Andrew Chua 1902

TWRREIT - Tower REIT - 6.04 sen Dividend - Ex-date 14 Feb 2013; A possible strategy for CNY ahead of General Elections

2013-02-08T15:06:00.001+08:00

Tower REIT (TWRREIT) is one of the more solid REITs around with a dividend yield of approximately 8%. It is part of the Hong Leong Group and owns several office buildings in downtown KL with solid MNCs as tenants. Rentals are stable and increasing.

For anyone holding shares of TWRREIT at the close of 13 Feb 2013, they will be entitled to a dividend of 6.04 sen per share. On the 14th, it will be trading ex-dividend, meaning the opening reference price will be taken from the closing price on the 13th minus the dividend amount. So if it closes on the 13th at RM1.52, the opening price on the 14th will be RM1.46.

As the price chart of TWRREIT above shows, the share price consistently recovers from ex-dividend reference price adjustments. In Feb 2011, it took about 4 months to recover while in Feb 2012, it took one month. This means that in 2012, it only took one month for a shareholder to fully realize his dividend gains of about 4%. 4% for one month's waiting time is not bad.

For those interested to play on this theme, we can either buy the shares on the 13th, get the dividends, and wait for the share price to recover; or try to buy the shares at ex-dividend adjusted price on the 14th.

If we buy on the 13th, there is the pesky issue of having to manually reinvest the dividend income received. If we choose to enter on the 14th, we risk not being able to buy at the adjusted price (the market may choose to ignore Bursa's reference price).

A move into this share on the 13th (to secure the dividend) or on the 14th (at a lower ex-dividend adjusted price) may be sensible if we have money tied up in other stocks which are not moving or losing. Moving these funds into TWRREIT on the 13th or 14th may offer a higher probability of gains within 1-4 months (notwithstanding risks associated with the 13th Malaysian General Elections).

In the unfortunate event of unfavorable market developments arising from the General Elections, TWRREIT with its defensive features will probably be a good choice anyway.

Andrew Chua
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Financial Freedom; are we afraid of it?

2012-12-27T10:50:00.000+08:00

Financial Freedom is the holy grail of Financial Planning. It is the final goal of the whole exercise; to develop a stream of passive income to sustain our lifestyles. The whole idea sounds so good... We can retire and live on dividends, interest and rentals for the rest of our lives.

The way to achieve it is actually quite easy to quantify. Let's work backwards. Let's say you need RM5,000 a month to pay for your lifestyle. This is RM60,000 a year. At a rate of return of, say, 6%, you will need RM1,000,000 in capital to generate this amount of income.

Now, how do we get the RM1,000,000 in the first place? You need to save RM1,500 a month at a rate of return of 10% for 20 years. If you are 30 years old, the idea of becoming a guaranteed millionaire at 50 shouldn't sound too bad. After all, if you don't do this, what are the chances that you will get a million bucks in any other way?

And yet, not many people are willing to do what it takes to achieve this. At first, I thought that it may be due to the lack of discipline or lack of willpower etc. But now I think that human psychology is not that straight forward. It is not so simple, not so black and white.

Why would someone be willing to spend RM1,500 per month to pay for a car, but not be willing to spend RM1,500 a month to pay for their future financial security?

The answer is: That person prefers the car to financial freedom. Having a good car now is more important than having financial freedom later.

It is simply a matter of preference, not willpower. You don't need willpower for something you don't want.

Now, why would someone prefer a depreciating motor vehicle compared to an income-generating slush fund?

I think deep down, the idea of financial freedom actually scares us. We may be very keen to make quick bucks here and there, but real financial security is a totally different thing...

For example, let's say you can have RM20 million now. An amount like this can easily generate returns in excess of RM1 million per year. You won't have to work another day in your life.

But if you are not working, what would you be doing? Watching DVDs? Playing games? Golfing? Visiting KTVs and spas? Shopping? Buying LVs? Touring the world?

Would that be fun? Of course it would be fun if you did it once in a while. But would it be fun if you did it for the rest of your life?

You won't be needed anymore. Your decisions won't matter. Your only decisions would be what to eat and where to shop. No one would be asking for your opinion on things like they used to at the office. You won't be involved in projects that matter. Even if you participate in some social charity projects, not doing a job out of necessity is just not the same.

You would have lost your purpose in life if your only purpose is to eat, sleep, and be happy. Nothing you do would actually matter to anyone and people would come to you for the sole purpose of getting some money from you.

There would be nothing to do that really NEEDS doing. Everything is an option which you could choose NOT to do. Would life be meaningful then?

I think for the majority of people, it wouldn't. That's why they subconsciously refrain from taking the steps to financial freedom although their mouths may claim to want financial freedom. It actually is quite low on the list of priorities.

Freedom from financial need...does it cut us off from a purposeful life too?

For a young person who is still productive, who still has ambitions and goals to achieve...are these goals purely monetary? Or do they also want to achieve fame and leave a social legacy?

I have come to notice that for many, fame and recognition is a much bigger motivator than money. Money is just our tool to buy fame. That is why people are willing to exchange wads of cash for a flashy car. That is why they are willing to commit to credit card debt to buy things which feed their social needs at the expense of committing to a savings program.

Financial Freedom may sound like the ultimate dream. But it actually is not.

It is not a lack of discipline or stupidity which causes people not to make the sacrifices to achieve financial freedom. It is because deep down, it's not what they really want.

Therefore, financial planning shouldn't be done on the assumption that everyone wants financial freedom. Some people may sacrifice a little to create an emergency reserve, some may want to invest a bit for the thrill and exhilaration, and some may prefer short term cash management just for the pleasure of squeezing some modest returns out of their cash in hand. We all have different tastes.

Every plan must be based on an objective. You can't have a good plan if you get the purpose of the plan wrong in the first place.

Andrew Chua

The most touching scene on the Voice of China

2012-09-10T11:02:00.000+08:00

小贼

2012-09-08T16:59:00.000+08:00

今天，当我在jusco买榴莲的时候，有一位不是很老的uncle排在我前面付钱。当他把篮子里的菜摆在柜台上时，故意留下一粒小包菜不要拿出来。以为cashier没注意到，他就会赚到一粒包菜。当时，我看了真的很不爽. 样子看起来也不像是个连包菜都买不起的人，为什么要做这种下流的事。真的好想揭发他。不过，想了一下，却觉得这个无耻的人必成不了大事，注定一辈子只能是个小菜贼。那已经是最重的惩罚。就不用揭发他了吧。离开案发现场时，我往包菜的方向望了一下，看到价钱是三令吉。你有本事偷三百万我说你厉害。偷三令吉的小包菜，你真的是kanasai.

Clever Investor

2012-08-24T14:48:00.001+08:00

A lawyer and an investor are sitting next to each other on a long flight. The lawyer leans over to the investor and asks if he would like to play a fun game. The investor just wants to take a nap, so he politely declines and rolls over to the window to catch a few winks.

The lawyer persists and explains that the game is real easy and lots of fun. He explains, "I ask you a question, and if you don't know the answer, you pay me $5. Then you ask me a question, and if I don't know the answer, I'll pay you $5."

Again, the investor politely declines and tries to get to sleep. The lawyer, now somewhat agitated, says, "Okay, if you don't know the answer, you pay me $5, and if I don't know the answer, I'll pay you $50!"

This catches the investor's attention, and he sees no end to this torment unless he plays, so he agrees to the game. The lawyer asks the first question. "What's the distance from the earth to the moon?"

