Thursday, June 21, 2018

It’s That Time of the Year Again

The first half of 2018 is coming to a close, and it is that time of the year again; yes, Bob will be rebalancing on 29 June 2018, the last trading day before the start of the second half, with an additional injection of $5,000.

I had mentioned that Bob may consider investing in some individual company securities, but had yet identified any to invest in, so he will be going along with his original ETF strategy. The $5,000, plus any dividends collected, will be split among the asset classes.

So watch out for Bob’s portfolio status here in July!

Saturday, June 9, 2018

Light Reads On Understanding Financial Statements

In my ebook The Bedokian Portfolio, I did not cover much on financial statements except for a brief description of the income statement, the balance sheet and the cash flow statement1. Short of reading up accounting and financial textbooks, it is not easy to explain the nooks and crannies of these statements in a simplistic form.

Fortunately, I have identified a couple of books that are light for reading (and light for your brain, too) in understanding some of, if not almost, the whole gist of things. Each of these books could be read over a lazy weekend and after reading them, I believe they will provide some form of enlightenment in understanding the financial statements.

Warren Buffett and The Interpretation of Financial Statements (ISBN 978-1-84983-319-6)

See book cover here.

Co-authored by Mary Buffett and David Clark, their aim is to provide “a straightforward and easy-to-understand book that would teach investors how to read a company’s financial statement”2. It also emphasizes on the search for companies with a durable competitive advantage, something that Warren Buffett, considered one of the greatest value investors of our time, would look for.

Buffett (Mary) and Clark introduced each line item in the financial statements in bite-sized chapters, and will disclose Warren Buffett’s strategies and viewpoints in some of them. 

Buy Low, Sell High, The Simplicity of Business Finance (ISBN 978-0-9969433-7-6)

See book cover here.

Written by Dr. Philip Young, a consultant and former MBA professor, this book is originally meant for people with non-financial background to understand business finance better. However, this book is suitable for investors as well, as he has stated, “understanding business finance is a critical part of being an educated investor”3, something which I agree wholeheartedly.

Young explained the financial statements in a simple manner, using examples and figures. He also touched on some financial ratios and the time value of money. To top it off, at the end of each chapter he gave diagnostic questions as a form of learning check.

I hope the above would give you a jump-start in knowing and understanding financial statements more. For the already trained, take them as a light refresher read.

1 – The Bedokian Portfolio, p86

2 – Buffett, Mary & Clark, David. Warren Buffett and The Interpretation of Financial Statements (2011). Simon and Schuster U.K. pxvii

3 – Young, Philip. Buy Low, Sell High, The Simplicity of Business Finance (2017). LID Publishing. p3

Friday, June 1, 2018

Physical Property in The Bedokian Portfolio?

I had mentioned about property briefly in my ebook1, which I stated that it should not be in The Bedokian Portfolio due to its huge capital outlay. One of my acquaintances suggested that I relook into this. Let us look at physical property as an asset class.

Real and Physical Asset

Unlike equities and bonds, properties are real and physical assets, meaning you can see it and touch it. The main argument for properties over the other financial instruments is that it will never go down to zero value (end-of-lease assumptions aside). Even if a house is demolished, the land that it once sat on is still worth something.

Passive Income from Rental

The main income stream generated from an investment property is rental. Be it a residential or commercial property, there will be people who would prefer to rent rather than to outright buy it for their stay or business needs.

Capital Appreciation

Like equities, properties benefit from capital appreciation, in which their values may rise with time. You may have heard of properties appreciating many times more than its original value over the course of years, beating inflation along the way. And to top it all off, the prospect of an enbloc would make a property owner potentially rich.

Sounds great? It is. However, for The Bedokian Portfolio, I would still not recommend properties to be inside. Here are the reasons:

Longer Time To Buy or Sell

Unlike REITs, where you could just buy or sell it off with a touch of a button through the financial market, for a physical property it takes weeks, months or even years to purchase or sell it. When a property is transacted, it will have to go through a conveyance process that may last for weeks, not to mention some time used for meeting the agents, lawyers and the other transacting party.

Cashflow Risk

When the rental market is down, there might be a chance where your property is not rented out, and cashflow is affected. If the mortgage loan payment is dependent on the rental income, you may have to dig into your other funds or investments to cover. Even if it is rented out in a down market, the rental may not cover the loan payment fully.

