Cryptocurrencies, an analysis

Disclaimer: Admittedly, I am biased against cryptocurrencies, but I'll try to make this article as fair as possible. Just a reminder though.

Stories of people earning a windfall from the speculation of cryptocurrencies are not uncommon nowadays. Recently, stories such as these(link) '

If You Bought $5 of Bitcoin 7 Years Ago, You’d Be $4.4 Million Richer'

are appearing all over the place. This creates a snowball effect that attracts more investors and attention to themselves, causing a self-fulfilling prophecy of value appreciation. However, as history has proven itself time and time again, there is nothing that can rise in value that drastically without an actual product or object backing it up. I'll get to that later.

Fundamentally, the valuation of everything in the world depends on demand. That's the rule that underpins the entire economy since the beginning of mankind. Currency or not, a transaction can only occur under the condition of 'coincidence of wants'. Be it trading an apple for an orange, or buying an apple for $1, both parties must be willing to accept what the other party have to offer.

And what exactly does this have to do with cryptocurrencies? The meteoric rise of the valuation of these cryptocurrencies highlights a major flaw/point in our economy - that government-backed currencies are too lawful to be used. Most transactions with cryptocurrencies are used because of its anonymity, you don't have to declare income taxes on bitcoin gains, nobody will know if you wired millions of bitcoin overseas to pay for firearms or drugs, because there is no central bank or regulatory bodies acting upon cryptocurrencies. This mean that while originally the demand stems from these properties, more aboveboard parties such as banks and financial institutions are starting to join in where wall street companies are starting to accept bitcoin transactions because illegal or not, wherever there's profits to be made, people will be there.

However, what puts me off is that because of its growing acceptance, people assume cryptocurrencies are a good investment opportunity or a quick get-rich scheme. It is not, at least not by traditional standards.

For those who studied finance, you would have known the concept of beta, risk-adjusted returns and some, the modern portfolio theory. Basically it means that with increased returns comes increased risk. There's no way around it, at least not over the long run. Markets are increasingly becoming more and more efficient as technology involves, this also means that the appearance of a profitable opportunity appearing would quickly be known by (informational efficiency) and quickly seized by the influx of investors (allocative efficiency) dumping funds into what's hot.

I do not deny the emergence of cryptocurrencies is a lucrative new opportunity opening up. However, temporal opportunities are never a source of long-term investments. I emphasize long-term investments because while personally anything that isn't long term is simply not investments, many do not feel that way.

Traditionally, stocks and bonds have been the key players of anything investment related. While they still do so now, the creation of complex products as the result of financial engineering have brought many new financial instruments into the game - with cryptocurrencies as one of the newer big boys. That aside, the fact that stocks and bonds manage to hold their ground over the centuries are that they are easier to be intrinsically valued. Vanilla bonds pays out a fixed rate annually. Investors knows what are they gonna get, expectations are usually met. Stocks are for people with a riskier appetite, some mature companies rise slowly over the years while paying out dividends, some such as REITs provide more fixed income with lesser growth. Key point is, investors can reasonably expect some returns on their funds.

One simple concept highlighting this is
Total returns = Appreciation in price + Dividend/cash payouts

However, the valuation of stocks and bonds can be said to come from it's expected payouts, as seen in the discounted cash flow (DCF) or dividend discount models. The fact that these models exist, and also they can only be used in is because that a company issuing stock or bonds are expected to continue its business and generate cash for investors.

With the creation of complex derivatives and cryptocurrencies, this is no longer the case. While some derivatives are good, whereby is actually reduces risk, most amplifies them and increases its speculative capabilities. While I do not believe in derivatives as a suitable investment instrument, I do understand its purposes.

First-order derivatives have themselves an underlying traditional asset, meaning that these derivatives are created based on bonds and stocks or debt such as mortgages, such as a collateralized debt obligation (CDO). They still have something that are of intrinsic value in it, although the market valuation and intrinsic value can be very far apart, they do have some worth. Higher-order derivatives are derivatives built upon derivatives, and these can go up so many levels that one don't even know what underlying assets is the original first-order derivative based on. Even worse is that as derivatives stack upon each other, multiple asset classes can be lumped together into one huge mess.

The thing about cryptocurrencies is that THERE IS NO UNDERLYING ASSET. One can tell from simply observing that all cryptocurrencies start from nearly zero value, and as its use gets more widespread, so does its valuation. Obviously something with no underlying asset cannot have a cash payout, bringing us to the fact that

Expected total returns = Appreciation in price

This, if anything, is purely speculative. Speculative activities are NOT investment opportunities. Yes some people earned a million dollar from 10 bucks by buying (i refuse to use the word investing) into cryptocurrencies. Do you know where else you can get these kind of returns? The casino. Secondly, the other guy who probably achieved something like this, and also the creator of this type of business, Charles Ponzi. If you know who that is then you should get what I mean.

