Update Personal Equity Portfolio

After the disposal of HAIO, there are some changes in the portfolio and hence I would like to update the portfolio according to today afternoon market price.

Disposal of HAIO

Today I decide to dispose off HAIO at a market price of RM4.44 for 3,500 units of shares. The reason I disposed off HAIO is because I would like to increase cash holding ratio for my portfolio.

The holding period of HAIO was roughly 16 months. After disposing HAIO, the holding period return of HAIO is around 66% as calculated below:-

= [( 3,500 units * RM4.44) / RM10,164] – 1 = 0.66 (66%)

Whereby the equivalent annualised rate of return is calculated as below:-

= [( 3,500 units * RM4.44) / RM10,164]^(16/12) – 1 = 0.47 (47%)

Nevertheless, I decide to retain 36 units of HAIO shares, because these quantity of shares is odd lot and they are difficult to sell. Furthermore I would like to keep these shares just for the purpose to receive HAIO’s annual report and a right to attend its AGM.

(Note: The uploaded picture seems not that clear. Click at the picture in order to enlarge the picture.)

The Power of Compounding Effect (1)

I always raise a question to my friend and ask for their opinion that if they had RM1,000 and invest this amount into a subject company which rewards them a return of 34% annually. Moreover, the 34% return that they earn from the company would be retained to further reinvest into the company for further business expansion. After 40 years, the investment value of the company will be how much? Some of my friends answered the investment could be around RM100,000, some even said it could be RM10,000,000.

The actual answer is far more than RM1 mil. Maybe we should use a calculator or mathematic formula to value the investment amount as stated below:-

Investment Amount After 40 Years = RM1,000 * (1+0.34)^40 = RM121,392,522.10

By investing RM1,000 for 40 years, we will be rewarded roughly 120,000 times of return! Put it into another way to say that RM10 will become RM120,000 after 40 years! This is how Warren Buffet becomes 1 of the most richest man in the world.

Warren Buffet acquired the holding company Berkshire Hathaway at an average share price of USD12 at year 1964 (till 1966) and grow the share price to a peak USD$150,000 at 2007 (around 41 years). So what is his annual compounded rate of return within this 41 years? Just use a mathematic formula to count then we should get:

Annual Compounded Rate of Return = {[USD150,000 / USD12]^(1/41)} – 1 = 25.87%

With a world class rate of return around 26%, Warren Buffet becomes a gozilionaire within 41 years. No wonder even Elbert Aeistain is quoted as saying "The most powerful force in the universe is compound interest."

I would like to further point out that compounding effect does not care much about how many the initial amount put in. Indeed, that is all it takes 2 basic elements, i.e. sustainability of the rate of return and time.

(To be continued)

Supermax’s AGM (2)

Frankly speaking, my holding of few thousand units of Supermax shares do not motivate me much to go such a long way from Ipoh to KL in order to attend the AGM. However, my bester friend, Kam Chyuan who is investing into Supermax heavily, was unable to attend the AMG at work day because he is now working at Singapore. So he strongly urged me to attend the AGM not only for the benefit of myself but for him as well. He promised to bring me to his hometown Tualang and will pay me the Tualang prawn as the compensation for me to attend the AGM…^_^

After a long preliminary story about the ‘unbelievable couple’ and my best friend, it is now the next story going more into the actual theme, the AGM. The meeting started at 10 a.m. The company had arranged around 200 seats, and I roughly counted that there were less than 100 people were attending the AGM, including around 10 people were from the press.

I further noticed the majority of the shareholders who attending the AGM were retiree. This situation further explained that the AGM that hold at week day or working day might greatly affect the eagerness of the shareholders to attend the AGM. From my point of view, this was a negative sign of corporate governance as the company might indirectly discourage its shareholders to attend the AGM in order to pass certain resolution without strong objection or queries from minority shareholders. I hope the company should further improve on this issue by arranging the AGM at weekend in order to show their integrity to minority shareholders.

