Cold Eye's Sharing - Part 2

The second part of Cold Eye's sharing is found here.

Essence of his comments:

1. Do not buy stocks which does not have fundamentals (Think: strong stable fundamentals with long-term shareholders). Only stocks with fundamentals can rise in its value.

• During the bear market, the investor can be rest assured to purchase more and more of stocks with good fundamentals with a cheaper price, thus lowering its average cost price and improving the odds of making a handsome profit when prices recover later. The lower the cost of equity, the bigger the benefit, so why not overweight on it?
• Investors who do not purchase a stock after a correction usually did not perform their own due diligence on the stock nor understand its value.
• By just looking at the stock's price and not its intrinsic value, speculators ignore the fundamentals and therefore misses the opportunity in investing in a stock that will create a huge success in their portfolios.
• You may risk losing everything if you decide to buy a stock without fundamentals. Beware!

2. Be overweight on stocks you have confidence in

• After a market correction, the investor must have the courage to invest in good stocks that have been thoroughly researched on.
• However , the lazy investor will never do their homework and thus not understand the true value of a good stock during the market reversal, leaving good market opportunities untapped and losing a great investment opportunity.

3. Characteristics of a Strong Fundamental-Stock

• Reasonable profits
• Reasonable dividend
• Reasonable business growth
• Financially stable
• Reasonable share price

4. Why do we purchase stocks?
The prime reason is because we want to become shareholders(or owners) of the company. If a company is not growing, there is no reason why we should endeavour to become its owner. So, in buying a stock, do ensure that the company is making profits, otherwise do not buy it.

5. Avoid Stocks without Dividends
Some companies avoid paying dividends to its shareholders and conserves cash due to excuses such as reserving cash for future development, contrary to the wishes of the shareholders themselves who would like dividend payout as part of their income. Therefore, avoid dividend-less stocks so as to avoid being trapped in the stock market in a long period of time without any return of income.

In fact, by focusing on the D/Y (as a sign of company's of income stream stability), it also indicates the long-term profitability, low-risk and stability of these companies.

By researching on a stock, the intelligent investor can avoid many pitfalls :) Even if you do not have time to research on a stock, ensure that your stock pick provides a reasonable profit and a reasonable dividend. It is the minimum you should do to avoid buying the wrong stock.

6. Choose a company with moderate business growth
Operating cost ( labor etc) will continue to escalate. Without growing its business, the company will find it difficult to maintain profitability, not to mention increasing it. If the profit declines and the company fails to pay dividends, the stock price will be worse off. Even if the company remains profitable and gives out dividend payments, but without real growth, the share price performance is often below par.

A case in point is China Steel(CSC): Moderate growth, shareholders have a long-term investment horizon, resulting in most shareholders achieving significant returns. With earnings, dividends and business growth, coupled with strong stable financial conditions, a business can withstand the test of economic turmoil, hence a worthy buy!

7. Choose a company with a strong cash flow and low debt

Some companies have very low or even zero gearing(debt), and hold a large amount of cash. These financially-sound companies can ride out the storm even business downturn. When a new opportunity arrives, they are more able to seize new investment opportunities and drive the business to a new high.

8. Cash is King but look at the Stock Price too!

There are two perspectives to holding on to a large amount of cash. 

• From a negative perspective, by holding on to a large amount of cash, the investing community sometimes may regard business owners as not having sufficient resources to accelerate the growth of corporate earnings.
•  But from a positive point of view, such shares possess tough vitality, and can withstand the storm. Therefore, "cash is king" is true in some cases.

Some listed companies generate good profits, dividends (although not high) as well as growth, but also holds out huge, persistent debt, while the "accounts receivable" is always increasing. In the unclear economic outlook, it is advisable to stay away from such companies.

