'What don't kill you make you more strong'
- Metallica -

Monday, April 27, 2009

What is a 'Share'? What is a 'Bond'?

Warning: Keep in mind, this discussion is insufficient and its not in depth to provide a clear, decision-making process in investing in bonds and stocks. It is merely a discussion on the general characteristics of bonds and stocks.

*I can't be bothered to highlight important words..just for this article..sorry readers..

Hello fellow 'potential investors', 

I should have started with this article in my 'Lessons in Value Investing' as it discusses the differences in share and bond. Anyhow, I do not plan to have a structure in my lessons. But it was a bad start..

Today's discussion is rather straightforward and simple. At this time, I am not mentally prepared to discuss on critical issues...Exam season..

Let's begin!

Many of you (all I hope) knows what is a Share. It is also referred as ordinary shares, common stocks, or stocks By purchasing a share, you are buying a partial ownership in a company. You own a piece of it. You are entitled to its earnings, assets, liabilities etc. Say, Company X issued 100 shares. I bought 10 shares - I own 10% of the company. However, I am not entitled to effective control of the company's resources. In another words, although I own 10%, I can't sell 10% of the company's asset and pocket it or take 10% of the company's cash and spend it. This issue is known as the separation of ownership and management which, isn't our topic of our discussion.

By having a partial ownership in a company, you are able to vote during the Annual General Meeting (AGM) - selecting directors, approving certain company policies etc. Also, why people buy shares because they are entitled to dividends. However, the company is not obliged to payout any dividends. Of course, shares are purchased to earn capital gains as well. You buy $10 today and hope to sell it for more sometime in the future.

Being a shareholder is not all that good. Before a company makes any payout to its shareholders, it has many other obligations that has to be settled. Firstly, if a company has loans/debts, it has to pay the interests and capital repayments before distributing dividends to its shareholders. In a worse case when a company is about to go bust, the creditors have prior claim to all of the company's assets to settle the obligations by the company. Residual assets after all obligations are settled, if any, will then only be distributed to shareholders. In simple words, when a company is in an adverse financial position, shareholders are the last in line for any claims.

Moving on, what are Bonds? Bonds is a form of debt/loan. Instead of the company obtaining debt or financing from a bank, it issues bonds directly to raise money. Company A needs $100 and issues bonds with par value of $1.00 and coupon of 5% annually for 5 years and redeemable at the end. With a par value (or face value) of $1.00, this means there are 100 bonds issued. 5% simply means the interest rate the company has to pay as the costs of bond financing. The company pays 5% of the face value annually to its bondholders or 5cents a bond for 5 years and at the end of 5th year, you will receive your final interests and also your principal value of $1.00 invested initially. 'Redeemable' option is just one of the few examples what a company can do at the end of the bond's life. Other options are converting it to ordinary shares or a combination of both redeemable and convertible feature.

One can see that bond to investors is like a savings account. I put my money into the bank (I buy the bond), and I receive interest from the bank for keeping it there ( I receive interest from the company as a return for using my money). Bond is more interesting than that. On the surface, it looks the same. What is left out from the picture is there are risks inherent when investing in bond and also, you can earn capital gains from it.

Risks in this case refers to the financial position of the company or the company's operating environment. A financially distressed company will have difficulty in meeting obligations and therefore will have a hard time paying you interests. Worse still, you might not be able to recover your principal. A cash-rich company is seen as low-risk as they have sufficient funds to meet obligations. Credit Rating Agencies are institutions responsible for rating the credit/risk position of companies having debt/bonds/loans in their capital structure. Perhaps you might have heard of few of these institutions - Moody's, Fitch etc. 

If a company is in an adverse position, its bond price will fall below its face value. Bonds are like stocks. You can trade it (sell and buy) so you are not lock into it until its maturity. Note that bonds do not usually trade at its face value. A distressed company will find its bond trading below par value. Bonds worth investing, with high credit rating is known as 'Investment Grade' bonds. Bonds by distressed companies are known simply as 'distressed' bonds or 'junk' bonds.

When a price of a bond fall, will it be a good decision to invest in it? Again, it is a case-by-case basis. You only invest when you know the probabilities and certainty of the outcome and the situation. A market will undervalue solid bonds for no apparent reasons. When its price falls, your interest yield is higher. 5cents interest on par value translates into 5% yield. What if the bond trades at 80cents instead of its face value of $1.00? In this case, you yield 6.25%! But if it trades higher than its face value, then your yield will fall.