The investor doesn't say a word, but reaches into his wallet, pulls out a five-dollar bill and hands it to the lawyer Now, it's the investor's turn. He asks the lawyer "What goes up a hill with three legs and comes down on four?"

The lawyer looks up at him with a puzzled look. He takes out his laptop computer and searches all of his references. He taps into the air phone with his modem and searches the net and the Library of Congress. Frustrated, he sends e-mail to his co-workers all to no avail.

After about an hour, he wakes the investor and hands him $50. The investor politely takes the $50 and turns away to try to get back to sleep.

The lawyer then hits the investor, saying, "What goes up a hill with three legs, and comes down on four?" The investor calmly pulls out his wallet, hands the lawyer five bucks, and goes back to sleep.

问世间,钱为何物 Ask the World, What is Money

2012-08-22T18:30:00.000+08:00

Five years ago, around the year 2007 - before the start of the Global Financial Crisis - I remember that prices were much lower than they are today. The price of real estate was roughly half of what it is now, and so were petrol and food. It used to be that RM5 was the standard budget for a decent meal, now it is closer to RM8 or RM10. The only things which have obviously become cheaper since then are computers and electronics - prices drop as the R&D cost for groundbreaking technologies are recouped and we get so much more functionality for the same prices – but prices of most other stuff has gone up.

Which begs the question: What exactly is money? What is this thing which can change in value so easily in such a short space of time? If you find an RM100 note today in your drawer which you stashed away five years ago, I am sure the ‘power’ of that note has dropped since you first kept it there.

Seen this way, money is like love. We can obsess about it and pursue it, without truly knowing what it is. Money, just like love, are not absolutes. The goal posts are always moving and we need the participation of others in order to make it work. Someone who hoards cash is like someone trying to ‘possess’ his lover. Just like someone who owns the body of his lover but not her soul, we can also end up owning the physical form of money without actually owning its usefulness.

In the end, money is just a figure; a numerical representation which can be manipulated by the powers that be. All over the world, our money is backed by central banks. Which means that they can actually gang up to decide what your money shall mean. Our monetary system has long been divorced from gold and silver. And even if it were still connected to gold and silver, it wouldn’t change anything. In the 16^th century, the value of silver crashed when the Spanish found vast amounts in the mines of Central America and started to produce too much of it.

Therefore, money and gold and silver are NOT wealth. They are just temporary representations of wealth. They can be proxies for the stuff which we can eat, use and live in; but we cannot eat, live in or use money in any practical way by itself. I can tell you that a house is worth a million ringgit today. But what is a million ringgit? The term ‘one million ringgit’ is one which changes meaning all the time.

A better way to measure the value of a house is by saying that: “The monthly rental of this house is equivalent to one thousand packets of chicken rice”. The value of houses and chicken rice to society is much more consistent than the arbitrary valuation of dollars and cents which is getting more and more unpredictable.

In the end, wealth should not be measured by a figure on a computer screen showing your bank account balance. This method works most of the time, but at certain points in our economic history, they get distorted beyond recognition. Wealth should always be measured in buying power; the ability to buy the things which really makes us wealthy – such as food, clothes, and houses.

Consequently, the best investments are also in these things which have ‘real’ value. Invest in companies which make and sell food, clothes and houses; as well as the companies providing the raw materials to make these stuff such as plantations and mines.

Investing in gold and silver is risky because NASA may just find a new mother lode of gold and silver on the moon next month, and the value of gold and silver will be altered. Lending money to the bank (Fixed Deposits) is also risky because the dollar value is locked; and in times of inflation, your FD will be eaten away. Gold and cash by themselves are not useful. They are only useful when we can exchange them for food and clothing and houses and cars; and the rate at which we can exchange is very volatile.

Therefore, I would rather directly invest in what is useful to me – in the companies which make the food and clothing and houses and cars; as well as the farms and mines and plantations which provide the raw materials.

The recent inflation in Malaysia which we can see with our own eyes very much clarifies Warren Buffett’s meaning in his article which I previously posted on this blog. The oracle of Omaha really is the oracle of Omaha.

Back to our comparison with love; when we deal with money, we must get to the foundation of what we want. Do you want romantic poems and lovely serenades (representations of love), or do you want someone who will always be there for you (real love)? Just like a wedding can easily be confused with a marriage; so too is money frequently confused with wealth.

Andrew Chua

The People’s Champion - Dato' Lee Chong Wei

2012-08-07T01:33:00.000+08:00

Do not be afraid of defeat. You are never so near to victory as when defeated in a good cause. ~Henry Ward Beecher

There are those who say there is no glory in losing. That no matter how valiant your effort, if you lose then it amounts to nothing.

That, actually, is not true. It was made very clear last night when the nation avalanched support and adoration for Dato’ Lee. It may have been a loss, but the effort certainly was not for nothing.

We could see he was playing for us, for every person watching the match in Malaysia.

We were truly represented in the Olympics; not just because there were participants there who happen to share the same nationality, but because there was someone there who sincerely wanted to win for us.

And this sincere effort, although resulting in a loss, made more of a difference to all Malaysians than any of his wins ever did.

On Facebook and Twitter, everyone told him that it was okay, that we still support him, that we are proud to be Malaysians because of him. For a while, the topic made the top three of Twitter’s ranking globally.

It was a loss that sparked a nation. Not many people have been able to unite Malaysia like this since Tunku Abdul Rahman led us to Merdeka.

Our response was not because we were sad. It was not because we were really disappointed. It was because we were touched by a true Malaysian hero.

If you win and people celebrate you, it is normal. But if you lose and people still support you; you are a true champion.

History is full of famous ‘losers’ who made a larger difference than many winners did.

In ancient China during the Three Kingdoms period, Liu Bei and his ragtag team rose to vie for supremacy over the realm. They did not succeed, but their deeds and exploits continue to inspire Chinese all over the world today. The cleverness of Zhuge Liang, the loyalty of Guan Yu, and the valor of Zhao Zilong is known by every Chinese child.

In ancient Greece, 300 Spartans blocked the path of more than 100,000 Persians at Thermopylae. They eventually lost, but their deeds inspired the subsequent united Greek defense.

In Scotland during the 13^th century, William Wallace faced impossible odds as he fought against the English. He was captured and killed, but his actions are immortalized and Braveheart continues to inspire freedom fighters over the world.

Sometimes, it doesn’t matter whether we win or lose. The important things are the reason behind our struggle and our courage in attempting it.

Linking this to business, we have the Chinese saying:君子爱财取之有道. “A gentleman desires wealth, but is honorable in the taking”. Aside from the obvious meaning that we shouldn't do wrong things to gain wealth, it also implies that although we want to win in business and investments, our true worth as men are measured in the way we go about it.

If we fail honorably, the worth of our assets may reduce, but our worth as men increases.

Dato' Lee's loss on the court meant he didn't get gold. But his attitude made him the Malaysian People's Champion.

My First Profitable Investment

2012-06-21T15:34:00.000+08:00

Was approached by a fellow finance blogger to give my story on my first successful investment. He is compiling stories from more than 20 individuals. While composing my reply, thought that it'd be good to share my story here too :)

The story behind my first profitable investment:-

Personally, my investments have always been focused on the stock market. I started to get interested in it mainly because my dad is an avid stock market investor.

