Dollar cost averaging, the math!

 Edit: Thanks to bro Leonard for pointing out to me that the value for paper losses after the 3rd purchase is wrong. It is supposed to be 5.26% instead of 7.02%. The mistake has been corrected!

Hello, I am writing this post to help our friends who are beginning to invest have a better idea of returns and the math behind dollar cost averaging.

Dollar cost average(-ing), DCA for short, is the action of buying a certain product, be it equities, gold, funds etc. over a period. This is similar to the common saying of "drop more, buy more!" or spreading your capital over a typical poker game. However, mentioning to buy when it drops is easy, but how much are you actually prepared to lose or/and do you have the next buying point ready?

Gut feeling aside, this post is to simplify the maths of DCA and newer investors such as me can learn how to appropriate their funds prior to making their first order. There are many reasons why one would buy a stock, maybe the market has fallen quite an amount from it's peak, friend's recommendation, rumors, analysis shown great potential, etc. this plan will only help once you have decided to start buying - it doesn't teaches you when to enter or exit.

Please take note that the price will definitely drop lower in a bear market at the end of your planned DCA. If you have done your research prior to purchase, further drops in prices shouldn't bother you much as you should be confident that the company will go strong and have good prospects that price falls are temporary. If not don't even start to buy, much less a DCA plan. You might also not be able to complete the plan due to price not reaching levels as low as planned but that should be expected while planning.

Ok lets move on!

Scenario 1. You have $10,000 cash you decide to invest in a certain company having a initial share price, p, of $10. Since the economy is unstable right now you decide to DCA, here is one way you can do it.

• 10k capital
• 3 splits
• 5% drop

Based on the above situation, you will be buying the same amount of shares every time the share price drops 5%. In this case, the first purchase will be 300 shares @ $10 = $3,000. The second purchase will be 300 shares @ $9.5 = $2,850. The third purchase will be 300 shares @ $9 = $2,700.

The total amount invested at the end (of the 3rd purchase) is $8,550. Your paper losses at the end is $450. These are the only 2 values we will be concerned about right now, lets disregard the unused cash balance.

When share prices rises back to the price at which you first bought it, you will have a profit of $450, or 5.26% of invested capital. This 5.26% profit WILL always apply as long as you follow the 3 splits - 5% drop plan, be it the first purchase is worth $50k, $200k or $1 million.

Having said that, let the first purchase amount be x. By following the plan, your purchase will go by 1x, 0.95x, 0.9x = 2.85x
In order to ensure sufficient funds, your available capital must be 2.85 times more than your first purchase. So factoring in the minimum purchase of 100 lots and etc. you can do the calculations yourself.

Here are a few values to note.
Loss after 1st purchase = 0%
Loss after 2nd purchase = 2.56%*
Loss after 3rd purchase = 5.26% (of invested capital)
Any further losses isn't of concern since you are not buying any more.
*This is also your profit % after share price returns to p should your 3rd purchase threshold isn't hit.

Assuming you completed your plan, the price it needs to rise to to break even your costs is (total losses/total shares owned) + last bought share price. This scenario is pretty bad to demonstrate due to the fractions and all but you get the point.

Scenario 2. Will be going a little faster and more simplified now.

• 4 splits
• 5% drop

If initial purchase cost = x, total cost will be 1+0.95+0.9+0.85 = 3.7x.
Your available capital must be at least 3.7 times of your first purchase cost.

When share price returns to p, your profits will be 0.05x+0.1x+0.15x = 0.3x. That gives us 0.3x/3.7x, or 8.11% of invested capital.

Loss after 1st purchase = 0%
Loss after 2nd purchase = 2.56%
Loss after 3rd purchase = 5.26%
(total)Loss after 4th purchase =  8.11%

Putting some numbers in.
1st purchase = 10x300 = $3,000
2nd purchase = 9.5x300 = $2,850
3rd purchase = 9x300 = $2,700
4th purchase = 8.5x300 = $2,550
Total = $11,100


To break even, (900/1200) + 8.5 = $9.25 (8.82% rise)

Scenario 3. This is slightly more drastic but still realistic.

