Author Archive

Posted on March 5, 2010 - by Jay

On Financial Freedom

Just some thoughts on this term “financial freedom” that has become a much coveted goal in life popularized by Robert Kiyosaki in Rich Dad Poor Dad. Btw apparently Kiyosaki was never as rich as he proclaimed. He got rich after selling his book. Well, some of his ideas are refreshing though.

What is the definition of financial freedom?

I guess to most people, it would be having enough money in your bank to last a lifetime living the same quality of life and thus having the freedom to choose not to work for money.

In the first ever post on this blog, we worked out this amount is probably slightly more than half a million dollars for a conservative guy and $3mn for someone more aspiring. And this amount is highly unreachable with normal jobs since annual salary is about $30,000 to $40,000 on average in developed countries. (Well actually it’s doable given enough time: like 30 years, as we shall see but that defeats the purpose I guess :)

Hence there is a need for passive income (another term from Kiyosaki) to help fund monthly expenditures. However passive income can only come from a few sources:

1. Dividends from stocks
2. Interest from fixed income instruments (bonds, T-bills etc)
3. Rental income from property
4. Pension or annuity payout
5. Cash flow from businesses (which you don’t have to run it)
6. Royalties from books, songs etc
7. Others: sponsorships, fees etc
Read more…

Posted on February 21, 2010 - by Jay

Concerns on ETFs

I love ETFs. They allow retail investors to invest in indices with low costs, liquidity, give dividends and even have a helpline that you can call everyday to ask about the ETF you bought. What else can we ask for? However, due to time constraint and limited resources, I haven’t been able to research and answer some thorny questions on them. If anybody reading this have answers, pls do comment and share the knowledge.

1. Forex risk

Most ETFs on the SGX are listed in USD and as we know, the USD is being dragged to hell as Fed prints money like there is no tomorrow to save the economy. Albeit this process will take many many years. However, if our ETF is in USD, wouldn’t that mean that we are being screwed? My answer would be no. Bcos the USD is just a medium to reflect the underlying securities. What matters is the underlying intrinsic value of the securities, not the medium. Take oil for example, it is also in USD. But the underlying value of oil will continue to grow because there is not much left. So USD goes down by 20%, doesn’t mean oil price will go down by 20%. Am I right? Read more…

Posted on February 8, 2010 - by Jay

The 7 Levels of Market Participants

This was inspired by the 7 Levels of Photographers by Ken Rockwell, which was perhaps inspired by religion. Well, in any case, here are 7 Levels of market participants, with One being the lowest and Seven being divine. Enjoy!

Level One: The Tippee

The Tippee is someone who receives a tip or some advice and wants to make a quick buck out of greed. This level of market participants usually never had a brokerage account and decided that they should make a some money from the stock market bcos everybody else is doing it. They are inevitably tipped to enter the market by friends who give bad advice at the peak of the bull market and are inevitably burnt and vow never to return. Only to do so during the next bullish peak, again tipped by another friend. In normal times, they live their quiet lives in reality, having full-time jobs and enjoying themselves like other normal folks. This level includes grandmas opening a brokerage account for the first time in their lives, taxi drivers, housewives, first time unit trust buyers, retirees and primary school kids.

Level Two: The Amateur
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Posted on January 28, 2010 - by Jay

A Two Iteration Monte Carlo Simulation on Trading

This is something that I have posted in a comment some time back. I thought I would just expand it for discussion and see if it makes sense.

First let’s work through some assumptions and no.s and see what’s the expected return for trading.

1. The capital base is $100,000
2. $10,000 is utilized per trade
3. 10 trades is done in 1 year
4. Take profit at 20%
5. Cut loss at -10%
6. Winning rate 60%
7. Transaction cost $20

Based on these:

a. The 6 winning trades will bring in $12,000.
b. The 4 losing trades take away $4,000.
c. Transaction cost is $400.
d. Total winnings: $3800
e. Return 3.8% – Yeah that’s life for a trader, my darling. Why don’t you put the money in CPF and earn the same return? Read more…

Posted on January 23, 2010 - by Jay

Management compensation

Needless to say, if the management team is paying themselves too well, pls avoid the company. Most annual reports of Singapore co.s these days have a section on management payout. I make it a point to find out how much they are paid.

Just some rough no.s (since I can’t really remember all the figures), the CEO pay package is usually about $1mn for a few hundred million revenue firm. For smaller co.s, it is about $500k or so. Of course, as we all know, the record is a whopping S$20mn.

What is a good sum to pay a CEO? And how to actually determine the formula for the payout? Well I don’t have a good answer, but what I do think is wrong is to base it off revenue. Bcos a firm could have high revenue but zero profits to shareholders. It is also wrong for it to be mechanical, like based on formulas. So maybe a basic package and then bonus to be based off a comination of factors like net profit growth, impact of past decisions and qualitative appraisal by stakeholders of the firm.

