Saturday, May 31, 2008

Investing in a bear market

The situation

Currently the Singapore stock market is in the midst of a bear market. The STI has fallen almost 30% from the highs of 3800 to around 2800. Compared to the peak, STI has recovered almost 500 points from its bottom, a 50% rebound. This is in line with the DOW theory. Although I am no chartist, I believe the market index will hover frequently between 50-200 points. This provides excellent trading opportunities of financial stocks such as DBS, UOB and SGX.


If you have the capital to buy and hold the above stocks even when market turn against you, it might be rewarding (and exciting) to trade the financial stocks actively.

DBS is currently a good pick for trading as its valuation is cheaper relative to UOB and OCBC. It has a quarterly dividend payout policy, thus when the day moves nearer to XD, DBS price will go up decently as investors rush in to buy for the $0.20 dividend. Try to sell it 2-3 days before XD for a small profit if you are not investing for the long term.


Japanese Yen is also a good hedge against the bear market. I do not want to go into the details of Yen carry trade here, but you may make a decent profit if you buy Yen when the exchange rate is S$0.0127 to 1 Yen. Current exchange rate is S$0.01287 to 1 Yen.

The value (demand) of Yen goes up when stock market falls as investors rush to buy Yen by cashing out the stock market.

In a nutshell, Yen is negatively correlated with global stock markets’ movements.

My strategy

As for me, I do not have a lot of time and energy to monitor and trade financial stocks frequently. Hence I prefer to park my money in decent dividend paying companies to improve my cashflow.

Recently I noticed such companies’ stock prices are taking a dive as institutions have been selling them. For instance, SPH has fallen from $4.63 (2nd April closing price) to $4.28; Starhub have fallen from $3.14 (17 April closing price) to $2.86. Singpost was one of the top traded stocks on SGX last Friday. SMRT and Comfort is not spared either.

This only means a sale is going on for dividend lovers. I will definitely buy more when I have more cash. In fact, I am considering liquidating my entire UT portfolio to buy more blue chips.

Friday, May 30, 2008

Can I invest in this business?

Thanks to a question pose by a fellow sgfunds friend, below are some questions I consider when it comes to investing in a particular business:

1) Business nature: Is there a never ending demand for it’s goods or services? Is the business easy to understand?

2) Dividend payout history: Is there consistent dividend payout annually? How often are dividends paid?

3) Dividend payout ratio: How much earnings are retained for organic growth, debts and paid to shareholders? Can shareholders invest in the business and be paid above treasury bonds earnings?

4) Current and historical profit margins: Are profit margins increasing, stable or decreasing? What are reasons for the change?

5) Current and historical ROE: Is ROE increasing? Did ROE increase due to higher leverage, share buy back or simply the company is generating more value for shareholders?

6) Current and historical PE: Is the firm too expensive to buy now?

7) Comparing business competitive advantage with industry's competitors: What are the business threats and opportunities in current environment? Are there high entry barriers to deter competition? Are they subjected to global competition? Is it a monopoly or market leader?

8) Current ratio: Is growth propelled by borrowing more money?

9) NAV: Is there a chance I can buy the company at a discount of NAV?

10) Management team: Is there good corporate governance in place? Does the management team own shares of that company?

11) Diversified earnings: Are earnings obtained from various sources and regions?

12) Government support: Does the government support the business? Is Temasek a shareholder of the company?

13) Trading volume (liquidity): Is the stock actively or thinly traded? Can I liquidate my stocks when I can investment the money in higher yielding investments?

14) Stock price volatility: Is the stock subjected to local and foreign institutions indiscriminate buying and selling? Does the stock price volatility reflect the nature of the business? Do I need to constantly the stock price?

15) Growth prospects: Can the business grow it’s earnings consistently?

16) Share buy back: Does the company have the mandate to buy back it's shares to stablise it's share price?

If the business can match at least 10 of the above criteria, it is likely I will invest in the stock. Actually most importantly, I must understand the business.

Stretch your dollars series: Reach your destination early

I understand that many peers my age like to spend/shop whenever they get their pay cheques. They feel that it is a reward of their hard work, tolerance to bitchy/domineering bosses and to relax one’s mind and body. However, I do not obtain pleasure from shopping and buying goods that are not necessary. If you take a close look of my expenditure, I rarely splurge on things that are not necessary. In fact, I derive pleasure from reading good books, jogging around my neighbourhood, watching cable drama serials with intriguing plots, deriving income from investments, talking to wiser people on life, taking an afternoon nap, driving down to neighbourhood central for a good meal and meeting up with friends working in different occupations at McDonalds or starbucks.

