Lesson from One Up On Wall Street

I'm still reading the book - "One Up on Wall Street" by Peter Lynch. My progress isn't exactly very fast as it feels like I really need to just sit down and read my books in order to have more take away lessons learned from the various books that I had read so far.

So the main lesson I learned from this one was that we should open our eyes bigger and observe the little things that's happening around us. Because any common person on the street can actually spot a good company at a much faster rate than the big investment firms, provided we are observant enough to spot them.

With this interesting fact and lesson learnt, I suddenly had this idea of looking up the company behind the things that I liked and enjoy and see how it goes from there. :) I can't help but think that I really had neglected this blog again for quite sometime and hope to be able to keep up once again. Let's hope this really works out.

It's like me and one of my best friends enjoyed shopping at Robinsons or John Little Sale. In fact the both of us had the Robinson's credit card, we will receive the mailer on their sales and will visit their sale at least 3-4 times a year. So I went to look up for Robinson's share only to discover that they are delisted in Jun 2008. Read more on that Channel News Asia Article.

Owning Stocks is like Having Children

One very interesting statement that I read in Peter Lynch's book: Owning stocks is like having children. Meaning we should only buy as many stocks as we can handle, especially for those part time stock holders. Because, it takes time, patience and effort to manage each one of the stocks. Even if it means that we only look at the annual / quarterly report every 3 months. But still, that takes time.

Personally, apart from the annual and quarterly reports, I usually will search for any potential risk that the company might face on a regular basis, especially when it comes to a company that has debts, it's important to know that they are still able to pay off the debts and not end up in bankruptcy. For such cases, usually you will see a notice in the SGX announcements or even just the regular news. When the red light indication is on, you just need to be aware and careful about that particular stock you are holding. Because, it might be just between 2 weeks to a few months that the stock can get suspended from trading and there goes all the hard-earned money...

3 Tips on Investing Regardless of Market Condition

Often people are confused not sure which way to go, what to invest. I hope the following tips would help you.

Here are some investment tips:

1. Stay focus and invested
No matter what you do, you must always understand what is it that you are doing. If you have already bought an undervalued stock or any unit trust or any other investing tool that does not have any threat of being closed down, keep them. Never sell them away during bad times and buy at good times! You are supposed to buy more at bad times and sell at super good times so that it's buy low and sell high!

2. Right Company, Right Management and Right Price
Ensure that you've bought the right company with the right management at the right price. The right company with the right management is one that everyone dreams of becoming their boss, such as companies like SMRT, Singpost etc, one that will always be in business and continue to make money no matter what market condition it is. The right price means that when you buy the stock, you know that you'll definitely make money as the price you paid for is about at least 20-50% below the price that company is worth.

3. Diversify your exposure
Buy a few companies from different industries that you know of and understands. Try not to put all your eggs into 1 basket unless you are 100% sure that it's the best basket to put and you will definitely make more money that way. Otherwise, it's best to spread it over a 5-8 baskets. Try not to go beyond that as it's hard to managed that way.

What is Warrants?

Warrant is an investment tool that enables the holder to gain exposure to a security at a fraction of the stock price. It is tied to the exercise price, a price at which you can have the right to either buy or sell the underlying stocks at, before the pre-determined date tied to the warrant, depending on the type of warrant. Hence, it can be used to profit from both a rise and fall in the stock price itself. It has this leverage feature. However, as we all know, leverage cuts both ways, when it goes in your favour, you may earn twice, when it goes against you, you may also lose twice.

The main downside of warrant is that its holders are not entitled to share dividends and they have an expiry date so they can't be hold over long term period. The good thing is that warrants can be bought or sold in a similar way as compared to shares.

Although the underlying issuer is different, it functions in a similar way as compared to options.
Read more about options.

Unit Trust

Unit Trust (also known as a collective investment scheme) is a pool of money managed collectively by a fund manager. The pool of money usually comes from retail buyers, such as you and me. Unit Trust is started with investors buying units in a particular trust / fund, e.g. usually at least $1K per investment. All these money are pooled together to buy a portfolio of assets such as other unit trust, stocks and shares, bonds, or treasury bills, etc. The portfolio of assets purchased by the fund depends on the investment objective of that unit trust.

Usually, there are 3 types of unit trusts:

1. Equities (consists mainly of Stocks and Shares, most risky)
2. Bonds (consists mainly of bonds, treasury bills, notes, least risky)
   
3. Balanced (a balanced mix of the 2 types mentioned above, risk level is in between the above)

And these basic type of unit trusts are then further dividend into various categories:

1. Money Market Fund
2. Global Fund
3. Sector Fund
4. Country Fund
5. Income Fund
6. etc..

For all unit trust, past performance are not indicators for future performance and there's always a chance of losing all your capital. So please ensure that you do know what exactly are you buying and make sure that the sales personnel do countersign your application form with the claims they mentioned if they claim that the returns is guaranteed. If they don't dare to countersign with their name and ic no as well, with all the claims they've made, do reconsider your decision in the purchase.

The risk factor varies between the various type of funds, which is not covered under this article. Alsoe, I need to mention about the sales charges. There are basically 2 types of sales charges, front end and back end. Most of the time, it's either front end or back end charges for a particular fund but rarely both. So it's best to check with the person that you buy the fund from or read the information carefully.

