Tuesday, March 28, 2017

How Our Brains Are Wired To Make Investment Decision

We often get questions either in person or email asking us on our thought process when making investment decision.

I tried to explain on one of my articles back then here on how I generally consolidate my thoughts around what's needed to pass through an investment channel in my wired brain function before I put my money in a particular company.

We have plenty of good bloggers in the community who are able to dissect through financial numbers of companies and explain the thesis or rationale to invest in the particular company.

What the finance community is generally lacking of though is the ability to explain these thought process from the moment an idea catches up to the time the investment is materialized. This is even made harder if the person we are relaying to is a beginner in investing. It is not only the tangible portion that can be transported but the thinking process is more challenging.

Kyith wrote a good article recently on the thought process behind the expected return from an investment which I thought warrants more than a thumbs up. I feel like many people are under-appreciating the importance of having such thought process in place before they could start anything about investment.

If you are into project management or have taken a finance or PMP module previously in school, you would realize that they would like to associate it with Net Present Value (NPV).

In layman terms, NPV is nothing but an indicator of how much value an investment can return after discounting it for a specific period in time. Generally, when NPV is greater than zero, we should accept that investment because that is returning us money.

This is the same with expected return and probability because at the end of the day, we want our money to grow. The discount rate is the tricky one here to decide because they are a variable function just like probability and it would swing the result from one onto another greatly if they are different.

This is probably the reason why you see many aunties and uncles queueing up to put their hard earned money into a fixed deposit promotion campaign. If the risk of default is low, it should be generating positive returns and that's the most important part of making money work for you.

An investor would usually benchmark his or her position to another product that is offering a definite or guaranteed return (or at least it is close to 99%) such as the Singapore Savings Bond or treasury bond issued by well credit rated company or country. 

A more savvy investor would benchmark to a different product that are giving them options to weigh in between the investment decision. This is why when we usually sell our position, one of the question to ask is if there are a better product out there giving us potential greater returns. Note that I use the word "potential" because they are not guaranteed in nature and thus have to be taken into consideration. But a good investor would have weighed the risk and computed the probability of an event not happening in making the decision.

If we take out greed out of the factor, I sincerely believe that everyone can learn well from their investment by taking baby steps and understanding how our brains are wired to make informed investment decision. This can start from putting our money into a fixed deposit and then slowly moves up the ladder gradually as we begin to explore more of what we already know or not knowing. It is often because of greed that causes the pitfalls because we mess up the steps in our brain thought process by thinking that we already know something when we actually do not know and that is something that will kill us.

Embrace the fact that no one knows anything from the start and there is a learning curve to be able to know something better in the future. This way, we keep on learning and making steps on informed decision that wired our brain with our action, consciously.

Thursday, March 23, 2017

$500K - Second Milestone Target Reached

This is an important milestone for me to journal so I could look back in the few years to come to see where I am today. It's importance means so much to me that I think it deserves an article of its own.

The last time I hit my first milestone of $250k (Link Here) was back in April 2014, where coincidentally I had my first son born on the exact same day. So many things have happened since then with my first parenting experience, the graduation of my MBA, the promotion of a new career role, and the recent birth of my second son. During the period, we also traveled to various other countries as a family and visited places like Hua HinHongkong and Krabi.

That's life for the past 3 years for me. 

I've experienced happiness and accumulated experience.

Accumulating experience in progress...

How It All Started

I've actually started off quite wasteful when I was young.

After graduation, I maintained my interests in chasing the latest fashion and gadgets and did not quite know what to do with the income I earned from my job.

I signed up for an ILP product from Manulife and bought a WL policy which I have since terminated both, with the latter very recently.

One day, I decided that things would have to change and so I decided to go into investing after reading a couple of blogs from bloggers which still existed today.

I had a huge project when I started investing some 7 years ago at this point.

The goal was to eventually reached a stage of financial independence, where in my definition that means a passive income of 1.5x of the expenses incurred. There are people with their various own definition of what financial independence stage means so they differ one to another.

1st Milestone - $250k

If I were to attribute a theme for the first stage of the milestone, it would be Growth.

At the back end of my head, I knew that I had to focus on something which could propels me to a head start in having a larger base. I decided that having a successful career growth in the first few years of my life was going to be extremely important and so I worked hard towards it. I went for it a lot more aggressive than I would for my investment which was considered minuscule back then.

