Market crash during the week 15th May to 19th May 2006

On Monday, the STI has its largest drop...don't know since when and on Thursday, it has its 2nd largest drop.  While most of the stocks I hold are not included in the STI, they were sold down too.  I see my cash portfolio dropped by approximately 6k over the week.  The unrealized gain has gone into negative territory.  My CPF portfolio is more resilient, fluctuating as per normal trading day.

So what was my response to this?

When I first read the headline on Monday before going to school, I was a bit gutted.  As last week, I was thinking of cutting my loss on YHI this week and switched the cash to other counters.   Reason being I think I have purchased YHI too expensively and other counters probably provide a better return in the same time frame.

I have already regretted making a too hasty use of the gain that I have earlier made on three new counters; I thought I could have been more patient.  This crash compounded my error and makes the lesson slightly more painful especially when I do not have much cash to take advantage of this weakness in the market.

In any case, I was thinking of selling China Flexible Packaging to raise funds to purchase other counters but after considering the low valuation the market is giving CFP at the moment, I decided against it.  I do feel that the market has over reacted to the raising oil price and “punished” my two plastic related counters: CFP and Full Apex too much.  With the two companies still expanding their top line and with ROE around 15%, the potential upside when the oil price stabilizes is at the very least interesting.

After overcoming the disappointment of the lack of funds to purchase more shares, I’ve decided to stay put with my counters and continue to track their business.

My investment strategies III - Company screening for CPF portfolio

Unlike my cash portfolio, I do not go through all the steps.  Dividend yield is an attraction to me and if the company can provide me with consistently high dividend yield, I will consider purchasing it.  So these are the few factors I look for.

Either:
Dividend yield of at least 5%
There are some large cap that provide such yield and of course the higher it is, the more entice I am to it.

Potential growth in dividend yield due to growth in company
These can be either through acquisition like REIT or organic growth oversea.  The minimum is that the company must not show deterioration in its fundamental.

Or

Very interesting business with huge growth potential
These are companies more like those in my cash portfolio but it must be a business which I can recognize with and strongly believe in.  Unlike my cash portfolio, I would not simply invest into a so-so business with cheap valuation.

My investment strategies II - Company screening for cash portfolio

How does a company enter my radar?  This is the initial part of the homework.  I do not actually specifically go look for companies but I stumble upon them through various means.  These means include recommendations on investment websites, “The Edge” magazines and simply coming across brands in my daily life.

So what kind of companies do I invest in?
i)    Business which I found to be interesting with potential to grow, valued reasonably.
ii)    Companies which are valued cheaply with its fundamental intact.

Based on what I read from different books and websites, these are the criteria I look for when I screen a company.

1) Company has shown consistent growth of 15% in both revenue and net profits over the past 5 years
Since I am looking for growth companies, this is important.  I can accept a year where revenue or profit is flat.  However, there must be a trend that the company is growing over long terms.

2) Company’s net profit should be around 10%
A higher percentage of net profit ensures that the company is not too badly hit when they cannot pass the cost to customers.

3) Company’s ROE around 20%
ROE shows how the company manages its equity.  A high ROE shows that management put to good use of their equity and not makes silly investment.  If the company is not able to sustain a high ROE, it should return the net profit to investor as dividend.  The amount of debt a company carries must be taken into consideration when using ROE.  With a high amount of debt, ROE will be higher.

4) Company’s cash position and cash flow
The company should carry little long term debt unless it is necessary for expansion.  I would avoid companies that requires large amount of capital expenditure (capex) regularly.  The operation cash flow of the company is also important.  It should mirror its earning.  I would avoid a company that consistently shows a must lower cash flow as compared to earning without investment/capex.

5) Management credibility and ownership
This is hard to judge but I would take it that if management is able to keep his promise or target and not afraid to come out to justify the company’s poor performance as creditable.  It would be a plus point if senior managements hold shares of the company; this will align their purposes with the investors.

