability rate the assets are generating, it should be an easy target for the trusts to inject further similar type of assets into their current portfolio. 

NOI Capitalization Rate %

Just take a look at the NOI yield highlighted and you can be impressed that the existing assets are generating a NOI capitalization rate close to 12.4% on average. This is based on the assumption that the utilization rate is at around 77%. Imagine if the management can ramp up the utilization rate higher and NOI yield should rise even further. Comparing this to a 40 years odd office leasehold (e.g OUE Tower) at a capitalization rate of 4% and you would see how good it is to own a golf business. 

Since the current existing yield is approximately at 8.6% at estimates, this means that any acquisition they make will most likely be accretive to the DPU since first, they will most likely be funding it via debt and second the existing NOI yield > dividend yield. This means that there are potential that the DPU can grow over the next 2 years rather rapidly, assuming they go ahead with the expansion plan.

5.) Catalyst for Olympic 2016 and 2020

After an absence of more than a century, golf as a sport will return as an Olympic event in 2016 and 2020, an event which will bring favorable take up rate for more members to get interested in the sport that will increase the utilization rate for the company.

Tokyo will particularly host the 2020 Olympic, so it'll be interesting to see whether the operations are able to draw larger crowds given that the premises will mostly likely be used to host the event.


Investors should note that there are inherent risks which they need to take note, and to me they represent the biggest risk that I consider:

1.) Currency Risk 

Since the company's operation is based in Japan, there are a direct currency risk especially since reporting and dividends are paid out in Singapore dollar. The japanese yen has not been performing well over the past few years and a depreciation of its currency this year led to the underperformance of the trust compared to the prospectus.

Fortunately for investors, there are the natural hedge between its earnings and borrowings as interest swaps are both done in the japanese yen, so it provides the natural hedge towards currency risk for the assets it owns. Their NAV is still at a respective 87 cents based on the latest results, which put the P/BV currently at 0.74.

Management has guided that they are looking into hedging a part of their currency to the Singapore dollar. A hedging of the currency might costs some money to the trust, but at least it makes performance reporting and budgeting more predictable to everyone.

2.) Natural Disaster Risk 

Earthquake is a common occurrence in Japan and massive natural disaster can be detrimental to the company’s operation which can destroy the golf course as well as its other extended operations in the hotel and f&b segment. From the prospectus, management has guided that it is very difficult to insure the whole assets because of the size of the golf course that does not make it worthwhile for the company to insure the assets for natural disaster protection. As far as earthquake insurance is concerned, they are only insured on the Probable Maximum Loss that would be incurred in excess of 15% of the replacement costs. Anything beyond that will result in material losses borne by the trusts itself. This is similar to China Merchant Pacific who does not insure all of their toll roads because the size makes it impossible to do so. 

For others that are interested to know more, Liberal Hills, Onahama and Miyagino Golf Club were affected by the great earthquake and the resultant nuclear power plant accident which took place in 2011. Even though they did receive some sort of compensation for the loss, you can see how this remains one of the main risks investors need to take note of.

Final Thoughts

There are a lot weighing on investor's mind on how one can operate a golf trust business successfully. The truth is, it is not something that we can have plenty of information to research on other than what is already presented in the AR. As investors, we just need to read between the lines and numbers more discreetly such that we do not miss certain information that might be important for our investing decision. 

The trust is not without the risk as I have rightfully presented both sides of the arguments, but whether or not they represent a value from a risk adjusted return point of view remains the call of an investor. One thing for sure is that the trust is losing investor's interest at the moment given the lackluster first year performance that disappointed badly because mainly of the depreciation of the Yen but you need to decide if that is something permanent that will impact the most part of the earnings for the next few years to come. 

For me, I'll be happy if this can yield somewhere in the range of 8% while my other counters in the portfolio are aiming for more growth. My take is that the decline should be quite overdone and I'll be surprised if I see them continue to slide down hard the way they have been sliding over the past few months. Nothing is impossible though so interested readers should do their own due diligence on the matter. 

What do you think of this trust? Will you be interested to add this into your portfolio?

Wednesday, July 15, 2015

Why Are Investors Afraid Of Opportunity Losses More Than Actual Losses?

Since I began investing about 5 years ago, I developed a state of consciousness and conclusion that investors are actually afraid of losing more opportunity losses than actual losses. This conclusion was made through a series of events, including looking at fellow investors' activities as well as experiencing some of the investing decision myself.