Front end sales charges are deducted from your initial investment amount upfront, the moment that unit trust is purchased, as a result, you will be purchasing less units. Usually, the sales charges varies with the mode that you purchase a fund. If you buy it over the internet such as POEMS, fundsupermart, etc, the sales charges is lower, it may varies around 1 - 2.5% depending on the fund. If you purchase it through agents from the bank, it's usually about 5%. If you purchase it through agents from NTUC income, it's usually about 3% but the funds available are quite limited and I personally won't do that ever again due to the low returns and high charges. If you purchase it through agents from various financial consultant, the sales charges may varies, there's a slight chance that you might be able to negotiate the sales charges.

Back end sales charges are deducted when you sell your investments, usually this will be waived or decreased gradually when you hold the investment over a period of 5 years or more. For this case, do take note of the details before purchasing but it can be negligible if you intend to hold it for long term, e.g. more than 10 years, but still check about whether the fees will be waived or not as well.

Switching Fees may or may not be applicable depending on the policy of the particular plan that you've purchased and depending on the company itself. Usually it varies from 0-2.5%. Anything higher does not really makes sense.

Do take note of all the fees / charges that may be involve and the risk level of the unit trust should you purchase any. :)

Bonds

Bonds, also known as Fixed Income Securities, is a debt instrument that may or may not give you fixed interest payments (coupons). Most bonds pay interest on a annually basis and the full principle on maturity.

Some variants are:

• Zero-coupon bonds
  Those bonds that does not give fixed interest payments but are sold at deep discount of the maturity (par / face) value. In other words, you don't get the fixed interest payment but do get them at maturity as these interest are paid in terms of the discount, and you only get them at the end of the maturity.
• High Yield / Junk Bonds
  These are in fact from the name itself, junk bonds. They do not provide any security in default payment and the company selling such bonds gives high interest as their credit rating is lower than BBB in general.

Please be aware that Bonds have certain risks and are never "risk-free" as anyone would claim. If anyone ever tries to convince you that that it's "risk-free", make it a point to get their name card and make them write that term down into the contract itself. If they refused to, especially in writing that term down, it's probably a scam. Try asking them, which line in the contract says that it's "risk-free"? Just remind yourself of the lehman brothers' case and be wary of such things.

Some Risks of Bonds includes:

• Interest Rate Risk (when interest rate increase, bond's market price will drop and the inverse if true)
• Reinvestment Risk (you can't be sure if you can reinvest the interest payment in a interest rate of something similar)
• Timing / Call Risk (if you bond has a call option that the issuer can redeem your bond before maturity, you'll lose all future income when the market interest rate drops)
• Default Risk (the issuer may go bankrupt like Lehmen Brothers, or may be unable to pay off your interest / the maturity value on a temporary or permanent basis.)
• Liquidity Risk (If the market lacks people that are willing to buy over your bond readily, you may face such problem if you needs the money and is unable to sell your bond.)
• etc...
  

Treasury Bills

All the below is based on Singapore Govt Treasury Bills, part of Singapore Government Securities.

This is the safest type of instrument especially if the Treasury Bill is issued by our Government. In general, this is something which is considered to be risk-free as it means borrowing our government money. Minimum investment size is $1K depending on where it's being sold.

Such investment instrument is issued on a discount on its maturity value by our government. The investment period is 3 mths and 12 mths. Liquidity is available unlike fixed deposit, they can be sold before maturity. It's just a matter on how much interest you'll get from such sale. But due to the low risk involved, there interest rate is not very high.

The interest aren't very high according to the statistics I've seem today. You may want to put them in those higher interest rate banks instead.

Endowment Plans..

Well, when buying endowment plan, there are really plans out that that seems to be out to con our money.. Imagine, an endowment plan that gives you less than the amount you put in during maturity. The only good thing about it is that it does gives you a basic coverage in the event of death etc. At least not so bad ba.. But the whole point is.. how can the plan give you less than what you put in? This might be the case especially if the plan is bought at a high age and the plan is bought with cash back every 1-2 years. Please beware..

I had a very bad experience with AIA 'cos that's what my dad's endowment plan is. Firstly, his policy gives him a negative return and the potential returns on maturity decreases every single year. Yup, I saw it dropping every time my mum ask me to read, when I told her, she said no choice, since buy already better don't terminate. Then the policy price go up every 5 years, thanks to the 5 year level term coverage. The return, no matter how I calculate also very weird, I think it's about 1.5% or something like that. Confirm cannot even beat inflation one.

I'm not too sure about investment linked type of endowment plan but at least for those participating or non-participating endowment plan, please kindly do the following basic calculation on the returns.

Total yearly payment:

e.g. 2400 (*Please remember to add in all the riders it's normally not calculated as a set in the illustration)

Duration of plan:

e.g. 20 years

Total payment made:

e.g. 48000

Total Cashback: (if any)

e.g. 2000 * 10 (i.e. 2000 every 2 years) = $20000

Total value on maturity:

e.g. 48000

Total Profits:

e.g. $20000 (in simple calculation terms it's about 3.5% per year of interest 'cos we only divide by 10 instead of 20 as the money is not paid in 1 lump sum (Not bad ba at least better than fixed deposit.)

But this is only what our example illustrates. If your return is confirm to be what the document says it's supposed to be then it's still not too bad. At least it's a 3.5% per annual so not that pathetic. But do take note that if inflation is 3% and your return is only 3.5% it just means that your money didn't depreciates, maybe it appreciates by 0.5% per annual. So if inflation is 5%, it means that your money still depreciates by 1.5%. Do ponder over this.

Also take note and ask if the rider will increase in premiums along the years to ensure that the calculation holds in years to come. Please ensure that if your agent tells you it's level insurance they write it down at the document they pass to u and sign off as the proof.