Sunday, 25 January 2015

What is the most lucky "M" in investing?

Many of you must heard of the 3Ms in trading (which I first come across in the book Trading for a Living by Dr. Alexander Elder) and now used by many to conduct "wealth creating" seminars:

• Methodology
• Mindset
• Money Management 

The above 3Ms are applied to you, the individual. Things which you are in control of. I have come up with the 3Ms of investing which are equally important but they are things which are beyond your control and which you should also think about when you invest. 

Today I will write about the 3Ms of Investing and one of which is a lucky "M". See if you can guess it before you read futher down...

For long term investing, you need the following 3Ms

First M - Management 

I don't think I need to spend time on this. You know the importance of management. With a good management, you can trust them with your hard earned money. There are many examples of why good management is important. Apple got a new lease of life when Steve Jobs returned. Berkshire Hathaway's Warren Buffet invests only in companies whose management he trusts. Good management creates value and bad management destroys it. 

Second M - Macro Environment

The second M is the macro environment and trends which the company is in and that affects the Company no matter how good the managent is. 

NOL and SIA were in doldrums because of the competitive macro landscape in which they are in. The share price only got a reprieve and went on a rally when the oil prices crashed. It doesn't mean the fundamentals have changed but a cheaper oil price definitely will help. 

Li Ning and other offline retailers in China suffered when the retail trend and habits changed. The new generation took online shopping with Alibaba to the next level and brick and mortar retail stores started to bleed. The anti corruption drive also impacted luxury dining and retail, so in that regard, do take note if you are currently exposed to such companies in China (maybe Osim?). 

Similarly Sony Ericsson, Nokia and Blackbery couldn't react fast enough to the changing competitive landscape caused by Apple, Samsung (and now Xiaomi) smartphones. 

Third M - Mulitple Expansion

This M can be your lucky (or unlucky) M. It doesn't depend on you or the management. It depends on the market. Let me give you a simple example. 

Assuming a company has $70m profits in year 1 and the market gives it a multiple of 10x PE. That translate into a market cap of $700m at end of year 1. The company still makes $70m at end of year 2 but the market sentiments have somewhat improved and investors start to be more bullish on its future prospects in general. They decide that a fair value of 20x PE is more appropriate and because of that, the company now trades at $1.4 billion market cap. 

Without any change in anything, the company is now worth twice as much "magically". This is called Multiple Expansion. 

In a lot of cases, you never understood why or bother to find out which component contributes the most. Let me give you a simple example, Breadtalk. 

I am not sure you noticed that Breadtalk is now trading at multi year high and at a PE of more than 30x (if I recall correctly). 

It is a combination of good management, favorable macro trend of rising affluence and multiple expansion. You can actually compute the effect of multiple expansion. Just use the latest EPS and multiple by the difference in PE multiple from one year ago. That will give you the "wealth created" to you by the lucky M

Why do some sectors such as healthcare have a higher mutiple versus others such as the construction sector? Can anyone control this? Probably not. You just have to "thank your lucky stars" when you benefitted from it. 

Happy investing. 

Keppel REIT and Keppel DC REIT

Keppel Corp continued to hog the headlines with the privatisation of Keppel Land. The chart also left behind the foot prints on people who are in the know... as evidenced by the increase in volume and share price prior to the halt and announcement. There are just too many people who may have "access" to the information, such as lawyers, investment bankers, corporate insiders etc and to be fair, such information are too difficult to control. The only thing the company could do was to suspend the share trading early and they did that 2 days ahead of their earnings announcement.  Anyway, I will leave that story for another day.


Keppel REIT announced its full year results for FY2014.


While the headline figures may not look good with DPU dipping by 8.2%, in my view, the results are actually ok. Currently i have 50,000 shares invested at $1.205 late last year.

Key Positives
  • The last quarter results only consist of 2 weeks results from MBFC Tower 3. It will have full quarter contribution going forward
  • Commercial rents continue to stay resilient and the rental revisions are done at higher prices.
  • Keppel REIT has one of the youngest and largest portfolio of Grade A office space
  • All in interest rates continue to be manageable at around 2.23%
  • NAV per unit is ~ $1.41 (versus the last trading price of $1.235)
Key Concerns
  • High gearing of 43.3%
  • Weakening of AUD against SGD from its Australian portfolio
  • They only partially own some of the key buildings. Asset enhancement projects will be more difficult if they don't have the controlling stakes in those buildings
Distribution Details

I like the quarterly distributions from Keppel REIT. Based on the announcements, i will get a distribution in February.

