Sound Investment

The tide had change against pennies.

Here’s a challenge that I think you might enjoy

Pick up a newspaper and turn to the business section. If you prefer, you can poke around one of the many financial websites instead. It doesn’t really matter what media channel you choose – the results are likely to be the same.

After a few minutes of reading, I am sure you will come to the same conclusion as I do – the investing world is full of uncertainty. I call it the guessing game and the media just loves playing the guessing game.

So what exactly are experts spending their time guessing at the moment?

The big question mark?

In the US, a big question mark hangs over the precise moment when Ben Bernanke will reduce the amount of financial support he will give to the American economy. In other words, when will Bernanke take his foot off the gas?

Analysts are going through every sinew of economic data to try and second-guess when that might happen. They are poring over house-price data, unemployment numbers, non-farm payroll figures, car sales, retail sales and inflation figures sniffing for clues. Every man and his dog now seem to have an opinion.

Incidentally, that is only the tip of the iceberg of data that analysts are sifting through. What a waste of time and effort. When Bernanke is ready to taper, he will do just that. And no amount of sifting, poring, combing and trawling by analysts will change that.

Meanwhile over in China, analysts have another heap of data to dig through. This time they are trying to guess when China’s consumers will take over the burden of driving economic growth. They are building complex models to second-guess whether China will have a soft or a hard landing.

The sleeping giant awakes

If the issues in China and the US were not enough to fill their time, analysts still have to contend with the on-going problems in Europe. Almost half a decade has passed and Europe is still muddling through its sovereign debt issues, slowing economic growth, high unemployment and pockets of social unrest.

And now, analysts have another bunch of numbers to play around with, thanks to what is going on in the Land of the Rising Sun. The Bank of Japan has awoken the sleeping giant by embarking on Quantitative Easing on a monumental scale. It plans to double the amount of money circulating around the Japanese economy in the hope of stoking inflation within the next two years.

So, take your pick. You can choose to worry about what is happening in China and Japan in the East or fret about the problems in the Eurozone and America in the West.

What’s for dinner?

But here is something that I hope could change your mind.

Some time ago, I planned to have dinner with a few friends in Cambridge. I couldn’t quite decide whether I should book a restaurant or to leave it to chance. After all, the UK was flirting with a double-dip recession, at the time. So what were the chances that restaurants would be busy?

However, being the cautious person that I am, I chose to err on the side of safety. I booked a Chinese eatery in the town centre that I knew well and liked. When we turned up at the restaurant it was positively heaving. Thank goodness for being cautious.

I even had a quiet chuckle as we sailed past other patrons who didn’t have the foresight to book in advance. They had to wait patiently outside for the diners inside to finish their meals and vacate their tables. Curiously, other restaurants in the area were barely a quarter full.

The moral of the story is that some businesses have built deep and well-defined moats around their operations. Start by looking at the companies that make up the Straits Times Index (SGX: ^STI). See if you can identify the moats that make companies such as Jardine Matheson (SGX: J36), Keppel Corporation (SGX: BN4) and Genting Singapore (SGX: G13), special.

The secret ingredient

These moats allow companies to defy downturns even when others are suffering. They appear to have competitive advantages that allow them to not only maintain healthy margins but also to grow sales at a time when others are slashing prices to stay in business.

BEING ABLE TO IDENTIFY RESILENT BUSINESSES THAT STAND OUT FROM THE CROWD IS ONE OF THE KEYSS TO SUCESSFUL INVESTING. IT DOSEN'T HAPPEN BY ACCIDENT THOUGH - NOR IS IT DOWN TO LUCK. IT COMES FROM PAINSTAKING RESEARCH AND ANLYSING HOW A BUSINESS FUNCTIONS.

Incidentally, are you curious as to why the Chinese restaurant was so much busier than other restaurants in the vicinity?

It’s because the chef has a master stock that has been developed and maintained over time for cooking its prized chickens and ducks.

So the next time you are looking for prospective investments, look for the secret ingredient that makes the company tick. Look for the sauce. It’s always about the sauce.

This article first appeared in Take Stock – Singapore.

SRS ACCOUNT FROM $0 TO $208.7K IN 6 YEARS
INVESTMENT WITH SRS CONTRIBUTION

I have made yearly contribution to my SRS account from 2007 to 2012, total 6 times.
From 2007 to 2010 for 4 years SRS contribution @ $11450 per year. Total = $45,900
From 2011 to 2012 for 2 years SRS contribution @ $12,750 per year. Total=$25,500
Total SRS contrbution from 2007 to 2012, total = $71,400
The SRS account was invested in Stocks.

