[Building Blocks]: The ‘Catalyst’ in catalyst investing

Hi everyone, first and foremost a Happy National Day to all of my readers! Today I am going further in depth into catalyst investing. I have mentioned quite heavily about how I like to look for catalysts in the company that will boost the share price. Generally, a stock catalyst is an event that will cause the price of the security to move and sometimes quite significantly. This can come in the form of a superb earnings release, a potential takeover offer, special dividend release etc.

The simple rule of thumb is that all catalysts should lead to an increase in either:

1. Revenue and profits

2. Shareholders’ value

It is purely because of events that lead to higher revenues/profits or enhanced shareholders’ value that will eventually cause investors to bid a higher price for a stock. Hence leading to an increase in share price. And depending on the impact of this catalyst, the magnitude of the share price movement varies.

1) Types of catalysts

When I look at catalysts, I tend to divide them into 2 types of catalysts, “Company-specific” and “Sector-specific”.

A company-specific catalyst is one that tend to be applied only to the company and is independent of other companies in the same sector or not. Examples of this includes, a potential takeover offer by another company, disposal of an asset of the company for a sum of money, spinning off of a subsidiary of the company, a new product that is disrupting an industry etc. All these catalysts are specific to the company and tend to either increase revenue for the company or enhance the value of the shareholders.

A sector-specific catalyst is one that tend to apply to an entire industry. This could come in the form of an increase demand of a particular industry like how the semiconductor boom this year have provided a favourable tailwind for many semiconductor companies. Those in this sector experience higher earnings QoQ which led to higher stock prices. Also events like lifting of regulations on a certain industry can also lead to higher stock prices as earnings is speculated to improve.

2) Real life examples

I will give you some real life examples of what catalysts can do to a stock price.

— Company specific —

1) Takeover offer

Some of you may know that Global Logistics Properties one of the largest logistics provider in Asia recently received a buy out offer of $3.38 per share from a Chinese consortium. However, this catalyst was not new. GLP had announced that it is undergoing strategic review early this year which eventually culminated in a buyout offer. If you had bought in when the strategic review was announced at $2.60, you are already sitting on a 30% return due to the buyout offer of $3.38.

GLP chart

2) Disposal of asset + special dividend

Neratel announced that they are in talks to dispose off their payment solutions subsidiary on April 29 2016 and are intending to pay out the divestment gains to investors.

neratel chart.png

This led to a gain of 18.4% if you had bought when the announcement is released in April at $0.49 to a peak of $0.58. Neratel eventually did dispose off the subsidiary and gave out a special dividend of $0.15 per share.

3) Earnings accretive business venture and acquisitions

Acquisitions that are earnings accretive or entering into a new business with huge upside to earnings are also potential catalysts.

I did a post on GSS before here, which talks about their foray into the oil and gas industry (new venture) which many thought was an earnings accretive venture. This caused the stock price to rocket up. Buying at the top of the green circle at $0.28 also gave you about 30% return at the peak of $0.375.

gss.png

Another example would be MM2 Asia, an entertainment company in Singapore. They produce films like Ah Boys to Men. Since 2016, they have been on several acquisitions, they include buying over cinemas, buying over a concert production company Unusual Entertainment and subsequently spinning off Unusual Entertainment. All these acquisitions have improved MM2’s results tremendously and by spinning off Unusual, it also unlocks value for existing shareholders.

mm2.png

If you had held from the first catalyst announcement in Jan 2016 at $0.20 to the peak at $0.630, this would have been a 315% returns!!

— Industry specific —

Industry specific catalysts generally come in the form of improved sentiments in the industry. Some of yall may know how badly hit the O&G sector was hit due to the drastic drop in oil prices. On the contrary, an improved in sentiments can also bring up the entire industry. For instance, earlier this year MAS announced the relaxation of a regulation governing the financing of SMEs.

industry catlayst.png

This led to all 3 smaller banks listed in Singapore, Hong Leong Finance, Sing Inv & Finance, Singapura Finance to all rise in tandem as investors believe that it will benefit from the new regulations.

 

If you are following up till now, you will realise that industry specific catalysts are usually more unpredictable compared to a company specific catalysts. However, its also good to choose a company with a good mixture of both. Depending on industry-specific catalysts alone is too risky.