So the Executive Chairman cum Group Managing Director (“MD”), Dato’ Seri Stanley Thai Kim Sim commenced his speech in the AGM. He first to brief us the latest financial progress of the company base on the recent quarterly financial result. Actually what he briefed could be found from the quarterly financial result announcement that posted at the Bursa Malaysia’s website last month. So he mentioned that the company is showing a positive sign of further improving its financial fundamental although the business environment becoming more challenging now due to the financial crisis. He pointed out the following good sign base on the latest quarterly result:-

- Revenue increased by 0.5% (Year-on-Year basis, “YOY”);

- Operating Expenses reduced by 1.9% (YOY);

- EBITDA increased by 24.5% (YOY);

- Net Profit before tax increased by 43.4% (YOY);

- Cash flow increased from RM20 mil to RM70 mil; and

- Gearing at 0.75 times;

The abovementioned points are good sign that indicating the company is improving except the increase of the cash flow. The improvement of the cash flow is just merely reflected the company decided to cut the spending on the working capital and capital asset investment (“CAPEX”). The company had previously announced that it will cut its CAPEX spending at this year in order to reserve cash during the financial crisis, but I view this more like the company is going to repay the bond which is going to mature in this year end.

When the MD answered 1 of the shareholders inquire about the dividend policy, his reply further proved my view that the increasing cash flow is to service the bond repayable. Because the MD mentioned though there is an increase of the company’s profit, he will only consider to increase the dividend payout ratio or will pay a special dividend depends on the financial year end result. It is a typical reaction to say no if someone reply to you that he will reconsider lah or he will make certain action depends on something lah.

With the increase cash flow but the company has no intention to pay more dividend or spend more on CAPEX, it leaves only 2 options either to put the cash at bank to earn fixed-deposit rate or either to repay the bond or term loans to save the interest costs.

Actually I was quite disappointed that the company will not pay out more dividend since its profit is increasing steadily. Without having high dividend payout ratio, its P/E will be stagnant so do its share price. Maybe I should think it positively that after the company settles most of the debt, it will save a lot of interest cost. Just look at the company’s last year interest cost that stand as high as RM20 mil, then this gives me a clue that it could be a wise move to repay the debt with the extra cash flow. I hope the company could further reward its shareholders with more dividends after settling the bond and term loans.

The next point the MD presented to us was his forecast on the next quarterly performance. He informed that the next quarter result will be quite positive due to the A(H1N1) flu virus has now spread through worldwide, so glove sales will be increase due to the demand from the health industries. What a dismal situation that when everyone becomes sick and nervous because of the said virus, the company is making more money.

Moreover, the MD further mentioned that in order to capture more value in the value chain of the glove industries, it is the distribution business the most profit making segment. Thus he has an intention extend the business into the downstream business of the value chain by involving into the distribution of the glove.

The company recently setup a new distribution center at Brazil and its sales profit is increasing exponentially. It is because the Brazilian government has imposed a new regulation with a higher hygiene inspection standard this year and thus a lot of products from the glove players in Brazil have been detained by the government. In view of this, there is a great shortage of supply in the Brazilian glove market and Supermax is able to penetrate well into the market with its new setup distribution center. The MD also further predicted that the company could make a windfall profit during the next few quarters before the Brazilian glove market is back to its supply and demand equilibrium.

I strongly agree to the MD’s view on the value chain that distribution is 1 of the most profit making sector, its profit could be even surpass the profitability from the manufacturing segment itself. By manufacturing its own brand products and marketing these products by its own distribution line rather through 3rd party distributor, the company is able to stand at a better price bargaining position and thus capture most of the value created in the value chain. So the MD was quite optimistic to foresee the contribution of the distribution segment to the company’s profit will increase exponentially. Indeed, the profit distribution profit was growing at a CAGR of 25% to 30%.

The next topic in the AGM was the merger of Seal Polymer (“S.Poly”) and the acquisition of APL Industries (“APLI”). The MD was first talked about the merger of S.Poly seems not integrating very well into the company. It has several production lines not fully utilised efficiently. So it becomes 1 of the reasons that the company not to have CAPEX spending this year, because the company would like to upgrade and improve the manufacturing lines from S.Poly in order to fully utilised those manufacturing lines (target 90% utilisation rate) before the company further expanding.

Whereby the acquisition of 14.09% of APLI’s shares, the MD admitted the acquisition was a disaster and he decided to impair the investment of 14.09% of APLI’s shares which cost a hefty RM16 mil (APLI was delisted by Bursa Malaysia and now on its way of bankruptcy. I believe Supermax cannot claim back a sen after APLI’s liquidation because APLI has so much default debt need to pay to the senior creditors first). By impairing the holding of APLI, the company will no longer absorb losses from APLI, so Supermax’s bottom line will be back onto normal track. I wish this failed acquisition will give him a lesson that a company should be more conservative depends on its own organic growth rather than base on merger and acquisition.

