Why invest in stocks? A primer on stock investing

Why invest in stocks?

You buy in stocks - because you get to own companies.

Ownership. This is more exciting than earning a profit on trades or flips. You actually have a stake in something that is so important, that hires some people and pays taxes to the Government for its programs.

The stock market platform is a platform where you can buy and sell ownership of companies fairly and equally. They can attract investors to trade fairly. They help companies to raise funds from us in a highly liquid market, where shares can be easily traded.

Kuala Lumpur Stock Exchange

When a stock is listed, it must meet certain criteria. A company's stock on the catalist needs to be sponsored by a financial institution. To list on the mainboard, a company needs to meet certain criteria of scale, such as pre-tax profits of S$30 million in more than three financial years recently, and capitalisation of more than S$150 million.

There are different stocks to buy. They include: stocks, real estate investment trusts (REITs, where property and financial institutions' managers bundle properties into tradable portions), exchange traded funds (ETFs), warrants, extended settlements, bonds and preference shares.

For REITs listed in Singapore, there are 34 of them in 6 different categories: residential, office, retail, hotel, industrial and hospitality.  Although interest rate environments are difficult for REITs, I think given the recent property cooling measures, it is actually more attractive to invest in residential REITs that cater to the higher end markets than in mass-market or suburban developments.

ETFs, on the other hand, buys and sells shares to reflect performance without the use of a fund manager, in accordance to an indicator. Examples include Lyxor, SPDR, STI ETF by Nikko AM, and so on.

Bonds are fixed IOUs where we buy a company's borrowings. Unfortunately, liquidity in Singaporean bond markets is not liquid enough, as we are a small market.

Preference shares are shares that give us a higher priority than ordinary shareholders, when companies dissolve and distribute residual profits. In exchange for a fixed dividend, preference shareholders do not hold voting shares. Also, there might not be maturity dates on preference shares, unless they are callable hares.

There are two schools of thought in share investing: technical analysis (TA) and fundamental analysis (FA).

TA is the art of predicting the future price movements of a company, based on both price and volume. TA gives us a point of reference on when we can enter and exit a market. Most stock beginners tend to be carried away by the hoopla of TA, because they will remember the patterns and candlesticks of intraday and inter-day charts, and make a living out of timing the markets. But the market is not made up of just winners. People are as likely to lose money as they do gain profits in the stock market. Indeed, only 5% of traders consistently succeed. I am trying my best to be one of the top 5%.

One should buy companies at the right pricing and exit at the right juncture. Hence, TA is useful as a guide to stock entry. However, it shouldn't be used alone.

Enter FA.

For new investors, I would strongly recommend they learn FA, if they want to get serious about share investing. If you need some guidance on share picking, do +1 or contact me on Google+ or Blogger. It will take some time as I have a day job (explaining the long gap between posts on this blog), but FA will definitely be worth it. The good thing is, to trade stocks, you just need to be old enough to legally trade them, and you have the desire to know more about the companies you are investing in.

Stock market investing should be a pleasant, sweet experience. We should preferably invest in the companies that we understand well. We should be familiar with the business models of the firms, understand that they are in great financial health, being satisfied with their returns and capital gains and satisfied at their growth or corporate development.

The main tool FA aficionados use is the Price-Earnings, or P/E ratio. Earnings grow, but the prices may not reflect the growth of earnings proportionately.

For stocks with a P/E ratio of below 10, they are deemed as 'cheaper'. For stocks with a P/E ratio of above 20, they are deemed as expensive. Most firms have P/E ratio of between 10 and 20. This means, when a firm has a P/E ratio of 5 to 9 and it is doing well, we should snap it at the right timing from TA trends. When a firm has unsustainable P/E ratio of more than 25 times, unless it is a growth stock with exciting developments the firm can afford to pay, I would not touch the stock.

When you invest in shares, you have to take note of cumulative dividends and cumulative rights, or cum dividend/CD or cum rights/CR in short. Stocks with CD do not yet distribute dividends, while stocks with XD (eX-dividend) has already distributed dividends. For CR, they are meant to help the company to raise money for existing shareholders. The company is issuing more shares, and it may offer current shareholders to buy new shares at discounted prices.

Earlier, I mentioned that buying shares mean buying shares of management in the company. You do not hold physical certificates in owning shares these days. They are kept with the Central Depository. Unless you go to their office to ask for share certificates, you don't get share certificates to show you're an owner of some shares of the company.

