Wednesday, July 27, 2011

Gold Rush

I bet some of you or even some of your friends might brag on their smart move for gold purchases.
And I also bet those of you who are still holding stocks for the past few months would have been thinking..."What am I thinking?" Or you might feel a little nervous at the development in the US and Eurozone. 2008 all over again? (Anyway, it wasn't that bad isn't it if it happens?)

1960s Mini Cooper S

Lets look at the chart below, Gold Prices ve KLCI (sorry, I don't have index chart for both....anyway..was I interested...)

Both charts show the prices or index for the past 1 year. As you can see, gold prices has risen from...what about $38.5/kg to ..$51.5/kg. That's a CAGR of  33.7%!. Sweeet. KLCI? 1350 to 1560 and that is 15.5%....not so good...but not bad still. So yes, if you bought gold then, you have all the right to brag...good decision. If you walk around on the street, and someone talks to you about gold and the reasons why you should buy them, they won't go far away from these:
  • It has only one direction in the long term - UP
  • Hedge against inflation
  • A safe deposit
Lets look at it one by one. First, prices appreciate in the long term. Yes. 20 years price data below shows that it DID indeed happen. So yes, they are right. But 10 years is also long term right...2001, not so at all. 

Second, hedge against inflation. Lets put it about $12/kg in 1991to $51.5/kg in 2011. That gives you CAGR of about 7.9%. A pretty good if you trust government data and yea...your wealth are protected if you spending increases by that amount annually. So it is quite true then. Safe deposit, yea....if you trust your bank.

So did I bought any, YES of course, for my girlfriend as a gift...a jewellery in fact. Good investment? Hell yeah, if she is happy it is definitely good then. (although I prefer platinum or silver...looks a bit nicer)

So did I actually bought one for investment. NO. There are few reasons for that. I don't know how to value a gold. It isn't something that generates income in my pocket nor it is for itself. Okay, the market did the price. So how did the gold appreciates? Supply and demand. If demand more than supply, it appreciates and vice versa. So we know the total supply of gold in this world is finite, unlike petrol/oil where supply depreciates in a very long term. So the only way for it to appreciate is when the demand increases.

Question is where does that demand come from? Gold in fact doesn't have much economic value. Yes, it is the best conductor of electricity and heat. It is so good that it is not suitable for electricity transmission because it is too difficult to control. Heat, yes. If your car radiator is made of gold (McLaren F1 is gold plated) or your CPU heatsink is made of gold, it'll be quite cool. But aren't there a much cheaper and better solution. Yes, did I mention about price. It is too expensive to be economical enough for industrial use and considering we have much better solution why gold then. Compare to copper for example, it is cheaper and more economical for electrical transmission. Aluminium properties are good for cars. Titanium is light and strong enough for aircraft. Yes they are all same commodities but they have economics value.

1960s Mini Cooper S

So gold....they have nothing much but only good for jewellery or for palaces or cars for some madmen from the Middle East (or our politicians). Then by simple logic, gold prices should increase in tandem with the world populations (after factoring birth and death) because that is how its demand increases (sound familiar to property investors?..i'll talk about that some day). And that if, or it should be, people demand for gold. There is how I see the fundamental of gold. Other than is speculative.

There is another way still. Hoarding. But like what Charlie Munger said "You are an a**hole if you did that".

1960s Mini Cooper S, a classic, a must try.

Thursday, July 21, 2011

Can You Invest in Stock with RM1000?

Yes, of course. You can even invest with RM300 (that if could find one) if you want to just that the cost of investment will way higher.

I have friends who use to ask me that question. "I have RM1000, can I invest in the stock market with that amount?". Yes, you can though RM3000 at least will give you the lowest cost. So should you wait till you have RM3000 before you invest? Not really.

Consider this. An X investment bank charges the minimum RM12 or 0.5% transaction fees per trade whichever higher. I'll exclude stamp duty and all that for simplification purpose. Then consider these 3 scenarios:

Invest with RM300
Minimum: RM12
0.5% of RM300 = RM1.50
So you transaction fee will be RM12 since it is higher.
Cost of investment = RM12/RM300 x 100% = 4%!

Invest with RM1000
Minimum: RM12
0.5% of RM1000 = RM5
So you transaction fee will be RM12 still.
Cost of investment = RM12/RM1000 x 100% =  1.2%

Invest with RM3000
Minimum: RM12
0.5% of RM3000 = RM15
So your transaction fee will be RM15 since it is higher.
Cost of investment = RM15/RM3000 x 100% = 0.5%

So now you can see clearly that investing with RM3000 gives you better cost saving. Now here is a little thing that you need to learn about investing: opportunity cost

Say you found (ICAP) is a good investment and you want to invest in it. I'll pick ICAP since it is easier to explain. If you do a little research on ICAP, you'll know that this is a closed-end fund. Which means there are 2 parts in its price.