6) PE less than 10 and PEG less than 0.7
I am attracted to company with a PE ratio of 10 and below.  Alternatively, if its PE ratio to Growth rate is less than 0.7, it will be a possible candidate.

My investment strategies I - Cash Portfolio

So what are my strategies in picking the stocks to invest?  As I mentioned earlier, I will use a fundamental approach instead of technical analysis.  There are two things I am looking for:
i)    the past performance of the business and its outlook in the future; 
ii)    the valuation of the company at its present price.

There is no specific industry which I will concentrate on but I will look into a company with a simple business model.  This means I will most probably not going into banking, properties and technology counters.  I am also more inclined to look into small to mid cap companies with potential to grow.  To me, this means that the company must have exposure to oversea markets and China is one country where there is a lot of potential.  Of course this does mean that risk is higher since I will not be able to have an actual feel of the market and there is always an inherent risk of creditability of China companies.  However, this is the risk that I will have to take and be more prudent in analyzing the companies’ reports.  This again works on the assumption that the reports are genuine and there’s no manipulation of figure.  How would I know?  I won’t but if I don’t believe the creditability of the report, then there’s no point in carrying on with the analysis.

My investment goal

When I started investment, I take it as a tool to generate alternative income.  As I learned more about investment and especially from Wallstraits, I like the idea of having a target of 15% CAGR because, with such a return, your portfolio doubles every 5 years.  It makes tracking easy.  It happened that I have about $25 k in liquid assets 1999 and thus by using the rule, I will have $1 mil in 2024, after 25 years.  I was able to double my liquid assets to $50 k in 2005 even though marriage preparation took up some parts of my savings.   So it seems that I am on track with my goal.

With the decision to be more analytical about my investment, I recently re-look at my cash-flow and verify if my goal is achievable or if the growth rate is sustainable.  The picture does not look as rosy as I have in mind.  Reason being my earlier projection has been made due to a lower equity base.  Also, I need to set aside a sum of money for renovation in this 1 ½ year which reduces the amount of money available for investment lesser.   As I put in the new factors, I will need to achieve a CAGR of 15% on my investment to achieve $1 mil by 2024.  At this current moment, I have little confidence of hitting that target.

Instead, I aim to achieve a liquid asset of $650 k by 2024 (CAGR of 14.5%).  This will be attainable through increase of both cash portion (including $40 k from insurance by 2023) and investment return.

With some planning from 2025 to 2029, I will probably achieve my $1 mil target by 2029 when I am allowed to withdraw from my CPF with the option of not working from 2025.

Translating all these figures to my investment goal means that I would need to achieve a return of CAGR of 10% from my stocks from 2005 to 2024, with an injection of $80 k into the portfolio from 2007 to 2024.

Why not 8% or 5% CAGR?  With such return, I do not think I am able to be financially independent by 2024.

A brief history 4 – Mistakes and Lessons learned

As mentioned, I did not become a guru after gaining some financial knowledge.  I still make mistakes and in the process of becoming a better investor.  These are some of the biggest mistakes and best moves I made from late 2003 to 2005.

1) Selling of CAO at a price of $1.28 and $1.87 in Feb/Mar 2004.  The price has rocketed without reason.  The fundamental remained the same.  At $1.28, I sold it to lock in some gains.  At $1.87, it has tripled to my purchase price and the PE was more than 20 x (I can’t remember the actual figure) which I feel that it will not be able to sustain.  Even though the price went to $2.7 later, I remembered I did not feel bad at all because the market is reacting irrationally.  I am glad that I have sold this stock before it crashed due to their trading loss.

Lesson learned: When the price shoots up too far from its fundamental without any news, release it.

2) Making a loss of $300 on Integra2000 in Mar 2004.  It’s a small loss but an important lesson.  I’ve speculated that the company will report good results and hence give me a good return.  How wrong I was.

Lesson learned: Do homework before investing.

