Documenti di Didattica
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to Investing in
Singapore
with David Kuo
Singapore
Risk free
By putting our savings in a bank there is virtually no risk to our
money. Whats more, we could even earn a bit of extra money on
top otherwise known as interest.
For some people, salting away money in a savings account is about
as far as they are prepared to go. But there can be a problem with
taking the safe option.
Unless the interest rate paid on our savings account is higher than
the rate at which our money is being eroded by inflation, then our
money is slowly losing its buying power. It can be a bit like trying
to run up a down-escalator. From my experience, it is neither an
advisable nor enjoyable act.
That is why many of us will try to get a better return for our money,
which is also why some of us turn to the stock market. Admittedly
there is more risk involved when we buy shares but we hope and
expect to be rewarded by a better return.
Speed bumps
Many young investors (and some older ones too) like to buy shares
in fast-growing companies. They believe that companies that could
grow faster than the overall market could have the potential to
deliver better returns. They are not wrong.
Growth companies are expected to increase their profits at a faster
rate, which is why their shares could also rise quickly. However,
growth companies could also hit unexpected speed-bumps along
the way. That is one reason why their shares can also be more
volatile.
Older investors (and some younger ones too) like to invest in more
established businesses. These are companies that have been around
the block a few times. These often familiar businesses have read the
book, seen the movie and even got the t-shirt to prove it.
These established companies generally dont need to retain as much
of the profits they generate to grow their business. That is why they
can afford to reward their shareholders with generous dividends.
Their shareholders are commonly known as income investors.
A lifeline
Elsewhere, some investors believe they are able to correctly identify
companies that might be in temporary distress. Think of it as
A Foolish Guide to Investing in Singapore
Growth investors, as the name suggests, are people who like to buy
shares in fast-growing companies. So, the obvious question is this:
Exactly how fast is fast?
As a general rule of thumb, a growth company should have the
potential to grow its profits at a faster rate than the rest of the
market, for a long time. But why, you may ask, are growth investors
attracted to this particular style of investing?
Doctor, doctor
Perhaps the best way to illustrate this is to consider a company
such as Raffles Medical Group.
In 2003, the healthcare provider earned 1.9 cents per share. At
that time its shares were worth $0.36. Now fast forward 10 years to
2013; a decade later, Raffles Medical Group was earning 15 cents a
share, which translates into an earnings growth rate of around 23%
per year.
That is fast. That also helps to explain why the companys share
price grew to $3.11 by the end of 2013. Shares in the medical group
How much?
What that means is that while the market might pay, say, between
$10 and $15 for every dollar of profit that a run-of-the-mill
company might make, growth shares can be valued at $20, $30,
$40, or even more, for every dollar of profit that they deliver.
The rich valuation is where risk comes into play. When a share
carries a high rating, investors expect bigger profits in the years
ahead. Or put another way, it is because the market expects the
growth company to deliver bigger profits in the future that it is
prepared to pay up handsomely for its shares now.
For instance, a company might have grown its profit very quickly,
say, over the last two to three years. Investors who recognise the
growth might be willing to pay a high price for the shares because
they expect even higher profits in the future.
But what if the company cant or doesnt deliver? Well, the shares
could fall very quickly. And here is why.
January 2014
January 2015
% Change
$1
$1.10
10%
Share Price
$40
$22
(45)%
Tell me more
But there are other clues about a companys ability to grow besides
its addressable market opportunities. These include the strength
of its finances, its employee culture, the social relevance and
attractiveness of its products or services, and the integrity and
innovative capabilities of its management. When all of these things
are considered together, it can help us separate the wheat from the
chaff.
That said it is not easy. It is never easy and there are also no
guarantees.
But, if we can improve our chances of being correct from, say, 10%
to 40%, then the mathematics could work in our favour. Let me
explain.
Consider a portfolio made up of Raffles Medical Group and seven
other shares. The healthcare providers 764% gain from the end of
2003 to the end of 2014 could have helped the portfolio achieve an
average cumulative return of 8%, even if all the other shares made
100% losses.
Lets go shopping
Most of us will be familiar with pan-Asian retailer Dairy Farm
International Holdings, which owns Cold Storage and Guardian
in Singapore. Its profits grew at an annual compound rate of 7.2%
between 2004 and 2014. If, say, Dairy Farm was included in the
portfolio, its gains of 456% would have given the portfolio of two
winners and six losers an average return of 59%.
Getting two stocks out of eight correct represents a batting-average
of just 25%.
So here is what we have looked at:
1. We have looked at why growth investing can be lucrative
with the example of Raffles Medical Group.
2. We have highlighted some of the risks involved with growth
investing, such as high valuations.
3. We have addressed the risks by looking at how to
differentiate real growth companies from the pretenders.
4. We have reiterated the risks of trying to predict an uncertain
future and how we can go some way to overcome it.
5. We also looked at how we can use simple arithmetic to
improve our chances of success.
But here is a question that only you can answer: Is growth investing
right for you?