Actually before involving into the merger of S.Poly and the acquisition of APLI, Supermax was doing fine by running its Own Brand Manufacturing ("OBM") policy well with a high net profit margin at around 14%. However, after buying the said merger and acquisition with a high borrowing, its net profit margin drop gradually from around 14% to 8% lowest at last financial year, which is even worse than those profit margin of some Original Equipment Manufacturing ("OEM") companies.

This is the reason that haunts me not to invest too much into the company. So the MD should lead the company to the OBM policy by focusing back onto its own brand name products in order to differentiate its products from other OEM such as Top Glove. He should know there is a Chinese saying that “there are no 2 tigers can crouch in 1 mountain (一山不能藏二虎)”. 

Last but not least, the 'unbelievable couple did not come out to voice their concern regarding the refreshment. They might already left the AGM as they could find it is very boring if they only care about door gift rather than the company business. Finally, the AGM was ended at around 11.45 a.m., last for 1 hour and 45 minutes.

Supermax’s AGM (1)

This morning I went to attend the Shareholder Annual General Meeting (“AGM”) of Supermax Corporation Berhad (“Supermax”) at the KL Hotel Equatorial. It was my 1^st time attending the AGM of Supermax. I arrived at the meeting ballroom at 9.00 a.m. and registered my attendance to the company secretary. After the registration, I noticed the company had prepared food and drink for shareholders. So I took some food and sat at the corner of the corridor that outside the ballroom.

Later, a Chinese couple, who were at their 40s, was trying to “squeeze” into the table that I was sitting at, although the table is too small for more than 2 persons. I had no problem of sharing table with others as I was going to finish my food soon, however something made me felt quite amusing and decide to stay on to observe the couple.

It was because the couple had taken so many plate of foods, at least 6 to 7 plates. They then took out bundle of used ice cream boxes from their bags and put the food inside those boxes. OMG, they “da bao” the food…>_<…The husband some more blaming his wife that: ”Aiya, it is getting more people and difficult to take more food now, I told you already that you should took more plates just now. And there is no food serving after the AGM! I will complain to the company during the meeting and told them next time the AGM should serve us the shareholders with food before and after the meeting.”

I was wondering whether this couple was pretending to be shareholders in order to cheat for food (in cantonese it is “nga sik”)! But I was wrong because I notice they had shareholder sticker and finally I come to prove myself that I had encountered the typical minority shareholders who only care about door gift and food. Maybe this couple only has purchased 1 lot of Supermax (100 units) shares with cost of RM165 (=100 * RM1.65). So they ensure they took back the amount of food and door gift which could worth more than RM165! I further noticed they took a lot of door gifts of which suppose each shareholder can entitle for 1 box only, it could be probably they request more for it.

I believe they are not only doing this kind of act at the Supermax’s AGM, they could have bought the smallest lot they could buy from many other companies and attending those companies’ AGM just for food and door gift! And they can even repeat this every year! Wow, it was an “unbelievable” couple I ever met and just wanna write this out because it was so funny…^_^

(Note: The door gift of Supermax was a box of rubber glove.)

(To be continued)

Is stock market a voting or weighing machine?

As I read the book “The Intelligent Investor”, I noticed the author of the book, the legendary father of Value Investing Benjamin Graham had once said in the book: “In the short run, the market is a voting machine, but in the long term it is a weighing machine”.

In the short run, Graham said stocks were a “voting machine” driven by investor sentiment. So the theory of supply and demand will function as “voting machine”. Our basic knowledge on economics tells us that the price of goods and services moves when supply and demand are not in equilibrium. Below are few examples of stating how the law of supply and demand will work:-

1) The higher the price, the higher the supply (positive relationship in between price and supply);

2) The higher the price, the lower the demand (inverse relationship in between price and demand);

3) The price is going up due to more demand than supply; and

4) The price is going down due to more supply than demand.