Lopsided Effect on The Bedokian Portfolio

The Bedokian Portfolio is modelled as a liquid, income generating and non-leveraged portfolio. By introducing physical property into The Bedokian Portfolio, it will create a lopsided effect in which the income stream could be disrupted to deal with the cashflow risk as described in the previous paragraph. Also, it is impractical and pound-foolish to conduct valuation on physical property just to get the value for rebalancing purposes.

So does that mean physical property is not a suitable investment?

Not really. Just take it out of The Bedokian Portfolio and treat it separately. In fact, physical property, other investments that are not suitable for The Bedokian Portfolio, and The Bedokian Portfolio itself, could be combined together to form the “portfolio multiverse”, a concept which I am working on at the moment.

1 – The Bedokian Portfolio p13

Friday, May 25, 2018

All About Price: Introduction & Valuation of Value

In our everyday lives, there is one attribute that you will see, hear, use, ponder and gawk about most of the time. Yes, that attribute is price. Whether you are comparing on the same item across different places, different items in the same place, or different items across different places, the notion of price will always be there.

Zooming into the financial markets, the price of the financial instruments will be the first thing you will encounter; the bid/ask figures on your trading platform, the ticker tape shown on most business news channels, etc. There is no way you could invest or trade without ever looking at the price first.

Throughout this intermittent series about price, we shall look into its concept and context, and how it affects us in the world of investing and trading in terms of perceptions, decisions and results.

First up we will talk about the valuation of value.

Price vs. Value

“Price is what you pay. Value is what you get.” – Warren Buffett, 2008 Letter to Berkshire Hathaway shareholders.

This saying made by the ‘Oracle of Omaha’ is often quoted in most investing communities, particularly value investors. In gist, the share price of a company does not necessarily reflect its underlying value. Price and value will fluctuate over time, and along the way the price will go above, below or remain the same with the corresponding value. Value investors would love to get their company shares when the price goes below the value, as they are viewed as a discount, ceteris paribus.

Valuation Methods

The intrinsic value is considered to be the widely accepted value of a company in most investment literature, and it is calculated using the discounted cash flow (DCF) method (read up from Investopedia here). However, others use a variety of valuation parameters, such as book value or net asset value (NAV), net current asset value (NCAV) (read up from Investopedia here), etc. Furthermore, the investors may use one, some or all of the valuation methods to come out with their own aggregated value.

So what does this mean? We would have a whole range of values popping up by different value investors using various valuation methods on the same company at a given point of time. In other words, a company could have many values, depending on how it was looked at.

For example, Company A’s current share price is at $1.00. Investor X valued the company at $1.20, so Company A is viewed as a bargain. On the other hand, Investor Y used another valuation method and felt that Company A is worth only $0.80, thus Company A is expensive.

And The Point Is?

While the quote by Buffett holds true, value is still subjective depending on how the investors arrive at their numbers. The myriad of price points generated by this range of derived values, coupled with other participants that do not use any valuation method at all, partially provides the liquidity of the buying and selling in the financial markets.

On another note, in my ebook, I used NAV and Price-to-Earnings (P/E) ratio valuation as part of my selection criteria, but you could also use other methods as you deem fit. Valuation is just one part of fundamental analysis, and there are other criteria and requirements to think about when selecting what to buy or sell.

Sunday, May 13, 2018

An Intervention and Some Lessons Learnt

While on a weekend getaway a couple of years ago, I received a message from a friend, whom I shall name “H”. H was a relatively new investor and wanted to seek my opinion on a blue chip company whose share price had fell drastically. From H’s entry price, the fall was about 40%, and H was worried about holding it.

As I did not bring my laptop or tablet along, I had to use my smartphone (and the hotel’s free Wi-Fi) to do some rudimentary research on this company. After a few rounds of reading from a small screen, the factors that contributed to the fall was due to sectorial (namely oil) and customer risks. Yet despite these setbacks, fundamentally wise the company still looked healthy, and some parameters looked promising, especially on the NAV and dividend yield.

Usually I do not do “what-to-dos” on other people’s investments, but this incident was one of the few that I came in, noting H’s desperation. I texted back H and recommended to buy up the same number of shares that H had at that fallen price, thus making an averaging down move. Either way, H could buy up the shares on the cheap, or alternatively H could just sell them off when it neared or reached the average price, thus minimizing the loss.

I did not follow up until some two months later, when the shares did reach near the average price. I asked H about the status of the shares. To my surprise, H told me the shares were sold off just a few days after my recommendation, overwhelmed by fear and panic. And as expected, H regretted the sell decision back then.

The above true story provided some interesting lessons for H, and I shall share with you what they are.

