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Peter Lynch’s Rule of Thumb in Investing

Alvin — Tue, 10 Jan 2012 22:57:17 +0000

I found this on Wikipedia and it is worth archiving:

Market cap

Market capitalization less than $5 billion – Lynch generally avoids large, well-known companies in favor of small-cap stocks that still contain significant upside potential. Most fund managers define small-caps as companies with market capitalizations under $1 billion. Institutional investors often use market one investment criterion, requiring, for example, that a company have a market capitalization of $100 million or more to qualify as an investment. Analysts look at market capitalization in relation to book value for an indication of how investors value a company’s future prospects.

PEG ratio < 1.2

PEG ratio below 1.2 – The PEG ratio is a valuation metric that compares a company’s price-earnings ratio with its projected growth rate. Small, high-growth stocks generally trade at higher PEGs compared to the big-caps. If the PEG ratio is around 1, the company is considered fairly valued. A PEG ratio that is much higher than 1 indicates an overvalued company, and a PEG below 1 indicates an undervalued company. While the PEG ratio can effectively provide insight in certain evaluations, it is limited by its overriding focus on earnings growth. Revenue growth, cash flow, dividends, debt, and numerous other factors are also critical in determining value. Additionally, while PEG is useful for smaller companies it may be misleading for big-caps, since sustained growth is less important to their total returns. PEG is most useful when supplementing a thorough discounted cash flow analysis or relative valuation.

Earnings growth 15–30%

Five-year earnings growth between 15% and 30% per year – In investments, earnings growth refers to the annual rate of growth of earnings, or the amount of profit a company produces during a specific period, usually defined as a quarter (three calendar months) or year. Earnings typically refer to after-tax net income.. When the dividend payout ratio is same, the dividend growth rate is equal to the earnings growth rate. Earnings growth rate is a key value that is needed when the DCF model, or the Gordon’s model as used for stock valuation. Companies that exceed a 30 percent earnings growth rate are confronted with two fundamental problems: (1) sustaining a high growth-rate over the long term is extremely difficult; and (2) stocks growing that rapidly are usually already being actively covered by Wall Street analysts, and Lynch prefers less well-known names and avoiding competition.

Debt ratio < 35%

Debt-to-Equity (D/E) ratio below 35 percent – If a companies debt levels are excessive, it often proves extremely difficult for managers to raise sufficient cash to finance continued expansion. Without expansion into new markets, corporate growth eventually slows down. Companies with lower debt often have better prospects for future expansion. Additionally, in the event of an economic slowdown, these firms should be in better shape to weather any storms. Regarding debt-equity ratios, Lynch cites 0.33 (25% debt compared to 75% equity) as normal for a corporation. Additionally, he believes a debt-equity ratio of 4 reflects a weak balance sheet.^[8] Buffett echoed Lynch’s avoidance of companies that have significant debt. He argued that debt is “the weak link that snaps you.” A good business “will produce quite satisfactory economic results with no aid from leverage” while a company with significant debt will be vulnerable during economic slowdowns.^[5]

Institutional ownership 5–65%

Institutional ownership ranging between 5% and 65% – Institutional investors are organizations that trade large volumes of securities. Percentage institutional ownership is the percentage of outstanding shares that are owned by mutual funds, pension plans and other institutional investors. Most well-known stocks have at least 40 percent institutional ownership. Typically, upwards of 70 percent of the daily trading on the New York Stock Exchange is on behalf of institutional investors. Peter Lynch uses the degree of institutional ownership to gauge market interest. His contention is that stocks with a relatively small level of institutional sponsorship offer the best return potential. When ‘Wall Street’ analysts identify a stock and institutional money begins flowing in, price growth can be dramatic.

Dividend yields

When yields on long-term government bonds exceed the dividend yield (annual percentage of return earned by an investor on a common or preferred stock) on the S&P 500 Index by 6 percent or more, Lynch recommends selling stocks and purchasing bonds. He recommends this as a type of value-contrarian-safety strategy, claiming that when this situation occurs investors should enjoy the “risk-free” investment of bonds, they are either yielding exceptionally well or the stock market is over-valued. Either way bonds make more sense than stocks at that time. This is the only exception to Lynch’s assertion that stocks are always better investments compared to bonds.^[9] (See Fed model)

Cyclical stocks

For cyclical stocks it is recommended to purchase when the P/E ratio is low, and sell them when the P/E ratio is high (i.e. when earnings are peaking). Cyclical stocks tend to rise quickly when the economy turns up and fall quickly when the economy turns down. Examples are housing, automobiles and paper.

