My response to Musicwhiz’s comments

I would like to thank Musicwhiz for his encouraging and honest comments left on my blog. In fact, I am happy that another local financial guru has noticed my blog. Thanks MW!

Below was his comment:

Hi there, just came across your blog which was linked through Nuffnang. Thanks for visiting mine recently and also adding a link to mine.

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After reading some of your posts on portfolio buy/sell decisions, I still can't really get a handle on your investment philosophy. Are you a trader (speculator) or an investor? It would seem on one hand that you are going for regular income to act as passive income to work towards financial freedom (S$1K a month) but at the same time, also doing trading and contra (very risky) in the current bear market. Perhaps you can enlighten on your approach?

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I also noted that you mentioned that volatile stocks are risky. Volatility to me assists one in getting a better margin of safety once you assess the underlying business, and thus should be exploited.

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It's good that you start investing while young (with a very large war chest of S$300K!) and that you have time to learn from mistakes; but I personally feel it would be good to have a sound framework for buy/sell decisions moving into the future, otherwise it may be difficult to make consistent profits from the market.

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Regards,

Musicwhiz

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P.S. - Also wondering if you could express your returns (nett all gains/losses) as a % of your total portfolio ? That would be more indicative instead of mentioning $-amount gains. Thanks!

MW, I understand your confusion on my investment approach. I seem to be a hybrid of trader and long term investor! Allow me to clarify my approach towards the market these days.

At current market, volatility reigns and fundamentals are thrown out of the window, almost entirely. My current take on the market is that there is still room for stocks to fall further. I feel that the downward trend is likely to last till at least 2H of 2009.

In the meantime, it does not make sense for me to keep my money in 0.5% deposit accounts. I rather sit on paper losses and earn 6% P.A on dividend stocks than keeping them in banks and wait for market to bottom out. I will not be able to catch the bottom anyway!

If you have seen my earlier portfolio summaries, you would have noticed that earning $1000 recurring income per month from a fully invested amount of $300,000 is actually quite easy. I would just need to earn 4% P.A to achieve that. I have about 50 lots of SPH and Singpost (coincidentally), which at a yield of 6% would earn slightly above that targeted amount after adjusting for paper losses.

In fact, it is also my ultimate wish to apply pure passivity into my portfolio of stocks so I can concentrate on other simple pleasures in life.

I do admit that the current bear market packaged with huge dips and rises have made me more inclined to trade the market for quick gains.

In the midst of all gloom and doom, while it might not be the best time to cherry pick, I do see quite a lot of trading opportunities around.

Example: Starhub reported a good set of results for 1Q. However, towards its XD period (for 1Q), it dipped from nearly $3 to $2.85, in which I picked up 35 lots and sold off after XD, netting $1575 dividends and $1100 capital gains. Had I held it till today, I would probably be missing out a lot of other trading opportunities. It doesn’t help as Starhub last traded at $2.65.

This is the same case of DBS and HL Finance. Earlier I contra off SPH (6 lots) when market went up sharply and bought back (5 lots) when market came down (within 2 days), also to participate in trading opportunities.

I will also sell off Capitaland tomorrow when market recovers (temporarily) if possible.

The current market in the short term does not reward long term investors in the short run. I am capitalizing on it.

The strategy I have adopted is simple: Buy blue chips on sharp dips and sell within a few days for a quick profit, while waiting for the next lower entry price of the stock. At the same time, I have a core portfolio likely to generate $1000 monthly through dividends.

Hence, I allocate about $50k to trade the market. Of course, it is a small amount and I understand very well that I might get “stuck” if I read the market wrongly. However, the stocks I am trading are all blue chips and have a consistent dividend payout history. In the event that my purchase fails, I will either average down my cost or hold them purely for dividends.

For trading purposes, I am looking at banking stocks (dividend yield of 4%), property stocks (2-3% dividend yield) and oil and gas related businesses (above 4% yields).

In either scenario, my portfolio will still yield $1000 on average monthly, providing my targeted regular income.

I agree that one should have a sound framework and philosophy when it comes to stocks investment. However, my philosophy (farmer and his assets theory) I have come out with serves merely as a guide. As long as my main objective ($1000 monthly income) is achieved, I allow myself to deviate within reasonable boundaries to realize higher profits. Definitely my investment plan is not perfect and even not sound to many, but I believe it is the most comfortable one for me. Do stay with me and see how I succeed or fail!!

With regards of providing nett gains in percentage terms, I will probably come up with a summary on end Dec 08 on the annualized returns of my portfolio. I guess it is my personal preference to update in absolute dollars and cents!

Thanks again to MW for providing comments that set me to ink out my thinking!