3) Some tell-tale signs to improve accuracy

As you can see from all the examples given above, catalysts are definitely a great booster to a stock’s price. However, one must understand that buying on catalysts is like betting on the future which as investors we should avoid. This is because catalysts depend on many factors to allow it to come to fruition. Just like a company announcement signalling their intention to acquire a new business, it will not become a good investment if the new business do not lead to higher revenue and profits for the company. In this case, it is definitely a catalyst but it has not led to the ultimate end goal.

Thus, it is important to understand how to improve our accuracy when picking catalysts stocks.

— Management —

The management must be capable in order to successfully allow the catalysts to manifest. Thus it is important that the management have a large enough stake in the company (Insider Ownership), so that their interests is aligned with the shareholders. Have the management live up to their promises? A quick run through their Annual Reports should shed some light on the managements’ aspirations for the company. Comparing that with actual results, should shed light to their capability.

 

Always look out for:

  1. Insider buying more shares
  2. Share buyback by the company

These moves are usually an indication of better things coming that will positively benefit the company.

— Timing your entry —

To maximise your returns, one should always look to enter before the catalysts are made known to the general public. This will give you sufficient margin of safety and allow you to lock in the gains when the public come to hear of the catalysts. Doing that is hard because you will not know when it will happen.

Usually, you will hear of news that this certain catalyst is going to happen to this company but there’s no confirmed date. The best thing you can do is to look for a consolidation phase in the chart and buy on the first breakout.

GLP chart

As you can see from the GLP chart. The first breakout in the first week of Jan 2017 is a good time to enter. This is in conjunction with the news released on 5 Jan 2017.

Hence, buying on a strong breakout with high volume is also another way to enter at a better timing as strong volume usually indicates a strong uptrend as buyers are usually funds and big buyers.

In conclusion,

I hope you have learnt a bit more about my own experience on catalyst investing. Buying on catalysts alone is not recommended and this should be mixed with fundamentals analysis of the company including its PE, debts level etc etc. A good stock with strong fundamentals plus good catalysts and a perfect entry timing will be a much safer way to invest on catalysts!

[Building Blocks]: 5 good to know investment ratios for better investment analysis

Looking at a company financial statements and not knowing what to look out for can be a headache for investors, which is why certain investment ratios have been widely used to explain certain important aspects of a company’s financial statement in a more simplified manner. For those who have some investment knowledge would have heard of terms like PE ratio, Debt to Equity ratio etc. These ratios make use of certain elements of the financial statement to give investors an easy understanding of certain strengths or weaknesses of the company. In this post, I shall try to explain some of the key ratios that investors normally use and what it means.

investment ratios.jpg

These are the 5 common investment ratios that I will explain below:

  1. Price to Earnings (PE) ratio
  2. Price to Book (PB) ratio
  3. Return on Equity (ROE) ratio
  4. Quick Ratio
  5. Debt to Equity Ratio

1) Price to Earnings ratio

Just as the name suggests, PE ratio simply means:

 

PE Ratio

PE ratio is widely use by a lot of value investor to see if the stock is undervalued or not. Generally a low PE ratio of less than 10 is considered to be undervalued. Whereas a high PE stock usually are found in high growth stock. For instance the FANGs stocks, Facebook, Amazon, Netflix, and Google, most of their PE are above average PE ratio in the US. This is because investors believe that these tech stocks will continue to grow their Earnings per share (EPS) rapidly hence at present times they are willing to bid up its present stock price to a high level ==> Thus a high PE ratio.

In other words, it represents the amount one is willing to pay for each dollar worth of earnings of the company.

2) Price to Book ratio

Price to Book ratio (PB) is also another widely used indicator by value investors to determine if the stock is overpriced or not.

 

PB Ratio.png

In this case the book value of a company is the value of the assets of the company on the balance sheet =>  since Total Asset – Total Liabilities = Total Equity 

Thus, PB ratio is simply at what price are you paying for the value of the underlying assets in the company. A low PB ratio means that you are paying a low price for the value of assets in the company, the opposite is true for high PB stocks.