It also helps that I took advantage a lot during the 2011 Euro Crisis situation by putting most of my money in and it gave me a huge return when the market rebounded back.

Soon, I realized that investing wasn't easy and I continued to learn from the mistakes and apply the context in future. Thankfully, there wasn't any fatal mistakes which dragged down my capital base.

2nd Milestone - $500k

The theme for the second stage of the milestone has to be Accumulation.

It took me 3 years to get from the first to the second milestone.

Both my career and investment seeds which I have planted in the earlier years have reaped fruits and are paying a nice dividend. I played my trump card fairly decent and it has given me a huge advantage in this continuous journey I will have.

The market has not seen a huge dip since we last seen in 2008 and 2011 and I cannot say that I've done well without being mentally tested in the bear scenarios. 

I think I had somewhat positioned for luck pretty well in the past few years and I have some huge gains which I have realized in the market which helps the portfolio to continue growing.

Over the last year, I have also cautioned and prepared myself for the upcoming huge expenses I have had to incur for the family. I think the calculation went pretty accurate and it helps that I don't get surprises along the way.

$500K - Investment Breakdown

There were some readers who asked me of the breakdown in detail so I tried to see how I can do that.

Out of the $500k in the portfolio, the capital cost came up to $312k while capital gains and dividends totaled up to $188k.

It is important to me that I do not make huge losses in the market because that capital base of $312k could swing the other way if I were wrong in the market. For instance, if my returns were negative 5% over the past 7 years, it would erode my portfolio to $296k instead. That would have been hugely detrimental.

I don't track my performance closely like a hawk but I do monitor them from time to time.

For me, as long as the value of the portfolio keeps growing, it feels like I'm doing something decent and right. I understand that advantage of tracking one performance to a benchmark but at least to me investing does seem like a hobby right now, more than just a "job" to make more money. Maybe it will change someday.

TWR - 2011 to 2017

XIRR - 2011 to 2017

What's Next? - 3rd Milestone

I'm going to take baby steps at a time and not rushing in to hit my goal.

The next milestone stop for me would be to reach the goal of $750k and if history in the market could help, I am targeting to achieve them in the next 3 to 4 years hopefully. With the higher expenses, I might suspect the higher range of the 4 years but it doesn't matter too much to me at this point.

I think I've grown way more than simply hitting some financial goals that I have.

Equally important to me would be to accumulate more life experience and I am actually more excited to see my 2 boys finally going to grow up in the next 3 to 4 years, which would allow the entire family to try something really out of this world. I think that's what we are going to go out for and that's why we are going for financial independence.

I do hope in the next 4 years I could be on the way writing my 3rd milestone experience and looking back at the past 4 years of life experience where it could be another massive journey.

Thanks for reading.

Monday, March 20, 2017

"Mar 17" - SG Transactions & Portfolio Update"‏

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
CDL Hospitality Trust
Fraser Logistic Trust
IReit Global
LippoMall Trust
Far East Hospitality Trust
Keppel DC Reit
Sabana Reit
First Reit
Total SGD

It's been a very eventful and action packed month this happens to be.

I can't recall exactly if the market moves up from the previous month but my portfolio seemed to benefit quite a bit from it. I guess the recent M1 saga helped to push quite a bit upwards.

Let's see the many activities I've made on this month.

I started off by adding Comfortdelgro into the portfolio which I blogged over here. I still think that current valuation is fair and many issues that arise out of their taxi business have been priced into the share price. 

I also bought off ISO Team for momentum play which I have then sold off recently, incurring a 5% loss. It was meant to be a calculative move but I guess it didn't work out as expected. There's some learning points on me on this one.

I managed to divest off my ST Engineering since the recent run-up due to the stronger USD and defence budget. The valuation is currently in the top range of the historical mean and unless earnings can recover fast (which I doubt in the next 2 years), I think it's hard to see them going up further.

I also added UOL right upon the announcement of the relaxation of the cooling measures. I blogged my thoughts over here. I have one other property counter FCL which managed to run up as a result of this news as well. I think property developer is due for a recovery and it has been the top performer ahead of most other sectors to date.

