A sample defensive portfolio

As I was chatting with my wife regarding investment and how can we, the small investors, protect ourselves from the current wild emotion of Mr Market. The recent eurozone news triggered the roller coaster effect of the stock market. How are we affeted by that and how can we protect our investment from the effects?

I have included here a sample portfolio for the elderly. This portfolio is a real-life example that I recommeded to an old couple. The shares were bought one year ago and you can take a look at the percentage dividend yield and the returns on invested capital.

A defensive portfolio for the elderly
				as at 29 Sept 2011
Stock (No. of shares)	Buy at	1-year dividend	Realised profit	Unrealised profit
Cerebos Pacific (2,000)	$            4.48	$                640.00	$              640.00	$                  560.00
Popular (50,000)	$            0.15	$                500.00	$              500.00	$                  400.00
OCC 5.1% NCPS (200)	$        105.00	$            1,000.00	$          1,000.00	$                  (20.00)
	$  37,460.00		$          2,140.00	$                  940.00
		% Yield	5.7%
		ROIC (%)	8.2%

This couple was very satisfied with this portfolio which can give them a passive income of $2,140 in the year 2010/2011, compared to only $352 if they put $40,000 into fixed deposit that pays only 0.88%.
The price to buy Cerebos Pacific and Popular shares were calculated using my own formula before recommending to the couple.

Please note that these shares were bought in mid-2010, when the STI index was at 2987.70. The index closed at 2708.13 yesterday. This portfolio gained 8.2% (including dividends) while STI index lost (9.4%). This portfolio beat the STI index by a margin of 17.6%. I would have considered this an achievement.

What are the lesson that we can learn from here?
1.  Value investing is timeless. You can buy undervalued stocks anytime.
2.  A defensive portfolio is able to let you have a good night's sleep. Even during these uncertain times in the eurozone, this portfolio is still able to give the couple a dividend of more than $2,000.
3.  Buying and holding stocks that are not actively traded can protect your portfolio from the effects of news.
4.  Buy businesses, not stocks. Cerebos Pacific is a company that produces Brand's Essence of Chicken, Popular is a company that is known to almost everyone in Singapore.
5.  Buy a high yield preference shares can almost guarantee every dividend payout at a fixed rate.
6.  Buy at the strike price and not any other price.

The couple will still be holding on to this portfolio for the next couple of years to enjoy the high dividend yield. Will update on this portfolio at the same time next year. So do keep a lookout.

Happy investing and cheers!

A 'tough' road to be an investor

What does it really take to be an investor? Route to become one is not an easy task.

Recently, friends have been asking if they should buy more shares or sell their shares during this volatile period. I told them that I have bought some shares and did not sell any of my holdings. They were again confused by my actions. That's very normal. It's human. There's always an element of fear in the current situations.

One friend asked, "Why don't you sell your holdings and wait for the price to go down before buying back?"
Another friend asked, "Why do you buy when the Euro zone is in a mess now? Greece may default and cause another Lehman-like crisis."

The answer I gave to both my friends is the same one. "I do not know if Greece will default. I do not know in which direction will the share price go. All I know is, I have my personal valuation of these shares and they have fallen to my strike price (a discount of my personal valuation), so I opened my warchest and bought these shares."

What if the prices of those shares fall further? Well, I will just buy more. If I can get the same shares at a cheaper price, it means I can buy more of them. Isn't that great?

One way we can invest is to use just a part of our investible savings to buy first. If price falls about 10% more, then we stockpile. If price rises, then we are all happy investors.

Investing is not as easy as buying low and selling high. How do we know how much is low? How do we know how much is high? Do we buy at $3 and sell at $3.10? Not that I know of any investor would do that. A real investor is one that will put their money into a company that can give them comfort to sleep soundly at night. An investor does not put money in the company's shares and hope that the price will increase in the next few days. (That's gambling. It's like putting your money on the gambling table and depend on luck.)

My journey to become an investor is not as easy as it seems. When I first started to buy shares in the stock market, it was like ok, I just buy and hold the shares till the price goes up 10% then I sell. Well, I was wrong. There are just too many traders out there buying and selling shares. I cannot control the direction of the share price. Currently, I am still holding on to these shares and the price has gone up but I am not going to sell them as yet. That's the first lesson I learned. Do not put all your money at one go.