Cyclicals can be a rewarding investments if purchased at their bottom price, so it helps to seek opportunity in depressed stocks, rather than analyzing potential reasons why a cyclical will take losses. When cyclical stocks are crushed by a weak economy and it appears things could not possibly worsen, cyclicals usually hit their bottom.

Lynch goes on to explain the PE ratios for cyclicals, advising the time to buy is when their PE hits a historic high, because ‘Wall Street’ has caught on to cyclicals and often begins discounting them before the overall market tops-out (i.e., ends a period of rising prices and is expected to stay on a plateau or decline). When a cyclical stock is at a low PE ratio, alongside record-high profits that have grown for several years, the market is anticipating a downturn. When a cyclical reaches a high PE on very low earnings, the price may be ready for an upturn because earnings will be at or near their nadir.

What to do with your investments in view of US and Euro debt problems?

Alvin — Sun, 21 Aug 2011 05:44:36 +0000

The current market is giving everyone jitters. The volatility has not decreased after 2 weeks and it is very hard for people to hold on to their losses. The Federal Reserve is meeting central bankers (Jackson Hole meeting) around the world 26 Aug 11. It was the same meeting last year that the Fed hinted on QE2. Would the same thing happen this year? Would the hint of QE3 stimulate the stock market?

No one knows the answers to the above questions and that is what makes investing so difficult. You are put at the cross roads now, do you sell and keep your losses small? Or do you hold on for possible good news? For those who did not have much stocks, is it time to go into the market?

Given the fundamental weaknesses in the United States and the Euro zone, things are really not rosy. The I am holding quite a number of stocks and have not sold any yet. My portfolio is down about 10% and I am planning what I should do next. Earlier this week, Germany and France refused to agree to the issuance of Euro Bond which a potential good news turned bad. If the upcoming Jackson Hole meeting conclude that QE3 is not happening, market is going to react very adversely.

Our fate lies in the hands of these policy makers now. But what can we do to protect ourselves? Below are the 5 options:

Option 1: Buy put warrants/options

This is an insurance policy. If market continues to have bad news, holding put warrants/options would give you profits when the prices dive. I have just taken a look at the available STI put warrants listed on SGX. All of them are already in-the-money and I do not think it is advisable to buy them now. I am looking at strike price 2000 within the next 3 months but they are not available. Alternatively, you can look at the US options market which I believe would have more contracts for you to choose from.

Advantage: If market goes down, my losses in stocks would be reduced by the profits from my warrants/options. If market goes up, I will lose all my money in warrants/options, but I will gain in stocks.

Disadvantage: If the market stays stagnant, I will lose money in warrants/options and I do not gain much from my stocks. Since the market is very volatile, warrants/options are very expensive now.

Option 2: Liquidate

I have contemplated to sell all my stocks as one of the exit options.

Advantage: No worries anymore. Accept the loss and leave the market. Further losses will not decrease my capital. I can always buy back at a lower price.

Disadvantage: If good news push the market up, it will be very difficult for me to buy back the stocks at higher prices.

Option 3: Do nothing

This is probably the most comfortable thing to do for me. Just keep all my stocks regardless of what would happen.

Advantage: If the market ride through this rough patch, I would be able to enjoy the potential profits.

Disadvantage: If the market goes very much lower, I will lose a lot of money, even if it is paper loss. And it would take years to get back to where I were in the first place.

Option 4: Increase monthly contribution to STI ETF

I am currently contributing S$600 monthly to buy STI ETF. This Dollar Cost Averaging method has proved worthwhile. Since I do not know what will happen to the market, I just buy on a regular basis to average out the price. I can push the contribution comfortably to S$1,000 and take advantage of the market weakness to buy STI ETF cheap. I intend to do this long term hence it is possible for me to sell when market is good and accumulate when market is bad.

Advantage: Do not need to worry about market ups and downs. Just keep accumulating and sell when market is euphoric. If market happens to rebound, I would still in a position to ride the profits.

Disadvantage: It would take a long time to see decent profits.

Option 5: Buy gold and silver

USD and EUR do not look good in the future and money will flock to gold and silver. This would push the gold and silver prices even higher.

Advantage: Enjoy the bullish run in gold and silver.

Disadvantage: It is quite expensive now and better to wait for pullbacks. Gold and silver prices may reach a state of euphoria and collapse.

What should I do? I am looking at both Option 2 and 4 at the moment given the current circumstances. I expect the market to rebound a little following the big drop last week. It would be an opportunity to sell. I have silver holdings in ETF and UOB, and I do not intend to add more at this moment. Let’s see what the market will do next.