For stocks in the short-run, demand of stocks is affected by transaction cost, liquidity, level of interest rates and the perception towards the stock’s price movement trend, and most of these factors are beyond the control of the retail investors. Moreover, rumours that circulate in the market and the psyche of investors will cause the demand varied more drastically. Whereby, supply of stocks is largely driven by the same dynamics but with the reverse effect. 

However there is one difference in between demand and supply. Demand for a stock can be infinite, but short-run supply is limited by the number of shares in issue. If the majority number of shares in issue is being hold by company founders, substantial shareholders, institutional investors and/or long term investors, it will even scale up the scarcity of short term supply. Thus, given the such imbalance, it should not be too surprised to see stock prices can go sky limit up within a day, or appreciate few hundred percent in a matter of days, despite the lack of any change in the fundamentals of company.

Players of the short term investing comprise mainly two groups – traders and speculators. A trading strategy has worked for some groups, e.g. arbitrageurs, day traders and hedge funds, but that is only in more developed markets. Even then, returns are highly volatile, and the risks taken could be very high. Speculators on the other hand, seem to be in the stock market primarily derived from the chase, not much different in another way of gambling. The reason for buying into an over-priced stock is not important, as there seems only be able to be justified for an assumption of a greater fool out there who will buy it from him at an even higher price.

On the other hand, in the long-run, stocks were a “weighing machine” and stock prices will be driven by the potential of the underlying business of the stock to generate a value higher than what it costs the investor to purchase it. There are list of famous proponents of long term investing, such as Benjamin Graham, Warren Buffet, Peter Lynch, John Templeton. They share the common investing philosophy that short term stock price movements are unpredictable because of the large number of factors that come into play in the market. Taking a short term approach to investing is an exercise in futility due to great price fluctuation, as you could end up buying high and selling low. But business conditions and trends should hold steadier and be easier to identify.

Therefore there are few good points of taking a longer term approach, as investors will have the luxury of being able to ignore short term price fluctuations and investment cycles, minimise transaction costs and enjoy the benefits of compound returns. According to this school of thought, the only thing that matters is the company’s ability to generate earnings and dividend policy. As Benjamin Graham advised, "Investing in a stock market is most intelligent when it is most business-like". To advocate the long term approach, it is most appropriate to think of the investment process as a means of buying into the underlying business. As we should rather say we are “shareowners” instead of “shareholders”, or we would treating buying into stocks as serious term as “investing” (投资股票) rather than “playing stocks” (玩股票) or “goreng saham” (炒股票).

Which way would you like to go on becoming a “voting machine” or “weighing machine”? Make up your own decision before you decide to invest.

一本改变我对投资看法的书 （A book that changed my view upon investment completely)

有时候，一句话／一堂课／一番说教／一个教训/一部电影/一本书都有可能改变一个人的想法甚至一生人要走的路。我就曾读了一本我好友向我推荐的书，而改变了我对投资的看法。

以下我列出了部分我曾经阅读过的投资和理财书，刚才我所说的那本对我起了很大影响的书就是以下名单的其中一本:-

1.证券分析 (Security Analysis) - [Benjamin Graham & David Dodd]

2.投资圣经: 巴菲特的真实故事 - [爱德华李诗林]

3.聪明的投资者 (Intelligence Investor) - [Benjamin Graham]

4.巴菲特至股东的信 (Letters to the shareholders: extracted from the Berkshaire Hathaway's annual reports)

5.做个聪明的投资人 (The Intelligent Investor) - [麦青远]

6.理财圣经 - [黄培源]

7.富爸爸穷爸爸 (Rich Dad And Poor Dad) - [Rober Kiyosaki]

8.怎样选择成长股 (Common Stock and Uncommon Profit) - [Philip Fisher]

9.邻家的百万富翁 (Millionaire Next Door) - [Thomas J. Stanley & William D. Danko]

10.漫步华尔街 (A Random Walk Down Wall Street) - [Burton G. Malkiel]

11.滚雪球：沃伦·巴菲特和他的财富人生 (The Snowball: Warren Buffet And The Business Life) - [Alice Schroeder]

12.思考与财富 (Think And Grow Rich) - [Napoleon Hill]

以上的书，有几本我是百看不厌的，有些却看过一次就被丢到一旁了。那你们曾看过以上那几本书呢？

从Cari论坛转载的文章

我还未开这个部落客之前曾在Cari的中文论坛开了个专区，写了些有关投资的心得和想法。我当时写的东西到现在都一成不变的贯彻落实中，所以我想将我认为之前在Cari写的比价有意思的文章都转载来此向大家分享。不过我可能将对之前在Cari写过的文章做一些小小的更改，以更符合此部落客的主题。

Personal Equity Portfolio

Currently I’m managing my personal equity portfolio that consists of 10 stocks (including an open-ended unit trust fund). All of the stocks are traded at Bursa Malaysia. 