However one have to understand that PB ratio has it own shortcomings, for instance, it is more accurate for company that are capital intensive or company with a lot of assets.

3) Return on Equity (ROE)

ROE is a measure of how many dollars can a company generate on every dollar of equity.

 

ROE

Many termed the ROE as a measure of efficiency as it measures how well the management deploy the shareholder’s capital. Being able to get more dollars of profit out of lesser dollar of equity is a good thing to look out for (High ROE). Thus, usually company with high ROE is preferred over one with low ROE.

However also note that ROE can be artificially affected if the total equity portion is changed. For instance share buyback decreases total equity and hence boost the ROE.

4) Quick ratio **

Although not used by many, I feel quick ratio is a rather important measure of the company ability to manage their debt obligations.

 

Quick Ratio.png

Quick ratio provides an understanding of whether a company can meet its short term debt obligations. In this case, the short term investment refers to any securities the company hold that can be liquidated in a year.

A high quick ratio of more than 1 would mean that the company are able to pay off their debt in a year and hence the company would not run into any issues with the debtor within the financial year.

A low quick ratio of less than 1 would show that the company may have troubles meeting the near term debt obligations and could run into financing issues which as investors we would not want. This can prompt management to take on more long term debt to finance their short term obligations or raise funds through rights issues which we usually try to avoid.

5) Debt to Equity ratio **

Debt to Equity ratio is another way to understand about the company’s debt status.

 

Debt to Equity Ratio.png

Debt to Equity calculates the amount of financial leverage the company has.

High debt to equity ratio (usually more than 1.5x, in my opinion) mean that the company is highly leverage and can be rather risky. If the company cannot generate enough cash to pay off the debt that could spell trouble for the company.

Whereas an extremely low debt to equity ratio can mean that the company are too conservative and may be missing out on the extra growth benefits that taking on some debt can bring.

 

** For both of the ratios used to determine the debt status of a company. It is important to distinguish the nature of the debt. Is it being use to expand operations, or is it used to pay off loans that are going to expire? Choosing a company that uses debt well to expand operations that lead to higher profits and growth is good. Whereas a company that consistently borrow to pay off bad debts is definitely bad.

Another indicator would be to examine their cash flow to see if they are earning enough from their operations to cover the amount of debt they incur. Hence, one should never fear away from company that takes on debt, but instead study them closely.

 

In conclusion,

no one ratio can tell you the full story of any company. You would need to actively look at a few ratios, compare across the industry, look at their growth prospects before you can derive at a fuller picture. Hopefully, you have learnt more about certain ratios that are widely used by investors. If you are looking to learn more about how to read annual reports you can click here (for part 1) & here (for part 2) which should greatly aid in helping you make better use of the ratios you have learnt here!

[My Story]: My Investing Strategy

Hi all, apologies for not posting for a while now. Peak period of outfields week in week out made me procrastinate for quite a bit haha. I realised it’s been about 1 year since I started investing. A lot had happen and I am thankful for the many lessons I have learnt over the course of the year. All that happened, made me stronger and allow me to continuously revise my own investing strategy. Today, I shall share about my own investing strategy. How I identify potential investment targets, what I use to time my entry into a stock and when to sell.

1) Investment Objectives

Previously, I shared the importance to know your own investment objectives before being able to craft out your own investment plan.

my-investment-objective

Your own investment strategies are the actions you are going to take in your investment plan. Just a recap, for now my investment objective remains to grow my capital. From a measly sum of $300 at the very start of my investment journey, I am targeting to grow it to at least $10k before I enter the university. (Of course along the way, I added more money into my investment.) As of now I have about $6k vested in the stock market and sitting on a 20% realised return so far. Below is my investment strategy I am using to reach my objectives.

2) How I pick my investment targets

Personally, I like to look for companies with low Price to Earnings (PE) ratio with huge growth catalysts ahead. Companies that are of such qualities fill up about 60% of my portfolio. The reason why I adore such a company is because it is both undervalued and have ample of growth characteristics. (Killing 2 birds with 1 stone!)