When you look at stocks, you have to consider the operations of a firm.

Basic ratios have to be profitability ratios (gross and net profit margins), liquidity ratios (think current ratio) and solvency ratios (along with interest coverage ratio). It has to be one with solid potential growth in the next 5-10 years. With globalisation, I expect the typical telecommunications, logistics, transport and hospitality-linked firms to keep growing. Also, with climate change, oil prices may not sink forever, and this may result in the rise of commodities, alternative energy (think oil palm, for example) and water.

You can trade your stocks either through a remisier/trading representative, or through the online platform of your stock broker. The trading representative is still relevant to you because he may manage your transactions and credit risk, as you are supposed to make payments within 3 days of the share transaction.

Brokerage houses charge commission rates. Hence, if you want to minimise your brokerage fees, you try to trade within $8,500 for most companies, as most brokerage houses charge 0.28% fees with a $25 minimum commission rate. If you are going to pay $25 per trade anyway, why not trade at around S$8,000 if you can afford it?

You buy 50% of your stocks at the first opportunity. When you're right, buy 30% more stocks at the second entry point, and 20% at the third one. If you're wrong, sell fast.

Pots of Money

Going to any FRANK store, you see that there are four financial principles in life:

1. Saving
2. Investing
3. Insuring
4. Spending

Bank of England

Usually, we save before we spend, we save at least 10% of our income, and we maximise higher returns by looking at banks with higher interest rates. We also try to spend only the necessary, so we can eventually have more money for other uses.

Other uses may include insurance and investments.

Insurance protect our wealth. There are two types of insurance, namely: life and personal insurance.

For life insurance, we need coverage of 7 to 10 times of our monthly income, we need monies to cover our future hospitalisation and medical expenses that is an integrated healthcare plan and rider, we need a whole life or permanent disability insurance policy to cover our financial obligations when we are diagnosed with permanent disability. We may also need dependants' insurance, to cover our loved ones when we are not around.

Personal insurance covers travel insurance, home (housing loan and housing content) insurance and vehicle insurance.

As for investments, we multiply our wealth by two tools: fundamental analysis and technical analysis. Fundamental analysis looks at the intrinsic value of companies, while technical analysis looks at the direction of market prices and their effects on companies' stock performance.

May I humbly add something never mentioned in 'pots of money' -
5. Contributing.

What is the use of having so much wealth and protection when we are not relevant at all with our society? Our society has so much that we can improve on, especially with the widening rich-poor income gap, we need to do more to help the poor and helpless.

Government schemes for higher productivity in smaller businesses

As an entrepreneur, one must better think of making the best out of our opportunities. Our world, an interconnected world with lots of opportunities, needs to commit the necessary fixed costs while scaling up and exponentiating, so our businesses can be 'cheaper, faster and better' for growth.

To grow our firms in Singapore, where space is a premium and physical resources are limited, we have to consider the capital, labour and entrepreneurship parts of production.

I believe that the Government is doing its best to support smaller businesses. After all, small and medium enterprises make up 99% of our businesses, and they employ 70% of our workforce and half of our economic output. The government defines SMEs eligible for grants and incentives as firms with some local management (at least 30% of total shareholdings) with annual sales turnover of S$100 million OR headcount of 200 workers, or less. Even companies with a hundred or so employees can build a large company, and seek to be leaner and more efficient, with government grants, if needed.

There are a few schemes smaller businesses can benefit from, namely: Productivity and Innovation Credit Scheme (PIC) by Inland Revenue Authority Singapore (IRAS), Innovation and Capability Voucher (ICV), Micro Loan Programme (MLP), SME Talent Programme (STP), Capability Development Grant (CDG) by Spring Singapore,  iSprint by Infocomm Development Authority of Singapore (IDA) and WorkPro by Ministry of Manpower.

PIC is currently used for tax deductions for activities that boost productivity. It can be used for:

- Acquiring and leasing of PIC IT and automation equipment
- Training of employees
- Acquiring and licensing of Intellectual Property rights
- Registration of trademarks, patents, designs and plant varieties for at least one year
- Research and development
- Investment in design projects

ICV is a capability development project that improves the various aspects of a business, from human resources (manpower selection, planning and developing), financial management (budgeting, cash flow control, planning), innovation (customer insights, legal diagnostics, technical feasibility studies) to productivity (quality management, productivity management, service excellence and energy efficiency audit). It can also be used on equipment, renovation and design.