First is the NAV which is tells you the mark to market asset value of the fund. put it simple, say it has RM100mil worth of stocks and RM100mil worth of cash, its NAV will worth RM200mil. divided by the number of units/shares issued say 100mil shares, it's NAV price would be RM2. Got it?

Then it also has the other part which is the market price. This market price is not always related to its NAV. It can be more (premium) or it can be less (discount). It is about how the general market feels ICAP is worth just like the stock market price. Supply and Demand ma. And this is the price which is shown on your trading platform when you key in ICAP or the current price demand from the market. So this is the price you would pay if you were to purchase it.

Now based on July 17th price, ICAP NAV is now RM2.79. It's market price is RM2.19. That would mean it is now selling at a discount to NAV which also mean you can purchase RM2.79 worth of stocks and cash for RM2.19. That is a 21.5% discount to NAV!

Say you were to wait till you have RM1000 before you invest, your opportunity cost for omission would be 21.5% - 1.2% = 20.3%!!!
That is Hell A Lot! Giving up 20.3% just to save 0.7% doesn't make any sense if you find ICAP a good investment. Plus if you know how ICAP invest, you would know that they won't hold onto a stock if they feel there is little upside on it versus the downside. So there is potentially bigger losses. Sorry to say this, isn't this what we call penny wise pound foolish?

The same goes to stock. If you find a good stock that is selling cheaply compare to its valuation, do the math above to see if it is worth saving that small transaction cost.

Sunday, July 17, 2011

Your First Investment in Stock

I have friends who ask me, how do I learn how to invest in stock market. For a start, I don't have a financial degree nor it is my profession. Well....maybe part time yea, since I am an investor now. In a way (no disrespect to business school), I think its is good because I happen to know that thing that were taught there weren't exactly helpful if not harmful - think Wall Street and Efficient Market Theory. Of course there are better school as well. Just that I would most likely fall into one of those teachings.

How I get started is a long story but I do have economics background picked up when I was younger. My knowledge in stock investment is through reading, reading and reading....and reading. It can be books, blogs, forums, financial sites or anything. Books of course have been the most helpful. I think for starters, the first and most important investment to make in stock is the investment in yourself. 

So here, I have three books which you can pick to invest in yourself and they are for value investing. Why value investing? To make it short, you'll be investing in the business and its fundamentals not the price - which makes more sense. These are the quickest way that I could think of.

The Warren Buffett Way - Robert Hagstrom
I always recommend this as the first book for everyone who just started. In fact this is the book that I read when I have no idea at all what is a stock market! So it is a book The book have a short history of you know who, how he got started to become who he is today. It provides the overall strategy for investing base on the 4 tenets:

  • Business tenets - Business economics of a business: the competitive advantage or moats
  • Management tenets - Which tells the honesty of the management and whether a management decision makes sense
  • Financial tenets - This tells the financial of a company. Is the balance sheet strong? Are they making profits?
  • Valuation tenets - How much would you pay for the business. The also also provides a sample of a Discounted Cash Flow Valuation. But I would recommend DCF table in wikipedia as it is more simplified and clearer. One note though, you might end up with over valuation if you follow his style, there is another book on valuation I'll show later.
It also mention about the concept of margin of safety which is an important tool that you would need.

The Five Rules for Successful Stock Investing - Pat Dorsey
This is a all in one book. It covers the first 3 tenets above in better details and only cost you about RM56 if you were to purchase it in Malaysia. This book discusses the economic moats for every sector or industry there is in the business world. You'll be able to identify great, good and ugly businesses after reading this. Although I would recommend The Little Book that Builds Wealth by similar author for moats, this book itself is good enough if you are a little bit tight on budget. 

Accounting is the language of business and investing. You won't be able to do this successfully if you don't understand the language. There are basically 3 financial statements: Income Statement, Balance Sheet and Cash Flow Statement. These are the 3 statements that you need to understand before you can start. And to be honest, I am sceptical if people are able to manage their own personal finance without understanding these 3 statements. This book could provide you enough knowledge that you need. It even discusses the debatable discount rate - if you know what I mean. I have to say I agree with him.

It also points you some red flags that you might want to take note on the management. It definitely doesn't cover all as there are infinite ways for financial shenanigans. But do not let this scares you away because I bet you know who to trust and who doesn't. Understanding the financial language and margin of safety will give you good enough protection already. 