Quick updates

It was a disappointing day for stocks, as usual. I could only contra off my DBS @ $18.80 for a modest $190 gain after the announcement of 2H results. Today Capitaland took a severe beating and went down 4.7% to $4.86. I am sure it is due to massive redemptions by local and overseas fund managers. Hence, I queued 2 lots at $4.85 and got it. It is their 52 week low. As I am bearish on the property market, I only intend to trade it for modest gains on Monday. Hopefully there is a post National Day rally! If not, I will just keep it and wait out for a better selling opportunity.

For my core portfolio, I have added 5 lots of SPH bought @ $4.02 today as well.

Corporate: Starhub

Excerpts from OCBC research

StarHub Ltd posted a disappointing set of 2Q08 results. Although revenue rose 8.6% YoY to S$531.4m, it was down 0.7% QoQ. Meanwhile, net profit tumbled 20.5% YoY and 19.9% QoQ to
S$64.2m, way shy of our S$76.2m estimate and the street’s S$83.6m number. Management attributed the sharp earnings decline to three reasons

1) a 4% fall in mobile pre-paid revenue;
2) increased acquisition & retention costs; and
3) higher Pay TV content costs. Together, these resulted in a
compression of EBITDA margin from 33.5% in 2Q07 (31.4% in 1Q08) to 27.6% in 2Q08. On an interim basis, revenue rose 10.9% to S$1066.3m, meeting 48.2% of our FY08 estimate, while net profit fell 4.3% to S$144.3m, or 43.1% of our FY figure.

Intense competition in mobile segment: Mobile business sales rose 6.5% YoY (down 1.4% QoQ) to S$269.3m, or about 50.7% of total revenue.

Although StarHub recorded its highest quarter net adds (36k) for its postpaid segment in over five years, its pre-paid segment saw a 40k net drop after it failed to respond promptly to a competitor’s aggressive strategy.

And as expected, average acquisition cost jumped by another 19.4% QoQ (+27.8% QoQ in 1Q08) ahead of the implementation of true mobile number portability (MNP) in June 2008. But on the flip side, StarHub has managed to reduce its churn rate to 0.9%, the lowest level since 4Q05.

Slower growth and lower margin expected. Going forward, management has moved to slash its revenue guidance from 10% previously to 7%, citing flat pre-paid revenue growth projection. In addition, StarHub has cut its EBITDA margin guidance from 33% previously to 31%, even though it expects the aggressive handset subsidies to ease towards the end of the year. However, it kept the total dividend payout of S$0.18/share for the year; it has also made S$0.045/share for 2Q08. In light of the latest developments, we have cut our FY08 forecast for sales by 3.3% and earnings by 9.9%.

Sgbluechip says: There is a drop in free cash flow from 303m (1H 07) to 170m (1H 08). EPS is only 3.76 cents and they are paying out 4.5 cents dividends. I am not sure if they can sustain the dividend payout. The share price will continue to face selling pressure to perhaps $2.50. If you have read my rationale for taking profits on Starhub here, you will know that my worries on the increased competition has been realised. In my opinion, Starhub will be unable to keep up with a yearly dividend of 18 cents. This is due to the entry of broadband market by M1, Singtel aggressive promotion of Mio TV and recent additions of the US channels. Also, Singtel has the telecast rights of Champions league which will again prompt some cable TV subscribers to switch to Mio TV. The increase in SPH advertisement costs in Septemeber will also challenge Starhub’s profit margins in the mid term. I will revisit Starhub shares towards it’s dividend payout date for trading purposes.

Stretch your dollars series: The case of buying a washing machine

My washing machine broke down on Sunday and I was in a frantic search to buy one as I did not want my mother to use her bare hands to wash all our clothes. Immediately, I took out Saturday’s papers and scanned through for promotions.

COURTS advertisement caught my attention. A LG front loading washing machine cost only $450 and they are also giving out $50 GIANT and $50 COURTS vouchers. Together, the washing machine on offer seems a steal. However, when I went over to enquire, the staff told me the promotion was only 1 day and there is only $50 vouchers given by the brand distributor.

I felt rather cheated on a Sunday morning.

I decided to look for another brand and saw a Samsung washing machine. It is sleek looking with digital thermostat functions. It cost $550 together with a $50 GIANT voucher. However, if I were to purchase the 5 years extended warranty, it will cost an additional $150. Together with a delivery charge of $20 (for members), it will cost me $720 for a China made, Korean brand washing machine. The sales staff was also quite impatient to close the deal which actually let me rethink the “offer”.

I decided to walk over to NTUC at Ang Mo Kia HUB to search for bargains.

The exact modal was selling for $470 at NTUC (vouchers included)! However, there wasn’t anybody there to help me. No sales staff to enquire about the functions, warranty and delivery dates.

I was not impressed by their sloppy service and thus drove to Katong Mall. Over there, the same machine was selling for $600. Initially, I regretted that I did not purchase the item at NTUC.