Lesson 1 – Do Not Panic

It is natural to feel panicky when your investment securities had gone south. After all, this behaviour is associated with the term “loss aversion” (coined by renowned psychologists Daniel Kahneman and the late Amos Tversky), in which the impact of a loss of an amount is felt greater than a gain of the same amount. While nobody likes losses, the key thing is to remain calm and detached from emotions. Gains and losses are part and parcel in the investment journey.

Lesson 2 – The Loss Is Not Realised Yet

While some of us will go ga-ga with the loss of capital, as long as it is not cashed out, it is still not realised yet. Unrealised losses in your portfolio are deemed as paper losses, so do not be too uptight about how much you MIGHT lose. 

Lesson 3 – If The Fundamentals Are Healthy, Why Sell

If the share price suddenly took a nosedive, it is logical to find out what was going on with the company. Most of the time, some bad news or some poor financial numbers are the causes of the downward heading, and these must come to your attention. After analysis, if you conclude these events are non-threatening or having a short-term only impact, then it is safe to keep the shares.

Lesson 4 – View Them As A Sale

If a fundamentally sound company’s share prices go down, what would be the next step? Buy more, of course! The valuations and the yield would be seen as a bargain, and you could deploy cash from your Bedokian Portfolio or excess spillover from your emergency fund to buy them.

Remember not to have a knee-jerk reaction when things do not go your way. Keep calm and adopt different perspectives to the situation.

Sunday, April 22, 2018

Do Not Underestimate The Power of Dividends

One of the underlying principles of The Bedokian Portfolio is in dividends (with bond coupons and bank interests included), which is why the tag line for it is “passive income through dividend and index investing”.  Dividends serve as the compounding effect in the early part of portfolio building, and then later as passive income when one is ready to retire.

On a shorter term, dividends can magnify your gains and mitigate your losses. Here’s how.

You May Be Earning More Than You Think

Take for instance the SPDR STI ETF, one of the ETFs that track the Straits Times Index, which is considered to be the proxy for the local equity market. If you had bought 10,000 shares of the ETF on 4 Jan 2010 (the first business day of 2010) at $2.971, and the price of it on 20 Apr 2018 was at $3.572, you would have made ($3.57 x 10,000) – ($2.97 x 10,000) = $6,000.

However, if you factor in the dividend component for that same period, and assuming that your number of shares remains at 10,000 throughout, your dividend amount would be $7,5203. Therefore if you realise your gains today, you would have made about 45% of your initial investment made eight years ago.

Let us use the ABF Singapore Bond Fund, which is deemed as the de facto local bond ETF used by many investors, as another example. Using the same dates and number of shares as per the SPDR STI ETF example above, you would have only made ($1.12 x 10,000) – ($1.10 x 10,000) = $200, a paltry sum4. But, if you include its distributions, you would gain $1,6485, still substantially more than the capital gain. 

With dividends factored in, you may be earning more than you think.

You May Be Losing Less Than You Think

Returns = Capital gains/loss + income.

This is the formula that we know for returns. The income component would be the dividends. So, in the event of a capital loss, we could still get positive returns if the income component is larger than the loss. Also, in the event of negative returns, the positive income part could help mitigate the overall loss.

Now brings the part of the terms realised and unrealised gains/losses. Realised means that the gains/losses are materialised and the investment concerned has been transacted for the monetary value. Unrealised means that the gain/loss exist on paper value and this value could change from a gain to a loss or vice versa depending on the price of the investment.

Back to the returns equation, as long as the investment is not sold off, capital gain/loss is unrealised, but the income component is always realised, since the dividends/coupons/interest earned is already in your pocket. 

So, in the event of overall negative returns, you may be losing less than you think.

1, 2 – Yahoo Finance. SPDR STI ETF. 22 Apr 2018). Closing price of the day is used.

3 – State Street Global Advisors SPDR. SPDR Straits Times Index ETF (ES3). Dividend Information. 22 Apr 2018). Dividend payouts between 2 Feb 2010 and 20 Feb 2018 are used.

4 – Yahoo Finance. ABF Singapore Bond Index Fund. 22 Apr 2018). Closing price of the day is used.

5 – ABF Spore Bond Index Fund ETF (A35). 22 Apr 2018). Dividend payouts between 15 Oct 2010 and 15 Jan 2018 are used.

Friday, April 20, 2018

Bedokian Portfolio In Graphics

A graphical look on some of the important points mentioned in The Bedokian Portfolio ebook.

Diversification Levels

Bedokian Portfolio Allocation

Fundamental Analysis Levels