Watchlist Updated

I have added a new company to my watchlist. You may view it by clicking on the right sidebar link.

Sunshine Holdings (Y34.SG) is currently priced at SGD 0.170 and I have calculated its fair value to be SGD 0.550. The company is principally engaged in the development of residential and commercial properties for both retail and office developments in selected cities in Henan Province, China. The company sells all the residential units and most of the commercial units, as well as provide property management services for its completed properties. It also leases out some of its commercial properties to retailers and companies.

Please be reminded that the companies listed on my watchlist are intended for long-term investing, so please do not expect instant gratification on the prices.

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Think Like Warren Buffett

I chanced upon a good article from Glenn Curtis on how Warren Buffett thinks. Hopefully readers can change their mindsets and think like the greatest investor to improve their stock selections.

Following are excerpts by Glenn Curtis:

Many years back, Robert G. Hagstrom wrote a book about the legendary investor Warren Buffett, entitled "The Warren Buffett Portfolio". This book offers the reader valuable insight into how Buffett actually thinks about investments. In other words, the book delves into the psychological mindset that has made Buffett so fabulously wealthy.

1. Think of Stocks as a Business
Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors, which might help prevent investors from becoming too emotional over a given position but it doesn't necessarily allow them to make the best possible investment decisions.

2. Increase the Size of Your Investment
While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

3. Reduce Portfolio Turnover
Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett this trader is actually hampering his or her investment returns. That's because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission dollars that must be paid in a given year.

4. Develop Alternative Benchmarks
While stock prices may be the ultimate barometer of the success or failure of a given investment choice, Buffett does not focus on this metric. Instead, he analyzes and pores over the underlying economics of a given business or group of businesses. If a company is doing what it takes to grow itself on a profitable basis, then the share price will ultimately take care of itself.

5. Learn to Think in Probabilities
Bridge is a card game in which the most successful players are able to judge mathematical probabilities to beat their opponents. Perhaps not surprisingly, Buffett loves and actively plays the game, and he takes the strategies beyond the game into the investing world.

Buffett suggests that investors focus on the economics of the companies they own (in other words the underlying businesses), and then try to weigh the probability that certain events will or will not transpire, much like a Bridge player checking the probabilities of his opponents' hands. He adds that by focusing on the economic aspect of the equation and not the stock price, an investor will be more accurate in his or her ability to judge probability.

6. Recognize the Psychological Aspects of Investing
Very simply, this means that individuals must understand that there is a psychological mindset that the successful investor tends to have. More specifically, the successful investor will focus on probabilities and economic issues and let decisions be ruled by rational, as opposed to emotional, thinking.

More than anything, investors' own emotions can be their worst enemy. Buffett contends that the key to overcoming emotions is being able to "retain your belief in the real fundamentals of the business and to not get too concerned about the stock market."

7. Ignore Market Forecasts
There is an old saying that the Dow "climbs a wall of worry". In other words, in spite of the negativity in the marketplace, and those who perpetually contend that a recession is "just around the corner", the markets have fared quite well over time. Therefore, doomsayers should be ignored.

On the other side of the coin, there are just as many eternal optimists who argue that the stock market is headed perpetually higher. These should be ignored as well.

In all this confusion, Buffett suggests that investors should focus their efforts of isolating and investing in shares that are not currently being accurately valued by the market. The logic here is that as the stock market begins to realize the company's intrinsic value (through higher prices and greater demand), the investor will stand to make a lot of money.

8. Wait for the Fat Pitch
Hagstrom's book uses the model of legendary baseball player Ted Williams as an example of a wise investor. Williams would wait for a specific pitch (in an area of the plate where he knew he had a high probability of making contact with the ball) before swinging. It is said that this discipline enabled Williams to have a higher lifetime batting average than the average player.

Buffett, in the same way, suggests that all investors act as if they owned a lifetime decision card with only 20 investment choice punches in it. The logic is that this should prevent them from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.

Believe Your Own Eyes

The Singapore market has been trending down since the start of this year. When you switch on your machine these days, more often than not, you will see a sea of red numbers. Companies are selling at cheaper prices day after day, but how cheap is considered cheap? And when do we know if the prices have bottomed?