Many people have doubts about investing in shares, mainly due to perceived 'risk'. But I prefer to view this in a different way. The so-called 'risk' that many people refer to is not ‘risk’ as I understand it. I believe the more correct term would be 'volatility'. The prices of shares may go up and down, making them 'volatile', but that is different from the 'risk' that the companies you invest in will actually go bust.

For example, the price of Maybank shares have travelled between RM3 and RM9 in recent years. This makes it a volatile investment by many measures. But what is the real 'risk' that Maybank will 'chaplap'? If Maybank really chaplap, even your FD placed with them will be in danger isn't it?

I believe that given time, market fluctuations will be averaged-out and we will earn a very healthy return from our share investments. We just need to accumulate gradually and try to avoid buying at times when the market is obviously too high.

The ‘risk’ that comes with volatility can be managed. It only becomes dangerous if we are greedy and want to win big quickly ‘show hand’ style. If we are patient and systematic, we will be okay as long as ‘inherent risk’ is not high (risk of the underlying company going kaput).

The listed companies we invest in form the backbone of the Malaysian economy. It is with this belief that I began my foray into share investing, and I have not been disappointed.

My first profitable investment was in AEON CO (M) BHD some years ago. At that time, it was building several new shopping malls in my hometown Johor Bahru and the business model looked impressive. I liked the fact that in addition to their own Jusco supermarkets, they would also be receiving stable rentals from the tenants renting retail lots in their malls. It is a cash flow that is locked-in and set to increase every year.

It was just a small investment of less than 3 thousand ringgit. I sold it for a slight profit within one year of my purchase. Looking back, my first 'profitable' investment was a huge mistake. I sold out too early. The current price of the share is almost three times my original purchase price!

The entire series of more than 20 stories will be published on LCF Personal Finance Blog once it is ready. It's a great blog and there's some free cool stuff available, so be sure to drop by!

Andrew Chua

The Rise of Intellectual Property

2012-05-14T16:41:00.001+08:00

Investing is a science, art and skill; in that order. It is the mistaken idea of many to think that we can move straight into technical charts and easy techniques and start making money from the stock market. Investing involves an understanding of the basic concepts of business, and to do that, we need to go to the very foundations of our modern economy.

This blog has touched many times on the basic building blocks of modern capitalism which forms the basis of all investment; namely, the factors of production. Traditionally, these have been Land, Capital and Labour.

You buy land, and you can use it to produce money by building houses or planting crops on it.

The owners of capital can use it to generate interest.

When you rent the labor of employees, you can direct their efforts towards making money for you.

In recent times, a newer form of Factors of Production (FoP) has taken prominence. It is known as Intellectual Property (IP). There has always been some form of recognition for this type of FoP, mostly in the form of Goodwill, but in the 21^st Century its importance has grown in proportion.

Intellectual Property deals with things which add value to a product which cannot be easily seen or touched. The purest form of IP would be software, books and music. But for the purposes of this article, we are more interested in less obvious forms of IP which add a lot of value; or in other words, intangible ideas and concepts which are embedded into the goods and services we buy.

Branding

The most interesting would be Branding. Branding adds PERCEIVED value to the product. This means that the product is not better than rival products if you look at the technical specifications alone. It only becomes more valuable in the eyes of a consumer who has gone through the company’s ‘brainwashing’. Here, instead of adding value to a product by working on the product, we add value by working on the buyer. We make the buyer look at a product through our favored ‘lens’.

For example, if you meet a consumer who likes class and elegance; you can be quite sure this guy will choose your offering as long as you are able to make him feel that your product is classy and elegant.

Starbucks brands itself as the coffee place for young, sophisticated yuppies; with the result that people who want to be seen as young and successful will choose Starbucks. They did not wake up one day and suddenly find that young people liked coffee. They worked more on the ambience and styling; then proceeded to project this image on the target market; thus MAKING young people like their coffee.

When a successful brand is created, it becomes a money-machine as valuable as Land.

Design

However, regardless of how powerful the brand is, the product itself cannot be under par. Once the branding begins to attract the fish, you must now have the right fishing rod to haul them in. The design of products and services (yes, the provision of services can be designed too) must be consistent with the image projected by the brand. Then, it must be convenient, fun and effective.

Business Processes

Once the above two items have been achieved, efficient business processes are required to keep everything in order. Companies have to deal with government regulations, accounts have to be kept, and machines have to be maintained. These ensure that the company is sufficiently free of clutter which may hinder growth.

Implications to Investors

Investing in modern-day companies require that we have a good grasp of intellectual property. We can never effectively gauge the future growth of a company if we are clueless about the strength of its brand, product design and business processes.

For example, if you are considering buying into two different banks, consider which one has the better image, which image identifies more with affluent customers, which one has the better loan and credit packages, and which one has better systems and controls which are less likely to break down. A study of financial statements alone is not enough.

Implications to Entrepreneurs

Do not make the mistake thinking that only the knowledge industry (software, publishing, music) requires IP. Regular businesses will also do very well to ride the IP train to success. In fact, all of business success is attributable to IP.

If you have seen the lines queuing up for Chatime you will see what I mean. Tea has been around for thousands of years. Why are people suddenly so excited about tea now? There are hundreds of tea shops which sell better tea, but you don’t see lines upon lines upon lines of people there. What’s up? It is a right combination of branding, product design, and business processes. From the distribution of tea leaves and other ingredients to its worldwide chain of stores to the way each cup of tea is made to the advertising and promotion activities; everything is packaged within an effective system.

In short, if you are an investor, invest in a company with the IP comparable to Starbucks and Chatime and McDonald’s and Google (at the right price, of course). If you are a businessman, strive to build the IP which will power your business, also in the mold of these legendary companies. It is not just about what you sell, but how you sell it.

Andrew Angelo Chua

BLUE is the Colour!

2012-05-14T00:42:00.000+08:00

Tremendous last-minute win by Manchester City to secure the Championship. (Story by BBC, pictures from Soccernet)

Manchester City scored twice in stoppage time to be crowned champions for the first time in 44 years by beating Queen's Park Rangers to win the Premier League on goal difference amid almost unbearable drama.

City's hopes of claiming the title looked to slipping away as QPR - already safe after Stoke City beat Bolton - held on desperately to an unlikely lead and Manchester United led at Sunderland.

City, needing three points to clinch the prize, led through Pablo Zabaleta at half-time but Djibril Cisse levelled for QPR just after the break.

QPR lost Joey Barton after he was shown a red card following a clash with Carlos Tevez but then stunned the Etihad Stadium into silence as Jamie Mackie headed them in front.

City set up permanent camp in QPR's half but looked to be condemned to utter misery as QPR keeper Paddy Kenny produce a string of saves to ensure Mark Hughes' side held firm.

Then, as the clock ticked into five minutes of additional time, City and their supporters were transported from the depths of despondency the highest high in the space of moments.

Substitute Edin Dzeko headed an equaliser two minutes into the extra period and then - in a stadium almost bordering on hysteria - Sergio Aguero drove into the penalty area and flashed a finish past Kenny.

The Etihad Stadium was an explosion of joy and relief as 44 years of frustration poured out, Aguero wheeling his shirt about his head in celebration and manager Roberto Mancini, who had cut an increasingly frantic figure, racing around on the turf in ecstasy.

As Mike Dean's final whistle blew, the reality dawned on City as they capped a run of form that has seen them overturn United's eight-point advantage in the space of five weeks.