Well there is also the social pay scale to consider, in our crazy world where a 23 yr old analyst could be paid S$100k a year, surely we cannot expect CEOs to be paid like S$150k a year right? So actually there is a floor for CEO’s pay. Since senior managers in big firms get around $200-300k so it is not unusual for CEOs to be getting around $500k at least. Read more…

Posted on January 15, 2010 - by Jay

More on Dilution

Rights issue sucks! Let’s see how this works:

Imagine you are the sole owner of Company ABC. It’s better to think as a sole owner, it makes things clear.

So you put in $10mn capital to start the co. You list the co. and now own 1mn shares of $10 each. ie mkt cap of your co. is $10mn. Then you appointed a CEO to help you run the business. He lost $8mn, well partly bcos of the crisis, partly bcos he was not prudent and expanded to rapidly during the heydays of 2006-07, partly bcos he paid himself and his kakis $1mn over the past few yrs.

The share price plummet to $3, ie mkt cap is now $3mn and the capital is now $2mn. So the CEO announces a rights issue of $10mn, 5mn shares to be issue at $2, that’s 33% discount to today’s price of $3. Do you:

A. Rejoice bcos now you will own 6mn shares of your co. at an average of price $2+ but the share price is $3 (btw you paid $20mn in total, but the value of your co. is now only $12mn)

B. Or you curse the manager for losing most your capital, fire him and sue him in court to try to salvage part of the lost $8mn. Read more…

Posted on December 31, 2009 - by Jay

Capital Prudence

One gauge for management which is often overlooked is how they manage the firm’s capital. Do they see the firm’s equity and cash on its balance sheet as valuable resources that belong to the shareholders and think twice about doing funny things with them? Well most management will do funny things when given the chance.

We look at 4 aspects of what crappy management will do:

1. Dilution

Most management couldn’t care less about diluting shareholders’ stake bcos they get the much coveted capital to cover up their mistakes. In Singapore, dumb retail investors actually rejoice when management wants to do rights issue: bcos they can get more shares at a cheaper price! The irony!

When management comes cap in hand to shareholders for money, multiple times in a span of a few years, run for the trees! This is one of the most unforgivable management mistakes.

2. Aggressive Capex

Beware of management that always announce huge expansion projects in the name of growth. Especially, when they are done at the top of the cycle. Most of these projects will not recoup its capital fast enough ie ROI is very low, like maybe 3% (ie 33 years to recoup the investment). Read more…

Posted on December 22, 2009 - by Jay

On Bad Management

Basically, bad management doesn’t have the shareholders in mind. Or if the bad management is the majority shareholder, they don’t have other shareholders’ interest in mind. Their policy is about “Screw You and I Get My Bonus” or “I Win, You Lose”.

On bad management, CK Tang’s recent saga definitely comes to mind. It’s a long story that probably deserves a book trilogy starting with the great CK Tang himself, who built a solid business based on virtues like good customer service, treating employees well etc. His business approach was a very traditional, fundamental approach that sadly had lost its touch in today’s Singapore.

The poor management began shortly after his death some 10 years ago perhaps. Over the past 10-15 years, CK Tang had been able to deliver annual sales of S$160-220mn sadly without very significant growth. Singapore’s GDP has probably doubled in that span of time.
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Posted on December 4, 2009 - by Jay

If you don’t know the jewellery…

Buffett lives by a few simple rules throughout his life. He has acquired them over the years and found them to be useful rules to live by. He and his partner Charlie Munger believes in such simple logic. Charlie Munger used to say that there are really just a few big ideas in life. There are no secrets to become rich, or to be successful, or to be whatever you want to be. The so-called secrets are simply ideas/rules that we know so well but we fail to apply them. Or our emotions overrule our logic and deter us from applying them rationally. The simple rules are like these listed below:

1. Early bird catches the worm
2. Live within your means
3. Bang for your buck, value for money, go for bargain
4. Keep things simple stupid
5. Be fearful when others are greedy

So today, we look at a similar one that Buffett came up with: “If you don’t know the jewellery, at least know the jeweller”. The idea behind is really simple. You must know that the management of the company is good and trust them to do the right thing. You may not know whether you are really buying a real gem or a useless piece of rock at the jewellery store, but if you know that the jeweller is honest, wants to help you whole-heartedly, (unfortunately no such retailer exist in Singapore, ALL retailers are out to screw the customer), well then perhaps you can trust him to select a good gem for you. Read more…

Posted on November 14, 2009 - by Jay

One-off businesses

This is the opposite of recurring revenue businesses. Basically, the company sells a product to a customer and that’s the end of it. There is no need for the customer to buy anything else for the next few years and hence no contact between the customer and the product seller for the next few years.

Most products that most companies make fall under this category: cars, massage chairs, LCD TVs, home sports equipment (like treadmills and stationary bicycles), vacuum cleaners, MLM magnetic beds, well you name it.

There is a stark difference between these one-off products and necessity/staples like shampoo, soap, kitchen paper etc. That is: you don’t buy staples products once and do nothing for the next 3 years. You keep buying them. Of course, there are times that the lines can be blurred.

There are a few major shortfalls with this type of business model:
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