Previously as I mentioned, risk and return are correlated, but in most lessons of finance, risk is simply measured as standard deviation, which is the chance of fall in valuation. This means that risk is defined as personally, how much money would an investor stand to lose or make by taking on a certain amount of risk. However, one additional perspective I would like to add into evaluating risk is the ratio of successful investors vs total investors.

Imagine buying a US government bond that pays out 5% annual coupons. Out of 1000 investors, I'm sure all 1000 investors would be getting their 5% at the end of the year. For a corporate junk bond, out of 1000 investors, perhaps only 800 of them would be getting the promised returns while the rest defaults. For the investment in risky growth stocks such as technology, perhaps out of 1000 investors, 100 of them would see considerable returns. For a ponzi scheme such as most MLM nowadays, probably only 10 out of 1000 people in it would be sitting in the green, this is worse because it actually drags more and more victims into it.

In the case of cryptocurrencies I believe it to be no different. The percentage of winning investors are only the ones at the very beginning and that percentage is definitely not large. Yes cryptocurrencies is definitely here to stay, AS A WHOLE. This does not mean that any single cryptocurrencies is a good buy. Do not fall into the fallacy of composition. Stocks have existed for centuries and many have reaped great benefits from it, but I'm sure all of you can tell that this does not mean simply buying any stock is a good idea. Same as cryptocurrencies. That is not to say that one CANNOT make a windfall from buying cryptocurrencies, you can. I am just saying that it won't be a sustainable venture, if you even manage to gain anything from it in the first place.

If anything, cryptocurrencies is the biggest ponzi scheme since the 2008 financial crisis.  
Feel free to quote me on that.

"When you start thinking that you can create something out of nothing, it's very difficult to resist" - Lee Hsien Loong

Finance 101 part 2: Bonds

1. What are bonds and the different types of bonds

As we mentioned, bonds are contractual agreements for borrowing and lending between borrowers and investors. Bonds are a separate funding mechanism an entity can get besides bank loans, although they are contractual as well. For example, a $100 bond paying coupon rate of 5% maturing in 10 years would pay you $5 every year for 10 years, where you then get back your $100.

There are many bodies that can issue bonds, mainly government and private companies. Governments issue bonds when they run out of money. How do they run out of money? Well governments get their revenue mainly from taxes, sometimes in a bad economy such as financial crises, entire economy plunges and that is bad on tax revenue. Sometimes they just want to spend more than they have (such as the USA) be it due to badly planned expansions or too much natural disasters. Road repairs, infrastructure upgrading, military spending, building more lamp posts on the roads, reclaiming land ALL requires money which are funded by the government, so sometimes they just need more money than they got, this is what we call a government deficit.

And so they issue government bonds. Treat this as the government borrowing money from it's citizens to build stuffs for the benefit of the citizens, good right? In Singapore, our government is in a surplus, meaning they are actually earning more than they spend. However, as an avenue for citizens to invest their money in a risk-free asset, they still offer bonds that pays you a coupon yearly, but they are so low that you might as well invest them elsewhere. It makes sense because if they don't really need your money, definitely they are not going to pay high interest for it.

Secondly, here are the people who really needs your money. Corporations. Companies issue bonds as a method to raise funds, with the other being equities, but as we shall see there are a plethora of ways to raise funds. We'll go through that in corporate finance.[xx] Why do they raise funds? Most of the time they are probably planning expansions, acquisitions and sometimes to tide them through a bad year. For example, if Singtel wants to build more telephone lines and radio towers, upgrade computers, implement a 5G network etc. all of these requires money. If they do not have enough liquidity, such as cash in the bank, they would have to borrow the money first and to pay them once these investments pay off. It's another matter if they DON'T pay off, though. Therefore, by terms of 'neediness', we can see that companies need the money more than governments, since their profit is at stake, and so they will be willing to pay more on their bond's interest. As a gauge, if SG government bond is 2%, most companies would probably be at 4-5%.

But what if the government is actually in deficit and really needs your money to pay for the defense in case north korea nukes them? Will their coupon rates be as high as a company's? Most of the time, no. We will now discuss another factor affecting bond yields - credit risk.

Credit risk is the risk that a bond defaults, which means that they are unable to either pay the promised coupon rates and/or the face value at maturity. This is what would happen if a planned expansion for a company turns very very sour. Most companies usually operate on a relatively low debt-equity ratio such that in event of a bad decision making, they wouldn't go bankrupt immediately. The optimization of this would be covered in capital structures.[xx] Other than that, remember that a bond usually lasts a long time, commonly more than 5 years. It is hard to tell what will happen to the company in 5 years time. There could be new technology rendering their product useless, a major embezzlement or fraud (see barings bank) or simply bad economic conditions causing the firm to be unable to pay its debts.