Of course, sometimes it’s hard to find such a company. But all you need is that 1 or 2 opportunities to give you astronomical gains. Examples are companies like AEM which was previously PE of 8-9 (undervalued) and had a innovative product (growth). When the market comes to realise the company’s potential, the share price will readjust upwards.

After finding that few value-growth companies, I like to diversify across themes. By that, I like to research their growth areas and see if it fits any major trends happening in the world or in Singapore. For instance, now the One Belt One Road is quite a big thing, companies (construction, railway builder etc) that are undervalued and have operations in this area will potentially stand to gain from the growth opportunities available. Here’s another example, I may want to look at a more defensive theme. Companies that are undervalued and are in the industry that provides services to consumers, governments etc are all plausible candidates.

Of course, after shortlisting the few that make the cut. Checking their fundamentals is next and even better if there has been insider buying. (Here’s how I evaluate a fundamentally sound company)

3) Timing my entry

After all that filtering process, you should probably be left with a list of less than 4 companies. Timing my entry to buy into the stock is next. How should I buy at the correct timing. For me, some technical indicators and the chart have helped me quite a bit.

I like to enter my first position after a period of consolidation (where the price have been around the same level for a few weeks) and with low volume.

AT chart

I use the weekly chart for a better long term view since I usually hold my position for a few months at least. The red rectangle is the period of consolidation where prices close in very tight range. And if you look at the blue circle, the volume is below average for those few weeks. This represents a rather good opportunity to enter. I like to see consolidation period as a spring board to propel you upwards. But, how do we tell if price will go up after consolidation and not down?

AT chart1.png

I use the MACD indicator to see if there’s a possible uptrend coming. (I am not going to go too in depth into indicators) When the blue line cross the red line as shown in the circles, it is a possible indication of an uptrend. For me, I only use indicators as an additional reference after I spot a consolidation zone.

4) When to sell?

Haha to be honest, this question always baffles me. I myself am also not a good seller. There are a few times a stock raced upwards after I sold away all my position. Sometimes, I get to emotionally attached to a stock and tend to sell too late. Hence, this portion is something I am constantly still learning. However I do have a few ground rules to follow.

  1. Sell when the undervalued stocks become overvalued.
  2. Sell at your stop loss.
  3. Sell when the business is no longer attractive or fundamentally sound.

I don’t really use technical indicators to predict when to sell, because I believe that as long as the business’s value and growth aspects remain intact, a downtrend should be temporary.

In conclusion,

planning your own investment strategies to achieve your own objectives is important.  You need to know what stocks you are looking into, when to enter and when to sell. Only then will it translate into gains in your portfolio. Hopefully for those who started investing, you will be empowered to write out your own investment strategies after reading my own strategies. Writing it out is really effective, as it makes sure you do not get flustered when anything happens in the market.

[Building Blocks]: 3 useful online resources to help with your investing journey

Living in a world connected by the internet means information are widely available just a few clicks away. No doubt, I myself have benefited immensely from the information I found online. Today, I want to share with you some of the useful online resources that will definitely be of help to your investing journey.

1) Investopedia

investopedia.png

Investopedia was the very first website that I visited to understand more about investing. It is like a huge encyclopedia on anything related to finance. I would say that it is easily one of the top few investing websites that are easy to understand and well organised. Not only are there information on investing, there are information on current affairs, insurance and many more. The only down side of this is that it mainly focuses on the US markets. However I would recommend this website for beginners wanting to invest because their beginners’ tutorials are very comprehensive and easy to understand.

investopedia 2

You can find tons of tutorials about investing at this website.

And if you are still clueless where to start from, I have compounded a list of tutorials from Investopedia that you should start with. Click on the link below for you to be teleported there haha.

  1. Investing Basics 101: A tutorial for beginner investors 
  2. Stock Basics Tutorial
  3. Bonds Basics Tutorial
  4. Mutual Funds Tutorial
  5. Introduction to Fundamental Analysis
  6. Basics of Technical Analysis

Here you go. Starting out with these few tutorials should allow you to understand investing clearer. If in doubt you can always drop a comment below and I will answer to them 🙂

2) InvestingNote

investingnote

Think of InvestingNote like a Facebook for investors. It boast a huge collection of users ranging from beginner investors to the very experienced ones. Interestingly, this platform is set up by Singaporeans and was only launched recently. The community in InvestingNote is fantastic as many are willing to share about their strategies and styles of investing. What’s more? You can also find out more about the stocks you are interested in, like the information of the company, what other investors are talking about that stock etc etc.