Investing in the next big thing

Alvin — Wed, 17 Aug 2011 12:54:53 +0000

We know companies come and go. No companies can last forever if they do not innovate. The basis of human advancement is about finding a better way to do things, either more effectively or more efficiently. And by doing so, certain industries would be obsolete and replaced by new industries. Joseph Schumpeter coined the term, “Creative Destruction”, to describe this process.

Let’s take the music industry as the first example. The first commercially viable music recording was the vinyl records and gramophones. These were considered mechanical mode of recording. With the advent of magnetic storage media, the creation of cassette tapes ‘destroyed’ the vinyl market. Companies which were unable to move on to cassette tapes became obsolete. Thereafter, the ability to digitize music and store them in Compact Disc replaced the cassettes. Cassette makers were out of job. Soon, internet came around and file transfer were enabled. This allowed internet users to download music in MP3 formats and piracy proliferated, endangering the profits of music makers. Where do we move on from here?

Likewise, you can also think about the evolution of storage media for moving images. VHS -> Laser Disc -> Video CDs -> DVDs -> Bluray -> ?

How about our computer storage? Hard Disk -> Flash Memory – > Cloud Computing -> ?

Creative destruction is happening in the background and we adapted new technologies unknowingly. Are you able to spot the trends such that you can avoid investing in declining industries and put your money in future industries? It is easier said than done.

First, we must be very familiar with the developments of various industries to be able to make certain predictions of the future. And we know how accurate prediction is. There are many inventions that failed to materialise as well. I can think of Plasma TVs, Mini-Discs and HD-DVDs.

Second, adopting new technologies and commercialising them require high capital investment. Success is not guaranteed and companies are taking high risks. It would take a few years to recoup the capital outlay and achieve economies of scale in production. The initial stage would also attract a lot of competition and you would not know which companies would gain the biggest market share eventually. For example, during the internet boom, everyone recognised the prospects of technology companies but many of them were not profitable at that point in time. The exuberance was too early. It was after a few years after the internet bubble that Google and Amazon emerged as truly profitable IT companies.

With all these uncertainties, are you willing to take the risks and put your money where you think is going to be the next big thing? I personally would not as the success rate is too low. On the other hand, we must also understand how developments can affect the companies that we have shares in. You would not want to hold on to shares of companies that are likely to be obsolete.

Travel Investing – Seoul, South Korea

Alvin — Sun, 17 Jul 2011 13:29:11 +0000

When we think about Korea, the first things that came to mind would be their drama, pop stars, soccer team, Samsung, LG and Hyundai. Korea has slowly gained competitive market share over the Japanese, especially in the realm of electronics.

Getting there

I think there were only a few flights to Seoul from Singapore – SIA, Korean Air and Asiana. SIA charged S$1,200 which is about $200 more than the cheapest Korean Air. I chose SIA for the reputable safety and service standards.

Cho Yang-Ho is the chairman of Korean Air. He is the 31st richest in South Korea with $520m.

Getting around – Seoul Subway Metro

Seoul has an extensive network of subway lines. It is quite confusing as there are 8 lines, and some stations can have 3 lines intersecting. I pretty much traveled on trains 90% of the time. The lines are complicated to the point that I see Koreans referring to the map time to time. Even the locals cannot remember the stations and their connections. Like Singapore, the stations are filled with retail shops and connected to adjacent shopping centers. Seoul is in turn connected to other Korean cities by railway, operated by Korail. Below is a picture of a typical subway walkway littered with retail shops.

Samsung

The biggest corporation in South Korea by market capitalisation would be Samsung. Most people will be familiar with the electronics products but Samsung Electronics is just a division of the conglomerate. Besides Electronics, the Samsung Group have businesses in ship building, engineering, construction, life insurance, investment banking, theme parks, hotel chain, marketing, medical and IT services. Samsung accounts for a fifth of South Korea’s exports and has a revenue larger than some countries’ GDP.

Looking around my household, I notice a few Korean products. I have 2 Samsung refrigerators and 1 Samsung 21.5″ LCD monitor. I even remembered when I was a kid, I used to record TV shows. At that time, Sony was the dominant brand, but I was handling this unfamiliar brand “Samsung” VHS tapes. That was my first exposure to the Korean brand and who knew they grew to a giant over the years.

The richest man in South Korea is Lee Kun-Hee, the reinstated Samsung chairman, with $7.9b.