Governments on the other hand, have a much more steady stream of income from taxes compared to individual corporations. Governments can also control their spending much more ad-hoc than corporations. Lastly, government CAN print money via the central bank to repay their loans. Therefore the credit default risk of government bonds is extremely low, where in the financial world, they are referred to as risk-free assets. We will take a look at why governments do not print money to solve every financial problems we have later on.  [xx]

Given these increased risk from a private company defaulting, an investor would expect a higher return from lending them money. Simply put, risk = return. This would explain why government bonds carry a lesser yield/coupon rate than corporate bonds.

2. Yields of bonds, issuance and secondary market

At the point of bond issuance, the face value (also called par value) is usually fixed at a nice number, say $100. This would allow the coupon rate to be calculated easily and to also facilitate transactions. If a company wants to raise $1million, they would simply issue 10,000 of these $100 bonds. Note that bonds are usually issued via a underwriter who then sells it in smaller chunks in the secondary market. It means that an investment bank will pay the entire $1million themselves less some cut off as commission, and cut them into smaller pieces of $100 or $1000 bonds to sell in the SECONDARY market, because obviously very little investors would have or want to purchase $1million in bonds at one go. Initially, these $100 bonds with a coupon rate of say 5%, would pay you $5 annually till maturity, thus your YIELD TO MATURITY(YTM) is also 5%.

However, after the initial issuance, the demand of a certain bond might increase. It might be due to interest rate falling, so that no other bonds have such a high coupon rate anymore or that the safety rating of that issuer has gone up and thus more investors want to buy those bonds. Remember that the company had already raised the money it needs and is NOT issuing any more bonds, so any increased demand for the bonds would have to be fulfilled by the existing secondary market. Increased demand would bid the price of these bonds up. For example, if you buy the same $5 bond at $110, your yield to maturity would fall to approximately ~4.5%. You cannot simply use the 5/110 as the YTM since maturity affects the YTM, thus approximate.

As an investor, what you should be interested in is the YTM, not coupon rate, although that plays a part too. For example, off the bat a bond paying a coupon rate of 6% would be better than a 5% one, but what if the 6% bond costs $150 and the 5% costs $110, which is the better one now? IMPORTANT: Note that in this example, the 6% bond WILL NOT pay you 6% of $150, but 6% of its par value of $100, which is $6.

3. Bond pricing

Note: This section contains technical information not needed by the average person unless you're a student or worker in the finance industry, or you are very keen in learning, then by all means.

YTM can be defined as the yield you are getting per annum if you hold the bond to maturity, given the price you paid for the bond. Without any calculations, one should intuitively tell that if a bond is purchased at a price HIGHER than the par, also known as a premium, the YTM will be lower than the coupon rate, and vice versa. If you buy a $100 par bond at $150, then definitely your yield will be lesser than the coupon rate % on the bond.

The pricing of a bond is simply the net present value of the future cash flows of the bond, and so we consider the net present value formula:

NPV : CF1/(1+r)^1 + CF2/(1+r)^2 + .... CFN/(1+r)^N

Where (1+r)^N is the discount factor. For more understanding on discount factor, refer to time value of money. [xx]

CF would be respective cash flows.

In the case of bonds, it would look like:

Bond price: Coupon payment 1/(1+YTM)^1 + coupon payment 2/(1+YTM)^2 + .... last coupon payment/(1+YTM)^M + Par value / (1+YTM)^M

Where M is the maturity periods. If a bond pays annual coupons and mature in 10 years, M is 10. If a bond pays semi-annual coupons(2 times a year) and mature in 10 years, M is 20.

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. WIP TBC

Finance 101 Part 1: General concepts

Hello. This is (hopefully) one of the many posts I will start to publish with what I know about finance. My method of learning and storing information is rather erratic and I wish this would help to cement my knowledge better and also help others with similar attributes to pick up what I know. For knowledge is like happiness - the totality only increases when shared.

This list is by no mean bridging and so it is not meant to be learnt in order. You can skip to any points you want/are more interested in but generally I will try to state the simpler ones first.

[xx] markers denote further in-depth topics that are separately discussed, yet to be written.

1 - Asset classes. 
These are broad terms that includes securities that share the similar attributes. Examples are
-Stocks (I will use 'stocks' and 'shares' and 'equities' interchangeably and they mean the same thing unless otherwise stated),
-Bonds,
-Options
-and Cash.

However, we will learn later that different items in the same asset class can behave very differently, even to the extent of having characteristics from multiple asset classes.

Stocks are in its simplest form, rights to part of a company. Assuming a company has 100 shares issued, and you own 1 of them, then you own 1% of the company, simple as that. These holds true for private and public companies. The only difference for public companies is that their shares are PUBLICLY traded and are subject to much more stringent compliance laws and regulations. Private companies (usually identifiable by the 'Pte Ltd' in their names) have no shares available in the public, but among their founders, such as a family, they can internally trade their shares but of course these are much less legally binding.