Investingnote 1

For instance, if you are trying to find out more about Japfa, you can get a summarised information on Japfa’s price actions, fundamentals and financials on the left and the chart of Japfa on the right. Personally, I find InvestingNote’s charting platform to be one of the best. It allows you to plot your own lines, overlay them with a myriad of indicators and you can even save your drawings on the chart.

investingnote 2

Scrolling down further, you can see what are some of the things other users are talking about and the upcoming events the company may have. It currently have information on companies in the SG, US and HK markets. But many of the users of InvestingNote mainly talk about SG stocks which are good for new investors looking to go into the local market.

What’s more important is that you can get these amazing features for FREE. All you have to do is to sign up with them. It seems like I am doing an advertisement for them haha. Rest assured I am not paid to do this. For me, this platform have really accelerated my learning on investing and hence I thought of promoting it to you guys.

3) Investment Blogs

Many investors do have their own blogs where they document their own investment experiences. Some of them are so influential that some investors buy whatever they preach. Personally, some of the blogs that I have came about have helped me in terms of understanding how different investors analyse a company, their investment strategies etc.

I think what’s really beneficial about learning from investment blogs is learning the way others analyse a company. By reading their investment thesis on certain companies, you can understand the way they think which you can apply when you are analysing the company you are planning to invest.

Here’s an article on 55 SG Financial Blogs that are useful.

For me I am a regular reader of TTI, thelittlesnowball, my15hourworkweek and TUBinvesting.

Do give them a visit! 🙂

In conclusion,

good resources are everywhere on the internet. Use it to propel your investment knowledge as much as possible. You will realise that you may not have to even pay a dime to attend courses which teach you about the basics of investing. Also, the best way to learn is from each other. Hence, I believe InvestingNote and reading of other investors’ blogs are two good ways to deepen your understanding of investing. Do note that everyone have their unique styles of investing, different upfront capital and different investment objectives. Thus, completely copying someone else’s method may not suit you. I would suggest adopting good practices and incorporate it into your own method of investing. Hopefully this post can help you realise some of the good investing resources online that will be beneficial to your investing journey!

[My Story]: How I managed to regain all my losses with one solid stock

Hi everyone, it’s been about 3 weeks since I last posted. Was away for a military exercise in Thailand. A lot have happened while I was in Thailand, the weather was crazily hot, GID outbreak in camp and I also sold one of my stock holding that gave me a 100 percent return on investment. The profits made from that investment was able to cover out all my losses incurred when I just started out investing. Today, I will be sharing more about the characteristics of that stock and the things I have learnt from this episode.

1) 100% return in just 3 months?!

Yup I was equally surprised! Some of you may have noticed that in most of my recent posts, I have been using AEM Holdings as an example. Yup this is the company that have became my very first multibagger (a stock that returns more than 100%). It all started out when I was screening for low PE stocks in the SGX. (Value approach). This company popped out in the screener which caught my eye. It has innovated a cutting edge product that no one in the world has been able to and back then its PE was less than 10 (relatively undervalued). The company have also just returned to making profits and are planning to ramp up the production of this product which means that further earnings growth is guaranteed.

Since it fulfills the basic principles I set out for a fundamentally sound company and I read an interesting piece of analysis by the guys over at thelittlesnowball.com which reaffirmed my beliefs, I vested into the company at $0.885 per share.

AEM stock chart.png

From the chart, I entered AEM at $0.885 per share, added more shares at $1.055, before selling them at $2. If you were wondering why did I decide to sell it instead of holding onto it longer, it was because this stock was about 60% of my portfolio. I have about $2000 invested in it. As this stock catches the attention of more people, it will become more volatile as big players come into the fray. Since I am just a small fish in this, I decided to take the money off the table and only enter again when there is a dip in prices.

Not all company can be like AEM, which gives a 100% return in just 3 months but there are certain characteristics that the company possessed.