This of course does not simply apply to investing alone. In fact, we see this sort of behavior in almost every aspect of life. We try to keep up with the Joneses, buy diamonds that are bigger, go to vacation destinations that are more exotic than the norm, etc. We are always constantly comparing ourselves with the people we know because we want to be better ahead, even if we are already winning the game ourselves.

We, as investors, regardless of whether we subscribe to the risk taker or risk averse mentality, are aware of the risk of permanent loss of capital that we may be subjected to when we invest. Nevertheless, we still believe that stocks represent a long term investment that can multiply our returns over time. Some of us subscribe to fundamental value investing while the prevalent may be towards more of technical analysis these days. The level of individual activities in investing is of the belief that one can perform better than the average people does and if we compound these returns over time, this can add up quite substantially.

Take bonds for example which are assets that grown to be relatively unpopular in Singapore (as compared to stocks and properties). Most of us know the basic of how bonds work as an assets. As a bondholder, we are essentially providing loans to the government (or companies) and in return we get a fixed percentage of coupon paid to us. The main reason I can think of why bonds are generally unpopular with the community is because they offer a fixed percentage of coupon rate until maturity that are stagnant without accounting any "growth" or "increment". Again, because we are a bondholder instead of equity holder, we are not entitled to any growth a business owner would enjoy. This was not helped by the fact that in recent years, we have liquidity favoring the equity market because of low interest rates. By using this logic, investors flock to hot assets like property and stocks that provide supposedly higher returns for them and investors do not certainly want to miss out on these opportunities while liquidity is pushing these assets up.

The STI ETF or the Permanent Portfolio structure is another example of proven returns based on a long term historical data available. Investors could simply stick by the simple investing principle and enjoy decent returns over the long run. However, many investors do not choose to do so because they are afraid of losing more opportunity losses if they didn't invest elsewhere, especially highly driven assets at certain point of time. The high level of individual activities has instead returned them lower returns than these simple investing methods because they aren't capable beating the system.

This could well go down due to psychological matter and the notion that more activities in investing results in higher returns over the long run. It's probably akin to going in to a casino and yet you're spending your precious time playing the slot all night along.

I have not even included people who are in a binary position of all in cash versus all out cash. Talk about the investors from the 2008, 2011 and 2015 I just mentioned in my previous post. Hmm.

Are you like that too? Why do you think investors are more afraid of opportunity losses than the actual losses?

Saturday, July 11, 2015

Stress Test For Small Cap Stocks

Before you continue to read the rest of the article, I have to warn that it's going to be another piece of pessimistic view which follows from the previous article. This article is written since we are in the midst of a global rebound from the turmoil of the recent Chinese and US market, so I thought it might come in handy and practical. For others, I'll promise to write some happier views in my next post at best.

Small Cap stocks have been one of my personal favorite in recent years. These stocks have some of the best earnings potential and balance sheet we've ever seen compared to others and valuations are not unreasonable. Fellow blogger, Investment Moat, has written an article about small stocks (Link Here) and he mentioned that not all picks of these small cap stocks will work out. There will be a couple which will propel multi-bagger returns for the portfolio while the rest are probably value traps. It is the responsibility of the investors to dish out the value play from the value trap and some luck probably plays a part more than skills. This is vastly different from picking some of the blue chip names we are more familiar with because the latter are usually backed by more powerful institutional and sovereign funds, compensated by a much more expensive valuations.

For the purpose of this exercise, I am going to pick up some of the small cap stocks which interest me and conduct a stress test tolerance on these stocks. I will also be using the most recent 2008 GFC and 2011 Euro Crisis as part of the stress test trough period to see how these stocks are doing back then and now.

  • China Merchant Pacific
  • Riverstone
  • Silverlake Axis
  • UMS
  • Sarine Tech
  • Nam Lee Metals
  • Second Chance
  • Boustead
  • Kingsmen

Balance Sheet Strength

The first stress test is to check on the strength of their balance sheet.

On the overall, it looks like most companies have a much stronger balance sheet now as compared to back then in 2008 and 2011. Companies which are visibly in the net cash position for years have grown their cash position to even more in 2015, with Riverstone, Silverlake and Kingsmen leading the pack. I've previously mentioned that while keeping cash increases the strength of the balance sheet in general, hoarding too much cash may not be the best decision as it erodes the long term roe of the company.