Hyundai

Hyundai is the next giant conglomerate giant in Korea. Hyundai Heavy Industry is the biggest shipbuilder in the world. Hyundai Kia Automotive Group is the largest car maker in Korea and second in Asia. The company also dips its toes in retail and operates the Hyundai Department Stores. I observed many of the elevators and subway gates bear the name of Hyundai. It also have insurance and underwriting services. By the way, I drive a Kia which I find it cheap and good. Hyundai Motors Office in the picture below.

Chung Mong-Koo is the chairman of Hyundai Motor Group, and is the second richest man in South Korea with $4.1b.

LG Electronics

I just learned that LG was a merger between Lucky and Goldstar, and that was how the acronym was derived, even though the company associates with the slogan “Life’s Good”. LG is also dominating the display market, probably after Samsung. For your information, I am typing this post with a LG laptop and it is still working well after 3 years of heavy usage. I was utterly impressed when I watch “Transformers 3″ in South Korea. I went to Times Square’s cinema, CGV, to catch the movie and I believe the screen and projection were made by LG as shown before the show. The 3D effect was mind blowing. The explosion really approaches you to the point you can grab the fragments with your hands. We have nothing close in Singapore cinemas.

Koo Bon-Moo is the chairman of LG Group. He is 11th richest in South Korea with $1.25b.

CJ Group

As I research more about the cinema, CGV, I learned about the CJ Group. CJ Group is another conglomerate that have 4 main businesses – Food, Logistics, Entertainment and Pharmaceutical. CJ GLS is a logistics company and has a branch in Singapore. I remember the logo to the point I had deja vu moments when I see their trucks in Korea. CGV is known as CJ Golden Village. If you are wondering if there are connections to our biggest cinema chain in Singapore, you are right. Golden Village is jointly owned by Hong Kong’s Golden Harvest and Australia’s Village Roadshow. In Korea, CJ is the third partner operating the chain in Korea.

Lee Jay-Hyun is the chairman of CJ Group. He is 17th richest in South Korea with $800m.

Lotte

Lotte is another conglomerate. Korea is never short of one. It has food, retail, financial services, heavy chemicals businesses and more. I usually expect McDonalds to be the dominant fast food chain in any country but to my surprise, Lotteria is a commonplace in Korea, and it is quite crowded at all the branches. I filled my meals with traditional Korean food and had no room for fast food so I did not try it. Below is a picture of the many Lotte shopping centres.

Shin Dong-Bin is the vice chairman of Lotte Group and CEO of Lotte Shopping. He ranked 6th richest in South Korea with $1.6b.

Naver

Google is not the champion search engine in Korea. The global search giant has its limits in a country with her own language. Naver has 70% Korean market share in search and Google with a mere 2%. I noticed this when I saw an email given by a supplier with @naver.com and I subsequently see it online while surfing on the free internet terminal at the cinema.

Yongsan Electronics Markets

I went to the Yongsan Electronics Markets and expect to find state-of-the-art IT products at cheap prices. It was touted as the largest electronics retail place in Korea. I was pretty disappointed to find older models there while prices are comparable to Singapore. There was no Samsung Galaxy Tab 10.1 in Korea even though it was launched in US in Jun. The entire place was quite empty, maybe because it was a weekday.

3G Network

My partner and I was trying to connect our phones to the local network but to no avail. After searching the internet, we found that we need on our 3G connection. My partner had an iPhone and she connected without problem. I was using a 2G phone and hence, was not able to connect at all. Most, if not all, Koreans use a 3G smartphone. Compared to Singapore, there have less iPhone users and more Samsung users. Not surprising afterall.

Chey Tae-Won is the Chairman of SK Group, a telecom provider. He is 10th richest South Korean with $1.3b.

Cosmetics

Korea is famous for cosmetics. My partner’s friends asked her to buy truckloads of facial masks as they are cheaper there. The competition is fierce since almost every corner of the street or building has a cosmetics shop. It is as ubiquitous as convenience stores in Taiwan and Hong Kong. I see Face Shop, Skin Food, Etude, Tony Moly and Innisfree.

Suh Kyung-Bae is 12th richest in South Korea with $980m. He is the boss of Amorepacific which owns Etude and Innisfree.

Lock & Lock

Whenever we went to dine at a Korean restaurant, we will be given a bottle of plain water. The bottle is usually made by Lock & Lock. This brand is widely used in Singapore as well based on my observation.

Kim Joon-Il is founder of Lock & Lock and is the 26th richest in South Korea with $590m.