And for supporters who have suffered watching the successes of neighbours United under Sir Alex Ferguson, this was the perfect moment of redemption.

The atmosphere was a mixture of the tense and triumphal as the teams came out to a torrent of golden ticker tape raining down from the stands.

QPR's intentions soon became clear as City ran into massed ranks of resistance and the early celebratory mood became tense as Mancini's side struggled to fashion clear cut chances.

The breakthrough finally came six minutes before half-time. Yaya Toure had been struggling for some time with a hamstring injury, but he was able to play in Zabaleta and his shot squirmed through the hands of QPR keeper Kenny and in off the far post.

QPR were level shortly after the restart when Cisse took advantage of Joleon Lescott's poor header to beat Hart - but they were then plunged even further into a rearguard action when Barton was sent off.

He will claim he was provoked by Tevez, but he can have no complaints as he raised his arm to the Argentine and then kicked his fellow countryman Aguero after he received the red card.

QPR lifted the siege in stunning fashion when Mackie stole in at the far post to head them in front and all City's efforts were thwarted as Kenny saved well from David Silva, Aguero and Dzeko among others.

It looked like the day that had started for City with such anticipation and expectation was going to end in despair - then came the finale and the goals from Dzeko and Aguero that will live forever in the memories of every City fan who witnessed them.

By Phil McNultyChief football writer, BBC Sport

Battleship

2012-05-01T01:04:00.001+08:00

To be sure, Battleship is not a thought-provoking or deeply philosophical movie. But even in shallow popcorn flicks, there are lessons to be learnt.

The movie is about our human navy ships battling alien forces which have landed in sea. The two sides bomb each other and I don't think I need to say who wins in the end.

But halfway through the movie, there occurred a scene which sheds some insight on timeless principles which hold true from ancient battlefields to the modern workplace.

The hero of the movie, upon finding his senior officers all dead, lands in the commanding position. He is forced to give orders, which he does, and the crew follows; grateful that there is someone to take charge.

Soon the crew begins to execute his orders and the actions of the entire ship begins to reflect the intentions of the hero. It is as if the entire gigantic ship, through the actions of the crew who are taking orders from the hero, becomes an extension of the hero himself. It is like he multiplied in size, and the ship is actually him.

That was the idea I got amidst being bombarded by the missiles on screen.

And it is so true in the workplace. A company of many many employees can be directed to perform the will of one man. The intentions of one man can be projected upon hundreds of others, and they all act in concert to bring his ideas to life. Now, this man at the helm has increased his physical presence in the world, the thousands of people under him becoming a part of him.

This is what being a leader is all about; to direct others to carry out tasks which are too big for one man. The trick of course is to make sure that the followers can accept and execute the orders as accurately as the navy men in the movie.

Being a leader is not about basking in the glory of a leadership position for and in itself.

But neither do we have to put undue emphasis on the politically correct traits of empathy, engagement, empowerment etc. These are definitely nice things to have, but they mean nothing if you don't have a vision of what you want done and give the right orders to have it done. You will just end up the leader of nothingness.

But as long as you have the right vision, the right ideas to carry out that vision, and give the right instructions to the right people; the results will speak for itself and the followers will be willing to follow, even if things are not perfect.

For this is the core of real leadership. To have something meaningful to be done, and the will to drive yourself and others to do it. Anything else is secondary, and is all just fluff if there is no substance to the goals and activites of the group.

Andrew Chua
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Income

2012-04-15T14:22:00.000+08:00

In Personal Financial Planning, the plan always starts with Income. It is always how much we earn that determines much of everything else. Of course, this factor is also one of the most difficult to change. There is not much we can do to boost or tweak it, especially if we are on fixed pay. Much of what we can do is frequently to be found in the other areas such as debt structuring, risk management and investment planning.

Here, we will try to explore the topic of ‘income’, the all-important top-line item which usually just merits half a minute in the planning/budgeting process.

For most people, income comes from work. And this work is frequently in the form of fixed-pay employment, such as being an engineer, technician, nurse, company executive, teacher, etc. Sometimes, there would be a variable component, such as commissions for a salesperson.

The advantage of this sort of arrangement is obvious. Your income is fixed and stable, thus making any budgeting or planning process simple. You always have the same top-line month after month, and as long as you handle the stuff in-between well, you will have a positive bottom line.

The disadvantages too are becoming more and more obvious in today’s world which heavily promotes entrepreneurship. A fixed pay is limiting and restrictive. The monetary value of your contributions is limited. For example, if your pay is RM5,000 a month, you will be inclined to think that your worth to society is RM5,000 a month if measured in dollar value. For some people, this might limit them from producing outstanding work which far exceeds the value of their paycheck as it would create an internal imbalance within their minds. “Why am I working so hard when the max I can make is only RM5,000? To make the best use of my time, I should only give RM5,000 worth of work in my job, and divert excess energy and creativity to other activities which may give rise to other sources of income, such as running an online business or giving tuition part time”. This type of thinking destroys the focus that would enhance the effectiveness of our work. If our top line from any single activity is limited, the only way to increase income is to add more activities. And when we have too many activities, we lose focus and all activities will likely falter.

A variable-pay job based on commissions would seem to solve the problem, but actually it only gives a short term respite and has problems of its own. Although in this case, the person can focus solely on this commission based job, the money is still too tightly tied to personal effort, and there is a lack of systematic money-gathering which produces income even when the person personally slows down or takes a breather. Once you stop, the money likely dries up too. For the short term, it offers an opportunity to amass a respectable sum of money. But what next?

This brings us from the ‘employee’ segment (as depicted in Rich Dad’s famous EBSI cash flow quadrants) to the self employed and business segments. Under the self-employed segment, you work for yourself, doing stuff such as book-keeping, plumbing, selling insurance, hawking food, freelance designing and giving tuition full time. The problems here largely resemble those of a variable-pay employee. Once you stop, the money stops. It is when self-employment grows into a business that the significant improvement takes place. From a book-keeper, you start to run a book-keeping firm, with a stable of freelance book-keepers under your care. You take the difference between what you charge your clients and what your freelancers charge you. Or as a designer, you take in jobs which you then proceed to cut up and distribute to your freelancers. Here, you can begin to earn some ‘sleep money’. It is at this point that the money you get loses its direct relationship with personal effort, and the seeds of financial freedom are planted.

The ultimate phase, is of course the Investor segment. As an investor, as opposed to a business man, you don’t even need to run the business. You just provide your money to the people running the business. It is quite like a food chain. Investors are at the top. And where do you find these businesses to invest in? The best place to look is obviously the stock market, with thousands of business ready to accept your investment monies. Sadly, most people look at the stock market as a casino rather than a market where you shop for business to invest in.

But this doesn’t mean investors don’t have to ‘work’. It just means that their work is not in actually personally producing the work with economic value such as carrying goods, cleaning kitchens, drawing blueprints, repairing machines, balancing the books, prescribing medicines and explaining insurance products. Your work now is to study businesses and choose the best ones to invest in. It involves a lot of research and judgment and leg-work too, but the rewards cease to be directly tied to the time and effort you put in. One week of focused research can reap the equivalent of a year’s ‘personally produced economically valuable work’.

All these is the result of a capitalistic system, where money goes to factors of production; and work is but one of many factors of production. The other main ones are land, machines, intellectual property and business systems. Money goes to these factors by virtue of who ‘owns’ them. Ours is a society which recognizes ‘ownership’. We get to own stuff. This is a relatively new development in society which we shouldn’t take for granted. But as it is, we get to own things, and money flows to he who owns stuff which are factors of production. In other words, you will be entitled to get money if you own stuff which produces stuff which people buy.