  1. Growing earnings
  2. No debt
  3. Frequent share buybacks
  4. Undervalued

and most importantly it has major catalysts (in the form of their cutting edge products) coming its way.

2) Lesson learnt from this episode

I think the most important lesson I learnt from this episode is to be consistent in your approach. A lot of times, young investors like us tend to be swayed by our emotions. For instance, chasing the next hot stock etc etc. When we are swayed by our emotions, we tend to forget all the framework that we set in place for ourselves. Hence being consistent in our approach and calm minded are very important when we are investing.

This episode also shows that you do not need to be in many trades to profit from investing. Sometimes, all you need is that 1 stock to do the magic. Hence, when you are disappointed because you had to be force to exit a stock due to the stop loss in placed, remember that 1 win can easily make up for many small losses if you exit them early. Personally, I was down about $600 since I started investing and this was still when I didn’t learn to cut loss. In that $600 includes the 70% lost incurred from my Noble’s debacle. I am glad that my revised approach, have led me to recover from my losses and rake in a small profit.

In conclusion,

I would like to say that not all stocks can be like AEM. However, many stocks do have some resemblance to it. With enough due diligence, and a small leap of faith you may just stumble upon the next AEM. Most importantly, do not forget the framework you built for yourself while investing. Personally that has been the most important rule that led me to find this undervalued gem!

 

[Building Blocks]: 4 principles of a fundamentally sound company

Hi all, as promised I would like to share with you some of the criteria I have before I decide that the company is fundamentally sound and worth investing. These 4 simple principles can be applied irregardless of what style of investing you pursue. (Growth, value, income etc) Investing in a fundamentally sound company reduces your exposure to the risk that the company may fail. These principles also act as red flags when a company with good track records flouted any of these principles. Adhering in these 4 basic principles should put you in good stead when investing directly on the stock market.

Processed with VSCO with b5 preset

Without further ado, here are 4 principles I always apply when evaluating a company.

1) Earnings Record

A fundamentally sound company should have a stable or growing earnings record. If the company can show stable or growing earnings over the past few years, it is likely that the company’s product or service are well sought after and there is some form of economic moat around them.

The 2 most important components to determine the strength of their earnings are:

  1. Revenue
  2. Net Profit

** Revenue – (Cost of Sales + Expenses incurred) = Net Profit

Revenue reflects the amount of sales that the company have done for the products/services it provides. It is often referred to as the company’s top line. On the other hand, net profit shows the earnings after subtracting the costs involved in manufacturing the products or providing the service and the various expenses incurred. Net profit is often referred to as the company’s bottom line. Hence, when someone say a company has achieved top line growth, it is referring to increase in revenue and likewise for net profit.

aem 3q result.png

Companies with stable or growing revenue shows that their sales are increasing. Improving net profit also shows that the company have been able to manage their costs and preventing it from exceeding its revenue. Thus, these are good sign of a company that will be stable compared to a company with fluctuating revenues and net profit.

2) Low Debt

This goes without saying. Company that takes on huge debt are often at higher risk of failing. Imagine being chased by debtors for payment while trying to do business. Earnings will definitely be affected as earnings may have to be used to pay off debt. These are definitely not a good sign for a company. A classic example would be Noble Group which I shared before in [My Story] component.

Of course low debts are healthy as they aid a company to grow its business. So what’s a healthy amount of debt? I have 2 ways to evaluate if a company have over-leverage.

  1. Cash and Cash Equivalents > ST Debt + LT Debt
  2. Current Ratio > 1.5

This works in such a way that if both rules 1 & 2 don’t hold, you are probably looking at an over-leveraged company. The best case scenario would be that rule 1 holds which most of the time means rule 2 will hold.

3) Positive Cash Flow from Operations

Cash flow is important for a good company as some companies can have very strong earnings but those earnings may not be recognised in cash. If a company consistently register a negative cash flow from operations, it should set off some red flags. This is because most of the company’s debt and expenses are paid for in cash, if their earnings do not bring in cash this might be a problem in the future.

Take the case of Yuuzoo Corporation.

yuuzoo

Strong growth in revenue and net profit recorded. Indeed very impressive.

yuuzoo3

However, look at net cash from operating activities. It has been negative for 2 years. It is okay if the company at times record negative cash flow from operations as they may have use the money to pursue expansion etc. But if it has been happening for a few years, it is definitely not a good sign of things to come.