If you buy lower today, and the company manage to survive to redeem the bond, you will earn capital gains. You buy at 80cents and at maturity, the company will pay you back $1.00. Effectively, you earn capital gains and also higher yield. However, always compare your return to time-value of money. 

For a better discussion on bonds, check out the link below.

http://www.btimes.com.my/articles/georgy2/Article/

The above article was contributed by the Funds Management Division of Aminvestment Bank Group.

That's all for now folks. 

Cheers.

Aaron.Hee.Wy


Friday, April 17, 2009

Of Dinner and Pablo Escobar..

Ni Hao,

Everyone, pls give Aaron a big clap - yet another quick update in record breaking time =)

Going to talk about something interesting..at least to me it is.....

I cooked today.!!!! hell yea!!!!!...Just realised I havent cooked for like the past 1-2months..cook as in dishes with rice..all this while i ve been surving on chips (fries for malaysians to call it, chips for british people) and pasta and pizza and eating out lots..alrite..tat s all..nothing much..Interesting huh........

Another thing i ve been up to is reading on Pablo Escobar. Not sure who he is? The world's most big time criminal..Columbian druglord and philanthropist.....he flooded America with coke..go google him.. Apparently, he was ranked one of Top 10 richest in the world by Forbes.. yeaps..Forbes the business magazine..The book is called 'Escobar' authored by his brother and 'business partner', Roberto Escobar..cool book..it shows how a unexpected normal kid turned into such a big timer..damn..anything can happen.......at this point..i fear that an innocent, shy, gullible person like me will turn into something along the lines of a crime lord, wheeler dealer etc... ;) kakaka..

I m so lazy to update my 'I Want..' list...got so many things on that list... and investing topics...
 
Anyway, enough now...going back to reading ESCOBAR..

Btw... how can i be LOST? When I got nowhere to go..... you are rite Daryl..it din occur to me until u mention it..haha..oh yea..Daryl..to rub it in..they din perform this song during the Nottingham concert...wat a waste..but at least they played other songs.. kakakaka...

OH YEA!!!!! IRON MAIDEN FLIGHT 666 -(dun worry about the 666..it s just the flight number of Iron Maiden's private jet.. it coincides with their famous hit song 'Number of The Beast'. There are misconceptions that this song was composed to worship devil......well..it s not...DAMN IT, READ THE LYRICS BEFORE COMING TO THIS CONCLUSION...) a documentary on Iron Maiden's historical Somewhere Back In Time Tour!!! Worldwide release next Tuesday and I am watching it! It is airing for one night only! 

Bruce Dickinson, Iron Maiden's vocalist is the pilot of Ed Force One (the name of their plane. Eddie is Iron Maiden's mascot. Fits well huh? ). This dude is quite pro in fencing and hell...has his one bloody tank....though without ammo...haha..interesting....hmmm...haha..How often do u find such a cool rock band besides Metallica and few others..it's GLAM ROCK nowadays.. just fame and one hit wonder....Rock bands today are PURE SHIT... offensive statement? Well, just stating the truth..To be honest..i do listen to modern rock...a lil..but none is good enough to sustain your interest to listen to it for more than the 5th or 6th consecutive listening..it gets dry..boring..typical sounding..minimalist..and when is the next u find it interesting? Say few months later..unlike old skol rock...when do u get bored listening to one track? erm..say..20th to be the least? Old Skol Rock!!!!

oh crap...din realise i suppose to sign off quite a while ago..anyway,...chows my frens!

 LOVE YOU GUYS!!!

xoxo 'Gossip GirL'

 hahahahah....damn...i watch Gossip Girl nowadays........thanks to Gan Leong...and few other guys ironically....

Got to bounce now! Chows! Chows! Chows!

WEI YEN
'Be proud of your name no matter how gay it sounds..' - Aaron.Hee.Wy


Sunday, April 12, 2009

Back and still the same..

Hello frens,

Tried and failed - i can't blog consistently.............................I dun understand where do consistent bloggers and those people who can upload pics non-stop on facebook get their motivation to do these activities.....

Been lazy lately...slacking lots...summer term coming up! SWEET, SEXY, SUNNY weather is to come! But damn....it's exam term..and worse still..it's 2nd year..harder exams..can't enjoy the sun as much as last year..no more lying down under the sun... =(..argh...

tat's all..i m too lazy to blog.....