The best all-in-one package of factors of production is a listed company. If you buy the shares of Nestle for example, you are buying the buildings and land they own, the workers in their employ, the business systems they use, the goodwill of their brand and the trucks they drive their goods in. It is a ready-made package of money-production. That is to say, buy Nestle, and you buy the money Nestle as an institution produces. Assuming that Nestle gives a return of 8% per annum in the form of dividends and capital growth, it means that Placing RM300,000 in Nestle will net you RM 24,000 a year, or RM2,000 a month. This is money that flows to you as the OWNER of these shares, with no relation at all to how much personal work you do. The research is only done once at the start with maybe brief subsequent quarterly reviews. After that, the money flows to you even as you sleep. RM2,000 a month, the same as an entry level accountant working his ass off 12 hours a day trying to balance obscure figures from some infernal accounting system.

Therefore, in short, the price of a RM2,000 a month lifestyle is either RM300,000 or perpetual 12-hour work days.

Of course, you won’t manage to get that RM300,000 without first working your ass off somewhere 12 hours a day for some time. But the sad thing is not that people don’t manage to amass RM300,000 or 500,000 or 1,000,000. The sad thing is that they actually do after some years, but don’t know where to put it. Instead of investing it, it goes to LV bags and BMWs. There is no focused effort to move from E to S to B to I. They struggle in E, and buy BMWs to ease the pain. But of course it just creates more pain down the road.

This is not saying that the E, S and B quadrants should be ignored. You need a good foundation in the work place and in society before you can have the judgment and discernment required in the I quadrant. A doctor needs experience in seeing patients before he can run a large clinic with many doctors. An engineer with experience working on oil fields can better choose the right oil company with growth potential. Dealing with customers and colleagues brings understanding of human nature which is required by the investment strategist.

You need to go through the entire food chain of income accumulation. Just don’t get stuck at first base all your life.

Andrew Angelo Chua

The Theory of Relativity

2012-03-12T18:15:00.000+08:00

When Coffee Bean first arrived in Johor Bahru many years ago, I was shocked by the prices. Almost Rm 10 for a cup of coffee, when mamak shops were selling for Rm1.20. However, that sort of disbelief has now faded away. Heck, nowadays I patronize Coffee Bean and Starbucks regularly, not to mention the Pappariches a Station Ones. The prices are still in a way exorbitant, but the unwillingness to spend on them has slowly died away.

A 10 ringgit cup of coffee has become alright because many other coffee houses have sprung up and begun to sell coffee for Rm 5, Rm 7 and Rm 9. The average cup of coffee is not Rm1.20 anymore.

5 years ago, a double storey terrace house in Johor Bahru was considered to be on the costly side if it exceeded Rm 300,000. But now, a 500,000 ringgit one does not seem expensive anymore because a simple apartment has risen to 350,000 ringgit. Even though the actual usefulness of a house has not changed, our perception of its value has changed due to external influences.

Dollars and Cents are simply numbers which humans assign value to. How much is a dollar worth is actually a very difficult question to answer. The value of things is always relative to other things. We decide whether a cup of Starbucks coffee is expensive based on how much other coffee houses are charging.

Interestingly, this intuitive method of assigning value does not translate nicely over to the stock market.

The most basic mistake is when people compare ‘coffee with wine’. If a cup of coffee is Rm 5 while a glass of wine is Rm 50, does that mean the coffee is underpriced while the wine is overpriced? When it comes to stocks, many people seem to think so. They will never pick the Rm 50 glass of wine over the Rm 5 cup of coffee because it is more ‘expensive’, never mind that it could be a glass of Domaine Romanée-Conti they are looking at.

The second common mistake is when investors have no idea what are the ingredients in the cup of coffee they are buying. You can’t apply relative valuation if you do not know what you are valuing. What’s in a cup of Maybank shares? What’s in a cup of Amway shares? What are the ingredients of this brew you are buying?

A share is considered high-yielding at 8% if FD returns 3% and EPF gives 5%. But if FD rose to 10%, will the 8% share still be considered good? It is all relative.

Once the investor is well-acquainted with the contents represented by the piece of paper known as a share certificate, the value of each share will suddenly be made clear in his eyes. When you know what different shares ‘contain’ and begin to compare them, you will easily be able to gauge the value of each relative to other available choices.

Investors should not invest before they know what they are investing in. Knowing what you are buying is the first order of business.

Andrew Chua

Warren Buffett: Why stocks beat gold and bonds

2012-02-27T01:34:00.001+08:00

This makes a lot of sense:

Debt pays you back in a pre-determined currency; what if the currency value drops?
Gold is a commodity that has not much use in itself; why buy something which just glitters in the sun but is of no other use?
Companies, on the other hand, produce goods and services which are inherently valuable; buying stocks in a company allows you to have a share of this.

In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives over time.

By Warren Buffett

FORTUNE -- Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur.

Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain -- either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've exploited both opportunities in the past -- and may do so again -- we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof " delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.

This article is from the February 27, 2012 issue of Fortune.

Buying for Investment vs Buying for Own Use

2012-02-07T18:50:00.000+08:00

Real Estate will always be a good item for investment. So are companies and businesses. But a worrying mindset of many investors is that they have divorced the concept of the value of investment properties with the value of self-use properties. It is as if Investment Properties are different from Self-use Properties. It goes something like this:-

A: Hey B, I heard you just bought a new condo at XXX.

B: Yeah, had to queue up for it. You wouldn’t believe the crowd at the launching.

A: Good good. Congrats… But… I also heard it’s a bit pricey for its size..? It’s quite small and bare isn’t it?

B: Haha. Yeah. It’s expensive. But don’t worry. I am buying it for investment…

Now, does the intrinsic value of investment properties behave any differently from a property which you are going to live in? Why are some people very nitpicking when selecting a house for themselves but apparently more lenient when choosing investment properties?

It probably comes from a misconception that buying an overpriced investment property will not hurt because you will make it all back when you sell it off later; while a house which you are going to stay in will probably not be sold anytime soon, so you have to be careful that every cent you spend is worth it.

But wait a minute. Your investment property will also eventually be sold or rented to someone who is going to stay in it. That person will also be nitpicking and making sure that every cent he spends is worth it. Will he be willing to take it off your hands similarly over-priced?

While it is true that real estate tends to grow in value over time, you still can’t afford to be careless when picking investment properties. If you buy something over-priced, it will take you a long time before genuine capital appreciation catches up with your folly. You will be forced to sell at a loss if you do not have the required staying power.

All these probably comes from a speculative mindset, fed by the glossy marketing material by property developers assuring you of how secure your investment would be if you buy their properties.

If anything, you have to be even more nitpicking when choosing an investment property, because the subsequent buyer could be even more nitpicking than you.

Always just ask yourself a very simple question. Would I pay xxx amount of money in order to stay in this house? Would I pay xxx amount of money in order to rent this factory lot? Will I pay xxx amount of money to share in the profits and dividends of this company?

If the answer is no, then it doesn’t make sense as an investment. Don’t go thinking there are bigger idiots than you out there waiting to take a bomb off your hands. The music could very well stop when you are without a chair.