It does not cost me much to obtain pleasures in life. I have often reasoned that it is easier to spend than to save. It is harder to derive pleasure cheaply than to spend and derive it. Hence, I am doing things the difficult way (relatively) to get the same outcome. Does that mean that I am intellectually less competent than people who choose the easier way to get the same outcome?

It does not matter to me. In fact, I am relieved that simple things in life can keep me motivated and positive to face life’s challenges. Most importantly, if I can retire earlier than my peers, I do not mind to be intellectually handicapped all the way.

At least I can reach the finishing point earlier.

On a personal note, I would like to thank all the encouragements given by members from Sgfunds forum. I have received encouraging private messages and positive suggestions on my investment strategies.

Thank you!

Starhub corporate news: Mio TV poses no threat

StarHub – Nearly a year on since it relinquished its decade-long stranglehold on the local pay TV market, StarHub has maintained that it has not seen a drop in its subscriber numbers so far. The telco said that it is expecting to continue to grow its pay TV subscriber base here by 5 to 10% a year, as part of its ongoing bid to boost its current penetration rate of 44.5%. Latest figures show that StarHub has 508,000 pay TV subscribers out of 1.1m potential households. In contrast, rival SingTel's 10-month-old mio TV had 44,000 subscribers for its pay-TV service at the end of March 2008, up from just 27,000 last December. Even with such a sizeable difference, StarHub's aggressive push to further expand its stable of channels is being seen as a way to build on that advantage over the competition. While maintaining that its cable TV prices were unlikely to fall any time soon, due to soaring content costs, Starhub said that consumers will get more bang for their buck in the long run. For starters, four new channels will be added to the Basic and the newly created Basic Upsize tiers, taking the total number of channels on offer to 159.

Sgbluechip says: Cable TV accounts roughly 17% of Starhub FY 07 revenue. The main cashcow is still mobile, accounting more than 50% of their revenue.

DBS Vickers: SPH

Attractive yield on offer

Story: We like SPH as a defensive play and believe that valuations at this level are attractive for investors to accumulate.

Point: We remain sanguine about SPH’s prospects as it is a good proxy for Singapore’s firm economic outlook. Notwithstanding a recession in the US, DBS Economics is projecting 6% and 6.8% real GDP growth for Singapore in 2008 and 2009 respectively, along with healthy private consumption growth of 4.6% and 4.8% in these 2 years respectively. We believe this should help ensure continuous top line growth for the Group’s core publishing business over the next 2 years. After factoring in higher newsprint costs, a weaker US$, and a quicker delivery of Sky@Eleven in FY09, our forecasts remain largely the same. We have raised our newsprint cost assumption to US$710 per MT for FY09, versus US$615 for our previous assumption. SPH has hedged its newsprint costs up to October 2008, which is currently at over US$800 per MT. We believe that if newsprint costs spiral too high, SPH may look to raise its cover prices (not raised since 2004) and/or its ad rates to maintain operating margins. Nonetheless, with growing contribution from Sky@Eleven,we are projecting 23% and 11% EBIT growth for FY08 and FY09 respectively for SPH. This should translate into higher dividends for shareholders.

Relevance: SPH’s share price has weakened in recent weeks despite posting a strong set of interim results and at current levels, the stock is offering an attractive prospective net yield of 7.4% for FY08 and 8% for FY09. We reiterate our BUY call for SPH, with S$5.65 target price, which is based on sum-of-the-parts valuation.

Sgbluechip says: SPH last traded @ $4.28. This is quite an attractive price. Having paid out $0.08 interim dividend (up $0.01 from FY 07), I expect SPH to pay $0.20 final year dividend (up $0.01 from FY 07) this December. This translates to a healthy yield of 6.54%.

Trade less and earn more?

In the realm of value investing advocated by Ben Graham and his disciple, currently world richest man, Warren Buffet, trading stocks frequently is totally unacceptable. I am incline to subscribe to their trading principles, after all, Buffet build his fortune buying stocks (business). However, principles are often easy to understand and hard to follow. If you just look at the transactions I have for DBS and one can see that I am a frequent trader of the stock. The highest price I bought is $22.50(2/10/07), lowest is $17.98(21/01/08).

