Monday, 29 February 2016

My simple dumb way of following Warren Buffet method of investing (With pictures!)

There are 3 main points in valuing a stock

1)Value of the company now

2)Fundamentals of the company

3)future earnings


This is literally the basis of the discounted cash flow method where you

- Predict future cash flow(3)
- Compare it against the value of the company(1)
- Take a discount(margin of safety) based on how well you think the company can achieve these future cash flows (2)


1) is easy, load up any bloomberg terminal and you get the answer



When P/E bands are narrowly trading around 18-20x, you know 16 and below is cheap and vice versa


2) is also easy, grab the company's annual report, do the usually check on its cash flow, D/E ratio, margins, ROE/ROA etc and you get quick a good picture of the company


3) Now this is the hard one, and its also the point that essentially dictates whether you are going to make or lose money on the stock.


So how do I do #3? How do I beat all the super smart people that are being paid $10k a month, to not create anything productive but instead to just guess what the company is going to earn next year?


What i do is to....... Not try to predict the company earnings but just find companies with predictable earnings.


I know myself, I'm a lazy investor that cant be bothered to fight with all the smart people head on, I like to answer questions where the answers are also a dead certain


Warren Buffet quote ' I don't cross over 10 feet poles, I look for 1 foot poles to stepover'

Just take a look at the earnings of raffles medical



With my lazy intellect, I can safely assume that this company is going to get me between 0-10% growth a year


Or even Comfortdelgro



I don't need some analyst to tell me that comfort is going to grow 5-6% next year, I can see that for myself



Barring some unforeseen
-terrorist act
-government order
-recession or the end of capitalism as we know it


I can feel safe with these numbers without you know... putting much effort



Of course this largely depends on the industry

Some people look at Sembcorp (like alot of retail investors do)

see it grow about 10% yoy (like alot of retail investors do)

see its high yield (like alot of retail investors do)

assume it will do so in the future (like alot of retail investors do).


Then you forgot about the part where rigs are tied to oil price, and go thru cycles.



Boom -22%!



However, the downside of this method is you dont get those spectacular returns, unlike when you call for the bottom or turnaround in an industry.

Thats because the market rewards people that do hard work and understand cyclical industries, small caps or those that swing from losses to +100% profit next year.


I on the other hand, am slightly allergic to hard work (even though I'm trying to improve), and I don't feel confident on taking all the 'smart people' who are in the serious business of making money head on.

*Insert sun tzi art of war quote here* (know yourself, fight the battles you can win etc etc)


I'm looking for stocks that is at least

-10% undervalued

-grows 5% a year

-pays 2-3% yield.


In 5 years that results in 10% + 5(3%+5%) = at least a 50% gain which is about 10% a year.


Now, even though it pains me to say this: markets are surprisingly quite efficient (most of the time)

and that its quite hard to find these stocks at even a 10% undervaluation.


But certain events such as

1) General market weakness

2) Slight miss in quarterly earnings

3) 1 time solvable problems


Can give you that window to invest


1) General market weakness




Comfort tanked about 13% due to the so-called China 'meltdown'
I'm sure that would hurt Comfort when it has a great...... 5% revenue exposure in China



2) Slight miss in Quarterly earnings


I don't have an example here, since most of my stocks have a bad, or should I say good track of beating earnings. But the point is, unless there's a huge shock or change in the direction of the company, there is no cause of concern.


If you expect the company to make 5-7% a year and it actually made.... 4%. I mean I'm disappointed but it shouldn't cause panic which is what Mr Market sometimes do


3) 1 time solvable problems



Visa tanked 13% in less than a month when Russia wanted to ban it (Russia contributes to a stunning.... 1% of Visa's revenue). It didn't get banned anyway.



The huge risk

However there is a huge risk in this seemingly safe method which is the structural shift of the company or industry.

This method heavily hinges on the company being in a position/industry so impenetrable (think coke) that it can be counted on to deliver steady earnings and is awarded with a generally high PE level.


But when the company loses it, everything gets thrown out of the window.