We can look at the question through the eyes of Mr Lee.
Mr Lee is in his mid-30s. He has roughly another 30 years before
he would like to retire. He does not think that he needs any
additional income to supplement his current salary. So, as such,
any savings he has at the end of each month could go towards his
retirement investment, which could be some three decades away.
In Mr. Lees case, investing in growth shares could be suitable,
given the potential returns and the fact that he does not need to
generate income from his investments.
But it is also important to consider volatility, as the price of growth
shares can fluctuate significantly. So even though Mr. Lees financial
circumstance might be right for investing in growth shares, his
emotions might prevent him from doing so.
It is also important to think about what could happen if his
emotional make-up and financial circumstances changed over
time. As such, it is important to first understand yourself and why
you are investing.
10
Spotting Turnaround
Opportunities
By Stanley Lim
What goes up must come down
-- Isaac Newton
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Bubble trouble
Before we delve into how to go about investing in a turnaround
situation, it is perhaps instructive for us to look at financial
bubbles.
By appreciating how typical bubbles are formed, we can not only
improve our chances of avoiding them, but we could also be in
a better position to benefit from the recovery that could follow,
eventually.
The typical lifecycle of a financial bubble comprises of four
key stages. At the beginning, a company could undergo some
fundamental changes that might go unnoticed by many investors.
As the improvements in the company become more apparent,
investors could start to show an interest.
Next, the bubble could develop through stealth, with only a
handful of people aware of the situation. Then comes the awareness
phase, where other investors start to take a real interest in the
company too. This is when we could see the first share price rally.
In some cases, this could also be the stage where market
participants experience the first challenge to the companys share
price. If the company is able to withstand the sell-off, then it
might gain sufficient momentum to reach the next phase - the
mania phase. At this stage, the company could attract some media
attention. The added interest could even pour fuel to the fire.
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Where do I begin?
Once we understand the basics of the financial cycle, we can start
to figure out how to put the various pieces of the jigsaw together.
In this section, we will examine some of the ways that investors
could identify turnaround situations. We will be looking at the
strategy through the eyes of Mr. Tan Mr. Turnaround Tan.
Mr. Tan is a 45 year-old investor. He has been investing for
about 10 years and likes to invest in cyclical companies and
turnarounds. He is financially comfortable and could easily live off
his investment. But he chooses to continue working, as he enjoys
his job. Typically, Mr. Tan would look for companies that are
wallowing around their 52-week lows. He does this about once a
month.
Mr. Tan has come up with a set of criteria to help him decide which
companies he would like to take a closer look at. For example, he
prefers to focus on larger companies. So, he has set a minimum
market value of S$1b.
Here are some of the other criteria that Mr. Tan has chosen to help
him narrow down his search.
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Transparency
If the company is newly-floated and lacks a long track record, the
information could be a little too opaque for Mr Tans liking. So he
would give these shares a wide berth.
High leverage
In Mr Tans opinion, a company that has borrowed too much
money could be vulnerable in an economic downturn. So, Mr Tan
would leave these alone too.
And finally
Mr. Tan repeats this process every month and only studies those
companies that fulfil his criteria.
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On the buses
Lets say that in March 2014, Mr. Tan found a company that fit the
bill. The company was SMRT Corporation Ltd.
SMRTs earnings and operating margins had decreased
significantly since 2010. Its earnings dropped from S$163m in the
financial year ended 31 March 2010 (FY2010) to around S$83m in
FY2013. Its net profit margins were also on the slide down from
about 18% in 2010 to just 7.4% three years later. The share price
followed suit. It more than halved from a high of S$2.31 in 2010 to
S$1.01 per share. That is a 56% drop.
The company continues to operate efficiently, though, and the
demands for its services were still growing, as seen from its revenue
growth from S$895 million to S$1.2 billion over the same period as
above. This situation appeared to warrant a deeper study.
Mr Tan spent his weekends researching SMRT and the public
transport industry in Singapore. He discovered that SMRT
Corporation operates in many different segments of public
transport. These include the MRT, LRT, buses and also taxis. Apart
from its taxi operation, the other businesses are regulated.
He also found that SMRT together with SBS Transit Ltd are the
only bus operators in Singapore. Both have seen the margins for
their bus and MRT operations decline.
Mr Tan concluded that the shrinking margins were not a company
specific issue but rather an industry-wide problem. Mr Tan decided
to dig even deeper by looking through the news and commentaries
in various trade journals. He concluded that the situation, as it
stood, was unsustainable. He also discovered that the authorities
A Foolish Guide to Investing in Singapore
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After Mr Tan has weighed up the risks and the rewards of investing
in SMRT (and if he is still comfortable with them) he could have
concluded that at a 52-week low of S$1.01, the shares could turn
around.
Mr Tan is a typical turnaround investor. But his method and the
criteria he has set might not be suitable for everyone. That said,
there is nothing to stop us from adjusting and adapting his style to
arrive at a process that we may be more comfortable with because
we are all different.