Then, I walked over to parkway Harvey Norman. It was the smartest choice. The same modal cost only $460 (after a $100 rebate) together with the $50 shopping vouchers. The sales agent explained to me patiently the differences between front and top loading washing machines and operations of the machine. In the end, I purchased it and added a 5 year warranty, costing me $85.

Including a $30 delivery charge, I paid merely $575 for a brand new washing machine with 5 years warranty. It was delivered on Monday afternoon.

Kudos Harvey Norman! Excellent service!

On hindsight, I actually had the impulse to buy the machine when I was in COURTS. However, I feel rather silly to pay almost 30% warranty premium. I do find it rather “aunty” to do such nitty gritty comparisons, but it really pays to source for the cheapest deal around. Not only did I manage to save $145 this time round, my future purchases will revolve around “comparing comparables” before I buy bigger ticket items. I think it is a good practice to know how much others are selling.

We notice that all businesses have different pricing strategies, profits margins, cost pressures, warehouse sizes and also sales quotas from manufacturer. This will ultimately translate to different pricings on all items. Sometimes the difference can be quite big. Also, I always try t buy items I need that are on sale. Again, this is applicable to the stock market. We definitely need to invest but we will only buy businesses when they are on sale.

Borrow from standard chartered?

Just received a call from standard chartered to take up a 25k loan @ 3.49% interest per year, repayable via installments for 2 years. This sounds like a great deal, considering buying high yield stocks will definitely allow one to earn at least 6% per annum.

As I enquired more, the telesales operator told me that there is a 1.8% insurance charge, which is compulsory. Meaning I will only get $9820 for a $10,000 loan. Together with the 3.49% interest, I will need to pay almost 6% annualized interest.

I felt cheated by the call. Wasted a good 10 minutes listening to the sales talk.

I wanted to make a counter offer. Why not I lend you 10,000 for 2 years and you pay me 5.5% interest in monthly installments?

Standard chartered needs to try harder to make me take loans from them. It is an irony that they only want to lend money to people who do not need it.

Banks

The price movements of Singapore banks are quite peculiar these few days. Take UOB for example, it has risen up to $20.14 today just because it has posted a 2% increase in profits. OCBC went up rather strongly yesterday and was undeterred by the poor results posted by Great Eastern, where it had an 80% stake. It went up to $8.55 today.

DBS however was “punished” for being late in dishing out its 2Q report. The behaviour of its stock price was very volatile, suggesting speculative activity towards its reporting day.

By right, when UOB have a good set of results, the prices of the other 2 banks will rally together. In fact, for the past 2 years before the eruption of sub prime crisis, the price range between UOB and DBS is $1 and usually DBS command the higher price due to its higher profits, NAV and dividend policy.

Of course, the exposure to CDOs reversed the trend and UOB share price begun to command a higher premium to DBS till today.

I am still quite puzzled on the rally of UOB share price. First, there was a cut in dividend payout. Last year, the interim dividend payout was 35 cents per share, versus 20 cents per share this year. Is there any reason to push its share price beyond the $20 mark, leaving DBS struggling behind at $18.50?

The thrilling PE ratio of UOB is about 14.5, compared to DBS 12.5. Again, I see DBS is trading at an attractive price relative to its peers.

Are there any surprises or skeletons in the closet waiting to hunt investors? I hope not! I believe DBS will come out with a decent set of results tomorrow.

In any case, I bought 1 lot of DBS @ $18.48 yesterday. I do hope to get a decent contra gain tomorrow or Friday! If not, it will become another dividend yielding stock in my portfolio.

Wish me luck!

Stock transactions and portfolio summary July 08

BUY (CASH)

Singpost: 10,000 shares @ $1.02

SPH: 6000 shares @ $4.18

SPH: 6000 shares @ $4.005

SELL (CASH)

SPH: Contra 6000 shares @ $4.08

Realised trading gains of $280

BUY (CPF)

None

SELL (CPF)

HL Finance: 3000 shares @ $3.48

Realised gains of $138

Dividends

Singpost: $500 (FY 07 final dividend of 2.5 cents/share)

Summary

In July 08, I received $500 dividends from Singpost and made $280 trading SPH when market went up 3% the following day. Together, I have a net cashflow of $780 in July 08.

I sold (contra) SPH for short term gains because SPH rebounded very sharply together with the broader market which in my opinion was unsustainable. I was actually correct as SPH went down to $3.96 the following day. I stayed by the sidelines and was hoping to pick up more when it falls to $3.90.

HL finance is due to report its 2H report in August. I believe it will come out with a decent set of results. This counter has a low trading volume and is quite a safe counter to hold. It currently trades narrowly between $3.41-$3.58. I will pick up more using cash or CPF to earn some extra bucks.