Companies which are in the net gearing position such as China Merchant Pacific, Second Chance and Boustead are usually asset heavy, with mostly PPE or properties development consisting the majority part of their assets. This does not immediately discount them as being inferior from the rest, it just simply means that they are not as liquid as the rest who are in the net cash position.

Balance Sheet Stress Test

Net Cash as a percentage of market cap %

Earnings Valuation

The second stress test is on their respective earnings valuation.

Given the overall general market trend, it's not surprising to see that most, if not all current earnings valuation are much higher now as compared to the low of 2008 and 2011. Most of these counters have a much stronger balance sheet now as compared to the past, but that doesn't mean that the low of 2008 and 2011 will not be repeated. We just need to know that it CAN happen to allow us to prepare for more room for unexpected things.

I've also included below the implied potential downside risk based on the latest earnings should we revisit again the magnitude of 2008. They are not the holy grail methodology to compute the implied downside, but they are definitely an important mitigation risk that investors need to consider should the world goes into extreme turmoil once again.

Earnings Valuation Stress Test

Implied Potential Downside Risk

Final Thoughts

There's plenty of local investors and friends who have expressed their interests in awaiting for the correction to come and that is a good sign because I'm basing on the assumption that they are ready to stomach the downside and take the opportunities given, either through having sufficient warchest to deploy or having the right mentality to approach them.

The investors from the 2008, 2011 and 2015 will tell you different stories because they have walked and experienced the different walks of life, given the different magnitude of their investing experience in the market. Those who have experienced the magnitude downturn of 2008 will have expanded their mentality of how much they can afford to stomach, including dealing with the less certainty of job security, lesser salary increment, bonus and the noise coming in from all over the media.

If you think just by investing in blue chips you are spared, you may want to revisit those time when Creatives and NOL are still blue chips or read this post I've written earlier about blue chips (Link Here).

For myself, even though I am currently holding a warchest of around 35% in the overall portfolio, I would be a liar if I tell you that severe market downturn does not totally affect me mentally. Take existing investors of Silverlake (vested myself) for instance. We invest in the business because we are determined and confident in their business moat, financials and management, but whoever tell you that they are not affected mentally when the implied share price potential downside is $0.12 (see table above) will be lying straight through their pants. When you see your share price goes down from the high to the extreme low, you'll be asking a lot of questions, including your ability to prospect the company in a logical and efficient manner.

Let me give you another analogy in more layman terms. I am a sucker for eating Salmon fish. Whenever I go to the supermarket, I would check for discounts on the Salmon they are offering on that day. Salmon is an expensive dish, so I'm most likely to buy when they are offering discounts, given the certain limitations that I would have to eat them within the next 2 days since it's probably not the freshest around. I love such deals because there are compromises between myself and the supermarket. They can get rid of the stock while I can get cheap Salmon that I like. However, should the day comes when I see Salmon is offering at $0.01 (extreme discounts), I'll be up on my feet and be very wary because I would be asking if my prospecting of the expiry date was wrong or in fact if they have already expired. I think you get the idea.

I'm not trying to scare the hell out of investors out there but you can't deny that in the stock market, anything is possible and probable. Even given the best preparation you have made out there, you still need to constantly review your prospecting of the business, your asset allocation, your job security, your downside tolerance level and your ability to survive and prosper during a severe market downturn.

Thanks for reading,

Vested in China Merchant Pacific, Silverlake Axis, Nam Lee Metals and Kingsmen as of writing.

Wednesday, July 8, 2015

Are You Panicking In The Market Correction Today?

I could sense some form of excitement amongst my fellow financial bloggers and facebook group of friends. Today, the Shanghai and HSI market plunged rather badly, providing contagion to its nearby market Nikkei as well as STI and the rest of the Asian market. The feeling of "correction is finally here" has risen amongst the more seasoned investors, but there are some who feel trapped and scared, perhaps given their lack of experience investing in the market, either through herd investing or investing at the peak of the share price.

I think it's probably a good time to look back at some of the recent posts I made in relation to what investors should be doing during a market downturn. This doesn't take away the emotional fear which investors would naturally possess, but rather a clarity on what investors should expect during a market correction.

The Firefighter Gene Way Of Investing

What Should You Be Doing In Current Market Conditions?

What Is Your Goal In Investing?