I will not be covering the public listing of a private company since that is more of an investment bank underwriting topic than finance.

For example, DBS bank now has approximately 2.5 billion shares outstanding. You can also see it as this company is divided into 2.5 billion parts, each share representing a part. If you buy 100 shares of it (~$20 per share as of writing) costing $2000 then you own 100/2.5billion of the company or 0.000004%. Yes $2000 is no small amount, and yes the fraction you would own is also rather negligible. That's how large it is. All stocks work based on this concept, no matter how small you are, where you are (USA/Europe/HK). There are definitely much more sub-classes of stocks such as defensive, aggressive, growth and passive but we will go through that in future topics. [xx]

Bonds are a rather fancy term for a legal loan contract. By contract it means that compared to equities, bonds do have some legally binding function in it. What this means is that if you, the investor, purchases a bond for $100, you are technically LENDING $100 to the bond SELLER. The seller would then be a borrower, or debtor, and the investor the creditor. This part of the article is not meant to discuss laws and thus I won't go into details how are they enforced but just know that the borrower are obligated to repay their debts (unless they pull off a Greece, but that's another story).

As such, borrowers usually pay interest on their loans, say 5% p.a. This would result in the lender getting back $5 every year until a fixed amount of time (the maturity of the bond) where the lender will repay the capital ($100). This percentage of interest is normally called the coupon rate. Our Singaporean government do offer bonds such as these, although corporates issue them as well. An example can be seen here :
http://www.sgs.gov.sg/savingsbonds/Your-SSB/This-months-bond.aspx
Government bond yields are pretty low at ~2% and there is a whole topic regarding bond risks and yield that I will go through in later topics. [xx]

Options are technically a subset of a bunch of securities called derivatives, which are endlessly technical and has too many innovative products in it (read: weird stuffs) but options are the most commonly used. What an option is is a payment that entitles you to something, imagine it as a gym membership, the membership ENTITLES you to use the gym, but you can choose not to.

Most options comes in the form of you paying X amount of money that entitles you to buy a certain share at price Y. Logically, 99% of the time share price will be = Y at the time of option purchase, but what happens is that share price fluctuates, while Y doesn't. 1 Year later, if share price > Y+X, you earn money, but the interesting thing here is that IF share price is lesser than Y, you can simply choose not to use('exercise') the option and let it expire. What you are losing here is then X.

If this concept seems hard to grasp, it kinda is, and there is much more innovative stuffs in options and derivatives, which the average guy has no business dabbling with for their financial safety. Do not mess with options and definitely not derivatives. Avoid them like a plague. Oh yeah, also they are one of the key causes in the global financial crisis of 2008.

Cash is pretty self-explanatory, but just to make things complete - Cash is fiat money that holds transactional value enforced by the governing body that issues the said currency. Fiat money means that the denoted value on the currency is usually much higher than how much that piece of paper/polymer is actually worth. And this value is enforced by governments. So the fed and USA government can exert its laws onto citizens rejecting it, but not USA citizens rejecting Singapore dollars. Likewise, the USA can't do anything if a Singaporean citizen rejects US dollars as payment in Singapore. That's that legal tender written on it means. Didn't know that before about money eh?

2 - Financial markets 
These includes primary markets and secondary markets. The primary market is where any financial asset is first sold/transacted. Examples of these are initial public offerings (IPOs) of shares when a private company goes public and initial issuance of bonds by corporations or governments.

Subsequently, trading among investors always happen in the secondary market. Examples are the stock exchanges such as SGX and NYSE. In between the investor and the secondary market there are usually brokers who does the technical part of actually doing the transactions. Broker services are usually provided by financial institutions such as DBS, OCBC... almost every bank and broker houses such as Phillip capital.

... I will update this list as it goes on on the future, for now we'll proceed to more educational stuffs.

The road thus far

Hello readers and investors. This post is mainly directed to my investors and those who bought the stocks I have recommended. Of course those who had met me have gotten slightly varying tips based on the individuals, but mainly the stocks comes from the 2016 posts of this blog.

Despite the slight correction these few days, I believe the profit till date is rather substantial, and this is quite a large difference from my prediction - whereby the market will do a slow climb from the bottom starting mid-end 2016. Clearly the market have rebounded quite strongly off the lows and I would say I was rather lucky to be able to get research done before that time period. The prices are shown all in their respective posts so if anyone would like to gauge the returns, feel free to do your own comparisons - namely OCBC, DBS, EMR and recently STI ETF & SHENG SIONG.