Economy

Nicknamed the “Miracle of the Han River”, South Korea had an exponential growth in its economy after the Korean war. It has no natural resources and relied heavily on exports to grow its economy. Despite having many years of peace after the war, the relationship with North Korea is still volatile and the underlying tension is ever present. Any outbreak of war or escalation of tension would have impact to its economy. Being export dependent would also mean they would be subjected to fierce competition from China, which the latter can produce goods at a cheaper price. We see it when Japan beat US to electronics and automotive market. Subsequently, South Korea is catching up with Japan in those areas. China would likely surpass all of them in the near future. Another characteristic of South Korean business is that they are usually run by family members. Samsung chairman Lee Kun-Hee has 2 prominent daughters running some of his Samsung groups. Likewise for Hyundai and many other big conglomerates. There is a Chinese saying, “富不过三代”, which means the wealth in the family cannot last beyond 3 generations. There is a danger of showing favoritism to family members in succession plans as it discourages meritocracy. An outsider can be more capable of leading the company than a close family member but would not have the opportunity simply because of his relationship.

Do not miss out this money making opportunity!

Alvin — Tue, 03 May 2011 15:16:53 +0000

Did the title attract your attention?

But I will disappoint a lot of people with the rest of this post as I am not going to share any money making opportunity. However, it may save you a potential loss of money if it can help you understand our human weakness – greed. I cheekily use 4 levels of investment sophistication to attempt to illustrate this human instinct that is detrimental to investing and how we can overcome it with increasing financial knowledge.

Level 0 investor – Submit to scams

The title of this post resonates with our desire to participate in rewarding ventures that require little or no effort at all. Without any financial knowledge and know-how, level 0 investors are ignorant and gullible. Without the financial knowledge to keep their greed in check and to warn them that there is no free lunch in this world, they are susceptible to investment scams. Conman thrives on this weakness. As long as humans nature do not change and not financially savvy, investment scams will occur again and again with a different story each time.

Level 1 investor – Follow stock tips

Level 1 investors may not believe in scams and they know that buying stocks is probably safer than unconventional investment schemes. The problem is they believe in stock tips. They want to earn profits and grow their money but they do not want to put in the effort to learn and understand investment. I noticed during investment seminars, the common questions posed are “what do you think of this stock xxx?” or “can you recommend some stocks?” Also in investment forums, the most active section is often the stocks discussion section where different people share their opinions on certain stocks. Instead of using these discussions as a lead to start one’s research, they use it as genuine stock tips. Some of them would even buy the stocks without fully understanding what the company actually do.

Level 2 investor – Follow the experts

Level 2 investor understands it is dangerous to listen to tips and more often than not, the tips wold not work in their favor. They do not engage in coffeeshop talk about stocks, but follow more reputable sources of information like leading financial news, gurus, analysts reports, etc. Let’s not even challenge the accuracy of these information and its timeliness. The problem with level 2 investors is that they will still invest when the story is convincing, without them knowing enough of a particular industry or country. Doesn’t mean if George Soros made a lot of money in forex, you must also do forex. Doesn’t mean Jim Rogers invest in Africa means you have to invest in Africa. Even if they are reputable investors, level 2 investors do not have the complete information on how the gurus get in and out. What are the things to look out for so that the risk is worth taking and well managed. You simply do not understand enough to make a good financial decision.

Level 3 investor – Invest in what he knows

We should be level 3 investors. Level 3 investors understand the importance to invest within their circle of competency. Such simple truths are easy to understand but hard to put into practice. It is always alluring to listen to the next great story and buy into it. But level 3 investors are able to keep their greed in check.

It is possible for the level 3 investors to discover good stocks during their course of work. They may get to know certain suppliers, contractors, and clients very well. These interactions and intimacy give an edge over other investors in the market. They would also know the strength and health of the industry and if any big development is undergoing that would have a great positive impact in the future. Since you spend time and energy at least 5 days a week in your job, you should use it to your advantage. Be more observant and inquisitive and you may find a few potential stocks.

Another area to be inquisitive about is the products and services that you often use. You have a deeper understanding about these products and services. There must be a reason why you keep going back to them and give them business. Would you be able to dig a little deeper to see if there are any potential to invest in them?

I will stop at just level 3 to keep it simple. As a retail investor managing your own money, you can already make a lot of money as a level 3 investor. You do not need to be dabbling in derivatives or force yourself to understand another industry. It cannot be emphasized enough to invest in what you understand. Many times, we are lured by greed which motivates us with a belief that there is a pot of gold at the end of it. You must say no to such opportunities when you don’t understand them enough even though it may be difficult to resist.