Lets start with Warren Buffet stocks (since he is a big user of this strategy)


1. Walmart/Tesco (Position decimated by amazon)





2. American Express (Decimated by supreme court ruling and losing its brand to Visa/MA)




3. IBM (Destroyed by cloud computing giants, though it may be too early to write them of as ibm has continuously reinvented itself)







I'd like to add on another i fell for


4. Sands China (Anti- Corruption Drive)





The good thing is these problems even though well-documented, takes AGES for the market to realize it.


Visa and Amazon didn't come out of nowhere, and neither did cloud computing giants. Xi started his anti-corruption drive back in 2014. So there should be ample time for you to get out when you see the signs


The bad news is that it hurts a lot, you suffer the horrible word called 'de-rating' where instead of having a nice 20x you get sent down to 12-13x, funnily enough same pe as industrials


The other bad news is that theres alot of false challenges. Loads of people tried to displace coke over the years and yet no one is calling for its demise, apple pay is trying to supplement visa (maybe in 10 years), but failing horribly etc etc.


Conclusion

Its not totally a buy-and-hold strategy, you still have to sell out when there is large structural changes, or when the stock gets too pricey (I mean if the stock goes up 20-30% while earnings grow 5%, there is a bit of a problem) its good to take money off the table.

But if you do want a sleep-easy portfolio, something that you won't feel worried about when the markets are tanking, then this may be a good method to start your investing journey

P.S I started investing 4 years ago, and I'm still refining this method instead of trying new ones

P.P.S Look at the performance of the companies I mentioned during this downturn (aka. coke, comfortdelgro, raffles medical, visa), in this period of horrible times they are all trading..... near record highs

P.P.P.S That makes me quite mad because they aren't cheap. I'm in this situation where the markets are tanking and I can't seem to add positions.


Monday, 8 February 2016

Markets aren't really crashing, they are normalizing

As much as I think its an extremely bad habit to make predictions on the global outlook/sentiments because

1. you are most likely to be wrong
2. unless you fancy yourself as a global macro trader, there are too many links before your call can affect your stock price (global outlook -> industry outlook -> country outlook -> stock earnings outlook -> stock price)

But, it is fun because for a brief moment I can sound like an 'expert' as the guy who is in the serious business of making money with little or no effort (and also with little or no substance)

1. The problems aren't new, just sentiment has changed
The 3 reasons that have been quoted endlessly on why the market is falling have been
1. China slowdown
2. Falling oil prices
3. US interest hikes

The problem is that all of above were already present in..... 2nd half of 2014. China didn't 'suddenly' slowdown, neither did oil prices 'suddenly fall', and there has been so many articles  analyzing the fed's move and Janet Yellen's words, that these people seriously need to get a life.

No, the big problem is that people are slowly waking up to the thought 'wait why am I paying premium valuation for stocks when the outlook is so gloomy?'

2. About that 'bear market' in the U.S
We are getting closer in technical terms (-20%), the S&P and NASDAQ is already down mid-teens from its all time high. Let me repeat, all time high. Even with the market bloodbath the past month, its still trading AT its 5-year P/E average.

3. About STI's world beating performance
Yes the STI is at 5-year lows, but as stated in the previous post
http://investproperlyleh.blogspot.sg/2015/09/make-sure-you-know-what-sti-etf-is-all.html
thats due to the heavy sector weightage towards, Offshore marine, banks and telcos, which each have their individual problems.

4. This unfortunately means stocks are not cheap enough.
When I mean cheap, I mean recession fear levels where every stock gets beaten down due to sentiment even though its unrelated to the global economy. The problem is that it hasn't happened yet to Singapore OR the US

Singapore
Comfortdelgro (still trading above its 5-year average P/E, -5% this year, hardly a move)
Raffles Med (down 20% in 6 months, and its still trading at......35x P/E)
Sheng Siong (has not budged from 85 cents for almost a year)

US
If you bought into 'momentum' stocks, then I can't help you there. On the blue-chips front, even though stocks like JNJ, Coke, Disney, 3M, PG, Visa have fallen in-line with the market (Well, I mean thats almost half of the Dow) its still trading wayy above its historical averages.