Portfolio

The feeling is not bad... as if you owned some prime office buildings in downtown Singapore.


Share price chart


Keppel DC REIT



Seemed like this stock is off to a good start after my entry at 96.5 cents.

Happy SRSing.


Monday, 19 January 2015

SRS Strategy and Portfolio

As mentioned in my IPO blog yesterday, I updated the investment strategies for all my blogs and today i cover the SRS strategy. You can find the updated strategy here and it will be constantly updated over time.



Let me reiterate the key concepts and mindset so that you can appreciate it better.

  • Fundamentals - Stocks are chosen primarily using fundamental analysis in terms of valuation, macro outlook and earnings potential.
  • Longer time horizon - The stocks are held over a longer time horizon and not intended for short term trading. 
  • Volatility - is actually not appreciated. I would prefer to see the share price creep upwards over time.
  • Cut loss - Protecting my downside or my profit is a must and equivalent to saying "I am wrong or Thanks for the ride up" depending on the situation. In any case, I would rather lose face than lose my capital! The rule #1 of Warren Buffet. I will keep my cut loss level to between 8-10%
  • Passive income versus capital gains. I am hoping to strike a balance between investing in stocks for the dividend income and investing in them for pure capital gains.
  • Targeted returns - My targeted returns for the portfolio is actually quite simple and straightforward. I hope to achieve portfolio returns of between 5% to 15% annually.
  • When to sell ? - I will sell the stocks when they hit the "intrinsic value" or when the valuations become too rich (or if i loses patience)..
Stocks that i missed out from my SRS accounts

I missed a few stocks that i was monitoring closely in December. They are UG Healthcare at 23.5 cents and Chip Eng Seng at 85 cents. No point crying over spill milk. Stocks that are in my watchlist include Nam Chong, CWT and Ezion. These are the stocks that "passed" my FA analysis in late December last year. The thesis should still hold. 

My current portfolio

My current portfolio consist of yield stocks. I will add some fundamentally strong stocks when the time is ripe.

Yield stocks
Keppel DC REIT 15,000 shares at $0.965 (data center REIT which i blogged about)

Keppel REIT 50,000 shares at $1.205 (office sector still the bright spot but this is highly geared and i may rebalance it later)

Cash ~$82,918

Ok so long for now. Happy SRSing.

Sunday, 4 January 2015

Put your CPF money to work


There is an article in the Sunday Times today on how to maximize the use of your CPF. 

Let me summarize the key points and share with you a tip on how to reduce your tax bill while doing something which you do anyway. 

Key Points
• CPF OA earns a guaranteed interest rate of 2.5% and can be used for housing, investing, education and approved insurance. 
• CPF SA and CPF MA earned guaranteed interest rate of 4%. 
• The first $60,000 of your combined CPF earns an extra 1%. 
• When you turn 55, a Retirement Account will be created and you will need to transfer the minimum sum in and for me, that will be $155,000. 
• You can enjoy tax relief of up to $7,000 if you contribute cash into your own CPF SA and another $7,000 if you top up the CPF SA of your spouse and parents (and loved ones)

How to reach your minimum balance of $155,000 faster and with less cash?

• If you want your CPF balance to reach the minimum balance faster and with less capital due to compounding effect, consider transfering excess lump sum cash from your CPF OA to CPF SA when you are younger. This will allow the compounding effect to take place as CPF OA compounds at 4% (without considering the effect of the extra1%). 

Tax Savings Tip: How to "magically" reduce your tax bill without any additional efforts? 

This is something which too many people are not aware of it or just plain lazy. Let me share them with you. 