Take care everyone.. =)

Aaron.Hee.Wy

Sunday, March 29, 2009

An Update! Hah!

Hello boys & girls,

How have you been? Having a good time??? 

Anyway, next week is going to be my 3rd week of easter break.. for the past 2 weeks.. i ve been working hard .. to make £££ ..well..i m not loaded..£££ is going to be used to cover my Amsterdam trip! 

Will be flying on Tuesday morning with Dao Wen and back on Saturday.. can't wait man..can't wait to see tulips and windmills.. =) nothing more..

Got my exams schedule few days ago..8 exams spread over 14 days..all but one starts at 930am..........this means i got to wake up at like wat......7am... damn..

anyway...longing to go home to Malaysia..7 months before I come home..in my 3rd year.. i ll be living on campus..going to miss living with my current WHITE housemates..i m the only YELLOW guy..haha..funny, interesting people..... 

ahhhhhhhhhhhhhhhhhhhhhhhhhhh!!!!!! not sure what was that for..but i m signing off now.. 

for once..the weather is lovely.... =) 

Aaron.Hee.Wy

Sunday, March 15, 2009

Holidays baby!!!

Hola My Frens,

It's my EASTER BREAK now!! 5 weeks of holidays!!!

Not really....... I have 2 essays to write...revision for my summer exams..I have an exam on the first week of Term 3 itself! Looking forward to nail that module (Information Systems)!!! In Term 1 of Year 2, business school students had to endure 10 weeks of lecture on 'what is Information Systems and how it changed our life'............Got to work really hard for my summer exams..i need to hit a high 1.1 (75%) otherwise I will get fired before actually starting my job..........madness...75% in british university education???

In spite of that, I got a part time job working behind the bar. No, i am not working  as a bartender. I am just serving drinks and not working in a club. People here like to grab themselves some alcohol drinks when having a break, like us Malaysian getting some air kelapa, milo ais. I will be working during conference sessions (not clubbing sessions) to serve delegates that are thirsting for alcohol. Hope to rake in some ££££.

Other than that, I am going to Amsterdam with Dao Wen. Just to see tulips and windmills...ah...sweet.. =) Will be meeting Jason Michael there? Did that name ring any bells? 

Signing off now!

Chows my frens!

Aaron.Hee.Wy

Saturday, March 7, 2009

Rejections.

It's a trend here in UK where penultimate students or 2nd year students of a 3 years course apply for an internship at the end of their 2nd year during summer. Typically, students will apply to companies in the financial sector. We know what these companies are - banks, accounting firms etc. Big names such as Goldman Sachs, HSBC, Ernst & Young (the list is endless) have  summer internship programmes for people like me - 2nd year students.

Despite the bad economic times here, companies are sustaining their intake, at least. I have worked hard to land myself a job in the City of London. If I do get a summer internship, my chances of obtaining a graduate job will be MUCH higher..especially in times like these. I was really close to getting an internship that I really wanted..but I failed BIG TIME in one of the test in the final stage..

Despite my effort, I failed to get any internships.  Applied to quite a handful of companies. It was official on Thursday when I received a reply from my final application- that they 'could not proceed with my application further' (a very nice way to put it). All the effort and persistence did not payoff. 

Morgan Stanley Private Wealth Management
Morgan Stanley Investment Management
Schroders PLC
Baillie Gifford Investment Management
SEO-London
Deutsche Bank Private Wealth Management

Applied for all the above, and got kicked in the ass! haha! 

Ouch. 100% rejection record. It hurts to think about it. Such a disappointment. Failure- especially when you worked so hard for it!That's bad! Can't blame bad economic times for my rejection. One simple reason- I am not up to their standards.

Well, got to move on and do what I do best, improve where I lack. Got to kill the pessimism and bring back the bright, blue sky and  sunny thoughts to my mind. Failures- Handle with care. Otherwise, it will make someone crash. It's a normal cycle. If there are successes, why not failures? Like the market, if there is a boom market, why not bust? And if it's busting, or busted, now, why not go against the herd and start making money? ..ok ok..screw those points.. I will leave it for my investment discussions..

I thought of a way to turn these rejections into my fuel of motivation. All those rejection letters, I have printed it and paste it right on the wall of my room, right in front of me. 