3) Making a loss of $1200 on AGVA in Sep 2004.  I was influenced by other analysis of the stocks and did not look into the business mold.  Also, I bought because I am familiar with the brand.  The company was affected by an increase in raw material price and could not pass the cost to its customers as their products do not sell at a premium.

Lesson learned: Familiar brand does not mean a thing.  Do no rely on others’ analysis.

4) Making a total loss of $3000 on UFood by Dec 2004.  I was influenced by Wallstraits analysis of the company.  The company has indeed done well from 2000 to 2003 and has been shareholders’ friendly with their generous dividend.  Due to an increase in pig price, the company suffers and both top-lines and bottom lines went south.  Management has not been forthcoming and the sale of shares my insiders sent the sentiment of the down.  As the fundamental did not improve, I still hold on to the shares, hoping for it to turn around.  I finally decided to let it go as I have no confidence in the management based on their actions and their inability to keep their promise on setting up a webpage.  Currently, I still think the share is cheap but opportunity cost and the lack of transparency of the management makes me decides to invest in PFood instead.

Lesson learned: When fundamental of company is not doing well, look hard into the cause and divest the shares instead of hoping for turn-around if there are no such signs.

5) Selling Celestial NF at a loss of $400 in Dec 2004.  The company has big expansion plan but market did not react positively to it and with CAO scandal, Chinese companies were not doing well.  I am impressed by their expansion plan and know that if their expansion plan goes well, their earning will grow.  However, I made an emotional decision to cut loss instead of hanging on to the shares.  My 5000 units would have given me a gain of $5000 by last week price.  I have let this four-bagger goes too early.

Lesson learned: Believe in your own analysis!6) Selling TPV and locking in gain of $1150 in Aug 2005.  I read up a report on TPV and after going through their annual reports, was impressed by their progress over the years.  The only worry that kept me back was their low profit margin.  Their prices move in Aug 2005 and at $1.12, the company was still valued pretty cheaply.  However, I let the fear of the margin overcomes me and decided to sell it.  With my confidence of the LCD market moving forwards and also how the company has progressed over the years, I should have hold to my shares and I would have another $4000 unrealized profit based on the recent prices.

Lesson learned: If valuation is reasonable with sustainable high growth rate, don’t rush into selling.

7) Making a loss of $1800 with SMT by Feb’ 06.  SMT has always been an undervalued stock.  Till now, the only reason I can come out with that SMT is undervalued because of its high debt.   I have held on this stock for more than 2 years and its price has been dropping with flat profit over the 2 years.  I decided to let it go because of pretty flat performance and it is a low profit margin.  This is not a company which I feel grow into a major player and I bought it simply because of its low valuation.  Is my decision correct?  Only time will tell.

Lesson learned: Valuation is not everything.

A brief history 3 - A new look at stocks

Through some idle chat with my brother and his friend, I have got to know this website Wallstraits.com in Aug 2003.  It was a turning point of my investment journey because it is from here that I gained valuable insights of investment.  I gained valuable financial knowledge and through the sharing of various forum members, I decided to read up more on investment.  Initially, I started with library and before long I was purchasing books on investing.

This does not mean my investment reaps fruits immediately but with the new knowledge, the stock market finally makes sense to me.  It is from this point that I believe that investing in company’s share is a mean of an alternative income for me which will assist me in gaining my financial independence in the future.

It is from this point that I move away from price movements and more towards business analysis and learn how to value a company, to invest in a business that has the potential to grow in the future.

Of course, there is always an argument between technical analysis and fundamental analysis.  I decided I am not smart enough and do not have time to track prices everyday and hence will stick to learn how to analyze a business and make investment based on that.  Also, I preferred a bottom-up approach in investment instead of a top-down.  This leads me to diversify all my unit trust investment in cash by April 2005.

Like I mentioned, I am still in the learning process and till end of 2005, my CAGR from 2000 is only a paltry 2.5%.  Yes, it’s definitely higher than bank interest but it’s nothing exciting.  Also, I am still prone to purchase/sale due to my emotion.  I believe one reason is that I do not know enough of the company I am purchasing to have the confidence to hold it longer.