Psychology In Crisis And Herd Investing

Pacing Your Buying Activities

My Feeling Today

I'm experimenting my emotional feeling in the market correction today, not just because share price has fallen which makes it a cheaper buy, but also the psychological factor in trying to understand how investors would react given first a small market correction, buying activities, catching a falling knife, holding on for further drops and bigger market corrections.

I've experienced a correction with a magnitude larger than this, but I was much more inexperience back then.

Today, my focus was directed right at the target of the shares I've been researching for a long time but has not had the chance to add on. This includes potential new additions as well as the current holdings in my portfolio. There were some other emerging value play that came out of random, some companies which has not been in my watchlist but has caught my attention. 

I believe this is what most investors would experience during a bear market. You have limited cash yet you have many more value emerging out of the correction. This is now no longer about a game where you had to pick winners. You are convinced that a lot of these companies are winners in the long run, but because you have only such limited amount of cash, you need to pick the best of the best such that you don't lose out on the opportunity funds.

I'm still not convinced I am seeing any panicking yet so the same would probably go to most investors out there. There are some who would hold on to their bullets while there are some who are nibbling a little out there already. Regardless, I hope everyone has a plan of their own so that they won't be caught naked or with too much clothes on when the tide turns around.

It's just the first day since a long time that we see such brutality in the market. 

I'm sure more feelings will emerge in the days ahead should market plunge further.

What about you? How do you feel during a small market correction today?

Monday, July 6, 2015

Half-Year 2015 Objective and Appraisal

We are officially in the second half of the year now and it seems just a couple of weeks back that we celebrate the end of 2014.

Since we are officially midway through the year, it's a good practice to look back at the objectives we set earlier (Link Here) and do an appraisal of how things are going. For myself, I do take these objectives seriously because I put in a lot of thoughts into it and naturally I would want to see them progressing well. Without further ado, let's take a look at each of the objectives and how things are progressing:

1.) Capital Injection of $36,000 and Networth of $333,105

I'll break this down into two parts.

The first is on the capital injection. I did mention that savings are going to be very tight this year due to having a child expenses. To top that off, my wife has also stopped working so that brings double impact to the household expenditures immediately. $36,000 capital injection objective would translate to about $3,000 savings per month, which would go directly right into investment. Of those, about $1,000/month comes from the dividends, so the savings out of the salaries would be $2,000/month. I've done pretty okay in that aspects, as we can see the overall equity networth increases from $279,780 in Dec 2014 (Link Here) to $300,020 in Jun 2015 (Link Here). Not all of the increase are due to the capital injection though, but a major play would be from it I concur.

The second part is on the networth objective at the end of the year. Looking at how things are progressing, it looks like I will fall short of the target by quite a bit. I can probably hit around $320,000 by year end should market goes into consolidation mode but we'll see how things will turn out. Again, I will not be overly concerned with the networth target because that's not entirely something I can control with the mood of the market playing a big role. If I can add on more cheaper shares while my networth remains lower, I'll take it right away.

On a separate note, I have also done my CPF Top Up of $7,000 (Link Here) for this year, so the shortfall will probably be coming from here.

2.) Projected Dividend of $18,000/year ($1,500/month)

Year to date, I've received a total of $5,603 in dividend income so far, which translates to about 31% of the goal. It's a far cry from the original target and I foresee the year end to come in at around $10,000 for the best case scenario.

The main reason for this is due to the lower achievable portfolio target as well as more cash holding in the portfolio, which brings about very little interest income to cater with.

We still have the big August and November months coming, so we'll just have to wait for things to turn out.

3.) Improving Personal Cashflow

Savings are tight this year but cashflow has been improving really well this year compared to the past couple of years.

I think the main reason is due to more discipline and handling of the cashflow, taking the system more automated than manual. For example, I'll make a habit to clear all my credit card expenses before I leave anything for my investment. Some people advocate the paying themselves first before spending but I actually think the opposite works better for me. As long I can control my discretionary expenses in check, the rest of the money would go into the investment pool (or warchest) which can be a lot more than if I decide to pay myself first.

Preference is subjective, It depends on which method you are more comfortable with. Both methods should work out fine.

4.) Writing more regularly and Blog content

This year I've met a lot of new bloggers and readers through content interaction with them. I feel this is the best part of writing as I get to interact and exchange ideas with these alike minded group of people.