6 months down the road, I picked up some pointers from the books that I have read and I also saved another sum of money. I thought I was ready to apply what I learned in the book. Again I was wrong. It was really not easy to put that sum of money into the stock market. There was always a fear that what if my calculation is wrong? Why don't I wait a while longer? What if I buy now and the price dropped further? There is always the emotion factor that will affect your decision making.

Thereafter, I decided to sell all my shares in my holdings and came up with another plan. With the cash I have, I put in about half of the money into the company that I have done my calculations. With this, I will not have the worry that I will lose the entire sum of money if company is going bankrupt, and of course, the companies that I have researched are those with more than 20 years in their respective industries. Hence, my worry that the company to go bankrupt can be put behind and I can sleep soundly at night.

This strategy works well for me. I also started to widen my search for companies to invest in. It's all hardwork but I do reap what I sow, and I am satisfied with it. My investment has been growing at more than 15% compounded every year for 4 years. If I can do it, so can you. Now I am able to overcome my fear that I had when I first started.

I always have a stirke price for each and every company that interests me, hence whenever there is a panic sell in the market and the price hits my strike price, I will buy the shares with my savings. My current shareholdings are able to give me a dividend yield of at least 7% each year and these dividends were mainly reinvested to buy more shares instead of spending them.This is the only way to grow savings at double digit rate and beat the inflation.

Investment in properties or in stock markets makes no difference. When they are at a discount of your personal valuation, it's time to buy. So when will I sell my shares? I sell my shares only when I need cash to fund my other investments. For example, I have sold some shares last year to fund my purchase of a property. If there is no need to sell the shares, I would rather leave them in my CDP account and collect the dividends.

To be a real investor, you may want to follow this list:
1. Be patient. When the share price did not fall to your buy price, don't buy.
2. Overcome the fear. Have confidence in your investment. Trust your own judgement.
3. Never time the market. Do not wait for the market to fall further.
4. Do not be too greedy. Buy enough and not too much, make sure that those are the companies that you want to hold for a long time.
5. Sell only when you have found a better investment or when you are in need of money.
6. Reinvest the dividends so that your savings can grow much faster than inflation rate.

If you have insights, please share here.

Happy investing.

Cheers.

Disclaimer: Readers are advised to exercise their own discretion when it comes to investments. All investmets involves risks. The blogger shall in no event held liable for any loss or other damages.

The real meaning of undervalued property

There has been a big misunderstanding when it comes to the meaning of undervalued properties. I mentioned in my post on 5 September, http://investwithjac.blogspot.com/2011/09/jac-strikes-at-property-market-again.html , I have bought an investment property in East Coast. My friends and relatives were shocked that I actually bought a unit at around $1450 psf. They were askng, "Why did you buy such an expensive property? Why didn't you wait for the price to drop?"

Then I felt that they had actually misunderstood the meaning of undervalued properties, that I have mentioned in my book, Route to successful property investment in Singapore. Undervalued does not mean low price. The meaning to the word is "value below the real worth".

I would like to emphasise that investment should be timeless. There is no need to time the market. Just take Vibes@East Coast for example, I, too, have a personal valuation of the properties in that area. When I bought this unit, I know that this property can give me rental yield of between 5% to 8%. This was calculated using my own formula. It is not the same formula that real estate agents use. All factors were considered in a short span of time? No. In fact when I went home on that Friday, I went to the Internet to search for the location, using One Map. That was when I realised that it was a good property to invest in. The reasons that I bought this unit can be found in my earlier post. You can click on the link above to take a look.

However, I did not just snap up any of the remaining units. These units do not have good facings. Hence, I just thought, I will just get everything ready and strike when there is a chance to. To my surprise, the agent called to tell me about the re-released unit. That was when I made the decision in a short span of 10 minutes, and bought the unit.

What if there isn't such a case? Well.... I will just forgo this project. It's that simple. Forgo this one and look for the next undervalued one.

When you are looking for a property, have a personal valuation of each and every property that you are interested in. Go around and view showflats and for sale units. Out of the many houses viewed, there must a one or two that are selling below your expected price. Patience is the key to investment.Take your time, do not rush into just any property. Once you stumped upon a chance, open your warchest and strike.