Visit MOOLAH.asia – Focus on wealth creation in Asia

Alvin — Sun, 10 Apr 2011 09:42:50 +0000

MOOLAH.asia is started by a personal friend of mine. Before you say that I am biased and trying to promote the website, I must confess that it is true It is nothing wrong when I share more resources to you. In fact, I have given my thoughts and comments in this post, leaving you to agree or disagree with me.

About MOOLAH

Moolah Asia is a financial resource aiming to raise financial literacy. As the domain name suggests, MOOLAH has a specialized focus in Asia, working with a panel of renowned financial practitioners, experienced traders and successful business based in Asia.

MOOLAH TV

A picture is worth a thousand words. A moving picture would worth even more! I think people can learn more from videos than text as we have varying literacy levels. With the proliferation of multimedia and a well developed internet architecture, videos could now reach more people as compared to the past. MOOLAH has made use of this avenue to make valuable interviews with financial experts available to people all over the world. You may say that we have plenty of investment educational videos in the United States, but what MOOLAH offers is pretty much unprecedented in Asia, taking views from financial experts in Asia itself. If you believe that the century belongs to Asia, you cannot afford not to keep abreast with the perspectives from Asia.

Webinars

Webinars is another avenue that is growing. Imagine a physical classroom is limited by the number of seats and locality. But with webinars, we can learn from people all over the world without travelling out from our house. This is definitely an area that technology could further enhance our learning experience. It would be no surprise that our dependence on physical space for learning would decrease in the near future. This maybe good news for land-scarce Singapore. With the reduction in cost for travelling to venues and rental of physical space, seminar fees could be very much reduced. It is worth anticipating if MOOLAH can bring in high quality financial education to members at an affordable cost.

Contests

MOOLAH has constantly introducing contests to woo members for its nascent website. To celebrate the launch of MOOLAH, they will be giving away a FREE iPad 2 to one of their members. For those who wants an added advantage in this lucky draw, refer to this blog post to see how you can increase your chances of winning.

Travel Investing – Hong Kong

Alvin — Sun, 27 Mar 2011 17:32:25 +0000

I visited Hong Kong at the end of Feb 2011 for a short holiday. I made the following observations, but they are not really for investment purposes, though the title may be a little misleading. Oops!

Pro-tourism

According to this website, Hong Kong had a 21.8% increase in tourists in 2010 from 2009. Tourists’ expenditure had went up 30.5%. This puts Hong Kong at second spot, behind China, as the most visited country in the Asia Pacific in 2010. Hong Kong is a very tourist friendly place which is why there is no qualms about this. I personally experienced this when I first touched down at the Hong Kong International Airport. A tourism board’s staff was stationed at the exit to serve as a customer service centre. Not sure of how to get to the hotel, and being a pretty unknown hotel, I had doubts if he knew where it was. To my pleasant surprise, he was able to even find a prepared piece of paper that consists of a zoom-in map and “how to get there” details specifically for the hotel I am going to. Given the number of hotels, I wondered how many different sets of guides did they have. Wow, they really did their homework to make your experience better.

Modes of transportation

I notice Hong Kong had many modes of transportation. Based on the “how to get there” guide to my hotel, there were already 3 ways to do it. I could take the train, taxi or the free airport service bus. Of course, being young and able, I took the harder way but saved quite a sum of money. Getting around Hong Kong was not a problem. The Mass Transit Railway (MTR) service in Hong Kong is similar to Singapore’s MRT. Besides the usual taxis and buses, Hong Kong had trams and ferries, which had been functioning more than 100 years. The best thing is, we could use the contactless card (Ezlink card as we know it in Singapore) on MTR, buses,trams and ferries which makes traveling easier. And if you have not known, Hong Kong is the first country in the world to introduce this contactless card for public transport in 1997. We have know that a good network of transportation is crucial to facilitate trade and commerce. It facilitates transportation of goods, and when well planned, it just make traveling fast and efficient. People could spend more time on more productive stuffs.

The contactless card used in Hong Kong was operated by Octopus. Octopus Holdings was a joint venture by 5 major transport operators in 1994. In addition to use the card for transport, one can use it for everyday transactions. Would such contactless card pose a competition to VISA and Mastercard? It has also started to expand into China via Shenzhen. You can now use the same card in Shenzhen and Macau. If Octopus could increase its presence in China market, it is a no brainer that it could very well increase its profitability tremendously. Based in Hong Kong, it is in a better position than anyone else to tap the market in China. Octopus is not listed publicly yet but it is very probable when it requires capital to venture into China.