Investments must have intrinsic value, or value-in-use. Anything not based on this is speculative. Always remember, anything you buy for investment will subsequently be bought by someone else who is going to use it for real. Therefore, something which you don’t feel good buying yourself (at the price you are paying for) will not make a good investment. You may make speculative gains once or twice, but when the bomb eventually explodes in your face, you will find yourself wiped out.

Investment properties and self-use properties should not be viewed differently, as if all the money you spent on an investment property will be promptly gained back when you sell it.

The Golden Rule applies:

Do not buy and sell to others what you would not buy for yourself.

Who would have thought, the secrets of investing have long been revealed to us in the Holy Book :)

Andrew Chua

Article in Personal Money Magazine

2012-01-31T22:53:00.000+08:00

My article in the February 2012 issue of Personal Money magazine. Get your copy today...

My Name is Bond

2012-01-17T23:54:00.000+08:00

There are three main categories of investments available to the general public; namely real estate, equities, and bonds.

For Malaysian investors, real estate is usually the most familiar. Most would have (or would like to have) investments in at least one unit of real estate. The attractiveness of real estate lies in the ease by which one can make sense of the investment. The asset is physical and there for all to see, and the returns by way of rental or resale is easy to understand. Furthermore, real estate allows leverage; meaning we can borrow money to invest in them thus stretching the power of our ringgit. This makes real estate popular.

Equities are mostly viewed as high risk investments, even though there are numerous defensive stocks available to the cautious investor. Usually, only the more adventurous investors ‘stray’ into equities. Unlike real estate, equities are not as intuitively understandable. One would need some background in accounting and finance to do a good job investing in equities.

But the focal point of today’s article is on Bonds. The average Malaysian investor does not have a very good idea on what bonds actually are. Those who do understand tend to write them off as ‘low-return’ investments no different from Fixed Deposits.

When we talk about bonds, there are a few basic points we have to know.

· A bond is a debt issued by a large company (such as Genting or YTL) which pays an agreed interest each year. For example, Genting may issue a RM 100 million bond which pays 5% per year. Investors will be invited to purchase chunks of this bond.

· The money you can make from bonds is not from the interest alone. You can buy and sell bonds.

· If the general interest rate (on bank loans and deposits) rises, bonds tend to fall in value because their interest rates have been fixed prior to the rise. The only way the bond can now offer the same interest is if you can buy it for a lower price.

· If the general interest rate falls, bond prices will rise, due to the same reasons stated above.

· It is difficult for small investors to directly invest in bonds. In the example above, small investors may find it hard to directly buy a chunk of Genting’s Rm 100 million bond.

· The best way for small investors to invest in bonds is by buying into Bond Unit Trust Funds. The Bond Fund, having accumulated large amounts from numerous small investors, will have enough money to go shopping for quality bonds.

· Bond Funds have very low service charges compared to equity funds.

· Typically, a bond fund in Malaysia would have returned you an average of 6%-8% per annum in the last ten years.

Bonds are considered as safe investments, and with returns of 6-8%, are a really viable (and in my opinion, superior) alternative to Fixed Deposits.

Bonds as an investment category are under-appreciated in Malaysia. They actually serve very well as the defensive/safe portion of your asset allocation. Most financial plans created by professional wealth planners would have bonds in them, but for the general public, there is still much room for improvement in awareness of bonds.

Andrew Chua
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We Will Be Back Soon!

2011-12-17T22:43:00.000+08:00

Dear Readers,

You may have noticed that this blog has been dormant for quite awhile, with no new posts since late October. I believe this is the longest ever hiatus in the 4 year history of this blog. I recently started on a new job, and time has been tight.

However, rest assured that we will be back soon. Come January, we will be back with a bang!

Merry Christmas in advance!

Best Rgds,
Andrew Angelo Chua.

Over Mountains and Across Oceans

2011-10-29T03:46:00.000+08:00

The Internet is Global. That has always been true and obvious. But sometimes, some stuff happens that feel a little unreal. If we are talking about well-known international sites like CNN or The Wall Street Journal, it will come as no surprise that they are read by people all over the world.

But this blog was never meant to be a CNN. It is written with a very Malaysian focus, quite close to heart and sometimes even containing direct references to my social circle. I have always known that I get international readers, but when you actually put a face to one of them... it feels unreal. It feels unreal because the lady down the street whom I see everyday has probably never read my stuff, but someone from across the world has. It feels unreal because even some of my acquaintances do not really know what I do and how I think, but someone from halfway across the world does.

I found one of our flagship articles used as a reference article by an Investment Management firm based in Ohio, USA. I wouldn't say I was surprised. Like I said, I always knew we had international readers. But it was quite an experience to actually have a 'face' to one of those far-away readers, rather than just another statistic on the internet-traffic software.

Our article on Defensive Investing, which is a perennial favorite among regulars, was featured on the website of Strategic Asset Management, Inc.

I don't know how long it will stay there, but it's nice to know that we've once made a dent in the consciousness of people located so far away :-)

Andrew Chua
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Making Investment Decisions – Hibiscus Petroleum Berhad

2011-10-28T18:41:00.000+08:00

Hibiscus Petroleum made the news these past few days following the purchase of a stake in an Oil & Gas company in the Middle East. Following the news, I received some interest from friends who started asking me about it.

Now, Hibiscus is not your regular company. It is a Special Purpose Vehicle, otherwise known as a blank-cheque company which goes public to raise funds with the intention of acquiring targeted assets and businesses. When it was listed, it owned nothing at all. It’s ‘mission’ was to use the money raised from the IPO to buy assets and businesses in the oil and gas industry. (I generally do not like this idea, that Special Purpose Vehicles can be listed on the stock market without any track record and existing business operations. Expected returns are solely based on hopes that their plans will come to fruition. More must be done to protect investors; ‘Caveat Emptor’ is NOT ENOUGH!)

With a blank-cheque company like this, it is hard to do a regular analysis using traditional approaches. Much of the valuation methods we are familiar with will not make sense here. How can we perform a five-year financial statement analysis when they have no track record to start with?

Investment Analysis shouldn’t be done in a vacuum where we analyze the investment on its own and in itself. It must always be done in relation to other available investments so we can compare the alternatives and understand our opportunity costs. With traditional stocks of normal companies, we can focus an article on the analysis of a single company because the results in terms of earnings yields, dividend yields and price/book ratio can easily be taken away and compared with other firms.

But for a ‘special’ entity like Hibiscus, a better perspective can be gained by comparing its qualities side-by-side with a traditional company. I noticed that the current price of Hibiscus is 67.5 sen, which is quite close to the price of Lonbisc (76.5 sen) which we analyzed (using traditional methods) last week. So let’s compare these two companies; hopefully the differences will help investors better understand what Hibiscus is about.

Track Record

London Biscuits has been around for years. Hibiscus is a new kid on the block. It began with a clean slate and recently purchased a stake in a business in the middle-east. The lack of a track record means we do not know what to expect. When we invest in a company like Lonbisc which has been around for some time, at least we have a good idea of how management will act in the future based on how they acted in the past. When they tell you they have an expansion plan, you can predict how it will turn out based on how previous plans turned out. Sales trends can tell you whether the company is good at capturing market share. Earnings trends can tell you about whether the company is good at giving stable returns. Dividend trends tell us about whether the company is a good custodian of cash and responsible to shareholders. But if there is no track record at all, then what do we have? Nothing. We have nothing. We know nothing about the style of the CEO. We know nothing about what earnings yield to expect. We know nothing about the ability of management to deliver. Yes, you may say that investing involves risk and luck and sometimes we have to take a bit of a gamble. But this is like going on a date with a man you’ve never met. Of course he may turn out to be a great guy. But are you really so desperate?