Your time will come. Work hard.

Remember, what don't kill you make you more strong.

' You rise, you fall, you're down then you rise again. What don't kill you make you more strong'
- Metallica -

Monday, February 16, 2009

Long-term Investing & Value-Investing: Any difference?

WARNING: THIS IS GOING TO BE A LONG AND BORING POST ON THE TOPIC OF FINANCE, MONEY AND INVESTMENT. IF PRESERVING, PROTECTING AND GROWING MONEY ISN'T YOUR CONCERN, THEN YOU MAY SKIP THIS POST.

Our first discussion was on the magic of compounding. If you haven't read it, please do check it out- it is important even if you don't invest because it has a lot to do with your savings SITTING in the bank.

This post will discuss about long-term investing and value investing. Before its major difference struck me, I thought both were the same. SAME. After one particular event, I realised such misconception can lead to financial loss- something that you don't want to experience. 

Lets get started by clarifying a core concept - VALUE INVESTING and LONG-TERM INVESTING are 2 different approach. However, long-term investing is a subset of value investing. The opposite, though is absolutely wrong, invalid and financially fatal.

What particular event brought me to discuss this issue? In Dec'08, I was back home in Malaysia. I tried seeking for capital from friends to invest on their behalf. One of my effort led to discussion of my venture with my friend's dad - in order to gain permission from his dad for some capital. This dad of my friend is a successful businessman in his own rights. He has seen successes and recessions (in another words, businesses collapsing) and how the stock market pushes and bullies investor despite of whatever approach that guides the investor.

During the discussion, I tried to convince him of my approach, explaining my method and fundamentals and techniques and so on, so forth. Well, based on experience alone, I am next to nothing compared to this successful businessman. You might find it stupid for me to go ahead with my investment and helping people to invest (or burning their money in your terms) given my major lack of experience.Hei, I am equipped with practical advice- established for more than half a century and practiced and proven by many well-known successful investors. Don't get me wrong- I am not implying that these methods are flawless.Ok ok...this post is not about me. It's about the concept.

From the very beginning, his responses to my ideas were filled with complete pessimism. Can't blame him. THE MARKET IS REALLY IN A SHIT HOLE. This businessman was drowned in sea of pessimism due to losses in his stockholdings, slowdown in this businessman's business and stories from his wealthy friends how bad they were doing. He was even adamant that fundamentals do not work in such bad times. To be honest, even during boom times or bull markets, fundamentals hardly remain intact. When you are doing well, it's a natural tendency for you to overlook some of the flaws in your approach. Well......of course fundamentals don't work in short-term..Market tends to deviate from fundamentals - frequently. Those investors who made it big exploited this deviation by sticking close to fundamentals.......He was adamant from the very beginning that what I am doing was big-time mistakes - both in investing in current market and trying to invest people's money without experience. I accept the latter part. I lack my own experience. But the former, it's rather subjective. Time will tell. From that very point onwards, I knew my chances of gaining fresh capital is less than zero..At least through that discussion, I was enlightened in this aspect.

When someone invest for the long-term, majority will say that this is a minimum-risk and wise investment since in the long-run markets will trend upwards. True to an extent. If you think its flawless, then continue reading.. 

When I was discussing my approach as long-term, he started explaining the flaws of fundamentals and long-term investment. He gave me real-life examples. He described some of his investments to me - his approach, his holdings. One particular holdings of his was bought because of interaction with a very senior executive of that company - reaffirming him and the rest of the market of the bright prospects of the executive's company. Honestly, the only answer the executive can give, in summary is 'our company is on the right track and doing well-expect for more'. Who will actually provide a pros and cons comparison when trying to sell you and the rest something....It is like a foreign investor asking our Minister of Trade (not sure about the actual name of ministry and the minister's name) whether they should invest in Malaysia or not. With this, decision was made, bought the shares during boom time expecting to hold for the long term, came the market downturn, and saw his holding fall in value substantially then started blaming that long-term investing does not work. Another approach that I could recognised was buying big, blue-chip companies because they tend to go up....not wrong when you have done proper analysis...all this does not reflect proper investing. What's the lesson? Do not buy on what others say, buy based on your analysis. And, up market will eventually be followed by a down market.. nothing is permanent especially in the financial markets..