Last but not least, I also added Far East Hospitality Trust which I blogged over here. I'm going pretty big here on the hospitality sector as I'm also heavily vested in CDLHT so we'll have to see if time will prove so. I believe the sector is coming to the bottom this year and will be a value play for the next few years to come.

I also take a bidding for the recent Kimly IPO (here) which I unfortunately did not manage to get it. It's a pity because the share price immediately double and the amount could have paid off a lot of my expenses in the month itself. I guess I'm always running out of luck in the IPO bidding.

The portfolio has grown from the previous month of $492,646 to $500,961 this month (+1,7% month on month; +34.7% year on year).

My current warchest is running low so I'm probably going to take a break from any further activities this month. I'll have to wait for next month when my bonus will come in and have the cash reloaded again. April and May will be both a very crucial month but I'm gingerly optimistic to achieve the target I've set for this year.

Thanks for reading.

The local market has gone up double digit at 10.8% year to date. How has your portfolio fare so far?

Friday, March 17, 2017

Kimly IPO - Balloting Results

This is the balloting results of my previous write up here on the company.

Balloting Results

I applied for 101 lots but didn't manage to get any allocation at all.

Turns out that balloting ratio was pretty decently spread out. 2 out 25 chances means a 8% chances of getting allocated. That's better chance than the previously hot IPO like Singapore O&G and SPH Reit.

For everyone's information, Katrina (another recent F&B IPO) surged 82% on debut day so I'd expect Kimly to debut strongly the same at about 40 cents to 42 cents on the first day. I don't think I'll be giving a chase on this one. The meats are mostly gone at such hefty valuation.

Congrats to the people who were allocated. My poor run on IPO continues...

Wednesday, March 15, 2017

Recent Action - Far East Hospitality Trust

I've been in a rather busy and heavy month transacting a few recent buys and sells. I'll consolidate my purchase and sells in my next portfolio update shortly.

Today, I've added 40,000 shares of Far East Hospitality Trust (FEHT) at a price of 59 cents into the portfolio.

My original intention was to accumulate more CDLHT shares but on second thought as it is currently already my top position, I wanted to diversity a bit within a different company with a slightly more concentrated Singapore portfolio but still within the hospitality industry.

My thesis on betting big on the hospitality industry is on the belief that the sector will bottom out in 2017 this year and start rebounding on an upcycle from FY2018 onwards. While it is not urgent to get into the sector right now (I'll explain why later), I wanted to accumulate in 2017 where I believe they will continue to see sector performance weaknesses.

When I wrote my article for CDLHT (Link Here), I believe that revpar was close to bottoming as it is currently only a few percentage point from where we see during the gfc. Demand has not been much of a problem in recent years but supply is so that's where we find problems with equilibrium.

Demand still growing year on year for the past couple of years

2017 will see a continued pressure on the sector as there were some hotels that were slated to open in 2016 that has been delayed into 2017. We'll continue to see massive expansion of hotel room supply this year as revpar will continue to decline.

The Singapore Tourism Board is forecasting a 4% growth in demand while they are projecting 6% growth in supply in 2017. Simple economic theory will tell us that equilibrium will move to the left side and pushes revpar down. 

The key play here is to look beyond this year and start to look from next year onwards when STB projects demand to grow by 4% but supply grow by only 2%. I think that's where we could potentially see a rebound in the revpar.

Far East Hospitality Trust

I don't think any investors have been impressed by how this company has performed since they have gone IPO in 2012. To be honest, neither have I been.

The share price has gone on the trend down in spectacular fashion and it has not rebounded since then.

To be fair to them, they've gone listed on times where the hospitality sectors were undergoing difficult period so it is almost impossible to grow organically through increased NPI. 

The management has been doing asset enhancement initiatives on a couple of its properties but it has not helped to mitigate the losses from the falling revpar and occupancy rate.

FEHT has a rather strong balance sheet and people I know are calling for them to acquire properties and grow inorganically to support the DPU. I thought a lot about the reason why they are not doing this and the only reason I can think of is that the management might need a lot more money to fund its acquisitions from its sponsors and it warrants funds not only via debt but also placement and rights issue. The problem with the latter is of course with the share price languishing on the low, it might not be a good time to issue units on the cheap and yet achieve yield accretive acquisitions at the same time.