Key assumptions:
• your parents are over 55 years old 
• you give them a combined allowance of  more than $583 each month. 
• please check with CPF if your parents have met the necessary conditions for cash withdrawals from the CPF-RA

Action required on your part
• Using the CPF portal, use Internet banking to transfer a lump sum $3,500 to each of your parent (my preference is at the end of each year when you get your 13th month AWS and you get to enjoy the tax savings for that year). 

Effect
Your parents will get $583 per month in cash for the next 12 months. 
• You get a tax deduction of $7,000 for the tax year that you make that contribution. 

Happy tax reducing. Like my facebook if you are going to use this tip :-P



Saturday, 3 January 2015

Think and Grow Rich

I read many blog posts on their reflections for 2014 as well as the goals for 2015.

There are many noteworthy goals and aspirations by fellow bloggers which are highly commendable. 

End December is always the time where I slow down, reflect on the year and set actionable goals for 2015. 

Reflections for 2014

I have a few passions in life and one of them is to travel. I love to visit and explore new places and will travel a few times each year. Actually that is what keeps me motivated.... by having something to look forward to.

2014 has been a rewarding year in terms of travelling to new places.  I visited the following places for the first time. 

Greece - Athens, Santorini, Mykonos, Nafplio, Corinth. 
Turkey - 4 hours transit in Istanbul (Blue Mosque) 
Japan - Kusatsu, Karuizawa, Nozawa, Yokohama
United States - San Francisco  

I would have loved to share my travel diaries with you except that I need a lot of time to write them and time is indeed the most precious element. Otherwise, the theory of compounding will be rendered useless. 

一寸光阴一寸金,寸金难买寸光阴

My goal for 2015 is to visit more new places and as I grow older, I start to look for more unique and exotic experiences. After all, we only live once, so love your life and live it to the fullest. 


Another passion of mine is to share with people my real life experiences in my journey for financial freedom (be it good or bad). You learn more things from the bad experience and it also helps make the good experience sweeter. So enjoy the journey. (I will leave out the parts on donating to charity and doing good etc. Remember to do good too). 

Financial Freedom

In case you still have doubts, I haven't reach there yet. This is because I equate financial freedom with having a regular passive income (from non work related) that is more than the daily expenses for my family. 

I am at a stage where I am still very focused on building my net worth rather than creating a portfolio for passive income. As such, capital gains from investing or income from trading and IPO punting will not be considered as passive income but will add on to the net worth (if I haven't spend it).  

I am glad that my net worth goal for 2014  hit my target last year. It was a pleasant surprise given how much I spend on food and travels. (Probably the target is too low. Haha)

My definition of net worth includes the property which I am currently staying but I included my wife's share as well since financial freedom is a family affair and I am the family's chief investment officer. 

However to inspire the younger readers, it is definitely possible to hit $1m before you turn 40. You just have to believe that you can, especially if you are below 30 now. There are a few cycles and opportunities in one's life, so grab it when it comes but you can only do that when your eyes are "opened" up to the opportunities that present themselves and you must have some capital to take advantage of them, so save up diligently when you are young and are just starting out.  

Think and Growth Rich ?


I am not sure whether you have read the classic book by Napoleon Hill. I am too lazy to read the original classic, however, I spent the last few days reading the comics version. There are 13 steps to it but i just briefly summarize in a paragraph as follows. 

You must first have the desire and belief to achieve financial freedom and the belief will open your mind and translate into actions which then create a virtuous cycle into achieving your objective. 

Simple enough to understand but you have to constantly remind yourself to practise it. 

Goals for 2015

I will cover that in a subsequent post. I am still trying to make sure the goals are actionable ones and not the fluffy big picture kind. I have read or write enough of those "crap" in the appraisals. ^_^

Happy goal setting.


Monday, 27 October 2014

360 review - SRS, CPF and Saxos

I have recently completed my 360 review on what I want to do with my various investment accounts and this will be my final post on this topic. 

The various 360 topics are:

Today's will be a bumper edition of topics on CPF, SRS and SAXOs. 

360 review - CPF accounts

After reviewing the cash balances in both our CPF accounts and the various restrictions imposed on using it for investments, such as the 35% limit on what you can use to invest in stocks and shares, I decided not to touch them. Given that it is risk free and earns a 2.5% interest, I have decided to keep CPF as a buffer for my home's "mortgage" emergency fund. 