In terms of writing for this year, I think I've kept the intensity going from last year so I'm pretty satisfied in that sense. Learning will still continue on an ongoing basis and I will continue to share anything that I am finding it useful to the community.

There has been plenty of new faces of bloggers in the community recently. I think it's a great chance to also hear from them from a different perspective but the same way some of us started blogging in the past.

5.) Reading at least 1 book a month

I can't believe this but I am progressing rather well for this for my standard.

To date, I've finished reading Security Analysis, Barbarians At The Gate, Project Rosie, Fault of my Stars, Irrational Exuberance and Wealth of Common Sense. These are some really great books that have increased my understanding of the subject matter and I like that the habits of reading get kicks under way more than ever.

6.) Eat less than 8 instant noodles in a year

It really sucks because I started off well by not consuming them for the first 3 months and then it just toppled from there. I think I have eaten about 10 instant noodles in the last 3 months from Apr to Jun and this really kicks in the hard truth about perhaps not being strong enough mentally to sustain the habit. I found some really great Korean noodles on the web that kick start my old habits and it doesn't help that I found a really cheap but super delicious instant noodles when I stepped in Giant.

Though the goal is somewhat over, I'll be trying hard to contain myself for the rest of the year and beyond, so we'll have to see the mental strength.

7.) Personal Mystery Project

I've blogged about completing one part of the personal mystery project when my wife decide to open her online shop at 24Fabulous (Link Here) and here for the instagram link:

4 months into the project and good to hear latest that we are on break even already. What was planned to be a small affair has now grown over the past 4 months, so things are going well underway. In fact, I can see that she is at times much busier than I am at home. But she's really happy doing it.

I am still in the midst of working for another project that is underway. I'll foresee them to be completed by some time early next year so I'll probably make it known once it's closer to being done.

So that's the plan for now. 7 goals. I'll keep focusing on these goals while maintaining the balance between work and family. The kid is taking a huge toll on my health so far, but I probably won't exchange him for anything in the world.

What about you? How has your half year goal been?

Thursday, July 2, 2015

Recent Action - Kingsmen Creative

This week, I made a purchase of 15,000 shares of Kingsmen Creative at a price of $0.98.

After recently adding Silverlake into the portfolio (Link Here), I am delighted to add another company that fits into my criteria of strong business moats, high free cash flow generating capability, strong Return on Equity figures, and a superb strength of the balance sheet. More on those will be explained in a short while. This adds into the collection of similar companies I had in my portfolio that fits into the same criteria such as CMPH, Vicom, Silverlake, Nam Lee Metals, etc.

This analysis and decision was made after talking to a fellow blogger and good friend on the qualitative and quantitative nature of it's business, including how they operate as a business and how the market perceived to value these sort of industries.

If you have been following the recent Sea Games which was held in Singapore, Kingsmen should not be a foreign company to you. The company has been bidding some of the world's most important event in recent years and their niche industries allowed them to be awarded to become one of the leading sponsors of the games.

Business Overview

Kingsmen Creative is one of the leading service contractor that specializes in many prominent events in Singapore and the rest of Asia, including conceptualizing the interior behind many of the high end fashion brand names such as Chanel and H&M, events and exhibitions such as the Formula 1 and theme parks such as the Universal and Disneyland in Shanghai. Their main core business and operations are in:

  • Research and Design
  • Retail and Corporate Interiors
  • Exhibitions and Events
  • Thematic and Museums
  • Alternative Marketing

Financials Overview

I come from a profession that deals with financials all the time, so I'm a pretty sucker for financial numbers that look great to impress me. Since I am pretty sensitive to numbers, I usually bide around my analysis using a bottom up approach from the company's financial figures.

I have tabulated a summary table for the company's financial figures for the past 8 years (from 2007 to present) and included some of the most important financial metrics I usually require to analyse.

Kingsmen's Financials - 2007 to 2015

The company has been generating very good and steady increase of topline figures across the years, with increasing revenue while maintaining a respectable margin since the past 8 years and more. This is important because this shows how the company deals with external events such as competition entrance into the market share which could eat into their margins if they are not being competitive.

Their bottomline profit margin tends to stay across the 6% margin across the years and as you will see later, it is important that they maintain a steady growth of their topline while keeping cost competitive in check if they want to grow their earnings. Failure to do so will be detrimental to their growth as we've recently seen in companies such as Japan Food Holdings, who are struggling to keep afloat their high headcount costs which eats into the profit margin.