Regarding EMR, I understand that due to the lack of capital and understanding of foreign markets, many did not participate in it, so I would leave that out here. Prior to investments, I had always advised on my time horizon and perspective, and not to follow me blindly. Take for example, should someone with a time horizon of 1-2 months maximum bought OCBC and DBS shares the same time as I do, I believe the next couple of months has seen their shares dropping another 5-6%, which would have been realized losses for them. However, for those with similar appetite like mine, the movements would have suited perfectly for the DCA plan. 

While personally my profits are nothing much since my capital is still small, I am extremely glad to have helped someone earn an amount equivalent to an COE (about?) with the capital of ~250k. The large trust of investing over 200k into shares based on my recommendations are worth much more to me than any monetary gains (I don't get a cut of it anyway), and because I feel only those who understand where I am coming from will have the ability to do it. The idea of my investing style is more towards avoiding risk than to seek profit. My only promise to investors is only that they will be richer 10 years down the road with my help vs fixed deposits. Since my holding period is indefinite, I have never and probably will not ever give advise on when to sell, so if they actually want to realize that mentioned COE, it is up to the individual.

I have always liked to maintain full honesty and transparency, so frankly speaking, I did not expect the jump in prices, nor your profits or mine. I would be happy if the prices didn't drop over 20% since I bought it, and that they continue paying dividends - that's it, I believe that's what I told everyone as well. Therefore, should prices maintain the way they are right now, of course its normal if the 'climb' i spoke about didn't happen, since... it already jumped up. Not considering dividends, current gains have already far exceeded the intended returns of 8% (annually+dividends) .Whether there be another crisis or not is still uncertain, given the general gloom about the economy, but should prices continue rising, then yeah go for more holidays and stuff, but if not, treat it as an opportunity to earn another COE.

There will probably not be any new picks given the adequately priced market right now, even more so if prices continue to rise. I am beginning to stray away from the Singapore market given its extremely inefficient workings, since it is often traded and very subjective to price manipulations - save for the few blue chips. However I will still continue to monitor the few large caps companies and will be ready to grab them when the chance presents itself.

In the meantime, I will be monitoring income-yielding securities, such as high dividend-blue chip stocks, REITs, defensive stocks and others. I am also not accepting funds for management in the meantime since I don't really know where to place them with current market conditions, so there will mostly be action only if the next crisis happens. Having said that, should any current or new investors have funds that want to be put to use, you can still contact me and I can try to figure something out - less lucrative opportunities are still opportunities!

Cheers!

Same boat, different design - the value of money.

Hello readers! This article is not so much about finance than it is economics, just to let you know. This post is mainly addressed to my friends and investors that are waiting to buy shares only at the 'previous crisis' prices, be it 2008 global financial crisis, the great depression era etc. Many people I know are spooked by high prices right now compared to say 10 years ago, especially my parents. ;) While the concept of this discussion might be subject to some controversy because 'things are not that simple', I believe this basic concept will definitely apply no matter what time or place you are, to different extents.

First of all, I am fairly sure everyone more or less grasp the concept of inflation. It is a inevitable phenomenon that erodes the purchasing power of our money over time. I remember buying plain pratas at 50 cents about 13 years ago, back in primary school. Right now the cheapest I could find is $1.10 (the 10 cents was added rather recently, to my further dismay). Over 13 years, this would mean a price compounding of about 6.25% annually. While in reality I doubt there are as many products who rose in prices as fast as this, just take note of this as an example.

That leads us to our second point. Would you still, logically, expect plain pratas to cost 50 cent anytime soon, such as next year, 5 years later, or even 10 years later? It would take a miracle or a insane prata seller to make that happen anytime from now. I am fairly confident when I say that the average price of pratas will never hit 50 cents anytime from today onward, assuming everything goes as per normal. If you are one of those who would find reasons to rebut this statement, such as the world might fall into ruins or maybe 90% of all the money the world disappeared overnight etc., just know that I totally agree with you and I also suggest you exit this page immediately.

Moving on, lets say a similar product is produced by CURRY CO., we shall call it CCO. CCO sells pratas at 50 cent 13 years ago. The cost price, taking into consideration the dough, manpower, utilities etc. comes up to about 25 cent per prata. This allowed CCO to make a profit of 25 cent per piece of prata sold.

Because of inflation, the seller supplying the flour to produce the dough increases price by 5% year on year (y.o.y), the rest of the suppliers - utilities, manpower salaries, rental - follows suit. This would result in total costs of producing the prata to increase by 5%. The company then decides to adjust for this by increasing prices by 5% as well. A year later, the new cost of a piece of prata is now 52.5 cents, while the cost to produce it is 26.25 cents. This would result in a profit of 26.25 cents, versus the previous profit of 25 cents per prata. Fast forward 10 years, the cost of a prata would be 81.44 cents, while the cost to produce it would be 40.72 cents, resulting in a profit of 40.72 cents.