Had I bought and held the DBS stock at $22.50, I will still be stuck with a $3000 loss*. Had I bought and held the stock at $17.98, I will be rewarded with a nice gain of $1500*.

I believe in investing for the long term, however during periods of high volatility, it seems more profitable to “hit and run” and pocket capital gains rather than rely in on dividends and “invest for the long term”.

Currently, I believe the markets have relatively stabilised and it is a good time to invest for the long term.
* DBS last traded @ 19.50 on 30/05/08

Thursday, May 29, 2008

Some thoughts of the market

If you have read the Straits Times today, it is mentioned that UBS chief expects worst of crisis to be over. Banks are clearing up their balance sheets and “everything will be over” by 2 years.

How did he know?

I am not as optimistic as he is. (Obviously he has to be optimistic; his rice bowl is at stake.) A housing led crisis (2007-20??) is not quite the same from a stock bubble crisis (2000-2002 technology: Nasdaq lost 70%, S&P 500 lost 41%).

During the burst of a stock bubble, anyone who has invested in stocks will lose money if they cash out. Some might borrow on margin, while others, invest their life savings. For those who invested using borrowed funds, they may borrow up to 2 years’ salary. When the bubble burst, many became bankrupts and spent the next 5-10 years repaying the loans they took to participate in the bubble. However, the market subsequently rebounded. Between Oct 2002-Oct 2003, S&P 500 rebounded 19%, Asia ex Japan rebounded 35%. New highs (peak) were achieved late last year.

The FED cut interest rates to 1% during the 2001 recession. This encouraged majority of home buyers to purchased housing on maximum loan. The loan period was typically 20-30 years. Due to irresponsible lending of banks, many home owners borrowed more than 30 years of their salary in anticipation to make a quick buck on their investment. The stake here is at least 30 years of their future income. Some even went on to buy a 2nd or 3rd property. That’s staking 90 years of their future income!

Compared to the stock bubble where a stock speculator possibly staked at most 2 years of their salary into the market(unless they mortgaged their homes), it seems that a “home speculator” may never pick himself up due to excessive leverage and exorbitant sub-prime interest rates. The home speculator’s poor investment decision will cause his whole family to be in debt, as everyone will be tightening their belts to pay for the roof over their heads.

Will the burst of the housing bubble create larger and longer lasting damages compared to a stock bubble? What we can see now is that the credit crisis is spreading to car and credit card loans, lowering consumer confidence, increasing unemployment rate, forcing FED to cut interest rates to induce spending and fueling inflation. More problems are created before the original set of problems is solved.

Based on my above analysis, it seems highly probable that a housing bubble has a bigger and wider damage influence than a stock market crash.

Will the housing crisis eventually lead to the stock market crash?

That is everybody’s guess.

(I will write my personal insights on investing in a bear market to follow up on the above article.)

My investment philosophy


Above $200,000. It was accumulated from my childhood ang bao money, yearly school book prizes, scholarship stipend, part time work and tuition while in NUS and the past 4 years at work.

Asset allocation-100% equities

I invest 100% of my cash in equities. I believe in contrarian approach and will lock in profits whenever I feel I can liquidate my current holdings and invest into higher yielding instruments.

Many investors might think I can grow my cash easily by seeking professional advice or investing all of them into higher yielding instruments. However, I prefer to do things my way and learn along the way. The trials and tribulations I have to face will only make me grow stronger and sharpen my investment instinct. Investment is not only about the destination, the journey is half the fun!

Risk tolerance

I do not have high risk tolerance and will avoid investing in equities that are highly volatile in nature. S chips, penny stocks and commodities are almost out of my consideration. Unless I have strong reasons and have done due homework, I will not invest in them, at least in the near future. In fact, as you will see from my portfolio of stocks later, you can see the blue chips I invest in are extremely stable in nature and have low price fluctuations.

Recurring income

I invest with the priority of having recurring income, followed by capital appreciation. Hence blue chip companies that provide consistent dividend yield of 4% and above 50% dividend payout ratio are within my investment radar screen.

Some of the stocks I like are banks, telecommunications, transportation, media and oil rig companies.

As I already have about S$200,000 in investments, I do not need to subject any single cent of my money to any unnecessary risk. I just aim to grow them at a single percentage annually to provide a recurring income for myself.


I imagine myself as an ancient man. Everyday upon waking up, I face the choice to hunt for food or toil my little land. If I choose to hunt, I may get lucky and catch several deers or hares for my family. They will get to eat nice red meat for weeks. It is a high risk but rewarding activity. In fact, it can be addictive to carry on hunting as the hunter relish on challenges and the rewards are enticing!

