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    What I Learnt as an Analyst: Sharing of Experience in Investment and Analysis
    What I Learnt as an Analyst: Sharing of Experience in Investment and Analysis
    What I Learnt as an Analyst: Sharing of Experience in Investment and Analysis
    Ebook263 pages2 hours

    What I Learnt as an Analyst: Sharing of Experience in Investment and Analysis

    By tze cheng lim

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    About this ebook

    "What I learnt as an Analyst" was written to share what I learnt in my years as an analyst and a fund manager. Citing personal experiences as an analyst and fund manager, "What I Learnt as an Analyst" does not aim to glorify successes or condemn failures, but to equip both novice and experienced readers with the right tools to succeed in their chosen financial path.
    LanguageEnglish
    PublisherBookBaby
    Release dateJun 24, 2018
    ISBN9789671560716
    What I Learnt as an Analyst: Sharing of Experience in Investment and Analysis

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      Book preview

      What I Learnt as an Analyst - tze cheng lim

      First published April 2018

      Text copyright © 2018 by Lim Tze Cheng

      Editors:

      Charleen Tan, Kuek Ser Kwang Zhe, Law Yin-Lyn, & Lim Han Yang

      Cover design: Thineswary Govindasamy

      Comic artwork by: Jian Goh (akiraceo)

      Author’s photograph by: Jewel Ling

      All rights reserved.

      No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher.

      The publisher can be reached at whatilearnt@yahoo.com

      eISBN 978-967-15607-1-6

      Preface

      I am not Warren Buffett. Neither am I Charlie Munger.

      Nor do I consider myself an investment guru.

      What I learnt as an Analyst was written to share what I learnt in my years as an analyst and a fund manager. This book is not written to glorify any successes or condemn any failures. It is more of equipping the readers with the right fishing rod and technique to fish, and not telling how big a fish I’ve once caught.

      This book is divided into two parts.

      Part I: Unit Trusts as an Investment is written for individuals who want to invest in the stock market but do not have the interest or resources such as time to conduct analysis on individual companies. For them, the most viable way is through investments in unit trusts. This part will guide investors on the ins and outs of investing in unit trusts.

      Part II: Shares as an Investment is meant for individuals who wish to invest directly into the stock market. Rather than jumping in blindly, this part aims to equip individual investors with the basic understanding of financial statements, financial ratios, basic valuation methodologies, and other aspects of analysis to be taken into consideration when analysing a company.

      For the unit trust investors, I hope this book will deepen your understanding on the basic mechanism of how unit trusts work.

      For investors who invest in the stock market, my wish is that this book will equip you with the basic methodologies and concepts to use to analyse companies before investing into them.

      For those who are just starting to learn what is investment and those who wish to have some basic understanding of financial statements, I sincerely wish this book can be your first text book into the investment world.

      The thoughts presented in this book are more of personal views and experience. Some may be acceptable to most, and some may contradict the views of the majority.

      In addition to being an effort to promote and spread financial literacy among society, all net proceeds collected from the sale & distribution of this book will be donated to Kriyalakshmi Mandir Shree Sai Gurukul Charitable Society (or KMSSG in short), a Non-Profit Organisation registered with the Registrar of Society of Malaysia.

      All KMSSG activities are posted on its official Facebook page @ KMSSG Charitable Society.

      TABLE OF CONTENTS

      PART I: UNIT TRUSTS AS AN INVESTMENT

      CHAPTER 1 WHAT IS UNIT TRUST?

      Difference between Investing in Unit Trusts & the Share Market

      -    Investing in the Share Market

      -    Investing in Unit Trusts

      What is NAV?

      Types of Charges & Fees

      -    Direct Charges

      -    Indirect Charges

      Management Expense Ratio

      Portfolio Turnover Ratio

      How does a Unit Trusts Work – From the Fund’s Perspective

      How does a Unit Trusts Work – From the Investors’ Perspective

      Impact of Expenses on Investors’ Return

      Types of Unit Trusts

      CHAPTER 2 WHEN TO BUY UNIT TRUSTS?

      What is Dollar Cost Averaging?

      What is the Time Horizon for Unit Trust Investments?

      The Fund’s NAV is at its All-Time High. Can I Still Buy?

      The Importance of Knowing the Style of Investment

      CHAPTER 3 UNDERSTANDING UNIT TRUSTS’ DIVIDENDS

      The Arguments For and Against Dividends

      CHAPTER 4 UNIT TRUST INVESTMENT INFERIOR TO SHARES?

      Is it Possible for an Individual Who Invests Directly into Shares to Out-Perform Unit Trusts?

      PART II: SHARES AS AN INVESTMENT

      CHAPTER 5 WHAT IS A STOCK MARKET?

      Investing in Shares is Actually Investing in Business

      Stock Market is a Collective but Unpredictable Expectation

      CHAPTER 6 WHAT IS COMPANY ANALYSIS?

      Is it a Good Business?

      Is it a Good Company?

      How much are We Willing to Pay for the Company?

      CHAPTER 7 BASIC GUIDE TO FINANCIAL STATEMENTS

      CHAPTER 8 INCOME STATEMENT – A MEASUREMENT OF PROFITABILITY

      Revenue

      Gross Profit

      Profit from Operations

      Profit Before Tax

      Income Tax Expense

      Is Net Profit the Actual Profit?

      Concept of Core Earnings

      What to Adjust?