As you can see, technically the company did not gouge customers by raising prices more than it need to, but profits rose 5% y.o.y as sales and costs also rose 5% y.o.y. Sure, one can argue that the company can only raise prices enough to maintain the initial 25 cents profit. However if a company does that then it clearly has incompetent short-sighted management and that company will definitely not last long.

Now that we are all on the idea of companies profits will simply rise along with inflation if all else remains same, let's talk about share prices.

Lets go back to CCO 10 years ago. The company sells 10 million pratas that year, that would mean a profit of $2.5m for the year, with 25 cents of profit per prata. The management then decide to distribute 10% of earnings as dividends. Assuming 100,000 shares in circulation, that would result in a distribution of $2.50 per share. Given an average yield of 4% dividend on generic equities, that would mean a share price of $62.50.

Then comes an financial crisis, share price plummeted across the globe, with CCO share price falling about 50% to $30 per share. This resulted in yields of 8.33% (this is no exaggeration , yields were seen reaching ~10% in the 2008 financial crisis). Sales then continued as usual, people still have to eat right? As mentioned earlier, 10 years later - now, profit per prata is at 40.72 cents. All else remaining equal, total distribution per year would be $407.2k.

The company still distribute 10% of their earnings to 100,000 shares. Each share now has a distribution of $4.072. The economy is now healthy with a dividend yield of 4% again, this would mean a current share price of $101.80.

Let's say you're an investor and you look at the historical price chart of CCO. Definitely you would want to buy the stock when it was at $30 during the financial crisis, or you might want to buy the stock only when it is selling at the average price 10 years ago at $62.50. After going through all the above, does this rationale still make sense to you?

A price of $30 with current profits/distribution would mean a yield of 13.57%, while at $62.50 the yield is 6.5152%. While the latter if plausible during a financial crisis, you are just buying the stock at a face value of $62.50, while the intrinsic value of the stock has already risen much more than that. It means that even if the price is the same, the stock - and the various factors along with it - is already different.

If as an investor, one plainly looks at prices to decide the value of the stock, then you have already missed the axiom of inflation and the value of money. In the case of CCO, you might have missed the '$30 boat', but assuming yields of 8.33% for a DPU of $4.072, a price of $48.80 is exactly the same as the '$30 boat'.

The points brought up by this discussion might come as common sense to many, such as inflation etc. but the amount of people who misses the big picture is still astoundingly high. So I hope long-term investors would digest this discussion and don't be so hard up with your money, lest you miss more future 'boats'.

Happy investing!

Sheng siong (SGX: OV8)

Hello readers!

The financial situation is still rather rocky, amidst a few short rallies now and then. I believe the rally of oil prices are definitely contributing to the recovery of the economy. From its lowest of ~26(?) to the current prices of ~40. It is definitely staging a strong comeback. However, the lagging growth of China is still weighing on investor sentiments globally. The effects do seem to be cancelling each other out in general, since we have a bull (oil) and a bear (china) right now, as compared to both the bears months ago. Should China's growth recover I believe a bull market might be back in place, although this might be far from the present, given the fact that China has been growing rather exponentially for the past decade.

While I personally do not involve myself in commodities nor cyclical markets, the ripples caused by the falling oil prices do open up opportunities in other segments of the market. One of the more obvious example were definitely the banks, where sentiment soured after realizing the NPL of banks might increase due to the defaults arising from the O&G industry. I seem to be getting off topic already so lets get back to...

Sheng Siong

1. Business outlook
I believe anyone reading this would know of Sheng Siong (I'll call it SS from now on), since its everywhere and sell stuffs everyone needs. Retail goods is in itself a rather sustainable industry, as we always need ...stuff right? It is also very easy for them to phase out or bring in new products as the market changes, be it the rising trend of organic foods, Japanese products, that Korean spicy instant noodles and the like. Therefore bottom line is I believe their business will continue to survive in the years to come, that is the bedrock of all my investments - sustainability.

As usual, for the people interested in the numbers, here's the excel link :
https://drive.google.com/file/d/0B1fcD_lJpW6hR01mc2VGY2JrUnc/view?usp=sharing

Given the high volatility in the Asian markets, I would say SS is quite defensive in nature and prices have not fallen far from its peaks. As a matter of fact, their earnings are still increasing in FY2015 compared to FY2014, probably because even in financial crisis people still need their maggi mee, shampoo and.. you know.. stuffs. This company could provide investors a relatively safeer growth stock while providing decent dividends no matter what state the economy is in.
 
Onwards to competitors, I believe names such as NTUC, cold storage, and 7-11 could pop to mind. Firstly, I have been observing quite a few branches of these stores myself. I would say the greatest competitor would be NTUC, as cold storage's goods are rather distinct from SS as they are dealing with higher-priced premium products. Basically if you have something you want to buy in CS, you will go to CS. SS probably doesn't carry that particular product that's why you go to CS, for generic products I believe people will still go to SS over CS, given the accessibility and pricing.