In the unfortunate event that if I loses my job or decided to take a sabbatical, the cash in the CPF accounts will be used for our monthly mortgages. Based on my computation, this emergency fund can support my home mortgages for about 4.4 years.  

One important action item resulting from the CPF review was that I decided to speed up the mortgage repayment even though the all-in cost of borrowing of 1.5% is lower than the 2.5% interest which I can earn in the CPF account. At the end of the day, a debt is still a debt. I think I would rather owe money to my CPF account then to owe money to a bank.  

While I acknowledge that housing is a good inflation hedge, my aim is to pay off my remaining mortgage by 55 years old. I intend to do that by either increasing my monthly repayment or do a lump sum payment and reduce the "CPF buffer" to around 18-24 months instead of the current 52 months. 

360 review - SRS accounts 

I recently top up the SRS accounts for me and wifey. The combined balance has now reached $160,000.  In addition to the tax savings and squirrelling some savings year by year, the good thing is that I finally decided what I should be doing with these accounts and hopefully I have the discipline to stick to the strategies. In case you wonder why Post Office Savings Bank uses a squirrel as well, the nature's answer is here.


I have decided to use the SRS accounts for long term strategies, for dividend or rental income and hopefully with no cut loss levels. I hope I can pass on that portfolio to the next generation. With the breaking down of minimum board lots from 1,000 shares to 100 shares, it will become easier to build up a portfolio of blue chips from January next year. What do I hope to see in that portfolio? 
  • Iconic blue chips. I want to build up a portfolio of iconic Singapore blue chip portfolio that has a strong Singapore Inc flavour and still likely to grow for the next 20-30 years. In that regard, following the weakness in the market, I have recently added Keppel Corporation to my SRS account. I will probably add some banks and telcos but will avoid airline stocks for now.  
  • Strong local brands.  It's hard to describe to you what such stocks are but to give you a flavor of what i am thinking about, it will be stocks such as Osim and Breadtalk. 
  • REITs, Business Trusts and Dividend-paying businesses. I will start adding REITs with good office and retail locations to the SRS portfolio. I want to start thinking of myself as landlords collecting rental every 3-6 months. I may add business trusts if the business model has sustainable and recurring earnings. I would consider toll road operators such as China Merchant Holdings or education provider Overseas Education in this category
360 review - Saxos

I have classified all my other accounts under the topic Saxos. This will include Futures and CFDs as well. I have decided to start focusing more attention on US markets as well given the breadth and depth of the markets there. With the advance of technology, I no longer need to limit myself to the Singapore market that really "cannot make it" 

I will use the Saxos account for a few purposes:
  • Investing and/or trading in global iconic stocks such as Alibaba, Google and Apple. 
  • Use local CFDs and Futures to hedge my positions in SRS in the event of a major crash.
I would like to build up a portfolio of global iconic stocks over time as well. 

360 review - Time 


My time is limited. This will be my last post on 360 review and you can see that it is a long post as i want to save time and squeeze everything into one post. hahaha 

Given my heavy work load, frequent travels and the retirement plans, I find it difficult to blog too frequently. As such, I will not be able to update my investments and trades on a real time basis. However, rest assured, I will continue to review all the IPO companies here and give you my chilli ratings. :) 

Before i sign off, have you watched the video from NTUC Income recently. I thought it was rather thought provoking. While i am not a fan of insurance products, it might serve to remind you to do your own retirement planning and the future you will thank you for that

Here is the video below for your enjoyment. ~ Mr. IPO


Sunday, 26 October 2014

360 review - Pre IPO investments

I spent a while thinking what the subject header should read like. Should it be a sensational one or just a boring 360 review....zzzzz... make sure you read till the end of the post....



What are pre IPO investments?

You can find the definition here. In lay man terms, it is to invest in a company just before it goes for listing, usually 6-12 months prior to listing. For early stage investing, it will be called venture investing, so don't confuse a VC investing, with growth investing with pre-ipo investing. They are all different and has different risk reward profiles. The strategies are very different as well. You can have a quick comparison between the various strategies i mentioned above here in terms of risk profiles and returns.