Cheers and happy investing.

INV101 Buy business not stocks

Mr Market is behaving like post-Lehman crisis again. He has taken so many people for roller coaster rides for the past 2 months. Until now, there is no telling sign when this is going to stop. People who have been buying stocks, hoping to make quick bucks after selling them in the short term, were not able to make much profit. The reason behind it? The hefty commission that he/she had to pay. For simplicity sake, I will just put the total commission, for both buying and selling, to be a 1% of the purchase and sale price.

Retail investors a.k.a. the small investors like us lose out because we invest in small amounts. Let me illustrate my point with an example. 

Contra with Genting Singapore (GentingSP). (Price ranges $1.46 - $1.93 from 20 July 2011 till today)

In July 2011, a novice investor just learned how to contra in stock market. On 20 July, he decided to contra Genting Singapore, one of the top 10 active stocks in Singapore every day. He picked up 10000 shares of GentingSP at $1.78 and sold three working days later at $1.81. In order not to fork out $18,000 for the 10000 shares, he must sell within 3 days. On paper, he has made $300 at 3 cents apiece. His commission? About $180. He has made a net profit of $120. So this profit has made him more confident. On 26 July he bought another 10000 shares of GentingSP at $1.81 and sold them at $1.90 three days later. This time round his net profit is $714.50 (Commission: $185.50). He does this for the next two months.

I have created a table below as an illustration.

Date	Buy	Sell	Commission	Net Profit/Loss
20-Jul-2011	$1.78
25-Jul-2011		$1.81	$180.00	$120.00
26-Jul-2011	$1.81
29-Jul-2011		$1.90	$185.50	$714.50
01-Aug-2011	REST
05-Aug-2011	$1.76
08-Aug-2011		$1.70	$173.00	-$773.00
10-Aug-2011	$1.68
12-Aug-2011		$1.74	$171	$429
15-Aug-2011	$1.66
18-Aug-2011		$1.65	$165.50	-$265.50
22-Aug-2011	$1.48
25-Aug-2011		$1.55	$151.50	$548.50
26-Aug-2011	$1.56
29-Aug-2011		$1.58	$157	$43
30-Aug-2011	$1.60
01-Sep-2011		$1.70	$165	$835
02-Sep-2011	$1.63
07-Sep-2011		$1.60	$161.50	-$461.50
08-Sep-2011	$1.69
12-Sep-2011		$1.63	$166	-$766
		Grand Total	$1,676.00	$424.00

You can see that the total net profit for 2 months is only $424 while the commission is 4 times as much. All the profit that the investor had made has gone into the broker's pocket. 

As investors, we must remember this, 

It does not matter if you make a profit or make a loss, the commission is deducted anyway.

Many people will say that, "I can buy low and sell high." But do they know when is the low, or when is the high? Are they able to control their fear and greed?

That is why when we invest in stocks, we should see it as buying into the business of the company. If you think Genting Singapore is a good investment but the price of $1.62 cents is too high, then wait for it to drop to below $1.50. Patience is the master key to investment. Imagine you have bought 10000 shares at $1.45 and now Mr market has valued it at $1.62. Your shares have already increased 11.7% in value. 

Look for companies that have good businesses. Breadtalk, Cerebos, SPH, and Popular are some of the good stocks to look at. Save money to buy when these stocks have reached your BUY price.

The stocks that I own now, including their appreciation in price and dividends, has given me a good 15% returns every year. If I can do it, so can you. It just takes some time and effort to do the research on your own. 

Happy investing and cheers.

Disclaimer: This post is just an illustration. Readers are advised to invest wisely in their own discretion. This post should not be taken as an indication to buy or sell any stocks and shares in the stock market.

Jac strikes at the property market again!

About a month after buying a home for own stay, Jac strikes at another undervalued property in the East. Vibes@East Coast is a freehold property that has yet to be built, expected TOP date is 31 Dec 2015! That's like 4 years later!!! Anyway, TOP date should be around end 2013 to early 2014.

Well, since the last property cooling action in January 2011, buyers have to hold on to their newly bought properties for 4 years before selling, to avoid paying the hefty seller's stamp duty. It looks like a good time to buy new launches as they will need 3 to 4 years to build anyway.