A company can use eight vouchers. Each voucher cannot last more than six months, and applications for new projects are only allowed after the existing project of the company ends.

Never again should we spend time on so much unnecessary physical labour.

For local SMEs with less than 10 employees, they can consider automate and upgrade factory equipment through Micro Loan Programme, or MLP. The maximum loan given out is S$100,000. Interest rate is 5.5% for loan tenures 4 years or below, subject to group restrictions. DBS, UOB, OCBC, Maybank, Hong Leong Finance, Orix Leasing and other institutions can assist further with MLP.

The SME Talent Programme (STP) provides good hires to smaller businesses. It sounds like a win-win situation for all parties in the STP: the student has good education, acquires work experiences and skills; the employer has more certainty in a consistent stream of quality hires, while upholding professionalism in their businesses and expanding their possibilities; and the Government can rely less on big corporations, whose decisions can shake Singapore. Students have to be hired through the different trade associations and chambers.

The Capability Development Grant (CDG) gives 70% funding support to businesses that develop businesses to scale up. Notable areas of support include brand and marketing strategy, something that expands the revenue base of firms, and service excellence, which most front-line firms need for better reputation and customer retention.

iSprint is a scheme that allows firms to scale up with provable sector-specific solutions, with a grant that covers total qualifying costs. It must be new solutions that the applicant companies do not already use. A grant of 70% of total costs that are qualified under IDA guidelines is given.

WorkPro is a scheme where the National Trades Union Congress (NTUC) and Singapore National Employers Federation (SNEF) work together to hire and retain mature and back-to-work workers. It involves an age management grant of up to S$20,000 per company, a job redesign grant of S$150,000 to back-to-work locals and mature employees respectively, a work-life grant of S$40,000 to co-fund 80% of work-life training, 50% for employee infrastructure, and a reward scheme of S$40,000 annually for 3 years.

Only when smaller businesses are nimble enough to make the most out of the assistance the Government gives to offer smaller businesses, while staying focused on their core capabilities, then the smaller businesses can make wonders.

Ascending Down Under

Ascendas REIT

Action: BUY
Target Price: 2.47 (in 3 months)
Entry Price: 2.28
Stop-Loss Price: 2.20

In the Annual General Meeting 2015 on 30 June 2015, Ascendas Real Estate Investment Trust (A-REIT for brevity) stated it will 'explore new investment opportunities in a developed country', confirming a similar statement on the Annual Report. When probed, the CEO, Tan Ser Ping, did not comment further. But in my opinion, Australia is the country to go; high level of demands for industrial property for e-commerce, continued growth in logistics in Australia, and firms acting on counter-cyclical buying opportunities to secure properties below fair value.


Today, it is reported that A-REIT is buying a logistics portfolio from both GIC and Frasers Centrepoint, and that the property is located in the cities with greatest industrial demand: Sydney, Melbourne and Brisbane.

Even with rising interest rates looming by the end of this year and weak international demand in resources, which led Australia's growth in the past 7 years or so; with continued growth in A-REIT's industrial land sector in both Australia and Singapore, its fit into a world with more home office and enterprises in future through its Australian investment, and the slow but sure economic recovery of Australia, I think A-REIT is making the right calls.

Sectors

Sector Review

Oil, gas and mining are good in future when oil prices bottom out, but not now. Regardless of what King Salman of Saudi Arabia does, he will most likely continue to out-compete shale oil to maintain market share for OPEC and hence, his kingdom. For this year, I shall not look at oil, gas and mining.

Banking and finance may benefit from rising interest rates (not bailouts) in future, though non-performing loans to oil and gas-related companies may be a concern, so Standard Chartered, HSBC are out for me, but maybe Aviva or Barclays look better with lesser exposure to 'bad markets'. Rationally, they are worth holding.

Telecoms are always stable. In the long run, telecoms stocks may benefit from ecological-friendly innovation, advancement in fiber Internet, particularly Google Fiber in the United States and Broadband Connection Voucher Scheme in the United Kingdom. If they partner with other organizations to create a super-connected economy, even better for them. With substantial capital investment, I expect the telecommunication companies to do even better than most of the other sectors in future, and the most innovative telecom may earn bigger monies. Similarly, engineering stocks that build the future of our economies, especially those that support telecoms' businesses, will grow faster than the average listed company.