Honestly, nobody knows when the prices have bottomed, so do not waste your time trying to locate the lowest price. Time will be better spent to look at the fundamentals of the companies, instead of looking at the daily price fluctuations. Till date, many people around me are not vested in the market yet, but the replies from them are always 'I will invest only after the market crashed!'. What puzzles me is that even after the market crashed, how do they know which company to invest in? There are 700+ companies listed in Singapore, so is it really so easy to reap the returns by throwing your money into any company? Some of you might rebuff that we can just invest in blue-chips like DBS, Singtel, etc. when the market crashes. You are right that eventually these blue chips will do fine when the market recovers. But again, why do you want to waste such a golden opportunity of gaining multi-folds (as opposed to a few folds) during a market recovery? Time waits for nobody, so please be prepared to grab the opportunity when it comes knocking.

The stock market is a human game. Different individuals react to the market differently. It does not matter the initial capital of the investment. I started off my investing journey with a mere SGD$ 1,000. The amount of the initial capital is not the key; what is precious is the learning process, the discovery of your investing traits as the years go by. You can only know more about your inner character when you are vested in the market, and the fine-tuning along the way will make you a better investor. Investing is a life-long education, so I strongly urge everybody to start investing early.

So in turbulent times like these, who can we turn to? For those who have prepared themselves well, this will be an opportunity for them. But for those who have just started investing, worries start settling in their minds. Honestly, nobody can predict if the market will go lower or spike up. You can rely on no one except yourself.

Do you believe what you see? I do, I believe my own eyes more than anything else in this world. So I trust the figures and information reported on the company/industry, instead of getting myself affected by others. It is based on these information that I derive the intrinsic value of the company. So did the company operate differently few weeks ago as compared today? I doubt, but it seems that some stock prices differ 50% in just a span of weeks. I have made more purchases recently, with the expectations that they will rise to my calculated value in years to come. Having said this, please do not be enticed to follow and purchase blindly. Even after purchases, please always ensure that you are at least 20% in cash and only invest up to 20% of your portfolio in one company. Your 20% cash will come in helpful to shoot flying elephants and in the event of fraud or insolvency, the exposure is capped at 20%.

S-shares have been hit pretty badly these days and some are really worth looking at. The market can go either way this year, but I am still on the optimistic side as I see many good companies at good prices. Everybody makes mistakes, but remember to learn from them and not to repeat them again.

Last reminder: Believe Your Own Eyes!

Cheers!

Options Trading

I had just attended a seminar in Novotel earlier this evening at 7pm. The seminar was conducted by Wealth Mentors and it is on Options Trading. There were two speakers for the entire session. The first speaker was Mirriam MacWilliams. She is the Chief Options Trader of Wealth Mentors and is a self-made millionaire. She trades for a living and she made over US$2 million in less than two years in the stock market with a starting capital of US$10,000. The second speaker was Aaron Sim. He is the CEO of Wealth Mentors and he has grown his business from zero to over $10 million a year in just 4 years.

Some of you might question why will I attend such a seminar when I am always promoting long-term investing? Do I have intentions to switch to a short-term professional trader instead? The answer is NO. My objective of attending the seminar is to gain more knowledge on the different financial instruments available in the market (and best of all, the seminar is FOC). I always feel that to be a good investor, we must always be open to new knowledge and information. Only with such an attitude can we keep improving ourselves to be better investors.

Basically, options trading is a method of leveraging your capital to generate high returns. So by having a 10% increase on a stock, it can result in an increase of 100% in options. I shall not dwell on the rewards/risks of options over stocks, interested readers can google it or read more via Investopedia.com.

There are many good points highlighted, but let me just share a few key points which is brought up during the session. Some of you might already realised them, but others might ponder about it:

1. Do you know how big the US market is? All the various US markets combined have a market cap. in excess of US$15 trillion. By comparison, Microsoft has a market cap of US$300+ billion, which is about 3 times as much as Singapore's GDP US$100+ billion. Having the largest market cap in the world, US market has the best liquidity and there are so many free sites providing information on US Markets. This makes investing/trading a lot easier, but why are there so many Singaporeans who rather trade in our local market and ignore the world biggest market?

2. The first key to a successful trade is the preservation of capital. This really surprises me when I heard it from the speaker. I have always thought traders are not as concerned about this rule. My perception on professional traders are very wrong and I am glad that I attended the class. I found out that there are actually many similarities between an investor and a trader.