Why is the unit that Jac bought was an undervalued one? These are the reasons:
1.   It is less than $600,000.
2.   It is freehold.
3.   It is just one floor below the top floor.
4.   It has 28 shops on the first floor.
5.   It has a number of restaurants serving good food nearby.
6.   It is within 1km from Tao Nan School and CHIJ Katong.
7.   It is about 1km from East Coast Park.
8.   It is within 1.5km from Parkway Parade.
9.   The living room, study and the bedroom is unblocked for up to 500m.
10.  The maintenance fee is only $180 per month. (The maintenance fee in Parc Bleu is $280.)

These are just some of the points that Jac, thinks the unit that he has bought is undervalued. It was a lucky opportunity that is not to be missed.

Jac's brought his wife and father-in-law to view some new showflats in Telok Kurau area. They enjoy doing it as a hobby. They viewed a unit at Parc Bleu, also a 4th storey unit, which is able to enjoy an unblocked view from the living room as well. The price? $618,000.

After viewing that, they just drove to Vibes@East Coast, just to take a look. When there, the 150 units apartment was left with less than 10 units. They were either in the second floor or facing another apartment. Hence, there were no 'good' units to buy.

Right on the next day, the agent who served the family, called to say that a unit was re-released as the buyer did not exercise the option due to bank's disapproval of the loan. Well, as Jac has already studied the floorplans and had done his homework on the surroundings, he already has in mind that this unit was one of the best units that can enjoy the unblocked view.

Immediately, he asked the agent to collect the cheque for the downpayment from his wife, as he was working. This unit was actually targeted by a few other agents' clients. They were lucky to have won the race and signed the option that night.

Buying this unit has saved Jac of about $20,000, compared to buying the Parc Bleu unit, and also able to get him a rental yield of at least 5% in the future. Whether the value of the project will rise in the future, there is no definite answer. Nobody will know if price will go up or go down.

It always pays very well to do your own homework, so that you can strike when the opportunity rises. Once you have that done, when opportunity knocks on the door, strike at it. You will never lose out and can only gain from it.

Have fun looking around for undervalued properties.

Cheers.

INV101 Buy or stockpile when the chance arises.

It has been a volatile month in August. Stock prices experienced wild roller coaster rides once again. Now, it has stablised at pre-US credit downgrade level. There will be bound to be some winners and some losers, but the overall winners are value investors.

Value investors took the opportunities at low prices and stockpile more shares of the companies that we have invested in. The returns on investment are high, compared to the banks' interest rates. Even a 5% gain in share price is reasonable. However, it is not the short term profit that we are looking at. We are looking at their long term value.

Even before the August wild ride, value investors have our personal valuation of companies. We have the money, that we continue to save each day. All we need is to wait for a very good chance to strike.

After the announcement of US credit downgrade, markets were switched to panic selling mode. Short term investors and speculations were busy selling their shares. Prices were depressed by about 15%. This percentage was actually the discount to value investors. We see it as buying valuable shares at a 15% discount.

In the world of investment, patience is the master key to making money. When times are good, we should continue to save more money from our salary and when noises create havoc in the stock market, we will strike with the money ready in hand. This is the way investment should be done.

Welcome to the investment world.

Cheers.

INV101 Dividend Yields

Many potential investors actually do not know how to calculate dividend yield. Some people just follow what is given by the analysts in all those research reports. In actual fact, dividend yield should be calculated according to the purchase price of shares that you bought with.

Take SPH for example. In 2010, SPH was trading between $3.43 to $4.07. The dividends given out was $0.27 in total. Hence, the dividend yield should be ranged from 6.63% to 7.87%. Dividend yield should be given as a range instead of a fixed number. At today's closing price of $3.63, the dividend yield is 7.44% Therefore, it is important to buy the shares at the right price so that we can get the highest yield possible. If you have bought the shares at beginning 2009 at $2.30, your dividend yield for 2010 should be calculated as 11.7%.