• 3 splits
• 10% drop

First purchase cost = x.
Total cost = x + 0.9x + 0.8x = 2.7x
Your available capital must be at least 2.7 times of your first purchase cost.
When share price reaches p, profit is 0.3/2.7 or 11.1% of invested capital.
Total losses at the end of last purchase = (1x - 0.9x) + (1x - 0.8x) = 0.3x
0.3x/2.7x = 11.11% (of invested capital).

These are just 3 of the infinite possible DCA plans you can come up with, with it being even more complex should additional factors be added in such as : different amount of shares each purchase, perpetual/long term DCA, DCA over bear and bull market and many more.

I also didn't provide examples for scenarios of averaging up because it doesn't really make sense nor I have any benchmarks to relate. Firstly, one should really stop buying shares when it reaches ridiculous highs, DCA or not. Secondly, if I use original price p as reference, then DCA upwards will only result in losses, losing money isn't really the goal of investments isn't it.

If you are planning on having a perpetual DCA, you should also consider the price ceiling in which you stop buying anymore, save them up for a crash - the profits/effort ratio here is totally worth it.

That's all folks, thanks for reading!

DBS (SGX: D05)

A while ago I posted some fundamental analysis regarding OCBC(link), and here is one for DBS. I may do another article detailing the comparisons between these 2 (or even with UOB's) but this article will just mainly be focusing on DBS.

The general sentiment I received in my research into Singapore's big 3 banks is that many prefer DBS. As we all know that since share price is ultimately decided by investors sentiment, this could be a factor to keep in mind, although this is extremely un-quantifiable. I would take time to peer upon the various factors such as income distribution by regions/sectors and acquisitions/divestitures, etc. but I feel that these factors will ultimately reflect positively or negatively in the numbers discussed below so I won't drag everyone through a long essay that talks about everything.

Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.
I usually write my articles over a period of time and thus there might be price inconsistencies to the market.

*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing


1.Financials
Revenue is growing steadily at nearly 6% compounded annual growth rate (CAGR). Operating expenses were also kept relatively stable at around 52%, except for 2009 and 2010. In 2009 there is a relatively huge loss arising from credits and other losses - mainly nonperforming loans (NPL). In 2010, a large goodwill expense arose from the loss of fair gains from acquisition of DBS HK. Technically one could say these 2 spike in expenses were caused by management oversight/poor decision making etc. but its really unfair for one like me to judge so we'll leave it as that.

On the positive side, net profit margin has been improving from ~30% to over 40% in 2014, bringing 'net profit attributable to shareholders' (hereinafter referred to as net profit) to a CAGR of 7.444%.

The rather high growth of net profit is however, clouded by the high shares issuance rate. The amount of shares from 2007 to 2014 has a CAGR of 5.818%, in my opinion this is ridiculously high. If that amount does not trigger some red flags, viewing it from another perspective, should the bank's net profit stays stagnant, one would be losing a compounded rate of 5.818% (not exactly share price, but it would be eventually reflected) annually from their DBS share holdings due to dilution.

Due to their high increase in amount of shares annually, EPS' CAGR has only been a meager 1.538% despite growth.

Dividends wise, the group paid out $0.68 per share in 2007 and $0.65 in 2008. This 2 values were not tax-exempt since the tax-exemption on dividends only kicked in after 2008. In 2009, dividend per share dropped again to $0.56. I am not exactly sure if the tax-exemption is a factor for the drop in dividends, it doesn't make sense for the group to reduce payouts (with regards to the exemption) since the tax is on us and not them anyway. I could use further clarification on this point as I wasn't exactly in the finance world back then, sorry. The reduction of dividends could possibly be due to the huge increase in expenses in 2009, as mentioned earlier. One should also take note of the payout margin of 81.94% in 2010. I believe due to the huge expenses again, this year the group has really stretched itself hard to maintain the payout amount.
Since then, the group has pushed their payout margin lower and lower to the current levels of ~35%, this has however, sacrificed quite a bit of payout increment.

Yield has increased since the average to 4.18%. It is not exactly a large increment from the average of 3.66% (2008's 7.37% removed as outlier), although one could reason that with the low payout margins, yields could be expected to increase as there is a lot of room for it to. Sounds speculative though, I won't bet on it.