4) Insider Ownership

Insider ownership is often a good sign to tell whether the company’s management believes in the company. This will show whether the company’s management put their money where their mouth is. A good level of insider ownership should give you the confidence that the company is good because the interests of the management is at stake as well.

Hence events like management buying or selling their own company’s shares could be a pre-indicator of their outlook on the company.

shareholder-info-for-dutech

This is extracted from the annual report of Dutech Holdings. Dr Johnny Liu Jia Yan who is the Chairman and CEO owns about 42.76% of the shares. Hence this should reassure shareholders that he will act in the interest of the shareholders.

Bonus

If you can find a company that satisfies most of the above, at least 3 out of 4 and you realise that the company are buying back their own shares (share buyback) or the management have been buying more shares of the company. (Insider ownership) This could mean that something big is brewing within the company and it is likely an excellent opportunity to invest in the company.

Some of you may ask how should I go about finding these information regarding the company I am investing. Firstly you should always check out the investor relations segment in their website which should contain information regarding the company. Alternatively, you can head to SGX website to find them. You can find out about every companies announcement with regards to their financials, insider transactions, annual reports etc here.

In conclusion,

these are 4 principles that I look for in a fundamentally sound company. It may not be fool-proof as many factors can affect a company. But these principles should allow you to sieve out the better companies in the entire stock market which should provide a relatively safe and lower risk investment should you decide to enter the stock market directly.

[Building Blocks]: How should I get started?

Hello everyone! Hoped that all of you had a great CNY holiday. Haha since I am now on my CNY block leave I decided to write today. In my previous few “Building Blocks” blog posts, I have talked quite a bit about the different styles of investing and the all so important investment objectives that everyone should have before investing. Since we are all richer due to our red packets (for those singles out that :P), I thought it is timely that I should touch a bit about how to actually get started.

Off my head, I thought of a few questions that a new investor would have when he/she is starting out.

  1. How much should I invest?
  2. What to invest?
  3. How do I go about doing it?

(Do reach out to me in the comment box if you have any more questions about investing. :). I will do a separate blogpost to address those questions if any haha)

There are 2 investing instruments that I would recommend a young and new investor to consider that would answer the above questions.

1) Regular Saving Plans (RSP)

What to invest?

 RSP is a great way to get started on investing. Most of the banks in Singapore offer RSP, but since most people are account holders of DBS or OCBC. I will mainly touch on the RSP programme that the 2 big banks offer. For me, I would recommend against investing in mutual funds because they tend to do worse than the general market in the long term. I would prefer a RSP in an index fund or an Exchange Traded Fund (ETF). Both the index fund and ETF are created to match the performance of the broad market. For instance, the STI ETF is created in a way to match the movement of the STI (the top 30 companies in the SGX). So whatever happens in the market, will be reflected in the fund. Also, sales charges for these type of funds are generally cheaper than a mutual fund because there are lesser transactions (less actively managed) made by the fund manager.

So how does a RSP works? A RSP invest a fixed amount of money every month into the fund you are intending to invest in. For instance, you could do a $100/mth RSP in the STI ETF.

pros-and-cons-of-rsp

RSP is mainly for those who want to invest for the long term and may not have a huge upfront capital to invest at one go. Think of this like putting your money into a piggy bank that yield higher interest rates than your normal banks’ interest rate.

STI ETF returns.png
If you hold this STI ETF for 5 years you will get a pretty decent 4.66% return compared to the bank’s non-existent interest rate

How much to invest?

This question will really depend on yourself. How much will you be able to take out from your monthly income to ensure that your living expenses etc are not affected. Since the RSP will only see fruition in the long term, cancelling the plan midway is not very beneficial to you. Hence, it is really up to you to decide the amount. In SG, the minimum amount to put in an RSP is $100/mth.

How do I go about doing it?

DBS and OCBC both have different types of RSP. You can only get an RSP with them if you are an account holder of the bank. For both banks they offer investing in RSP in unit trust. Do note that unit trusts are usually investment in mutual funds which I do not really recommend. (But of course if the funds have a good track record of returns then by all means). What I would recommend is their RSP in ETF and equities.