The risk here is that the hunter might get killed in the process and the game is over. Or simply, I come back home empty handed.

If I choose farming, I will need to be patient. I may often go hungry but slowly and surely, I will be able to claim my harvest and feed my family. I may save a bit of the grains harvested and expand my farming area or simply sell the grains for some pigs to rear. Of course there will be times of poor harvest, but at least I know the land and farms outside my cave is mine and good times will come eventually.

In time to come, my pig farm, wheat field will be producing much more than what my family need. I can then sell the excess and start taking over land of other lazy cavemen. I might diversify and build up a fruit orchid as well!

I can see the fruits of my labour literally, just outside my cave. I am in control and I believe I can become a wealthy ancient man eventually.

I apply the above imagination to my stocks selection. I do not invest (like the hunter) in high risk instruments such as warrants and futures as I can lose everything overnight, although it is exciting and lucrative. I do not trade on margin as the interest rates are exorbitant.

Instead, I invest like the farmer. I select stocks that pay good dividends in good and difficult times. They are bread and butter, yet boring to own stocks. The recurring income helps to pay for my bills initially but soon, I can use the excess dividends to buy even more stocks. There is no need for me to risk hunting and lose everything I have.

Eventually, I will become a rich modern man.

Unit Trust (UT)

My unit trust portfolio is globally diversified across regions, sectors and asset classes. I try to apply industry’s best practices such as modern portfolio theory, diversification, and passivity on my UT portfolio. 50% is invested in an index fund (S&P 500), while the rest are invested in Asian equities. They are currently down by 20%.

Wednesday, May 28, 2008

Why blue chips?

I love blue chips. They have strong cashflow have strong and consistently operating history, pay good dividends and produce products that I always use. Even during difficult economic times, they are profitable.

I love getting rebates. Hence, investing in shares of companies that sell me their products/services is a way to get rebates. When these companies pay out dividends, my rebate is back!

Below are reasons and shares of companies I am owning or had owned:

I read the papers everyday, hence I buy SPH.

I need the internet and cable for my everyday work and leisure, hence I buy starhub.

I need to use the credit cards and GIRO services for my daily expenses, hence I buy UOB and DBS.

80% of the exported products I use came via sea. Hence I buy Keppel Corp as it produces oil rigs to look for fuel for my products’ transport. They also own half of SPC.

I travel overseas at least twice a year, hence I buy SIA.

I take a cab occasionally when my car is sent for servicing. Hence I buy Comfort Delgro. I enjoying seeing or hearing people taking cab to work. This is because they are paying my dividends.

I receive numerous bills and sales advertisement weekly. Thanks to Singapore Post. I buy this company as well.

I am not staying in a cave, because there are houses being built and for sale. Hence I like capitaland and city developments.

I like blue chips because their businesses are easy to understand and they have strong corporate governance. Even Temasek owns most of them. Check this out:

Out government may not be always right but they are always correct. Follow them and we are unlikely to fail terribly.

Investment Journey

This blog is a reflection of my investment journey. My short term target is to earn a minimum of S$1,000 per month based on trading and dividends from Singapore blue chips. My long term target is to build up a portfolio of 1 million dollars by 2015. In between, I will also write issues on how to stretch your dollar to get MORE for less, different types of financial instruments, my costly investment lessons and financial education.

About myself

I am a young chap in my late twenties who is passionate about investing since 2003.

Currently I am working in a dead-end mundane silly job earning approximately S$75,000 per annum including all bonuses and allowances. I am unable to quit my job as I am bonded for 4 years as it sponsored my education and provided a monthly stipend during my university days.

I work 14 hours days and rarely get to see the sun. Weekends are also spent with work. My office colleagues are unfriendly and politics is everyone’s cup of tea. I believe it is due to punishing hours that made everybody upset. Most of my colleagues earn in excess of $100,000 per annum for the same work done. They know nothing about life outside work and most of them do not even have a brokerage account. They are leading a sad life.

I do not want to grow old and become like them. Hence I invest for a better future.

My interest is in investing and I aspire to build up a portfolio of 1 million dollars and get a recurring dividend income of 6% by 35 so I can happily find a relaxing job. The only way to achieve this aim is to work hard and invest prudently.

I invest in a variety of instruments such as unit trusts, stocks and foreign currencies mainly Australian dollars and Japanese Yen.