I suspect they might just want to wait for the sectors to rebound before looking at any further inorganic acquisitions to make. In any case, the properties are from the sponsor so it's left pocket right pocket.

If I could summarize my whole thesis on the reason why I decide to purchase this company, it would be:

1.) FY18 sectors rebound with demand outweighing the supply (FY17 bottoming out);
2.) Completion of Village Hotel Sentosa in FY19;
3.) Terminal 5 and Project Jewel completed in FY19.
4.) Decent debts headroom to gear up when times are right;
5.) P/NAV - Strong investment properties appraisal value despite falling NPI

The main risks that I could think of in my head in terms of the ranking:

1.) Management execution relatively unproven;
2.) Faster than rate hike increase - What this means is not only interest costs is higher but the discount factor for WACC is also higher which in turns will impact appraisal value of their investment properties.

FY16 dividend comes in at 4.33 cents (7.4% yield) and my projection for FY17, FY18 and FY19 would be at 4.20 cents (7.1% yield), 4.45 cents (7.5% yield) and 4.70 cents (8% yield).

From volume support, do lookout for the 58.5 and 58 cents support, it's massive and holding on extremely well in relation with it's daily volume. I think we might see a bottom at this range of the share price.

I think it's a decent play in the next few years to come on this sectors.

Tuesday, March 14, 2017

Recent Action - UOL

This will be a quick update on the portfolio as I added 3,000 shares of UOL at a price of $7.04.

I added this company right after the cooling measures was announced a couple of days ago, which I believe has brought the sentiments of the market into a different direction. Hence, this purchase was more of a momentum play than anything else.

Whilst the relaxation measures for the seller's stamp duty and TDSR is unlikely to bring about greater impact to the overall sales for the time being, I think more importantly it signals that the government are acknowledging the difficult times and are prepared to act accordingly to alleviate by adjusting to the measures they have put there in the first place.

Historical policy measures vs median price

We all know that developers have been trading at a discount since the cooling measures were introduced in 2009. So they have been undervalued for a long time. And because developers are not known to be a good payout master, we'll never know how long we might need to hold these companies if we stay with them.

One of my plan was to get back into developers once the momentum was back up and I thought that this year was a good opportunity to do so.

First, developers are one of the better performers this year as they are already up 16% YTD and you can see that they are inching up off their respective RNAV value, which stands at about 20% discount now.

Second, there is a trend down and reduction in supply over the next few years after a few years of supply glut in recent years which I think will stabilize the market.

Third, the reason why I chose UOL out of the other developers is because they are more a hybrid towards not just residential alone in Singapore but also towards commercial. 

UOL has a high recurring income underpinned from their hotel operations and commercial properties, one of the jewel Novena Square and United Square which will be a medical hub in the near future (Link Here).

They had also recently sold 200 out of the 250 units launched at the Clement Canopy at an average selling price of $1.3k to $1.4k. Looking at those sort of demand, I think we can safely assume that demand is slowly coming back, especially with new home supply going into the other opposite direction.

The interest rate hike will definitely be a knee jerk factor, not only to developers but to all companies that have outstanding debts in their book. Unless we'll see a faster rate hike than expected, I think the market might have priced this factor in.

Saturday, March 11, 2017

What Bruce Greenwald Thinks of Current Market Valuation

Bruce Greenwald is one of the renowned professor of finance at the Columbia University and is personally one of my favorite personnel.

Back late in Dec 2014, I've read books about him and tried to understand and replicate his financial modeling of the Earnings Power Value (EPV) method in great detail. You can read my past articles here if you are interested in the EPV method for valuation. It is one of the important tools of valuation methodology that are being used by many fund houses and analysts today other than the DCF.

Greenwald went to an interview recently and he gave this take on the current market valuation of the US market hitting new high.

Here are the excerpts:

Michael Ricciardi: Bruce has also been recognized across all of Wall Street as the Guru to the Gurus, and so we are delighted that he’s here with us today. So Carl Icahn has said that what’s going on right now is in effect a replication of what took place in 2007-2008, and in fact the market is about to go off a cliff, and that people are going to find themselves and dramatically worse shape going forward than they did at that point in time. And I want to have you about that? 