For DBS, their RSP allow you to choose between the NIKKO AM  SG STI ETF (the one shown above) and ABF SG BOND INDEX FUND (which invest in the bonds of SG)

For more info on DBS RSP, click here

For OCBC, their RSP is different from DBS, OCBC allows you to invest in blue chip companies in the SGX. The plan is called Blue Chip Investment Plan. Basically, the same concept of RSP applies but they invest your money into a blue chip counter you choose monthly. Of course the charges are a bit different for this plan.

For more info on OCBC Blue Chip Investment Plan, click here

Summary

The RSP is a very powerful tool and forms a relatively risk free investment vehicle for starters, but it must be held for the long term in order to realise the gains. For young investors who may not have a monthly pay now, this could be a bit of a problem as you may need to scramble enough cash in your bank account before the investment date every month. Ultimately, you need to carefully plan your expenses before you embark on this plan.

2) Investing directly in the stock market

What to invest?

The other way to invest is to invest directly through the stock market. Imagine the stock market as a big supermart and in the supermart there are a myriad of products on the shelves. Some may be more expensive but of better quality, some may be cheaper but of poor quality, some may be a new product that has just arrived etc etc. The trick here is to pick the right product that suit your personal taste and preference. And all this can be answered by your investment objectives. The stock market can be categories into 3 groups in terms of risk level.

risk-table-for-investing-in-stocks

If you are new to the market, you can consider your first stock to be something relatively of lower risk like an index ETF or a blue chip (Do note that there are many other ETFs too which have different objectives.) Slowly, as you learn more about how to evaluate a company fundamentally and technically based on their chart (which I will also share with you in future posts) you can invest in normal equities while minimizing your risk.

How much to invest?

This is again a subjective question. But I will share with you some pointers I learn while investing in the stock market with little upfront capital. Firstly, the commission for most brokerage houses in SG is at least 40 SGD for a two way trade (Buy and Sell). So the lesser the amount of money you invest in a stock, the larger the percentage that the commission will stand in your profit. Ultimately, you want to make a profitable trade so taking into account the commission is very important. Secondly, with lesser amount of money, the multiplier effect of your stock is much lesser. For instance, someone with 1000 shares will make more money than someone with 100 shares given the same percentage increase.

All in all, the commission cost is the first hurdle to cross before you can be profitable in any trade. And using the multiplier effect will greatly increase your chance of beating that first hurdle. So how much to invest depends on whether you can understand the risk reward ratio of the stock you are planning to invest and giving it sufficient amount of money to beat the first hurdle. For me, I always try to purchase at least 1000 shares in the stock that I plan to invest as it set a nice $100 return for every $0.10 increase in stock price.

How do I go about doing it?

First and foremost, in order to start investing in the stock market, you need to have a brokerage account that is connected to the Central Depository (CDP) which stores all the shares you buy in the SGX. There are several brokerage houses in Singapore, I will list out a few.

  • DBS Vickers
  • OCBC Securities
  • Philip Securities
  • CIMB Securities

Majority of the brokerage houses in SG charge about the same commission fees. A minimum of $25. Some brokerage houses have special programme to differentiate themselves. For instance, DBS Vickers Cash Upfront Account only charge a commission of $18 for buying. For brokerage houses that are owned by banks like DBS and OCBC, they would usually require you to have a savings account with them. 3rd party brokerage houses like Philip Securities doesn’t require you to do so. For me, I chose DBS Vickers because I am already using their savings account which save me the hassle to open another savings account with another bank. You do have to be at least 18 in order to open a brokerage account with some of the brokerage houses. Some require you to be at least 21. Hence it is important to research each brokerage houses first before signing up with them and you can have several brokerage accounts with different houses.

Here’s a good article to help you in choosing a brokerage house.

In conclusion,

these are the 2 ways I put forth for new investors to go into investing. Do always remember to do your due diligence before plunging into any decision and allocate your money well. That’s all from me today. If you have any questions, I would really love to hear them. Simply comment below and I will do utmost best to answer each one of them. Adios! 🙂