My SRS pofolio plus cash as @ 31st July 2009. Total = $59,559 (See statement)
As @ July 2009 I have made my 3 yearly contribution total = $34,425
Profit as @ 31st July 2009 = $25,134. (If I'm not wrong August 2008 is the Credit Crisis. May 2009 ST Index is at it's lowest)

My SRS pofolio plus cash as @ 31st July 2011. Total = $114,166 (See statement)
By 2011 I have made 2 addition yearly contribution in 2010 & 2011. The amount contributed are $11,450 & $12,750.
Total contribution made to my SRS by July 2011 = $58,650
Profit as @ 31st July 2011 = $55,516

My SRS pofolio plus cash as @ 31st July 2012 total = $143,494. (See statement)
By July 2012 I have made contribution of $12,750. Total = $71,400 ( Total contribution from 2007 to2012)
Profit as @ 31st July 2012 = $72,094

My SRS pofolio plus cash as @ 31st July 2013 plus div. Total $208,780

Devidend yet to receive from Biosensors & Cambridge REIT about $1000

Not yet make contribution to my SRS account. Total contribution to date stay @ $71,400
Profit as @ 31st July 2013 = $137,380

The key in my sucessful story is, invest in under-value and growth stocks for as long as possible.
Similarly like Sandy Chin CPF investment successful story is, do not over-trade but to invest in the long term growth of a company. Built up a poforlio of cord stocks.


My cord stocks are:

Bonvest average @ 55cts

First REIT average @ 41.5cts - Sold all 58 lots at average price of $1.35

Thomson Medical average @ 42cts - Excepted offer @ $1.75

Cordlife latest addition last year @ 52cts.

My latest stocks addition are Straco average @ 29.5cts & Biosenors average $1.20. I believe over times these 2 stocks will perform.

I had made losses in Qingmei & Rokko. Importance is to cut lost on under-perform stocks rather than to average down on under-perform stocks. Don't stir-fried shares and got burnt.

The sweetest of all is able to outperformed the bear market of 2008 Credit Crisis ( ST Index 1456 at it's lowest in March 2009), and the PIIGS Crisis in 2011.

Invest in the long-term growth of a company & sleep well. In addition, bennefit of income tax saving for the last 6 years.


Sorry, not able to attach the 4 statments.
God Bless

Risk Management Check Lists

1) PROFIT MARGIN: Keeping track of profit margin changes.

2) BUSINES COMPETITION: Either companies gaining market shares or losing market shares.

3) DELAY Project delay, material delay, goods delay etc.

4) COST – Product costs, administration costs, marketing costs, labour costs, etc.

5) PROBLEMS: political, social, environmental, etc

6) POLITICAL: Change of Government.

7) INTEREST RATE: Changes in Interest Rate.

MANAGEMENT: Company Mismanagement Or Accounting Problems.

9) DEBT: Look at debt level, some sectors like property developers, it's common to have debt, but know the industry norm for debt level.

10) IN VENTORIES: For manufacturing or distribution or retail, check inventories and receivables turnover rate, cash cycles etc.

11) OUTLOOK OF SECTOR: If possible, the state of health of their customers and suppliers. Track expiration/ renewal of key contracts

12) RESIGNATION & FUND RAISING: Check for sudden resignation of personnels, frequent fund raising.

13) MANAGEMENT STATEMENTS: Over bullish outlooks that dun pan out frequently, hiding problems, etc. management selling large amt of shares.

15) Understand as much as possible you can about the business you are buying. If some things doesn't make sense give it a miss. Better be safe than sorry


Investment Pitfalls

1). Letting our egos get in our way - our emotion.

2). Over-trading.

3). Momentum Investing - chasing after penny stocks when they suddenly burst back to life. Watch out for BB in the game (Penny stocks in play)

4). Noise trading - confused between the false signals sent out by a stock's trading pattern & the overall market trend. Investors have poor timing, follow trends, over-react to good & bad news.

5). Growth Investing - buy out-of-favor stocks with low price-to-earnings and price-to-book ratios.

6). Selling the winners & keeping the losers. We should build a portfolio of winners not losers.

7) Don’t be taken in by increase in profit. Profit comes from one-off increased. Examples; Sale of assets, revaluation of assets & completion of project.

Share price low does not mean it will rise to its past high. This is because its prospects are dim.

9) Don't stir-frying fundamental sound stocks, do that in the kitchen and not in the stock market. Trading in fundamental sound stocks rather than hold for long term investment.