      The Seasonality Factor in Earnings

      CHAPTER 9 BALANCE SHEET – A MEASUREMENT OF FINANCIAL HEALTH

      Property, Plant & Equipment (and Depreciation)

      -    How should investors look at depreciation?

      Goodwill

      -    Why Would a Company Pay Higher than the Net Asset of the Acquired Company?

      Inventories

      Cash & Bank Balances

      Issued Capital & Treasury Shares

      Deferred Tax Liabilities

      Of Minority Interest, Associates, & Joint Ventures

      -    Minority Interest

      -    Associates & Joint Ventures

      CHAPTER 10 CASH FLOW – THE LIFE LINE OF BUSINESSES

      Cash Flow from Operating Activities

      -    What is Working Capital?

      Cash Flow from Investing Activities

      -    The Concept of Free Cash Flow

      Cash Flow from Financing Activities

      Putting it all Together

      Does Business Exist to Generate Profit?

      CHAPTER 11 PROFIT MARGINS – PROFITABILITY OF THE BUSINESS

      The Relationship between Margin & Volume

      The Effect of Associate & Joint Venture Accounting

      The Leverage of Low Margin

      CHAPTER 12 OPERATING RATIOS – EFFICIENCY OF THE BUSINESS

      Total Assets Turnover

      Days Sales Outstanding

      Days Payables Outstanding

      Days of Inventories

      Cash Conversion Cycle

      CHAPTER 13 FINANCING RATIO – INDEBTNESS OF THE BUSINESS

      Equity Multiplier

      Debt-to-Equity Ratio

      Return on Equity & The DuPont Model

      CHAPTER 14 THE MILLION DOLLAR QUESTION: HOW MUCH TO PAY FOR IT?

      The Concept of Margin of Safety

      Price-to-Earnings Ratio

      -    Trailing PE and Forward PE

      -    How High is High? And How Low is Low?

      -    Achieved versus Expectation

      -    The Impact of Warrant

      The Concept of Enterprise Value

      Dividend Yield Approach

      Sum-of-Parts

      Price-to-Book

      CHAPTER 15 WHEN TO BUY?

      Does Industry Matter?

      Crisis is Mega Sales

      Only Invest if You Believe in The Product or Services

      Long-term Investing – Till Death Do Us Part?

      CAHPTER 16 WHEN TO SELL & INVESTMENT LESSONS FROM A SEASONED INVESTOR, MR. MAK TIAN MENG

      CHAPTER 17 UNDERSTANDING CORPORATE EXERCISES

      Share Split

      Share Consolidation

      Bonus Issue

      Rights Issue

      Warrants

      CHAPTER 18 INVESTMENT AS SOCIAL ENTERPRISE

      The Creation of iSERF

      CHAPTER 1:

      WHAT IS UNIT TRUST?

      Unit trust is actually one type of Collective Investment Scheme (CIS). CIS is a concept where a group of investors pool their money together in order to take advantage of having a bigger pool of money to invest. If you have RM100 available to invest, you can’t buy much. But if 100,000 people each chip in RM100 into a pool, the pool will have RM10 million available to invest. The extent of investment choice and diversification that the RM10 million pool can achieve is definitely much greater than what RM100 can do. And this is the inherent advantage of a CIS.

      Difference between Investing in Unit Trusts & the Share Market

      [1]. Investing in the Share Market

      To buy shares, investors need to go through a securities/stockbroking firm as the middleman to conduct the transaction. Assume you wish to buy shares of Company A, which is currently trading at RM1.30 for each share. You decided that you want to buy at RM1.25 a share. You then call your remisier (an agent, for the stockbroking firm, who holds the license issued by the Securities Commission) to inform him or her about the trade.

      What your remisier will then do is to find a seller who has Company A’s shares and wishes to sell at RM1.25 a share. If the remisier finds a willing seller at RM1.25, he will match and complete the trade. If he is not able to find a seller at the price you want, then either you have to revise your price to RM1.30 a share or wait for other sellers who are willing to sell at RM1.25.

      Figure 1 below shows the relationship. An alternative to a remisier is an online trading platform, where investors would be able to trade and manage their own transactions.

      Figure 1: Investing in Share/Stock Market

      One may ask why would we still need remisiers in this technological age, when we can trade on our own? Remisiers actually play a very important role for investors who just started investing in the stock market. They would be able to guide and hand-hold investors on what-to-do and what-not-to-do when investing. In addition, remisiers can help to monitor the trades on the investor’s behalf, compared to the investor having to keep checking on his trades.

      The mathematics for unit trust and share investments works the opposite way. Say Company A’s share is trading at RM1.30 a share. Shares are traded at a lot of 100 shares. So, at the minimum you must buy 100 shares of Company A, which is RM130, excluding brokerage charges. If you are buying two lots, you will have to pay RM260 (RM1.30 x 200 shares) before brokerage charges.

      [2]. Investing in Unit Trusts

      Unlike investing in shares, investors who wish to invest in unit trusts would need to get in touch with unit trust agents. Unit trust agents are representatives of unit trust management companies, and hold the license issued by The Federation of Investment Managers Malaysia.

      Now assume you want to invest in Fund B and you approach a unit trust agent for Fund B. The agent will assist you in submitting your request to the unit trust management company (UTMC) of Fund B. For unit trusts, there is no matching of trades needed. All buying and selling of unit trusts is between the investor and the unit trust management company, transacted at the Net Asset Value of the unit trust (or NAV, which we will explain further later). What this means is when you want to invest

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