Now comes NTUC, NTUC will never collapse, I hope that day never comes, because it would probably be disastrous. However, I like the fact that SS doesn't attempt to compete with NTUC and each of them ventures in their own strength. I would say NTUC caters to more large scale consumers such as shopping malls, and the occasional marketplace. SS however, pops up in locations you didn't knew existed. While this limits its customers to the neighborhood its in, the costs of operation are not high to do this. They do not need a huge amount of inventory either. As long as they are meeting demands, profits are there. In fact there's a SS right below my block, and if I wanted a carton of milk right now would I drive to NTUC in Jurong East? Definitely not.

NTUC is bigger and might be slightly cheaper, but trust me when I say if I were to go down now there would still be people buying stuff from SS. That's the power of convenience. Sure, if I wanted to stock up on groceries I might head down to NTUC on a saturday and get lots of stuff, but that's not the battlefield SS is in, SS profits from the few products you forgot to buy from NTUC or you know... you ran out of it and you're too lazy (and smart) to drive down to park at a $1.50/hr shopping mall parking lot to buy a carton of milk at NTUC. Oh and you're probably not going to 7-11 for that as you probably know, you're getting ripped off.

2. Financials
*Most discussion here are done with regards to the data in excel in case you're wondering.
2.1. Revenue
Revenue throughout the years is showing growth, at 3.32%. The chart below shows Singapore inflation rate.

Looking at the chart, Singapore's inflation averages out to be about 2% a year for the past 6 years (since SS's inception). With a revenue growth of 3.32% it is beating inflation rather well. This shows that other than simply raising prices due to inflation, their management is doing something to increase revenue, and doing it right.

2.2 Gross profit margin
While a growing revenue is good, its useless if costs grow as much as, or even higher than it. That's not the case for SS - showing a growth in profit margins from 21% in 2010 to 24.7% in 2015. This could prove that management is consistently taking steps to reduce costs and improve efficiency. One of the major factors I like to look at.

2.3 Net profit attributable to shareholders
Here we go investors, here's our money. Net profit has been growing strongly since SS's inception, at a compounded annual growth rate (CAGR) of 4.89%. Looking at the margins, it would seem that other than streamlining their cost of sales, SS also cut down operations expenses resulting in more profit for shareholders. Net profit margin improved from an average of 6% to 7.42% in 2015, hitting new highs.

2.4 Shares outstanding
The great improvements in net profits is however clouded by a relatively high issuance of new shares throughout the years too, coming in at a CAGR of 4.72%. Which means net profit growth is only slightly higher than shares dilution rate.

2.5 Assets & liabilities
One great thing I like about SS is that it has no debts. SS paid off its remaining debts in 2010, as shown in the non-current liabilities. No debts! Given the fact that it's a medium-sized company its understandable that it doesn't need to issue debt for funding, but having a self-funding business is definitely a major factor in sustainability and volatility avoidance. Interest rate hikes? Doesn't effects it. Having a bad year? Doesn't matter, don't owe anyone money.

Debt ratio is constantly improving yearly from 1.33 (that's already decent) to 3 in recent years, which is much higher than average. As a matter of fact, SS's quick ratio/acid test ratio is consistently over 1 after 2010. This means that SS's cash on hand is enough to pay off any liabilities it has for the entire year. That spells out safety better than anything else.

2.6 Inventory Turnover

SS has an average inventory turnover ratio of 12 throughout the years, save for 2010 where it is much higher. This translates to having a inventory of about 1 month worth of sales. It's very good since this demonstrates efficiency in inventory management. Maintaining a low inventory eliminates spoilage of goods from various reasons and also storage costs. However it cannot be too low as then it might be unable to meet demands. I do not believe this will happen though, since I seen them catering to the recent burst of sales during CNY2016 rather well.

A low inventory ratio also means that SS are selling the stuff they buy rather well, as a unnecessary growth in inventory usually means difficulty in clearing products.

2.7 Net asset value (NAV) and pricing
All good things must come to an end, such is the case for SS, where all the good points mentioned previously probably resulted in a much higher NAV/price than average. SS sits in at an average of 5.57 NAV/price. Which means should the company liquidates we are only getting 18 cents on the dollar. NAV is however growing at a rather solid pace of 8.66% CAGR. (2011-2015)

With the share price growing at 14.3% CAGR (2011-2015), there is still some catching up to do for the NAV. This could be rather evidently observed by the recent stagnation in price, as shown.