5. Going forward
Any fun market outlook post, isn't going to be complete without fun predictions, here's some of mine

Buy Oil at $30 Sell at $35 or whatever 10-15% gains you are happy with.   
You can do this by buying U.S oil etf's (USO US) or heck even keppel corp or those smaller O&M names. My simple dumb reasoning is

1. Oil is finally forming another support (not bottom, but support). The same thing happened when it was finding its support on $40 and bumped back up to $45 (on middle east troubles, less inventory than expected etc etc)

2. We are finally starting to see mega-mergers in the oil arena, horrible profits and shutdown on rigs.

3. Simple dumb math, if you think oil has a higher chance to go to $40 ($10 gain) than $20 ($10 loss) go ahead

Sell when you see an STI pop
The markets aren't really volatile actually. They're only volatile when you compared to the previous abnormal 2 years (when the banks were easing the market). This current volatility is quite normal-ish which is good news to sell out of some of your STI ETF holdings. 

The banks and keppel corp are going to take a looong time to recover from China slowdown and Oil(which isnt going back up to $60 anytime soon). Get rid of them when there's a pop, put your money elsewhere, or.... you can do the normal retail investor thinking of ('keppel and dbs won't die what, just hold until price recover and collect the dividends lor). Whatever works.
 
Cheap hiding places
Singtel and keppel DC reit, Genting 5.125% perps are the only 3 cheap hiding places i can identify, if you cant stomach the volatility, these counters would fit perfectly due to

Singtel  (Diversified portfolio + 5% yield)
Keppel DC reit  (Data centers, stable compared to office, hospitalility and logistics +6.8% yield)
Genting perps (almost trading AT par. Casino's also have strong cash flows, I mean all they do is to build a casino and sit back and collect cash, no inventory, no R&D, and even with the china tourists slowing down, its still has a pretty big war chest of cash)

Friday, 5 February 2016

Things I do not invest in.

Its always important to define your 'circle of competence', in addition to that, its even better to understand your limitations.

Look, I'm a 24 year old guy, been investing for 4 years have some experience looking at stocks and listening to analyst calls. But thats about it. Making huge calls on where the economy is going and predicting earnings on complicated companies are wayyyy out of my depth.

Of course that means passing up some (alot) of opportunities here and there but its fine. I'm perfectly happy to sit still and do nothing, then assuming that i know everything.

So here's a list of industries that I don't invest in.

Banks
Besides the line 'the P/B ratio of Sg banks are now < 1, the first time in 5 years or whatever' I have no other good reason to invest in them.
Do I have a clue where NIM's are going?
Do i know how the china slowdown is gg to affect NPL?
Or the weakening business climate and slowing property market affecting loan growth?

Not a clue

Do I want to find out? Ain't nobody got time for that!

Insurance
Even more complicated than banks, and sticking to my true form of failing to not recognize my limitations, i invested in AIA, will be looking to see when can i exit this dumb mistake.

Industrials (O & G)
Making a long term investment in industrials is all about catching economic cycles, oil price cycles (for O & G companies), as usual I can't even predict my lunch for tmr, I'm not expecting to predict when the next cycle is going to happen. Although I do have a hunch (we all do), I don't feel comfortable putting $5000 in it

Commodities 
Look if i want to gamble (a.k.a buy noble stock) I might as well wait for CNY blackjack, its much more fun.

Property
Same as banks, Besides the line 'the P/NAV ratio of property companies are now < 1' I don't have much insights on who is selling what, whether the government is relaxing its 12 cooling measures, so on and so forth.

Tech
Although if you closed your eyes, bought Facebook stock when it IPO-ed without reading a single shit or with the logic 'because Facebook is everywhere' you would have more than doubled your money, I never seem to be able to do that.

Things I do invest in

Telcos
Yes, with the 'forever new entry of the 4th telco', this industry isn't as steady as it used to be, but your dividends, earnings, valuation can still be easily predicted.