Bruce Greenwald: Okay, so let’s talk about that in detail. The first thing is that the valuations are actually not as rich as they were in 2007. 

Michael Ricciardi: That’s based on PE? 

Bruce Greenwald: Yeah. Second thing is that the craziness where nobody thought there was any risk, so that for example in 2007 you could buy credit default swaps on Dubai sovereign debt, the riskiest region in the world dependent on the most unstable commodity in the world, which is oil, for four basis points. Which is 1 in 2,500 years they’re going to go completely under. So that craziness is not in the market. The real issue is the earnings power of these companies. So that if you look at people like Jeremy Grantham who has been now for 9 years doing the Carl Icahn story. Their view is that these earnings levels are not sustainable. And what you’ve seen is that as a share of total U.S. income, corporate profits which pre-1990 were about 8.5 percent are now around 13.5 to 14. So there’s been this huge increase in profits. If that increase in profits is sustainable, and it’s likely to continue, then we may have a flat market for a while, we may not have the kind of increase in prices that we’ve had, but we’re probably not gonna see the kind crash we saw in 2008-2009. Now, I think that profits are gonna stay where they are, and I think that’s the important thing to understand. And then I’ll talk about the downside is that people are gonna have to get used to. 

Michael Ricciardi: So, to the extent that profits do stay where they are. Is your expectations that the market will stay in a range? 

Bruce Greenwald: I think that’s right. I mean, I think it’s pretty fully valued at these profit levels. It’s not they’re screaming bargains out there. Things fluctuate, and I think for various reasons interest rates are gonna have to go up, and that’s gonna make the comparison to fixed income a much tougher comparison. So it’s not going to be so easy to buy equities on margin and leveraged equities, and you really will. But let’s talk about what’s really going on with profits. We are in the middle of a transition that’s comparable to what happened in the depression. In the depression what happened is that agriculture died. So, you know the third of the U.S. population that was on the farms had their income fall 80 percent. That what happened then in the depression is all the countries with big agricultural sectors tried to save those sectors by exporting. You had the kind of imbalances that you have now where everybody try to export, nobody wanna import, and the problem was that when you added up overall countries, the surpluses and the deficits have to be zero. So, it was a very long-term problem until the adjustment got made in the course of the Second World War and they got everybody off the farms. What’s happening today is that manufacturing is dying, and everything is going to services. 

Michael Ricciardi: U.S. manufacturing? 

Bruce Greenwald: Global manufacturing. That’s why the Chinese are going down the tubes, and that’s why the Japanese have gone down the tubes. I don’t know if you remember, but when you got out of business school the Japanese were all the rage. Everybody was studying the Japanese. 

Michael Ricciardi: One square foot of property in Tokyo cost, you know, million dollars. 

Bruce Greenwald: Million dollars. Everybody was going to be dressed up as Mickey Mouse entertaining Japanese kids at Disney Land. Didn’t happen. And that’s because they concentrated in the sector which is manufacturing, which is just going away. And it’s going away for the same reason that agriculture went away, which is productivity growth is 5-7 percent and demand growth is like 2-3 percent. And so employment is going away, value added is going away. And you see that going on. What that means is that everybody’s trying to save those sectors. Everybody’s trying to export. You have these huge imbalances where the Germans who can control the appreciation of the market now that they’re part of the Euro, where the Japanese who control their currency, where the Chinese who control their currencies. Where they all basically maintain their currencies to maintain exports are exerting extraordinary deflationary pressure on the world. That’s the bad news, and that’s not going away. Nobody is talking about getting rid of manufacturing sectors. On the other hand there’s a good news side to this; everything is going to services. Now, profits come from either fair returns on assets or barriers to entry, which is protected markets. What barriers to entry look like is guys dominating markets and keeping everybody else out, which is economies of scale of various sorts. Whether it’s network effects, whether it’s just fixed cost, or whatever, coupled with enough customer captivity so the guys who wanna enter can’t come in and steal their market share. Big global markets, which are the manufacturing markets, which are the commodity markets, are very difficult to dominate. The markets that you can dominate are local markets, either in product space, so that if you look at the people in the personal computer industry have made all the money. It’s not the IBM’s and the Apple’s who originally dominated it. It’s the Microsoft’s who did only operating systems. It’s the Intel’s that did only CPU chips. It’s the Oracle, it’s Google and so on. Or in geography, which is how Walmart made all that money. They dominated geographies, they kept other people out, and they made a ton of money. As you move to services you move to local markets. The other thing about these service markets is they’re incredible stable. It’s not like you have a replacement cycle the way you always had with capital goods. Or you have these huge price swings, the way you have with commodities. So you’ve got very stable and safe sources of income increasingly that are not dependent on investing a lot. So actually, the thing that’s going to keep your kids at home to til their 55 years old cause they can’t get jobs which is this transition out of manufacturing… 

Michael Ricciardi: This is supposed to be the good news? 