Management

Our discussion about track record above touched a lot on the insights provided by prior year financial results relating to the performance of management. Now, let’s look at the management teams at Lonbisc and Hibiscus.

Lonbisc is managed mainly by the Liew family, who have been in business for a long time and have entrepreneurial roots. The chairman, Dato’ Sri Liew Kuek Hin, has been in the family business since he started his career and is already 71 years old now, gaining experience and networks over the years.

Hibiscus on the other hand, is managed by a group which has mainly corporate roots as opposed to entrepreneurial ones. Can they weather the storms when they come? Maybe, but we don’t know.

Product

Lonbisc makes cakes. We can see their cakes at Giant and Tesco. We can eat their cakes and compare them to some other cake and make a judgment on the quality and value for money. The location of their real estate is mostly in Malaysia. Just by looking at the addresses, we can have an idea of the market value of those properties.

What about Hibiscus? The asset they just bought is in the Middle East. And it is in the O&G sector. It is too far for us to see, and some of us can’t even conceive of what it looks like over there. Quite a high level of proficiency in the O&G sector is required before you can make a call on this one. You need to know all sorts of things on the technicalities of oil drilling. For many of us, we have nothing to rely on other than analyst reports and stuff we Google from the Internet.

Now, please don’t get me wrong. I am not saying that Hibiscus is doomed to failure. I’m not even saying that it is not a good investment. I am just saying that if you are like me and are not well-versed in the subject of oil reserves in the Middle East, it may be better to go to Tesco and try out different cakes to find out which one tastes better.

If I am going to issue a blank-cheque to someone to make investments; it has gotta be someone I can trust, someone who’s been around a while, and doing something I can understand.

When making investment decisions, don’t get too tied up in the financial analysis of a single company. This is not an exam. It is okay if you do not have certain answers. Look at the big picture of your investment goals, and let go of whatever does not fit in nicely.

As Steve Jobs says, “To be successful, we have to say NO to 1,000 things”, even if some of those seem seductive at first.

By the way, I am also not asking you to buy Lonbisc. I do not endorse any investments. I only lay down the facts. Some facts about Lonbisc can be found in last week’s article.

Andrew Chua

(The above is an academic exercise which applies well-established securities-analysis methods and benchmarks on currently available investments. It does not constitute a recommendation to buy or sell any security. The writer does not own any shares of the above-stated company at the time of writing, and does not receive payment for the sale or research of any security. ~I lay down the facts; you make your own conclusion...)

London Biscuits – Value Buy?

2011-10-20T02:47:00.000+08:00

Last year, London Biscuits Berhad saw its share price suffer due to its corporate exercises relating to the acquisition of a controlling stake in a public listed company (TPC Plus Berhad) and disposal of an associate company (Lay Hong Berhad) within the same year. Both these companies are involved in producing chicken eggs. The rationale behind London Biscuits getting involved in the egg business is that eggs are a major ingredient of their cakes and biscuits; therefore they want to control the source of their eggs.

Sadly though, the disposal of Lay Hong and the acquisition of TPC was not seen favorably by investors. Investors did not see any sense in buying an egg company (TPC) only to sell the existing one (Lay Hong) at a loss. The share price dropped from approx Rm 1.30 in July 2010 to approx Rm 0.70 in the middle of Oct 2011.

However, on 14^th October 2011 the shares were relatively heavily traded and the price rose to Rm 0.82. As at today (19 Oct 2011), it was last done at Rm 0.765. This followed the sale of its controlling stake in TPC announced in early October 2011.

From what we can tell, London Biscuits is now free of involvement in the egg business. On the bright side, this means that the nagging problem of holding non-core operations is no longer on its plate. On the negative side, they lost their favorable access to their eggs.

Now, why did London Biscuits sell TPC after all the trouble it went through last year? And why did the share price rise after it announced the disposal of TPC? These questions cannot be easily answered based on the information available to the general public. But what we do know is that the company is now mainly involved in the food production business without other operations to distract them.

Below is the five year group financial highlights (Click Image to Enlarge):-

One thing that is clear is that the company is good at growing revenue. Sales has been on a non-stop growth trajectory for the last five years. However, profits have not been so stable, going up and down during the same period. Sales growth which does not translate to profit growth signifies some problems with costs. The raw materials, which are mostly imported, are sensitive to foreign exchange rates and fluctuating commodity prices.

But even with these problems, the shares seem to be trading quite cheaply. With earnings per share of 17 sen for 2010, this represents an earnings yield of 22% if you buy it at the last done price of 76.5 sen. But before we go further, note that earnings suffered a hit in the third financial quarter of 2011, leading to a (unaudited-as-yet) reported earnings per share of only 14 sen for the financial year ended 30 June 2011. At this level, earnings yield drops to 18%; which is still pretty good value, but further shows the uneven nature of the company’s profits.

Concluding Analysis:

The share price of the company suffered last year due to negative publicity relating to investments in egg companies which were poorly perceived. This year, there are no more egg companies in the picture. The company seemed unsure about what they really wanted from their investments in egg companies and hopefully the recent disposal of TPC means that they are ready to put the whole egg business behind them and focus on their cakes. The poor earnings in quarter 3 are a concern, even though it came back strongly in quarter 4. If the company is committed to focusing on cake and biscuit production, we can see that they are adept at growing sales and profit growth should follow once they get their costs under control and as long as there are no unprofitable investments to be written-off. Going forwards, it can be hoped that the egg troubles of the company are a thing of the past. Net asset per share is strong at approx Rm 2 per share. If dividends are proposed at 1.5 sen per share as per last year, it would represent a dividend yield of approx 2%. The recent spike in share price after the announcement of the TPC sale could indicate some positive sentiment coming back. Current earnings of 14 sen coupled with a more favorable valuation at earnings yield of, say, 15% would result in a share price of 93 sen.

Andrew Chua

RM 1 Million Retirement Fund; Are You Prepared?

2011-10-12T01:06:00.000+08:00

Had a conversation on FaceBook regarding the costs involved in creating a retirement fund... Thought it might be helpful to share it here :)

The above stated savings plan is a straight-forward savings plan which does not take into account advanced (and riskier) strategies such as leveraging (the use of loans) and active investment through stock market valuations etc. This form of saving and investing is suitable for salaried professionals and executives who do not have the time to actively manage an investment portfolio. It is automated and robotic.

Many people do not like the idea of 'taking risk' with their money by investing, but they forget that inaction equals to taking risk with the quality of your life after employment. Most would end up spending the money of frivoulous stuff anyway. Remember that your LV will not help you when you are out of the workforce. A realistic look at the true situation and planning for the future is vital.

If you haven't started, there's not much time left...

Private questions are welcomed at iInvest@hotmail.my

The Rolling Five – A Method for Short-Listing Stocks for Analysis

2011-09-26T19:18:00.000+08:00

A common problem for many budding investors is that of short-listing. There are so many listed companies and available investments around, which ones should we be looking at? We can’t possibly look at all. And yet we need a proper system to select investments for analysis. Warren Buffett said that when faced with this problem, we should probably begin with those starting with the letter ‘A’.