The Return on Equity (ROE) is an important metrics that I usually keep an eye on. Over the years, they have been generating a respectable ROE in the range of 23% while maintaining their financial leverage low. In some of my previous analysis on other companies, I usually like to break the ROE down into 3 financial levers to check the efficiency of the figures, namely Profitability, Operating Efficiency and Financial Leverage. I'll skip this exercise for this analysis in view that I had their margins and financial leverage checklist in place. The company has had some cash hoarding and accumulating for a number of years now, which typically strengthen their balance sheet but drags down the ROE of the company. In this sense, this is very similar to what Vicom is currently doing.

The company business model is built upon such that they operate in an asset light environment, with talent resource an important asset metrics to the company. The company has a low capex requirement in this case, which means that the company is capable of generating a high free cash flow ability as long as their topline and bottomline is increasing. If we take a look at the historical P/FCF as reference, they have been hovering in the range of 8x (with exception to 2009) for the past couple of years, and this is attractive in my view. Not many companies are able to generate such consistent FCF for a number of years in today's environment.

The company has been generating their earnings yield (opposite to the P/E metrics) consistently for a number of years at an average of about 11% now, distributing about half of them as dividends to the shareholders while retaining the rest to grow the company. This is important for investors seeking a dividend growth company because you want your company to grow, and also ultimately your dividends. The company is able to operate in a distribution business model like Reits by distributing out all its earnings as dividends at 10%, but it wouldn't make sense for them to do so. This is a company that has ambition to grow and investors would need to be patient to grow together with them.


As with all companies, risks are pertinent when it comes to dealing with permanent loss of income, which will ultimately impact the bottomline and shareholder's profitability. In my view, the main risks for Kingsmen would come from these factors:

  • Rising Headcount Costs
As mentioned earlier, talent retention is the main asset for Kingsmen and with rising manpower cost evident in today's environment, the company may struggle to keep afloat their costs in check. Their bottomline margin is coming in at around 6%, so they would need to find ways to increase their topline figures in order to tide the wave of a rising cost environment.

  • Slowdown in global activities
The amount of pies across the various global activities has to somewhat increase for this to make sense, otherwise it'll be a case of fighting for the equal number of pies amongst the rising number of competitors. I was highlighted by my friend that this is a niche industry with a high barriers of entry and high switching costs by customers, so customer retention and loyalty play a somewhat important role for that to happen. The opposite case goes the same when Kingsmen is trying to gain more market share from its competitors and they are facing the same barriers as their competitors.


I am using a Discounted Cash Flow (DCF) for valuing the company due to it's predictability and consistency of it's FCF generating capability.

I am setting my criteria by using an unlevered FCF for the next 5 years starting from 2014, growing them at a terminal growth rate of 3% based on the profit figures, discounting them using a Weighted Average Cost of Capital (WACC) of 10% and using a Terminal EBITDA multiple of 10x, which is the average normalized multiple for the past 8 years. 

Sensitivity analysis of standard deviation +1 and -1 has been added for further reference and analysis.


  • WACC = 10%
  • Terminal Growth Rate = 3%
  • EBITDA Multiple = 10x
  • EV/EBITDA = 9.3x
Based on the above assumptions, the intrinsic value came up to be at $1.25.

Assuming we are taking in some margin of safety discounts to our initial assumptions, we now get an intrinsic value of $1.00.

Based on the Gordon Perpetuity Model of using a terminal perpetuity growth rate of 3%, we now get an intrinsic value of $1.70, which presents a 70% upside and comes in line for long term investors who are willing to hold this for the long term.

Gordon Perpetuity Model


The share price has increased about 10% since I started monitoring them a couple of years back when the share price was less than $0.90. I still think it presents value at this price and management has proven their capability time and again that they are able to withstand challenges in the midst of uncertain global environment. Balance sheet has also strengthen quite remarkably since a couple of years back.

This should be a good company to own if you are thinking of holding them for the long term. I think you should not expect any fireworks you've seen in other companies but instil a steel of patience to grow together with the company. As for myself, I'm really excited to be able to add on companies with strong moat into the portfolio.

I'll be updating my portfolio with the latest update shortly with this purchase.

What do you think of this company? Will you decide to invest your hard earned money in this sort of company?