Tier 1 capital adequacy ratio has been healthy at ~12%. IMO as long as the CAR is fine there isn't really much issues to harp about.

2. Balance sheets and ratios 
Assets and liabilities have been growing at a pretty fast rate throughout the years, with the CAGR of assets at 8.257% and liabilities at 8.375%, although liabilities has a sliiightly higher growth rate, they are pretty similar, so its fine. That has given us an average debt ratio of 0.9, which is fine too. Nothing spectacular, nothing bad.

Net assets has been rising pretty well at a CAGR of 7.139%. However, as mentioned above, this number has been clouded by an also very high share issuance rate of 5.818% CAGR. That has resulted in net assets value (NAV) CAGR of only 1.249%. Assuming this rate continues t = ∞ and market is efficient, share price would only be expected to appreciate at 1.249% yearly, which is... rather unremarkable.

 However, not all is that bad, at the current levels of $13.87, Price/NAV is at quite a low value of 0.833. In another way to put it is that should DBS wind up now and distributes everything left to its shareholders, for every $0.833 of shares you purchase you would receive $1. Of course there might be other complications but this is the general idea behind NAV.
DBS's average price/NAV isn't usually high, having an average of 1.087 throughout the years, while dropping to a drastic low of 0.58 in 2008. So should one be expecting this crisis to mirror 2008, DBS's share price still have a long way to fall - a similar price/NAV to 2008 would give us a share price of $9.66.

In fact the sentiment towards DBS has only increased a lot recently in 2014, where price/nav spiked to all time highs of 1.224. P/E is still reasonable at 12.1, however. The P/E now is rather low at 7.88, versus the average of 12.66.

3. Conclusion 
In conclusion, I feel that for DBS, it is more of a correction than bargain towards their valuation, partly due to the huge growth of share price from 2014-2015. However, the recent drop has also brought them much below than what they are fairly worth. DBS is actually in quite a discounted position NAV wise. However, given their high rate of share issuance, I wouldn't buy this share for the long term gains as the dilution factor here is pretty high and the yields isn't exactly spectacular.

On the other hand, it is quite reasonable to buy for short-term share price appreciation, since investors have a tendency to inflate DBS's share price to much more than it's worth, and its also at quite a bargain at current prices.

Personally, given the numbers, I would vest myself in a higher percentage of OCBC shares than DBS, whereby the purchase of DBS shares is to be sold when prices are reasonably high although their yields isn't that bad either, period, cause I haven't research UOB yet.
Furthermore, given the fact that the 2014's yield is 10 cent lower than 2007's doesn't exactly tick well with me, there's a feeling of stagnation when I am valuating DBS, especially given the high dilution rate.

That's all folks, cheers!

Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing
Link to article on OCBC: http://theinvestingnoob.blogspot.sg/2016/01/ocbc-sgx-039.html

Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)

OCBC (SGX: 039)

OCBC (SGX: 039)

The global economy has taken a beating in mid 2015 and the effects are just worsening. Banks aren't faring well either - share price wise. I believe this is a great time to highlight the fact that the market is always a manic depressive guy that pushes prices far too low to justify. Let's see what does the low now means.

Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.

*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.

Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing


1. Financials
Revenue growth has always been growing at a solid pace since 2008 to 2014, at over 8% compounded annual growth rate (CAGR). This is also coupled with a healthy level of operating expenses, at about 40.59% throughout the 8 years. It has not grown or shrank by a lot. Given the fact that this is a service/financial industry with little to no manufacturing, upstream or downstream processing, operating expenses can be assumed to be relatively stable.

However, revenue by itself does not really impact shareholders in terms of valuation as for investors, we are more concerned about the money that are attributable to us. Let's take a look at the final picture or as what they call it in the annual reports 'Net Profit attributable to ordinary equity holders of the Bank after preference dividends' (Net profit)

I am not a fan of companies issuing preference shares, since it is usually something that is done when a company is in a more desperate need of funding. However, I am quite new towards evaluating finance companies and thus this will not effect my judgement whatsoever.