I started purchasing stocks using my CPF account too.  The initial reason is that I still do not have too much cash to invest and there were opportunities that were too good to give up.  I am more conservative with my CPF investment because it earned an interest of 2.5% per annum.  So the company I invested in must be a blue chip with good dividend or a company with proven track record and has huge potential to grow.  I will analyze the individual companies later on.   The return from my CPF account had been good, with 25% in unit trust (due to a 35% limit on stock investment), it has returned me a CAGR of 9% since 2001.

If I tracked my return using NAV, my cash portfolio returned a measly CAGR of 2.3% till 2005 and my CPF portfolio returned a CAGR of 20.9% till 2005.  Looking at the CAGR for my CPF portfolio, it does make me think whether I should invest in unit trust or just concentrate on stocks.  Of course, the only reason I invested in unit trust is simply because of 35% limit.  So should I speculate my CPF in other funds, or should I stick to an index fund?  Points for me to ponder.

A brief history 2 - Venturing into stocks

I started investing in stocks in Apr’ 2000.  I am interested in this alternative way to earn money.  Again, I know nothing of stocks but was amazed by the lack of price movement when I read good news about the company in papers.  I remembered mentioning to a friend that to win the game, it is more important to know the psychology of the mass than the earning of the company.

Thinking back now, that’s quite a good observation.  After reading up, I still feel that understanding the psychology of the mass is important.  Or should I say you can make use of opportunities which surfaces when the mass reacted in an irrational manner.

Being new to the game, I was excited and with little knowledge, I traded a lot.  Locking in small profits; selling when the price drops.  I simply go by my gut feelings, thinking that it has gone down a few days and it was at this price two weeks back, and place a bet that it will go up.  Looking back now, these were such irrational behavior.
Luck was on my side I guess.  My portfolio has been erratic instead of going down all the way, such that I only made a loss of $1000 by end of 2002.  A much better performance than my unit trusts.

I have also started investing my CPF in 2001.  Again, with little knowledge, I made a paper loss of $2000 in 2 years.

Still, I was a loss sheep, not knowing anything how to make a consistent profit.  In a way, I was lucky that I do not have much disposal income for me to speculate and I was discipline enough not to go into debt or use money that I need for my daily expenses to play.

A brief history 1 - In the beginning with Unit Trust

I started investing after I graduated from NUS in June 1999.  I do not have any knowledge on investment but still went ahead to purchase GE insurance-investment plan.  This was followed by a purchase of UOB unit trusts, the highly popular Telecom unit trust which had appreciated 60% from its launch.  This was followed by another UOB unit trust Euro S.C since it was just launched and its prospect seems attractive from the promotional pamphlet.  These two UOB unit trusts turned out to be disastrous; I could not remember when I cut my loss but it’s a $2000 lesson and I was at a loss and blame it on my luck.  Yes, I am more of speculating than investing.

Introduction

The idea of starting a journal to track my investment has surfaced a few times over the past one or two years.  While I did one or two write up on two companies that I held, I have not actually put in conscious effort to consistently and systematically monitor my investment.  While I have put in effort to read on the business before investment, I still succumb to my instinct when purchasing or selling my holdings.

I was prompted to start this investment journal when I was having a discussion with a friend.  I found that I was not clear in my investment goals and strategies.  I was not able to inform, convince and put across my points clearly.  Hence, the discussion does not really benefit either of us.

Hence, I decided to put in a more conscious effort to reflect on what I have learned over the past few years and note down the positives and negatives of my buy, sell decisions.  I realize that this is important if I am to do well in investment and use it as a tool to realize my goal of being financially independent in the long term.

The followings are the objectives in this investment journal:

1)       Brief recap on my investment journey over the past 6 years.

2)       Define my goal for investment.

3)       Define my investment strategies.

4)       Write up on the companies that I currently hold

5)       Writing of important insights that I gained from the books/articles that I read.