Two Numbers To Focus on For Dividend

Dividends are a source of regular income for investors. Because of that, it should be no surprise that the dividend yield of a share is an important part of the investor’s decision-making process as it clues an investor in to the current income he or she can receive.

But, it can be dangerous to focus on a share’s dividend yield alone.

Instead, here are two metrics that investors can include in their tool-kit for a better analysis of a company’s dividends: Free Cash Flow; and Net Cash Balance.

What’s a Free Cash Flow?

In the daily course of every business, it either generates or consumes cash. When a business is able to generate cash, it then uses the cash to touch-up existing income-producing assets. After which, any left-overs can then be allocated by management to pay out dividends; make acquisitions; expand the business’s asset base; store it in the proverbial “vault”; or buy-back shares, among others.

That left-over cash is known as Free Cash Flow. Mathematically, the numbers can be gleaned from a company’s Cash Flow Statement and the equation’s given as:

Free Cash Flow = Cash Flow from Operations – Purchase of Property, Plant & Equipment (otherwise known as Capital Expenditures)

… And What’s a Net Cash Balance?

The Net Cash Balance tells us how much cash a company has stored up for future use, net of all debt. Companies with a large Net Cash Balance have an additional safety net to rely on to pay creditors, bills, suppliers, wages, loans, even dividends etc. when its business runs into any temporary slowdown in which it is unable to generate sufficient cash.

The required figures are found in the company’s Balance Sheet and its equation is given as:

Net Cash Balance = Total Cash & Equivalents – Short-Term Debts & Long Term Debts

Why the cash is important

While dividend investors often like to focus on the pay-out ratio, which measures dividends as a percentage of net income, we have to bear in mind that ultimately, dividends are paid out in cash.

Companies can report great profits but without booking the actual cash into its coffers, it is going to find it difficult to pay out dividends in the future. So, even though it’s important for companies to have profits, we should also keep an eye on the cash.

A Tale of Two Dividends

Let’s use Japanese ramen-restaurant operator Japan Foods Holding (SGX: 5OI) and industrial fishing company China Fishery Group (SGX: B0Z) as examples on the importance of the two metrics: Free Cash Flow and Net Cash Balance.

Price per share Dividend Yield*

S$0.79 / 3.2%


S$0.375 / 5.1%

Both companies have dividend yields higher than the Straits Times Index’s (SGX: ^STI) yield of around 2.6% (using the index tracker SPDR STI ETF’s (SGX: E3B) data as a proxy) so they might both be considered attractive dividend shareson that basis alone.

China Fishery might even be considered the more lucrative of the two based on its higher yield. But, a different picture emerges when we consider the companies’ Free Cash Flow and Net Cash Balance, as seen from the charts below.

We can see from the charts that Japan Foods has seen both its Free Cash Flow and Net Cash Balance grow steadily over its last five completed financial years (FYs). Meanwhile, China Fishery has had cumulative Free Cash Flow of negativeUS$15m over its last five completed FYs and consistently carried more debt than cash.

Under such a backdrop, it’s not that surprising to see China Fishery’s dividend fall to 1.9 Singapore cents per share for FY 2012 from a bonus-share-adjusted 5.48 Singapore cents per share for FY 2008.

Investors who tracked profits alone would likely be left scratching their heads on the big drop in dividends as the industrial fishing company’s earnings per share dropped by ‘only’ 30% from US$0.11 to US$0.076 in the same time period.

But for those who had been keeping an eye on China Fishery’s Free Cash Flow and Net Cash Balance, it would have been clearer to them that the company was just not able to bring in sufficient cash.

Meanwhile, Japan Foods – with growing Free Cash Flows and a balance sheet that becomes healthier with each passing year – has been able to grow its dividends from a bonus-share-adjusted 0.167 Singapore cents in FY 2009 to 2.5 Singapore cents in FY 2013 as the company is able to generate ample cash from its daily job of dishing out ramen and more to diners.

The Japanese ramen-restaurant operator, with its historical ability to generate Free Cash Flow and to maintain a healthy balance sheet, could be seen as a better choice than China Fishery for future dividends, ceteris paribus.

That’s especially so in light of the higher perceived risk of the latter dropping its dividends still further if it continues to struggle in producing meaningful Free Cash Flows from its business in the future.

Foolish Bottom Line

Every publicly listed company has to prepare three financial statements: the Income Statement; Cash Flow Statement; and Balance Sheet. All three have to be studied together to paint a holistic picture of a company’s financials and business condition.

That’s important for every investor – not just for dividend investors – to keep in mind.

REITs are in the sea of red again, lately had been buttered.