With the profits, dividends, growth, finance is also robust. If the price is too high, and do not buy. Buying overvalued stocks is equivalent to paying for the value of the stocks a few years later. :)

An example is Guinness Anchor Berhad (GAB). It is definitely the best blue chips, with all the conditions of a high-quality stocks. However, if the intelligent investor had bought the stock in June 2013 at RM22 per stock, GAB would have been a disastrous investment since GAB had fallen to RM 13.50 at the moment. Therefore, even if a stock meets all the characteristics of a good stock ( profit/dividend/growth/stable), one would still need to buy it ONLY at the right price.

 9. Pay attention to the company's Price-Earning Ratio (P/E Ratio)

Cold Eye cautions the intelligent investor to pay attention to the stock's P/E ratio before investing. Rule of thumb: The price of the stock should not be more than 10 times of its P/E ratio for an undervalued stock. Learn to calculate P/E ratio here. 

The intelligent investor should also look at the company's growth prospects.

• If growth is higher and is quite stable, it is still acceptable for the investor to pay for the stock at 10-15x times P/E. If it isn't, then 10x is already high, and one should be buying at less than 8x  P/E.

10. Five conditions of a stock-picking success

After the "quantitative easing" movement, Cold Eye advises that the equity investment strategy should be:

i) Do NOT borrow money to buy stocks; 

ii) Do NOT buy too unpopular stocks

iii) Insist on buying only fundamentally-strong stocks.

Compared to 2009, investors who want to make a profit must now have higher intelligence. "Stock picking" will be the key to success - selected stocks, must meet the above five criteria.

Commentary on the Current General Economic Conditions

• After the end of US "quantitative easing", the European economy is likely to decline. The Japanese has also decided to launch their own version of QE, therefore EU is also pressured to conduct their own QE.
• Continuing trends: Elusive movements in interest rates and therefore, the stock market's future will be full of uncertainties( hence volatility). 
• The intelligent investor only have one choice: To have a clear investment strategy, in order to make a difference in this environment.
• One thing is certain: the stock market is no free lunch. No pain, no gain.

All Ado about Hyperinflation, Inflation, Stagflation and Deflation.

What are they?

All of them are economic phenomenons.However, their impact on interest rates, purchasing prices and overall employment are vastly different.

Why does inflation happen?

• Demand-pull factor: Too many dollars(demand), too few goods(supply). Strong consumer demand.
• Cost-push factor: Increases in wages and raw materials cause production cost increases,hence goods prices to increase.

Why do they matter to business ? Why do they matter to the investor?

• Inflation:
• For businesses, inflation might be pushing the revenues up and overstating the earnings. Therefore, when an intelligent investor analyzes the financial statements, bear in mind the inflation and the technique used to value inventory.
• For  fixed income investors, a rise in inflation will automatically affect your real return, i.e. purchasing power of your investment. If your return is 10% (nominal interest rate), but inflation is 4%, your real return is only 6% (real interest rate). Remember to look at the real interest rate, not the nominal interest rate, as so many investors OFTEN do!
• If an unanticipated inflation happens, creditors lose, menu cost goes up, thus reducing spending and exporters are not competitive (due to high manufacturing cost).

Where are we now?

According to Bill Gross, we are at a cross road between inflation and deflation, as deflation potential concerns rise in Eurozone and Japan. The world is largely comfortable with inflation by introducing more money supply in the market, i.e. Quantitative Easing (QE) measures. Started by the Feds in the U.S, it was followed by ECB and now Japan's BOJ followed suit. Inflation is created to pay for the previous inflation, therefore deflation is not an option. Deflation would have stopped devaluing our currencies and hence our purchasing power, but no country in the world so entrenched in globalization and finance-based economy want to risk.

The magnitude of QE is huge, imagine USD  4,000,000,000,000 (4 million million dollars , or simply 4 trillion dollars) has been pumped into the US economy, not to mention USD 2 trillion in Japan and a trillion dollars by ECB. The money as we know it, was pumped into the system and did nothing but inflate prices of assets, not commensurate with their actual demand.If it was to increase productivity, innovation or even for infrastructure projects, it would have increased employment everywhere, and driven real demand-pull inflation. As Gross put it rightly ,"Prices go up, but not the right prices."