Of course, Buffett was a professional investor and many of us would not have the time to go through every company so closely. Personally, I prefer what I call the ‘Rolling-Five’ strategy. Using this strategy, our short-list will always consist of five counters. These will be the ones we analyze and study at any one given moment. How they get onto the short-list, we will leave to providence. It could be something that caught your eye in the news, or some promotion a company was doing at the shopping mall. Maybe you have a friend working for a listed company and she said some positive things about it. It doesn’t matter how they got onto the list. The important thing is that there should always be five. (Why five? No reason in particular… because we have five fingers on each hand perhaps…)

Once a stock gets onto this list, there are only two ways to get off it. One is if you reject it after analysis. Two is if you actually buy some of it after evaluation. Once a stock goes off, you scout for another one to take its place. Of course, those you have bought will go to another “Bought-List” which you have to follow up on, but that is another story.

Using this rolling-five system, we would find our investment analysis more manageable and less overwhelming. If your list is already full, don’t take on anymore until there is room. Otherwise your mind will be flooded with too many investment possibilities.

For example, right now my roiling-five consists of the following five; with some brief information on the evaluation of each one:-

Maybank. The biggest bank in Malaysia and a heavyweight on the KLCI index. The question now of course is whether it has been over sold during the recent fears over the European Debt Crisis. It last traded at Rm7.510 per share on 26 September 2011.

Earnings Yield (FY 2011 earnings): 8.18%

Dividend Yield (FY 2011 dividends): 7.99%

CIMB. Malaysia’s second largest bank has been under heavy selling pressure lately. Similar to Maybank, we want to know if the recent sell-down means there is now value to be found. It last traded at Rm6.700 per share on 26 September 2011.

Earnings Yield (FY 2010 earnings): 7.31%

Dividend Yield (FY 2010 dividends): 5.46%

Amway. A ‘Dividend Aristocrat’ on the mainboard of Bursa Malaysia. How much is the dividend yield now after the recent correction? Direct-selling companies are known to be resilient in hard economic times. It last traded at Rm8.500 per share on 26 September 2011.

Earnings Yield (FY 2010 earnings): 5.60%

Dividend Yield (FY 2010 dividends): 7.76% (includes distribution from retained earnings)

Padini. We featured this company a while ago on this website for its powerful market position in the middle-higher class apparel market and rising earnings trend. Will retail spending be curbed by any coming recession? What value does the company offer now? It last traded at Rm0.825 per share on 26 September 2011.

Earnings Yield (FY 2010 earnings): 11.23%

Dividend Yield (FY 2010 dividends): 5.45%

Sunreit. Another attractive Dividend Aristocrat, it distributes almost all its rental income to unit holders. It last traded at Rm1.060 per share on 26 September 2011.

Earnings Yield (FY 2011 earnings): 24.97% (includes unrealized gain on increase in value of properties)

Dividend Yield (FY 2011 distributions): 6.32%

For each of the companies on your list, you should at the very least have a copy of their latest annual report and maybe even some analyst reports which may yield additional useful information. You should give each one the attention you would give a potential husband or wife. Learn as much about them as you can; live and breathe these companies, get beneath their skin, understand their business models, and think of yourself as the owner… Because if they pass your test, that’s what you will become.

Andrew Chua

Undilah! Vote lah!

2011-09-22T20:14:00.002+08:00

Performed by:-

Tengku Razaleigh Hamzah
Afdlin Shauki
Namewee 黄明志

Movie Review; Nasi Lemak 2.0 by Namewee

2011-09-19T18:14:00.000+08:00

Facebook is both a good and horrible thing. The good thing is that it’s very good at bringing to us information which it knows we would find interesting. And it was from Namewee’s facebook page that I first learnt about his Nasi Lemak 2.0 movie project a few months ago, and also from facebook that I learnt he is doing a nation-wide tour to promote this movie. His visit to Johor Bahru fell on the 18^th of September 2011. As you can see from the above picture, I was there… Heheh…

It was only five years ago that he was just a naughty boy singing and rapping on the streets of Muar. Now, five years later, he has become a significant player in the local entertainment industry. It is no small feat to assemble the multi-racial cast of Nasi Lemak 2.0 which includes major Malaysian entertainment players like Afdlin Shauki, Adibah Noor, Dato David Arumugam, Kenny & Chee (from the famous Baba Nyonya sitcoms), Reshmonu and Miss Malaysia Nadine Ann Thomas.

No small feat too that he survived the controversy of rapping the National Anthem and be here today directing and starring in his own movie which is now showing at all cinemas around the nation. His passion for his art and beliefs is impressive.

Anyway, I had gathered a group of my friends to support his tour appearance and watch his movie. We caught him at 12pm, coming on stage and electrifying the crowd; he really has enough presence to carry a crowd. Then I bought the Nasi Lemak 2.0 ‘cookbook’ which is kind of like a picture book telling the story behind the making of the film. We diligently queued up to get on stage for him to sign the book and had a picture taken with him. Then it was time to watch the show at 1.45pm.

Talent is a difficult thing to measure and define. But it was immediately apparent when the movie started that such a thing existed. This is a guy who has never acted in a single film before; but he was able to carry the story along with the force of his personality, acting and humor. Together with the other main actors, the movie went along just fine, though there were some awkward moments when the secondary cast didn’t manage to convey whatever it was they were supposed to express.

The story is about Hero Huang, who starts out as a Chinese chauvinist but slowly finds the meaning of racial integration; learning from how the different ingredients in a packet of Nasi Lemak can be harmonized together. (Nasi Lemak as a dish is influenced by Malay, Chinese and Indian cooking)

There is enough eye candy in the movie with many top-class Malaysian beauties including a Miss Malaysia and a Malaysian Playboy Bunny. Then there is Karen Kong (who worked with Namewee on many occasions in the past as they are from the same company), who does a great job as Xiao K, the girl who goes to Hero Huang for help and ends up travelling the country with him looking for the secrets to a plate of great Nasi Lemak. Great first attempt, playing the female lead at that!

The pair also does a great job signing all the songs inside the movie. There is a funny English song which they perform on the stage of some cheap-looking beer garden; with lyrics which go something like “I live in big city yo, people mountain people sea, working so hard no money yo, why you still loving me’… Hahahaha… The song’s name is White Head Till Old. Very meaningful and touching in addition to being funny. Then there is one done Bollywood style with a team of supporting Indian dancers, called ‘Curry Neh’ or something… This one is really good with Namewee and Karen in typical loud garish Bollywood costumes. Hahahah, I can’t help but laugh when thinking about it. (See the YouTube videos below for these songs)...

Afdlin Shauki as the Malay Hero was cool. He was given the controversial line “Kamu semua balik Negeri Cina!!!” while waving a Keris around.

Dato David Arumugam as the Curry Master is just plain funny… Wait for the part where he speaks Hainanese and Hokkien.

The ‘horror scene’ involving the baba and nyonya in an old mansion was really quite creepy, considering this is a comedy and not a horror film.

Overall, the movie tells a good story. The main cast is solid. The production crew did a fine job. It was only lacking a little where the secondary cast was concerned. Maybe Malaysian entertainment is still too dependent on the few big names, without sufficient depth. But it is not reason enough not to see the film.

Definitely a must-watch for all Malaysians. Especially if you love a great laugh. I am gonna buy the (original) DVD of this movie when it comes out. It should be available soon after the cinema screenings end.

The movie's official trailer here:-

White Head Till Old:-

Curry Neh!

Andrew Chua.