Consumer staples
Mostly for large branded companies like (Dollar General, Coke, Sherwin Williams in U.S) you can't really go that far wrong in predicting what earnings growth next year will be when it has been growing 5ish% for the past 5 years (hint: its going to be around 5%)


Healthcare
Same, especially if you are the middleman (hospital or pharmacist). Steady growth, easy to understand business.

Reits
Ok this one doesn't quite fit because it is tied to the property market and general economy, but with a payout that doesn't fluctuate much and easy to understand earnings (I mean they already own the buildings not sell new ones) valuation is easy. 

Tollbooths
Waste management services, exchanges, payment services are all tollbooths.
You have to use them, so the volume they get doesn't really fluctate
The charge per transaction is mostly fixed
The cost are fixed too, they already built the booth

So this is shown in most of my holdings (past/present) which shows you how I invest or screw up.

Past holdings
Visa (tollbooth)
SGX  (tollbooth)
Raffles Med (healthcare)
Shengsiong  (Consumer)
Coke (Consumer)
Aims Capital  (Reit)

Current Holdings
Keppel reit (reit)
cache logistics (reit)
oue h-trust (reit)
AIA (screw up)
Dollar General (consumer)
Sherwin Williams (consumer)
Fedex (consumer)
Stericycle (healthcare)
CVS (healthcare)

Thursday, 4 February 2016

Having the right mindset for new investors

There's loads of starry-eyed people that like to start investing and drop hints to their friends like

'I'm in the markets'
'I monitor the markets'
'I read the companies fundamentals and judge its future earnings prospects' etc etc

The problem about this, it usually causes people to have the wrong mindset, that they are the smart ones in this 'serious business of making money' and then emotions start to come into play when they need to explain to their friend about how they go about the 'serious business of making money', which causes them to make the wrong choices.

There's plenty of blogs/strategy's out there that tells you how to 'look' at stocks, but not much about the proper mindset they should have, so here's a short list of stuff that I hope will help people alter people's mindset

Rule #1: Don't lose money
Pretty obvious but most people forget the fact that the majority of retail investors lose money, don't feel the pressure to 'beat the market', you are just a retail investor with a fresh annual report and a stock screener, relax, adjust your expectations


Rule #2: Don't forget rule #1
Another note: Even Warren Buffet places these 2 rules at the top of the list, drill it in your head.


Rule #3: There is no rush to invest
If you got into the markets 'early', bought the STI Index 5 years ago, you would have lost -20%, sticking it into a structured deposit or even your current account that gives you a 0.05% interest, would have allowed you to outperform other people that are in the  'serious business of making money' by 20.05%

Rule #4: Inflation burns you ALL THE TIME
There is the usual argument that if you don't invest, inflation will burn your returns. True, but that is not the main reason you should invest. Inflation doesn't disappear when you invest, its always there. Don't feel pressured to invest because of inflation.

Rule #5: Opportunities appear/disappear everyday
Unless capitalism is going to end tmr, opportunities are going to appear/disappear on a daily basis.  
 'You will regret the chances you don't take' But that's an obvious statement to make, there's an infinite number of chances, opportunities, but the # of chances you can take is a finite option.

Same as Rule 3-4, don't rush, there will be other chances. 

Rule #6: you are not smart
Before buying a stock, take a step back and think. 'Wait why did i just put $5,000 in a stock?' Am i really going to spend 5k based on this simple logic like

'p/b below 1 so i buy?'
'i like the fundamemtals'
'my friends all use the product'

Controversial point here, especially for people that think they are in the I mean the 'serious business of making money' .

You have to think of yourself as just a small little investor, no knowledge and just calculate a few numbers. By investing in a stock, you are making the claim that the market is wrong, the stock price is wrong,everyone is wrong, because I'm in the 'serious business of making money'

Once you have that in your mind, then check your logic for buying the stock. How are you different from the other people?

Don't get me wrong, investors can get lucky sometimes and small investors can beat large investors but usually not with '3 lines of logic'

I drill this in my head everyday 'whats a shmuck like me with an excel sheet buying stocks?' Helps to keep your head sane.