Pharmaceuticals are subjected to patent revocation and government policies to 'lift' patents to lower healthcare costs, as seen in India. Also, alternative medicine could lead to some diversion away from chemical drugs, particularly from governmental efforts in China and South Korea. There will be no dominant pharmaceutical firm in the future. I do not favor this sector.

'Sin' stocks as a whole interest me. There will always be great demand in alcohol, tobacco, gambling and, relating to our never-ending desires for more, consumer goods. Demand for this sector is particularly fickle, but there is consolidation here. I do not think we experience the full impact of  restructuring in this sector so far.

Property stocks may hurt from rising interest rates. Those that do not handle decreased market demand well, with worse cash flows, may be hurt in future. However, there are property developers who may use the window of opportunity to snap properties, hence they will grow in future. For now, though, I look at companies that deal with industrial space, and not companies that deal with commercial and especially residential spaces.

Noble Hit Iceberg! Sell It!

Noble Group hits the Iceberg. Today, share prices of Noble Group dropped by 9%, in light of a report by Iceberg Group that Noble is the next Iceberg.

We should have read the signs - actually, I think I did, but who will ask others to sell stocks they do not hold?

I do not understand the world of commodities, and I never will. I do not know the people behind Iceberg Research, who claimed Noble is the next Enron. But I know a few pieces of evidence why Iceberg may be right:

(1) Management-auditor conflict. 'Ernst and Young retire' in Page 76 of their 2013 Company Report. Unless forced by regulators, there is no good reason why a reputable company like EY would not continue do auditing for a listed company.

(2) Higher-than-optimal financing costs. They are at US$400 million, which is almost 1.6 times more than the stated profit of US$238 million. When financing costs are much more than profit, they are really sensitive to various market factors, from the drop in prices of commodities to a rise of interest rates. Both already happen because of the end of quantitative easing and the increase of production by OPEC lately.

(3) Loss of control of Noble in its associates, due to the Difference in scale of the main company and its associates and Joint Ventures (JVs). If Noble's associates have larger losses (associates lose US$107 million) than the main company (with a loss of US$66 million), then I do not know whether Noble really has control over the associates.

Regardless of who is making such statements that Noble is the next Enron, even if s/he may not be credible as we do not know the people behind Iceberg Research, the facts above from its previous company report show that Noble is indeed in deep trouble. 

A Lot has changed - So what?

A lot has changed.

It used to be that one lot of stocks is 1000 shares. From 19 January 2015 onward, it will be 100 shares.

It means for $10,000, you can possibly afford a decent portfolio of 3-6 quality stocks which trade at around $2 to $35. 

To put things in perspective, $10,000 is the monthly ceiling for a HDB flat for families currently (as of January 2015). It is also roughly a year's worth of school fees in Singapore Management University, the best proving ground for those who are passionate in business - your degree in SMU lasts for 4 years. It is probably as much as a month-long trip to the Americas. 

If you have the money to settle down, or invest in yourself in quality education, or even pursue your passions and explore the world, you can invest $10,000!

Regardless of your motivations, you invest to stretch your opportunities in your funds.

And you have opportunities. Not only you have your money, but you also have your social connections, your understanding of different companies' potentials, and you experience a different life from the person next to you.

I do not recommend specific stocks, in general, because everyone's understanding and sensitivity to different stocks are different. The entrance and exit timings and magnitude may be dependent on your daily life and your circumstances, all beyond your control. 

However, as a principle, I recommend investing in stocks that you are most familiar with. If you work in the manufacturing and engineering firms, for example, maybe you will be more aware of stocks in the electronics or construction industries, and less acutely aware of those firms in the retail and maybe land industries. I also do not think it is suitable for those in the finance industry to invest in the 'flavor of the month stocks' based on P/E ratios and technical analysis alone, because there are not just foreign currency, commodities trading and even quantitative financial data at play in stock prices, there are also stories behind every stock that one needs to uncover.

After all, when you buy the shares from the market, you not just earn money from the appreciation of the value of your shares, you actually own the company, and finance the capital the company needs for its operations and future growth. It is imperative, at least for me, to understand what we are in for, if we have ownership over something, particularly those things that could bring us benefits, preferably for the long haul.