Bruce Greenwald: Is really good for companies. So I think in those terms that you’re not gonna see some big reversion to the mean to historical profit levels. So, and because of the stability, I think you’re not gonna see things like the housing market or any other markets that are overextended, and again as I say, you don’t see those levels of no fear in the options markets that you saw in 2007.

Wednesday, March 8, 2017

Kimly Limited IPO - Should You Be Getting This?

There's a new IPO in town and it's not any stranger to most neighborhood folks who have heard of the brand.

Kimly Limited is inviting man on the street to become part of the shareholders by opening a total of 173,800,000 new shares which comprises of 170,000,000 placement and 3,800,000 public tranche at an offer of $0.25 for each share.

Indicative Timetable

About The Company

Kimly Limited operates and manages coffee shops chains as the master leaseholder which then lease these food stalls to tenants.

They operates a total of 64 food outlets, which comprises of 56 coffee shops, 3 industrial canteens and 5 food courts.

They also had a central kitchen where all the activities for the food preparation was done at.

The current occupancy rate was at 98% and they own 5.8% market share of the business.


Let's first go to see the financials of the company.

The company had a decent cagr growth of 7.6% and 9.9% over the last 3 years. To be frank, this isn't hard to do when they have the cash to operate more food stalls to lease out given their impressive gross and net margins.

The company boasts an impressive gross margins of 21.5% and net margin of 14%. Do note however that profits attributable to shareholders are around 50/50 with the NCI.

We can see that the company operates under a light asset model. 

Cash equivalent makes up around 67% of the total assets and that says all about it.

We can also see that cash turnaround trend is also great when they had such a remarkable less receivables and much higher payable on their books.

That says a lot about their business model.

In terms of Cashflow, they are also pretty much cash generative as they have such an impressive free cash flow generated.

Maintenance capex is low and is usually in the form of restoration costs and also some equipment changes.

Comparative Business Model

I've done some analysis on F&B companies in my past articles and draw up some pretty similar stats.

You can view my past articles on Jumbo here and F&B in general here.

Kimly do not operate exactly under the same business model as Jumbo, Sakae, Tunglok and Japan food holdings but what we can see from the latter is that only Jumbo makes the cut outright successful in terms of the numbers. The other 3 has such a difficult time trying to reduce their overhead and increase productivity that their net margin remains low. The latter are also asset heavy which drags their roa and roi numbers downwards.

Perhaps it's better to operate under the Kimly model. It's asset light and cash generative. Though we are unsure if the options to grow are more limited that way.


Valuation of the company is at 12x earnings and 5x book value.

I don't think it's the correct way to measure this via book value since they are asset light model so I would measure this via the free cash flow method.

If other F&B companies like Japan Food Holdings can be valued at 20x+ under such a heavy asset model, I think this might be valued higher.

12x earnings would look cheap if the company can grow well over the next 5 years.

My Thoughts

I do not quite understand the need for them to go public when they had so much cash in their book and they are generally cash generative.

I suspect the reason they go public is the need for branding as they are planning to open up an online ordering platform by partnering also with Ubereats and Grabeat. 

When they do M&A, branding also plays an important part in tendering process.

With 3.8m shares on the public tranche, investors can expect to get nothing or little. Even if you are lucky, it'll be at most 3 to 5 lots.

I think this will debut well and will be valued much higher at around 18x earnings. I suspect share price would go to as high as 45 cents before settling down around there. With growth to come over the next few years, it might be well worth to see how well it can run from here, though of course execution risk is another matter altogether.

I'll try bidding this for fun and see how it goes. Maybe I can earn some free milk powder money in Mar :)