The trams serve the public in Hong Kong Island over 100 over years. Not only it has historical value, it is still a practical mode of transport today. The trams are always packed and usually people take it for short distances. Veolia Transport had full ownership of the company in 2009.

I love the Star Ferry and its history. Hong Kong was very much a trading port and the ferries would have played an important role in the past. Like the trams, the ferries still transport people between islands daily. It was also a full house when I board it in the evening. Most of the passengers were working adults which I supposed were going home from work in the business district. Star Ferry is owned by Wharf Holdings. Wharf Holdings also owns Harbour City and Times Square, and is a subsidiary of Wheelock. Peter Woo is the man behind Wheelock, ranked #8 richest in Hong Kong in 2011 with $5.4bn.

Common Sights

Health and Beauty Retailing – There is an abundance of health and beauty retail shops. You would see a Watsons, Mannings (Guardian in SG), Sa Sa or Bonjour almost every 5 mins. I wonder if there is such a big market. The supply is way to much in my opinion. The dominant one would be Sa Sa, and it has made founders Simon & Eleanor Kwok #34 richest in Hong Kong in 2011 with $1.19bn. Watsons is owned by Hutchison Whampoa, which in turn belongs to Hong Kong richest man Li Ka-shing‘s Cheung Kong Group. Mannings (or Guardian in Singapore) is owned by Dairy Farm International (DFI). DFI has other retail operators like Giant supermarket, Cold Storage, Jasons, Shop N Save, and 7-Eleven, and is part of the bigger group, Jardine Matheson.

Banking – Traveling around Hong Kong has made me notice that most of the ATMs are from Hang Seng Bank. I cannot recall seeing other banks as frequently. It felt like an everyday bank similar to POSB of Singapore. Hang Seng Bank is the second largest bank in Hong Kong and HSBC has majority stake in it.

Jewelery Retailing – Jewelery retailers, Chow Sang Sang and Chow Tai Fook are a common sight. Cheng Yu-tung owns Chow Tai Fook and is the #4 richest in Hong Kong in 2011 with $9bn.

ESPRIT – Michael Ying had sold his remaining stake in the company. He is #16 richest in Hong Kong in 2011 with $2.5bn.

Cafe de Coral – This is a popular food chain in Hong Kong and it serves about 300,000 people in Hong Kong daily. Michael Chan is the founder of the chain and is ranked #35 richest in Hong Kong in 2009 with $560m.

Filipino Maids – There are about 140,000 Filipinos in Hong Kong and most of them are working as maids. Similarly to Singapore, I saw many of the maids hanging out on Sunday.

Adventure Capitalist by Jim Rogers

Alvin — Fri, 25 Mar 2011 07:40:37 +0000

Following his first motorbike road trip around the world in 1990-92, he embarked on his second road trip in 1999-2001. This time he was on a custom-made Mercedes with his current wife. Unlike the former book, “Investment Biker”, he shed fewer insights on investment philosophy in his second adventure book, “Adventure Capitalist”. Instead, he made more evaluation and analysis of countries and their economies, and how they may perform in the future. As usual, I will only extract the everlasting investment principles that I discovered in the book, “Adventure Capitalist”.

“Successful investing means getting in early, when things are cheap, when everything is distressed, when everyone is demoralized… To make a killing, you really need to get in during a time of despair.”

“In most places around the world, the currency is like a thermometer. It may not tell you what is going on, but it tells you that something is going on, and you know a country is falling apart when even the government will not accept its own currency.”

“And what success I have had in investing has usually come from buying stock that is very cheap or that I think is very cheap. Even if you are wrong, when buying something cheap you are probably not going to lose a lot of money. But buying something simply because it is cheap is not good enough – it could stay cheap forever. You have to see a positive change coming, something that within the next two or three years everybody else will recognize as a positive change.”

“If I do have strength, it is the ability to look at Industry X or Country Y, on which everybody is really down, and exercise the courage , the sense, the stupidity, whatever it is, to buy it, even though everybody is telling me I am nuts to do so. If people become hostile when you say you are buying, it’s probably the right thing to do. Hostility is a great indicator.”

“[W]hen governments print money, one of the first places the money winds up is the stock market.”

Rogers mentioned that “most of the sound-money governments were replaced by easy-money governments”. “Under the old system, when bad times came, there were certain things countries could do. One, they could print money. It would debase their currency, but that did not matter to the politicians who won the election. The stock market would go up (temporarily), the economy would get better (temporarily), people would have more money in their pockets (temporarily), and everything would be okay (temporarily). They would pay the price later. Another thing governments could do when times got tough was borrow huge amounts of money.”