Net profit increased even more on a compounded annual growth rate basis, having a 10.6% growth rate, with the CAGR of EPS at 7.16%. These numbers are quite impressive given the fact that banks do not come up with a breakthrough in technology or new scientific discovery that can boost sales greatly. I believe this would be creditable to good management and banking policies. Proper risk evaluation by the bank would also prevent the occurrence of non performing loans and increase growth.

Net profit margin has also been rising steadily from 38.19% in 2008 to 45.39% in 2014. This means that more and more of the bank's revenue are attributable to shareholders, which is good.

Dividends payout has been very mild since the financial crisis of 2008. The bank seems to be working towards lowering their payout margin before increasing dividends. This could also be a way to increase their cushion should economic downturn occurs so they do not have to lower their dividend payout (and maybe even increase it). Dividends payout has been increasing consistently throughout the years, although there isn't a increase every year.

However, given the decreasing payout margin, the yield is standing at quite a decent rate of 3.44%, averaged from 2009-2014. The yield from 2008 is not considered since the super low share price skewed the yield up a lot. Since 2008's yield of 5.79%, the dividend yield has not reach 4%, or barely even 3.5%, from 2009-2014. Thus a yield of 4.53% with the current share price of 7.95 could be a good reason to buy in. This is assuming the dividends does not drop from the previous year's $0.36, although I strongly believe it won't.

One must also take note that OCBC is constantly issuing shares throughout the year, either from scrip dividends scheme or just rights issuing, and that the increase of shares has a CAGR of 3.6%. Should net profit growth slows from the 10.6% (a rather high number to maintain), the continued issuance of shares at this rate could drastically impact shareholders growth. A drop to net profit growth to 5% annually, a reasonable rate, would bring EPS growth to merely 1.x%, which is very little. I believe the management will handle this matter properly though, as during the crisis of 2008, very little new shares were issued.

2. Balance sheets and ratios

Assets and liabilities have been growing at a extremely fast rate throughout the years. In financial companies assets and liabilities are more intricately related than typical industries, this is because the bottom line is the majority of both the sections are money. Unlike typical industries where assets could be inventory, PPE, patents etc. and liabilities payables, debts, rent etc,. banks are just mostly dealing with money. Therefore as assets rise liabilities are definitely rising with it.

It is then good to note that the bank's debt ratio has always been consistent at 0.9, although there is a slight upwards trend since 2008.

Net assets has been rising steadily at a CAGR of 8.8%, bringing their net assets value (NAV) to 8.844 as of 3Q2015, as compared to their share price of 7.95. This value is extremely critical as the bank's NAV has never been higher than its share price since 2008.

OCBC's Price/Nav has been consistently above 1 (avg 1.2) from 2009 to 2014. With the recent crash in the market, it's Price/Nav has fallen to 0.90. In term of Graham's net-nets, this could be considered undervalued. However, should we apply Graham's valuation of 0.5x receivables, it would skew the bank's net-nets to catastrophically low levels, which is unrealistic, since most of the bank's assets are from loans receivables. Since the bank's NPL percentage has always been below 1%, with 2014's 0.6%, even with the slight increase of NPLs in the O&G sector, net receivables by the bank wouldn't seem to be affected much.

The bank's historic price/earnings ratio (P/E) has seen an average of 13 from 2009-2014, with a decreasing trend of 14.9 in 2009 to 11.03 in 2014. With the recent crash, the P/E has dropped as low as 8.39, even lower than 2008's 8.88.

In 2008, the P/E*P/B was at 7.18 and its 7.53 now, not much further away. Although I feel that it is nigh impossible, for share prices to drop to it's 2008 levels of 4.84, would mean nearly a halved valuation of the company back then. If you don't understand this portion its fine. Basically I am saying the prices now are just slightly more expensive then 2008's.

3. Conclusion 

In conclusion, should you seek to get income from dividend yield, this is quite a opportune time to pick up some of OCBC shares, as discussed in part 1.

Also, should you seek to get share price appreciation, the NAV is only 90% of it's share price right now, which could also prove to be a bargain, as discussed in part 2. Please note that however, share price appreciation is something that even the greatest of minds cannot confirm it's occurrence nor the time it will take to occur, and these can only be viewed as educated guesses and predictions.

I will pick up OCBC shares should I verify that no other banks in the similar industry displays a better valuation (to be done).

Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing

Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)