Is Pre-IPO investing a high risk game?

Is pre IPO investing risky? Of course! In fact it is so risky that SEC actually has some advisory on it. The link is here.


If the Company fails to be listed or fold up, you will lose the invested capital. 

Have i invested in pre IPO company before?

In case you are wondering, my first pre IPO company was in a Chinese S chip in 2008. I have to say that I was quite lucky to get out unscathed despite the financial crisis due to a personal put option we had against the founder and we opted for cash instead of shares when the company was listed. The share price tanked post IPO (See chart below) but luckily the returns was locked in at around 1.66x with high teens IRR (based on my recollection) after 4 years. The share is still listed today but is languishing below its IPO price due to lack of investors' appreciation for Chinese stocks. It was a small investment which i co-invested with my ex colleagues.


How you make money in a pre-IPO investment?


This is a pictorial view in an "ideal" world where you invest at a lower valuation before the IPO and the Company's business plans progressed as planned and managed to list at a higher valuation 6-12 months later. Hopefully, the Company can continue to grow its earnings using the proceeds from the IPO.

You might ask why the Company even want to have Pre-Ipo investors in the first place. There are a few reasons for this.

1.The picture always look clearer with hindsight

At the point of investing for Pre IPO investors, the Company may be at an inflexion point where success or failure is a binary outcome. As such, pre IPO investors are assuming quite a bit of risk in return of a higher return. If things are so clear, investors would have piled into Alibaba, Google or Facebook way before they became 'big'.  Even the so called experts can missed it. I will just share with you some interesting articles in case you are interested in this private equity world.


2. The Company does not want to get diluted too early

By having a pre-ipo round at a lower valuation, the Company can issue less shares to tide their finances till the next big sale or milestone. This is less dilutive than having a full blown IPO. If the business plans did materialize as planned, the Company can sell its shares for a higher valuation in an IPO later.

3. The Company may want to have some 'quality names'

The Company might open a pre-ipo round to investors who can bring 'prestige' to the IPO later. For example in QT Vascular, the Company managed to get EDB and JnJ into the pre-IPO round.

The pre-IPO round can also be one way to 'incentivized' the 'who's who' to support the actual IPO later given that they would have a lower cost base. It can help to ensure a good IPO debut later. 

Some pre-IPO investors can also add value by helping to open doors and create new business opportunities for the Company.

What are the things a small pre-IPO investor should look out for?

This will be the things which i will look out for prior to investing.
  1. A sustainable business model in an attractive sector.
  2. A good story line at IPO and post IPO. 
  3. Reputable co-investors. Obviously i don't belong to this category but if i am investing alongside reputable companies and co-investors, it will be more assuring for me.
  4. Downside protection. There must be adequate downside protection to ensure the Company is able to redeem my shares in the event it can't be listed. 
  5. Upside. There must be adequate upside with formula crafted into the agreement on the conversion formula. In Singapore, it is usually based on a discount to the IPO valuation that ranges from 25% to 50%. 
  6. Lock up. There will always be at least 6 to 12 month lock up requirement. This is inevitable and usually unavoidable. One way to mitigate this risk is to sell some shares at IPO price and be subject to lock up for the remaining shares. In other cases, you just have to keep your fingers crossed that liquidity and valuation will continue for the next 6-12 months and allow you to exit from the investment safely.
Rubbing shoulders with the who's and who

Here comes to the crux of my post today if you bother to read till here. :-P 

Recently I invested in a pre IPO company alongside the who's who in the local investment scene. Those type of names who I know them but they don't know me. Haha. It's quite a key "milestone" for me to invest along side A.Wang, T.Goh and some other familiar names. Of course I ranked at the rock bottom of the list of investors in terms of the amount put in and has to practically "beg" my way in. I will not embarrass myself with the quantum here but in terms of milestone, I will regard this investment as my first official investment into the pre-IPO world. Wish me luck! :)

Mr. IPO is going to be famous !?

If the company is successfully listed next year and my name appears in the prospectus as a pre IPO investor, I am going to frame up the prospectus and hang it in my study room or create a tombstone from it hahaha. In case you are wondering, a tombstone looks like this....




Happy pre IPOing
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