Let us find out how much returns will we get if we were to buy SPH shares in January 2009 at the price of $2.30. In December 2009, the total dividend for the year 2009 was $0.25 (yield - 10.9%). In December 2010, the total dividend for the year 2010 was $0.27 (yield - 11.7%). In May 2011, the dividend was $0.07. The total dividend earned for SPH shares, until now, is $0.59. That is already 25.7% earned, with respect to what you paid for in 2009. Using the closing price of $3.63 today, our shares would have earned another $1.33, a 57.8% increase in value.

If we were to sell the shares today at $3.63, the total earnings, including dividends, is $1.92. That is an investment returns of 83.5% for two years of investing. The growth for $2.30 is calculated to be 35.5% per annum compounded for 2 years.

If we had invested $4,600 in SPH in January 2009, the current value of the invested capital would have become $8,440 today. Not a bad investment, right? Of course, we are not going to sell such a wonderful company. Now that the market is in panic selling mode, maybe we should consider to save more money to stockpile SPH's shares?

Have fun investing, cheers!

INV101 Element of fear in investment

Every investment carries risks. How much risk appetite does an investot have? There are different answers.

The recent downgrade of U.S. credit rating had caused roller coaster rides to the stock prices around the world. Singapore stock market was affected as well.

Kindly answer this question:
How do you feel when the stock market went down due to the downgrading news?
a.  Scared. Afraid that I will lose every single cent invested.
b.  Give up on investment straight away.
c.  Just sit back and relax. Wait and see.
d.  Very happy. Time to open the warchest and strike at will.

An investor does not worry about noises that cause the stock market to plunge. An investor is indeed happy to see the chance to buy more of the companies' shares. Anyone who chooses a or b is actually a speculator. Choice c will not get you anywhere either.

Since we already have our personal valuation of the companies, then strike when the iron is hot. Stockpile! It does not matter if you stockpile 1000 shares or 100,000 shares, as long as you stockpile.

The opportunity to stockpile may have come and gone last week. If you have missed it, then wait for the next chance. If you have bought some shares last week, you have done a great job.

Happy investing.

Cheers.

U.S. Market dropped 5% and what does it mean?

U.S. Market dropped nearly 5% last night, causing Asian markets, including Singapore, in a huge sell off.

All I can say is, "Speculators worry, Investors rejoice!"

Real investors do not worry about the big drop in the market. We invest in the companys' businesses and not the emotion of Mr. Market.

Mr. Market represents the general public's, mainly speculators', fear or greed. This is where we apply this famous quote, "Be greedy when others are fearful."

For those who does not own any shares, it's a good time to own some quality stocks. For those who already have some wonderful companies', it's a good time to stockpile. However, we should not time our purchases. We can never predict Mr Market's mood. Once the share price drops by 10 to 20% below your personal valuation of the stocks, buy them. If it has not happened, then wait further.

A value investor, like myself, waits for good opportunities to buy more shares. We do not time our purchases nor do we sell in panic. As long as we know the value of the companies we invested in, we will know when to buy or sell the shares.

Disclaimer: This post is just my personal view. All investments contain risks. Readers are advised to exercise their own discretion when investing.

A tale from 2 properties.

For the past two weeks, I have been to two different property launches.
Skyline Residences and Thomson Grand.

I shall give a brief description of the two properties here.

Skyline Residences is a freehold project at Telok Blangah area.
Telok Blangah MRT Station (opening in October) is just 200m away. That's only a 2-3 minutes walk to the MRT station.
It has 24 storeys. Their 4th storey is already the height of 10th storey of nearby HDB flats.
Average price of a two bedroom unit = $1.6 million
Average size of a 2 bedroom unit = 829 sqft.

Thomson Grand is a 99-year leasehold project located opposite Pierce reservoir and Singapore Island Country Club. There are no MRT line currently but may have Sin Ming Station nearby under Thomson Line.
It has 20 storeys will all 33 cluster homes sold.
Average price of a two bedroom unit = $1.5 million
Average size of a 2 bedroom unit = 947 sqft.

Both projects have TOP set in 2015.

At the current price, both will not give you any good rental yield. A two bedroom unit is Telok Blangah area should fetch only about $3500 while a two bedroom unit in Thomson area should fetch about $2800. Who knows what will happen in 2015?

Which one is a better choice? Share your thoughts here.

Happy investing.
Cheers.