Value Investing: from Graham to Buffett and Beyond - Bruce Greenwald
This is one of the best book on valuation so far. It defines the concept of value investing. It groups value investing into 3 types of valuations:

  • Assets Valuation - Which is on the balance sheet - aka the Cigar Butt style. It offers the least risk and of course huge returns. It is the safest bet of all. But, you have to be really good and extremely familiar with the business assets because there is where the value lies. I am afraid, this is better suited for full-time investor mainly for 2 reasons: It is very difficult to find such investment or assets that is selling below its hard value. And you need a team to identify its value quickly. Few of the best known investor in this style is Benjamin Graham and Seth Klarman.
  • Earnings Power Value - This is where we find the intrinsic value of a business. Buffett once said "...the value of a business is how much the business could generate over a period of time..". This has a little more risk. However it could be greatly minimized by picking businesses which wide moats.
  • Earnings Power + Growth Value - This is the riskiest of all. Although I have to admit that I use to this kind of valuation and in fact make great trades with this. But I guess I was a little lucky. I started in 2008, and it is difficult to get punished by such market condition. Never pay for growth unless you are very sure what it looks like.
So there you have it. These 3 books could give you enough arsenal to start in the stock market. Of course one might ask, these are Americans books which focus on US stocks. Okay, this is not a book on stock tips but rather educational. Except for taxes and laws, most of them are applicable to any businesses in the world. 

There are others books that you might be interested as well:
The Intelligent Investor - Ben Graham:  Dubbed as the bible of investing. It doesn't only cover stock but other investment types as well such as ETF and mutual funds. And the concept of margin of safety. A must read.
Common Stocks Uncommon Profits - Phil Fisher: Great book on management and "di-worsify". Also a must read.
Security Analysis: Ben Graham: If you are full-time or hardcore stock investor. This is a must read. In fact, any new employee in Uncle Tan's firm have to read this before they start anything. 

Of course, it would guarantee you success. Temperament is important as well but I don't have any remedy for that. That you would have to control it yourself. I'll leave you with this wise words from Sun Tzu "Know yourself and know the enemy, and you won't fear any battles"

Friday, July 8, 2011

Is Hai-O Shares Buy-Back Sensible?

This is probably one of the most exciting company on The List judging by the fact I wrote on it many times. But this is not a good thing because I would rather prefer it to be booooorrring - business wise. I wasn't the only one. This once darling of many analysts now find itself no worthy to look at. Although I must admit I did caught by the numbers as well but I'll talk about it in details later.

If you look at Bursa announcement, you would have notice they have been actively buying back shares all the way back in late March this year. There could be 2 reasons behind this. One the price are undervalued so it makes sense to purchase. The second one is that the management is trying to hold their share price from falling further (given that consensus analyst valuation is at about RM1.80 - RM2.00). It is for the first reason, then current shareholders should have no much complain. If it is the second....that depends on where you stand. If you talk about charity that'll be fine. Business-wise....huh? Isn't the cheaper the better? Why maintain the price?

So if the management think it is undervalued, is their purchase price sensible. Lets put business analysis aside as I intend to write a shorter one today...erm..night. If current earnings is sustainable, we are looking about RM29.9mil after-tax owners' earnings assuming capex is about RM3mil (which I think will grow higher since they are getting into manufacturing the heat thingy). The business has lost its moat in MLM division and other division probably never have one. So for my own valuation, I am looking at about RM1.30 to RM1.50 judging by the risk of having no moat thus higher discount. That is roughly my purchase price back 08 anyway but have sold them off lah....though abit late. The management meanwhile repurchase the shares at the range of RM2.15 to RM2.30 which roughly 8% discount rate. So it is not too insensible still just that I am abit "cheap".

Now my mistake. Previous MLM earnings are mainly contributed by the big ticket items which is the water-filters and lingeries. These earnings are not sustainable. How often do you buy new water filters or health lingerie? Of course those filters inside have to change every year and some 2 years. But that only cost around 10% each of the entire water filter's price. If say an average of 3 filters have to be changed annually, that'll be only 30%. That if all the consumers willing to change them. Coincidently, this year revenue also 30% of last year in MLM division. BUT that is really just coincident because average MLM turnover is about 90%. That also tell us that it is still growing in some way. But I was really caught by the big numbers it is generating. If it was like what the analysts say that it had hit the bottom, it means current earning is sustainable. For me, I don't know I'll just have to wait for the next AR.

I had to take my hat off to Uncle Tan (not the MD by the way) who sold off ICAP stakes in HAIO before April 2010. I don't think that is luck...perhaps a lil..that's investing right.

Anyway, I still think the management does the right thing over the entire period. Even before it slows down. They had actually introduce lower priced  products which could generate recurrent sales earlier. So they know it and are putting efforts to do more including some halal chinese herbs. On the new act, I do hear some CDMs (it is a top seller position for those who are not into MLM) had their membership terminated. This will definitely hurt on the short term but it good for the long term and the whole industry. As for the retailing division, I think they high level strategy is right by concentrating on more house-own brand as well as promoting it. Retail business naturally don't have moat. But with their own brand they might create a small one (if it is successful). Technology division....we'll just wait and see.