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Silver lining
Here is another example of the power of dividends. Between
the end of 2007 and September 2013, the Straits Times Index
in Singapore declined by 1.6% a year. But if dividends were
reinvested, the index would have generated an average annualised
total return of 2.0%. That is quite a pleasant silver lining on an
otherwise gloomy dark cloud.
For investors worried about their future income, dividends could
play an important role too.
Consider, for instance, Jardine Matheson. At the start of 2004, an
investor could have bought shares in the conglomerate for US$9.10
per share. That same year, Jardine Matheson dished out US$0.40
per share in dividends, which represented a dividend yield of 4.4%.
Fast forward to 2014 and we find that Jardine Matheson is paying
out US$1.45 per share in dividends, after growing its dividend
every calendar year. That equates to a 15.9% yield on the original
cost of the share. So, growing yields can make dividend investing
an attractive proposition.
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Tell me more
What should investors look out for, though?
There are many things to consider. Here are a few important ones
that could help us identify good income shares. But bear in mind
that not every good dividend-paying company will necessarily
exhibit all of the following characteristics.
1. A history of growing dividends
2. A track record of growing free cash flow
3. A history of generating free cash flow in excess of the
dividends paid
4. A strong balance sheet and
5. Room to grow the business
These five criteria are all important. Some might even say that they
all are equally important.
A companys track record of growing its dividend could give
investors some useful clues as to how seriously a company
considers rewarding its shareholders. After all, a company is not
obliged to pay shareholders anything. But even if a company might
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Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Dividends per
share (cents)
5.75
8.50
11.9
15.5
9.25
11.8
16.1
17.6
18.2
22.5
27.0
12.9
12.9
13.0
20.4
24.0
25.2
19.1
20.8
29.5
32.3
36.8
$5.7
$9.6
$13.8
$14.3
$28.3
$42.5
$49.2
$55.2
$66.0
$78.5
$91.2
million
million
million
million
million
million
million
million
million
million
million
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Conclusion
David Kuo
The key to making money in stocks is not to get scared out of them
Peter Lynch
I hope you have enjoyed our brief guide to investing. As you have
probably gathered, investing is not a one-size-fits-all discipline.
There can be a lot more to investing than that which meets the eye.
In this booklet, we have only highlighted three of the more popular
strands of investing. There are many others, as you will find out
when you embark on your own exciting investing journey.
When we invest, we should try to remember that it is a way of
putting our money to work in a considered way.
The operative word is considered. We should consider carefully,
our investing time horizon. In other words, we should think
carefully about how long can we afford to leave our money invested
in shares for? In the main, we should not consider any kind of
stock market investment unless we are prepared to leave the money
invested for at least five years or more.
We should also consider carefully why we want to invest. Simply
saying that my friend has made a mint from playing on the stock
market just doesnt count. You need to understand your ultimate
investing goal.
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Some people might invest so they could have a better life when
they retire. Some people might be investing for their childrens
education, which could easily be a decade or so away. Others might
put money into the stock market to help pay for their childrens
wedding at some time in the future.
These are all laudable reasons to invest because they relate to
investing with a long time horizon in mind. But having a punt on
shares today in the hope that you might have more money to spend
when you go on holiday next week is not a good idea.
It is also important to consider the type of investor we are. Trying
to fit a round peg into a square hole can be a pointless and painful
exercise. In a similar way, trying to be a growth investor when you
are really an income investor can be frustrating.
That said, many of us dont always know, at the outset, whether we
are round pegs or square pegs. That is why it is important to try
different investing styles first.
It can sometimes take years before you discover your true investing
passion. But once you do, it can be an enlightening experience.
Once you discover the kind of investor you are, everything that you
have learnt should fall neatly into place.
Until that moment arrives, gradually build a portfolio of stocks
that you have thought about carefully. Write down the reason for
buying each share.
You might be attracted by a companys dividend yield or you might
find that the company has unparalleled growth prospects. You
might even find that the company could be a potential turnaround.
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Whatever you think are the reasons for buying the share, just write
it down in your investing diary.
Keep your investing diary by your side and review your progress
over a period of months and years. Take a look at your stocks that
have done well. Take a look at the ones that have done badly. Take
an honest look at how you have performed relative to the market.
Are you beating the market or are you losing badly to a chosen
benchmark such as the Straits Times Index?
Consider carefully the stocks that have performed especially well.
Is there a discernible pattern as to why they have done well?
If you find that most of your market-beating picks can be classified
as income stocks, then perhaps that is your forte. But if you cant
even hit a barn door from three feet with a recovery stock, then
perhaps you are not cut out to be a value hunter. There is no shame
in that.
Once you have discovered your investing style, develop a
disciplined approach to investing. Buy when prices are favourable,
regardless of what others might be doing or saying in the market
at the time. A disciplined approach will help you to suppress even
your own distress signals.
You should even start to feel good when the market falls a hundred
points because you immediately know that bargains are abound.
The moment you start to feel good about a market fall is the
moment that you have become a true Foolish investor.
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Notes
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