In the long-run, yes, he might recoup his losses. But one thing he cannot recover - opportunity costs. Also, how long will it take for the loss to finally break-even? Aha, time value of money. Relate to compounding and you can see the extent of losses actually incurred if the capital is wisely invested.

Hmm, took me pretty long to state my actual point. Long-term investing is only successful if you relate it too value investing. Value investing, in a nutshell is all about identifying deviations and discrepancy between price and value. Exploit it wisely and money starts snowballing into your pocket. How to exploit? Simple. Everyone does this. We buy when things are on sale. So...BUY WHEN SOMETHING IS CHEAP RELATIVE TO THE VALUE YOU ARE GETTING IN RETURN. But the problem is this- it is difficult to define value of a company. To counter this, it is not necessary to place specific figures on this value- after all, value is a subjective term. Give you Benjamin Graham's analogy - you do not need to know the weight of an obese person to tell if they are overweight or not. In simple terms, profit by buying low and selling high. We all know this. Yet, many do the opposite. 

The main idea is your entry point when purchasing a share. When it is overpriced, and you buy this company, you are expecting the market to go higher (recall tech bubble in at the beginning of the century). But heated markets will cool down and things will start to collapse. So, your downside is way greater than your upside. There is still upside, but with minimum probability. 
Where as if you bought it at a lower price, or a discounted price to its fair value, your downside is lower since the company has potential to unlock its value. And to make yourself feel better, when things fall, you will start saying to yourself you are buying for the long-term. 

Take this for example. Your share value fell by 50% from RM100 to RM50. In order to break-even or coming back to your original position, you need to gain 100% of the current value of RM50. Assuming the general market grows by 15% annually after this downturn(this is rather quite an optimistic projection), you need 5 years to recoup your losses - assuming you do not cost-average your losses. 5 years and you only break-even...so much for long-term investing..Again, relate to compounding. Assuming capital after so many years could only be recovered at RM50. Is your actual lost limited to RM50? Not really. Factor in the opportunity costs of having the initial capital invested in bank. At a given interest rate of 3% per annum, compounded for 5 years, you will get RM115.93 in Year 5. So there is an additional loss of RM15.93. And imagine the capital was invested wisely......assuming conservative returns of 8% per annum compounded over 5 years.. you will get RM146.93 in Year 5. So...the loss actually widens substantially....bigger the compounding factor..bigger the losses..

Although buying at discounted prices to actual value is safe, this does not promise returns or complete protection from losses. What it gives you is protection or in more technical terms, higher margin-of-safety - lowering your chances of losses, NOT ELIMINATING it and increasing the potential for upside. Bigger the discount to its fair value, bigger the margin-0f-safety. Be logical and sensible- troubled companies are usually selling at distressed prices..when you buy it cheaply, you are assuming high risk of losing your capital. you got to take lots of courage to purchase such companies..Be discerning..

NOTE: the concept, margin-of-safety is extremely important, core to the heart in order to make successful investments. 

Also, I am not advocating against paying a premium for good companies. Some really strong companies deserve premium. Again, it is the amount of premium that the company deserves. Take ebay. It is quiet a decent company. During the tech bubble, its premium was easily more than 2000% of its fair value....

Still can't catch why long-term investing is value investing but not the opposite? You discover price-value discrepancy (value investing), buy, hold on to it(usually for the medium to long term) until it exceeds substantially its fair value then sell and you pocket a decent profit with little risk. Where as long-term investing, you might risk overpaying or buying a company at too high a price thus having little margin-of-safety to cushion your loss if the price falls.

This is the insight I got from the discussion with that businessman. No capital, but at least a big lesson. I felt intimidated and discouraged with all his 'advice'. But hei, it sets a challenge for me to prove to him and others in the community that this method actually works- this old-skol method actually works! Hmm..come to think about it, many people has done this, but many overlooked it.....surprise surprise..human nature..

I am not just all about saying. I am actually practicing this method, putting it into use. I eat what I cook. I am putting all my faith and trust into this- my entire net worth (life time savings) is invested with these fundamentals guiding me. On top of that, I do have other investors in my informal partnership as well..not just my money. At least i manage to convince some people..

There are definitely flaws with my discussion above. So, kindly leave a comment to discuss anything and give me an opportunity to correct or clarify myself.

Hope this has enriched you and if it does, continue sticking around here to learn more.

Anyway, thanks for reading! =) 

Aaron.Hee.Wy