3. Remain cautious after early successes. Many of us rake in huge profits but fail to protect them. Earlier gains are wiped out once complacency and arrogance seep in.

4. Create balance in your life. Even though investing/trading can bring you to the financial freedom which you seek, remember to enjoy the process with your loved ones. Get away from the market at least once a year to spend a holiday with your family. The Market will always be there for you, but the ones around you will not be always there.

I find the contents of the seminar pretty interesting, but the entire 4-day course costs more than SGD$6k, which puts me off. The objective of this course is to teach the 'trading rules' of Mirriam and allow any individual to profit consistently through options trading. Any of you care to share if such courses are really beneficial?

China Auto Electronics (T42.SG)

One of my reader has requested me to comment on China Auto Electronics (T42.SG).

Please note that the following should be purely used as reference purposes. I am only going to touch on the key pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities. Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Background:

The Company was formerly known as Snowcity International Holdings Limited and changed its name to China Transcom Technologies Limited in 2005. The Company changed its name from China Transcom Technologies Limited to China Auto Electronics Group Limited on 3 October 2007 following the completion of the merger with Tianhai Electric (Group) Corporation.

The Group previously is primarily engaged in the design and manufacture of a wide range of telecommunication, data network and transportation communication products in the PRC. The Tianhai Group designs, assembles, and manufactures wire harnesses, connectors, moulds, crimping machines, and electronic modules for the automobile industry. After the merger, the Company decides to focus fully on its core automobile parts and divest from the telecommunication business.

Pros:

1. The Company has a very high market share of 10% as a provider of wire harness to the automobile industry in China. Believed to be the top 4 in China.

2. The PRC automobile industry has been identified as a growth pillar. The Chinese government intends to push China as an viable player in the global automobile sector by 2010, and is willing to provide grants to boost efficiency and product improvements.

3. There are high barriers to entry to the automobile industry, as the qualification period for a component supplier to a automobile manufacturer can take up to three years. Being qualified to supply to 18 China automakers, it has many advantages to the rest of the players in the fragmented wire harness industry.

4. Interesting business model: Wire harness only makes up to two percent of the total car manufacturing cost, but being a critical component, automakers have to purchase them for every production. And once the automaker makes use of these customised wire harness for a particular model, it will be not practical to switch to other wire harness as it might run into design complications. Such recurring profit is a plus.

5. Net margin of 15% based on FY07 9M.

Cons:

1. Dependent on a few major customers, more than 50% of revenue came from 3 key customers. If any of these customers suffer a slowdown or switch suppliers, it will have a major adverse impact.

2. RMB appreciating and USD falling. This will have an impact on its bottomline since 20% or more of revenue was from export sales, which is in USD.

3. No track history as a public listed company for its core automobile business. I will try to avoid such companies as running a public listed firm is different from a private-held one, so will rather wait for management to prove its capability.

4. Unable to find out any future plans of this company, any readers care to share?

Actually, I received the coverage request on 7-Jan-2008 and the stock was trading at $0.595. In just a week's difference, it is now trading at $0.295, a 50% drop. It seems that the sharp fall was due to a price downgrade by DBSV.

Although there are many good points listed above, but I am still skeptical on the track history of this company. I suggest we continue to observe the company's results for the next few quarters before vesting into it. Nevertheless, for those investors who have been tracking this company for some time, perhaps you all feel that it is really a good time to enter. At the end of the day, you have to make your own decision. Remember, nobody cares as much as YOU on your own money.

DCF Valuation on Ouhua (AJ2.SG)

There have been queries from my readers regarding the usage of the DCF worksheet which I have put up previously. I did a brief calculation on a sample company Ouhua (AJ2.SG) and you may download it here. I have added some comments to aid all who are interested in using the worksheet. Any comments are welcomed and I am glad to answer any of your queries.

Peer Comparison

Peer Comparison is always on my list when it comes to determining if a company is a good buy. When all conditions specific to a company are satisfied, you can then proceed to compare this company with respect to other firms operating in the same industry/environment. Attached is a link from Investopedia.com which discusses about the importance of such analysis methods. Enjoy!

http://www.investopedia.com/articles/stocks/07/peer-comparison.asp?partner=basics