The objective of this portfolio is to grow the invested amount via the power of compounding effect in the long run and I will pursue ‘Value Investing’ philosophy to manage this portfolio. Value Investing meaning that buying a stock at market price a discount to its intrinsic value. My definition of long run is referring to beyond 5 years. So it could say that my investing style is base on Fundamental Analysis.

This portfolio was started since January of 2007 and I am still accumulating shares into this portfolio without selling any unit of share since inception. Out of the 10 investments from the portfolio, I invest more heavily into PARKSON, ICAP, HAIO, RCECAP and TONGHER of which I intend to hold for the next 5 to 10 years unless the fundamental of the said stocks has changed dramatically. Of course, there is another reason that I liquidate certain stocks if because their market price are much higher than their underlying value. Take note that a share price increasing drastically does not indicate it is really a rally. Indeed, it could be merely a correction that to reflect the intrinsic value of the share.

I will write analysis reports regarding the shares that I have heavily invested and post it at this blog.

The Matthew Effect

There is a parable in the biblical Gospel of Matthew at chapter 13:12: “For whosoever has, to him shall be given, and he shall have more abundance: but whosoever has not, from him shall be taken away even that he has.” (Translate in Mandarin : “凡 有 的 ， 还 要 加 给 他 ， 叫 他 有 馀 ； 凡 没 有 的 ， 连 他 所 有 的 ， 也 要 夺 去 。”). It was a sociologist, Robert King Merton who identified the phenomenon of “The rich get richer and the poor get poorer” and linked it with the abovementioned phrase.

When we consider now basing on the past, we will find out that God seems has permeated this effect every corner of the societies. It is getting even more prominent at the wealth distribution process. How could this happen? It is because either we are poor or rich, we need to fulfill four basic necessities, i.e. clothing, food, shelter and transportation. For most of the people at the middle class like us, these 4 basic necessities could have occupied most of our salaries, sometimes even up to 80% to 90%. Even though our salary will increase after certain period, but inflation and a list of expenses such as insurance, house and car mortgage payment and maintenance fees will still plague us along our daily life. We are just stuck in the rat race.

According to the book “The Millionaire Next Door” that I read few years ago, rich men only spend 1% to 5% at the necessities, and will have 95% to 99% of disposal income for either spending on luxury items and investing. By getting the right investment, the richer will be growing their wealth exponentially. Moreover, the richer will be able to access to greater credit to leverage their business and investment. In fact, what the poorer put into the bank are being utilised by the richer to grow their wealth.

I want to emphasise that savings and the power of compounding effect will be the ultimate way of breaking the circle of poverty. Savings will allow us to accumulate capital of which subsequently we need to use this capital to work our way out of the rat race. I will talk more about compounding effect in the next few threads.

1st Thread

Finally I created my own blog and it will become a platform that allows me to share and inter exchange experience with friends. I will share my own view from many kind of aspects that I could encounter during daily life.

The theme of this blog is named as "All things in Mathematical, Abstract And Art", because I like math, maybe it should be more appropriate to say that I am sensitive to numbers. So I will write about Finance/Investment, accounting, economic and statistic.

However, by knowing into numbers do not provide a complete view. Just like engage in investing, it is not just plugging financial data into template formulae in order to get us an accurate valuation, it is also more like an art that to use our imagination, creativity thinking and instinct to search for a good investment. So know how to think abstractly or using gut feeling (experience?) could avoid us from solely depending on the numbers which could lead us end up being cheated by the numbers (many financial accounting scandal happened due to the investors are digging too much into numbers).

By the way, this blog will be updated either in Mandarin or English (indeed my Mandarin standard is better than English, so I might write more in Mandarin at the next few threads liao...>_<).

And the frequency of updating this blog depends on how the mood striking me then, might be in daily, weekly, month or yearly. Who knows?