Wages remain stagnant in these countries; but more seriously soaring unemployment in Europe.Youth unemployment in more chronic in Europe - a staggering 21.7%, according to the latest census.

Stagnant wages everywhere... so where's the money? (Credit: IMF, Eurostat, Thomson Reuters.)

High youth unemployment rate. Where is their future? (Credit: Statista.com.)

Comparing unemployment in Europe and the non-Eurozone economies :

While Japan is able to control its unemployment throughout the years of deflation, US has managed to bring down the rate  officially. The same could not be said about Eurozone. (Credit: EconomicsHelp.org)

What are we to do?

In general, an intelligent investor's strategies should be :

• To avoid timing the market
• To build a diversified portfolio

There are also specific strategies during different economic phenomenons.

The investment strategies during Inflation & Hyperinflation:
a) Continue to invest in stocks ( buy value stocks and commodity-producing stocks)
b) Avoid bonds ( since bond prices and yield drops when interest rate rises)
c) For US-based investors, mutual funds such as the Treasury Inflation Protection Security(TIPS) can be an investment choice.
d) Real estates
e) Gold

The investment strategies during Stagflation:
a) Invest in 'real assets' whose growth is not dependent on a growing economy,e.g. commodities(gold) and real estates(sometimes).
b) Invest in defensive sectors - healthcare, education, utility, non-cyclical stocks.

The investment strategies during Deflation :
a) Avoid cash/stocks/real estates/commodities
b) Buy long-term bond fund for better yield
c) Invest in defensive sectors such as healthcare, education, food production, utilities, non-cyclical stocks


A summary of the write-up is presented here below:

In Conclusion

At the moment, we are experiencing the inflationary stage. But it's not a truly healthy one because, while the financial economy thrives, the real economy falters. Bill Gross notes that investors must recognize that in the modern day inflation, it is a not sufficient condition for increasing wealth at the rate necessary to beat real inflation rate and allow us to afford a comfortable education, healthcare and retirement.

Although money-printing pushes inflation up in the short run, it isn't a healthy phenomenon in the longer run. Money-spending in the right way is the only way we can get ourselves out of the rut, and that means spending from fiscal side (the government spending using taxpayers' money to create more jobs), something that governments across the world seem to fail to do due to a widening deficit in the budget. Gross notes that Jim Grant's (economic historian) prediction of a world deflation remains possible because of this, not in a good kind though : but "the kind that's trouble for prosperity".

All about Technical Analysis

Some important notes to remember about Technical Analysis Indicators

1. RSI

• Objective : To determine the true value of an oscillator and understanding  overbought or oversold positions
• At the bottom of the chart , the RSI, on a scale of 0-100, indicates that the overbought position is at 70 and the oversold position is at 30. An investor may choose to reset the indicators' parameters to 80 and 20. This helps the investor be sure when making the decision to buy or sell an issue, and not "pull the trigger" too fast.
• Some traders have found that the RSI works best when it's compared to short-term moving-average (MA) crossovers. Using a 10-day MA with a 25-day MA, you may find that the crossovers indicating a shift in direction will occur very close to the times when the RSI is either in the 30/70 or 20/80 range; the times when it is showing either distinct overbought or oversold readings. Simply put, the RSI, sooner than almost anything else, indicates an upcoming reversal of a trend, either up or down. 

101 Ways to Massively Increase the Value of Your Real Estate without Spending Much Money

Over BFM Radio this morning, there's a Property Show with Dolf de Roos , a property investment guru from the US. Some of his investing principles are interesting, and they include:

1. Never sell any property that you have purchased

• When you sell, you pay Capital Gains Tax(or in Malaysia's terms, the Real Property Gains Tax) and agent commission which could reduce your overall returns. RPGT could be quite substantial, and in Malaysia it's been increasing over the years because more and more people flip their purchases, and thus inflating the property prices artificially, making affordable homes out of reach for many Malaysians. 
• Here's the rate you pay if you sell within a certain time frame in Malaysia:

• You will be only be taxed on the positive net capital gains which is disposal price less the purchased price less the miscellaneous charges such as;( stamp duty, legal fees, advertisement charges ,etc). Additionally, a waiver on the taxable amount is granted to individuals (but not companies). The holding period is from the date on the S&P agreement till to the disposal date. For a simple and a quick calculation, the formula is;
  
  Chargeable Gain = Disposal Price - Purchased Price
  Net Chargeable Gain
  = Chargeable gain - Exemption Waiver (RM10,000 or 10% of Chargeable Gain,whichever is higher)
  Tax payable = RPGT rate (based on holding period)* Net Chargeable Gain 

• Read more about Malaysia's RPGT here. Of course there's also some exemptions that a property investor can utilise,
•  Exemption on gains from the disposal of one residential property once in a lifetime to individual (Please utilize this once in lifetime opportunity wisely!)
• Exemption on gains arising from the disposal of real property between family members (e.g. husband and wife, parents and children and grandparents and grandchildren)
• 10% of profits OR RM10,000 per transaction (whichever is higher) is not taxable
  Good news! There are exemptions allowed for RPGT. Among the exemptions are:
  1) Exemption on gains from the disposal of one residential property once in a lifetime to individual (Please utilize this once in lifetime opportunity wisely!)
  2) Exemption on gains arising from the disposal of real property between family members (e.g. husband and wife, parents and children and grandparents and grandchildren)
  3) 10% of profits OR RM10,000 per transaction (whichever is higher) is not taxable
  - See more at: http://loanstreet.com.my/learning-centre/rpgt-in-malaysia#sthash.kCLaWDN4.dpuf
  

  Good news! There are exemptions allowed for RPGT. Among the exemptions are:
  1) Exemption on gains from the disposal of one residential property once in a lifetime to individual (Please utilize this once in lifetime opportunity wisely!)
  2) Exemption on gains arising from the disposal of real property between family members (e.g. husband and wife, parents and children and grandparents and grandchildren)
  3) 10% of profits OR RM10,000 per transaction (whichever is higher) is not taxable
  - See more at: http://loanstreet.com.my/learning-centre/rpgt-in-malaysia#sthash.kCLaWDN4.dpuf
  Good news! There are exemptions allowed for RPGT. Among the exemptions are:
  1) Exemption on gains from the disposal of one residential property once in a lifetime to individual (Please utilize this once in lifetime opportunity wisely!)
  2) Exemption on gains arising from the disposal of real property between family members (e.g. husband and wife, parents and children and grandparents and grandchildren)
  3) 10% of profits OR RM10,000 per transaction (whichever is higher) is not taxable
  - See more at: http://loanstreet.com.my/learning-centre/rpgt-in-malaysia#sthash.kCLaWDN4.dpuf

2.Since you can't sell out your properties and realise your gains, what do you do to have additional funds to purchase your next property?

The answer lies in the power of refinancing your property. Once the first investment property has been purchased and its price has inflated to perhaps 1.5x to 2x, you can then ask your bank manager to assist you in refinancing that property and use the extra cash (essentially taking out more loan from your first property; which means you now have to pay a higher monthly loan installment too!) to purchase the next property. In that way, you do not have to sell out your first property which is bringing you monthly rental income stream as well as capital appreciation over the years, as well as expensive capital gains tax and agent commissions.

3. It's better to invest in REITs as compared to never investing in any property at all.

4. de Roos believes in diversification. However, he does not believe in diversification into other asset classes apart from properties ( such as buying stocks, commodity, etc). He believes in diversifying within the property sector itself. Hence he suggests two ways:

• Property type diversification - residential and commercial properties
• Geographical diversification - apart from your own country, you can invest in other countries in the region ( of course everyone who has the money has already done that, looking at the number of international property fairs being run in Malaysia!!!)

If you're interested in Dolf's work , here are some books he has written over the years to educate your further:

• 101 Ways to Massively Increase the Value of Your Real Estate without Spending Much Money
• Real Estate Riches