Given the rather solid price/nav ratio maintained throughout the years, I believe investor sentiment is rather strong towards this company, and this nav/price ratio could be maintained so long as earnings or p/e do not fall drastically. SS has shown bouts of stagnation in pricing previously, before climbing to new highs and staying there. Should this phenomenon repeats itself it might occur after the present china-oil crisis when the next bull run comes in.

With Singapore's inflation rate being so low recently, an increase in inflation from bull runs could also result in increased earnings from SS simply due to price raises, which means shareholders are getting more money.

2.8 Dividends
Sheng Siong pays a rather strong dividend, achieving over 4% yield every year. Taking the fast growth of share price into consideration, this is quite an accomplishment. However, there is no buffer for downturns as SS pays out over 90% of its net profits as dividends - this can be seen in the excel sheet and SS actually declares this themselves in the annual report. I do not feel much volatility from this lack of buffer however, since compared to REITs (which also does >90% payouts), the industry SS is in is much more stable.

3. Conclusion
I believe there wouldn't be much better deals out there taking into consideration the efficient frontier of investment theory. Assuming a stable flow of profits, and thus dividends, ~4% a year doesn't sounds like you will lose much in opportunity costs either even if you might have something slightly better. I wouldn't say SS dividend payout is inferior to REITs even though they are both paying over 90% and REITs averages a yield of 6%, given the volatility of the property market. Again, its all about risk-reward.

Share price wise there might be some appreciation to come should Singapore inflation rates get back on track, as mentioned above. This is assuming investor sentiment is strong enough to maintain the current NAV/price. Even if it doesn't, going by inflation of prices alone, SS should result in more profits and that could push dividend yields up. Good enough.

While this wouldn't be a cash cow, SS could serve well as a defensive segment in anyone's portfolio.
On a side note, I feel better buying stuff from SS knowing that I am a shareholder. Which is why I always convince my friends to buy stuff from SS ;)

Happy investing!

Character & principles, your best friend in finance

I am sure many people know the famous quote by Warren Buffett, "Be greedy when others are fearful, be fearful when others are greedy". There's probably a good reason why a widely-spread saying from him has nothing to do with analysis skills. As I have probably said multiple times already, WB made a huge impact in my investing journey, he is a mentor to both my analysis skills and character, the latter being the much more important aspect of investment in my opinion.

Anyone can pick up analysis skills such as understanding financial reports, numbers crunching and graph-plotting, but everyone has their own personalities. The interest in finance is rather rare in my circle of friends. Coming from the engineering field, it shouldn't be a surprise I guess.

I would say my friends who came from a business-related diploma courses or had investor parents would have much less difficulty picking up finance than I did, but then apparently none of them had much interest in it. So there wasn't really anyone to guide me on what type of investing suits my personality. My parents knew nothing about shares investing either, my first introduction into shares was a google search of 'stocks'. It has been a long way since then.

It could be sort of a blessing in disguise. Since I started writing on  this blank piece of paper with only my own pen, I was largely unaffected by the styles and character of others, I managed to develop my investing principles best suited to my character, while drawing serious influence from Buffett, Graham and Fisher. Of course at the beginning I didn't knew what kind of investor I am, but as I read through their books, their investment philosophy felt more and more like 'yeah I could definitely see myself doing that', it feels right - and good - to adapt their principles. During the start - the most exponential growth of my learning curve - I burned through piles of finance books in the library. I needed to know what I didn't know. From that experience I can definitely tell you that some investing principle are not suitable for everyone. I am rather averse towards the idea of using technicals to invest.

Personally I would say that I have sufficient knowledge of technical analysis - that's what majority of forex is. I did forex for some time before I realized that the profits does not outweigh my unrest. From basic SMA and candlesticks pattern to more complex indicators such as bollinger bands and ichimoku kinko hyo, the charting techniques like Fibonacci retracement and Andrew's pitchfork, along with oscillators such as RSI and MACD, I had my fair share of technical analysis. I would go out on a limb and risk sounding cocky (I am definitely not) to express that I doubt many business undergrads have TA knowledge that exceeds mine.

With that said, I absolutely do not use nor recommend technical analysis in my investments. One important thing in any learning journey is to know what isn't suitable for you. Technical analysis helps out my trading a lot, but it absolutely has nothing helpful in aiding my investing judgements - so I'm simply not using it. You don't have to apply everything you know, that's where analysis by paralysis comes from.

I have gotten quite a number of requests and questions asking me and also expressing the interest to start investing. Sure I can definitely tell you how to set up a brokerage account and buy shares, I could even give recommendations to which stocks to buy (I am definitely not liable for your losses). However, for one to really improve their circle of competence and principles, one have to understand what investing principles suits them best. Some people cannot hold their equities for more than a few months, some people can't sleep well at night knowing they have positions open, while some simply want to buy and forget about it. These factors, while definitely nothing skill-related, will surely plays a part in any investing journey to come.

Happy investing!