Rogers’ mantra: “The only successful way to invest is to know what you are investing in, and to know it cold. If you do not know about an apple orchard in Washington, do not get into the apple business.”

“The way of the successful investor is normally to do nothing – not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up. That is how you invest. You wait until you see, or find, or stumble upon, or dig up by way of research something you think is a sure thing. Something without much risk. You do not buy unless it is cheap and unless you see positive change coming. In other words, you do not buy except on rare occasions, and there are not going to be many in life where the money is just lying there.”

“One of the mistakes that many people make in the stock market is buying something, watching it go up, and thinking they are smart. They find themselves thinking it is easy. They take a big profit and immediately go looking for something else. That’s the time they should really do nothing. Self-confidence leading to hubris leading to arrogance – that is when you really should put money in the bank and go to the beach for a while until you calm down. Because there are not many great opportunities that are ever going to come along. Bit you do not need many if you do not make many mistakes.”

“If you learn nothing else in your life, learn not to take your investment advice, or any other advice, from the U.S. government – or any government.”

Rogers is insistent that government should have little intervention in the free market. However, governments around the world have been doing more than what they should – for example, bailing out big companies like AIG during the sub-prime crisis. Instead of letting the fundamentals correct themselves, they preserved the bad apples and let them snowball to bigger ones in the future. “People want the government to do something. And I say the government should do nothing. Reacting to immediate pressures, which is what governments have done throughout history, is invariably the wrong thing to do. Correcting the fundamental problem or letting it correct itself, while temporarily more painful, is the only effective course of action.”

”Everything changes; nothing is permanent, especially one’s portfolio. But all bubbles and manias in the financial markets are the same, and have been throughout history.” “Whenever you hear somebody tell you that investing is different this time, grab your money and run. It is never different. There never is a “New Economy.” There never is a “New Era.”

“It may have been Meyer Rothschild, the German banker and patriarch of the legendary House of Rothschild who, when asked how he got so rich, attributed his success to two things. He said he always bought when there was blood in the streets – panic, chaos – when despondency gripped the markets. (In old man Rothschild’s case, investing amid the turbulence of the Napoleonic wars, the blood was just as likely to be literal as it was to be figurative.) And he always sold “too soon.” He did not wait for enthusiasm to peak. He always knew when to get out, and he got out in time with all his money.”

You can buy “Adventure Capitalist” at US$14.40 only. Free delivery to your address.

A Strong Mindset is Essential to Succeed in Investing

Alvin — Sun, 20 Mar 2011 09:43:56 +0000

This recent correction has reinforced my perception that a strong mindset is required for investing. We have always heard psychology is an important part of trading, but not so in investing. I begged to differ as an investor also needs to manage his emotions in a market correction, just as similar to a trader having a drawdown on his capital.

The recent Japan Earthquake crisis is a good example. The markets around the world were reacting to the Japanese stock market, coming down with the latter. I cannot say how much relation or business dealings did the foreign companies had with Japan, but locally, there were some stocks not related to Japan at all, but came down as well. Unless you are a believer of the Butterfly Effect – A butterfly flapping its wings in say China can create ripple effect and cause a tornado in Brazil, I do not think the Earthquake is going to have a big impact to these companies not related to Japan, or even be affected by the potential spread of nuclear dust.

The price of an asset is determined by mainly supply and demand. Price changes are caused by changes in supply and demand. With bad news like the Japan crisis, demand for stocks would dropped as investors perceived troubles and decided to take a more conservative measure by selling the securities as fast as they can. In the market, not all the investors are equal – investors have different investment objectives, holding period, psychology, evaluation of the current market situation etc. This means that some investors may be spooked by the news and sell, but there may be other investors who see this as a temporary reaction and would like to hold through the period. This is especially so when the volume is thin and yet prices are coming down. This suggests that small retail investors are still selling stocks and but at a lower price which other investors are willing to buy. The number of shares transacted on 17 Mar 11 was 1208 million, and on 18 Mar 11, it was 1143 million. Comparing the average shares traded per day in Jan 11 and Feb 11 were 1810 million and 1342 million respectively. Until a time when the weak investors have sold the stocks, the market will only consist of strong investors (when I mentioned weak or strong investors, I am referring to their psychology). These strong investors would not want to sell these stocks at depressed prices, and eventually investors who want to buy from them have to bid higher, resulting in rising stock prices. And this is how a market recovers from the correction.

As long as the majority of the investors do not perceive the market as doomed, the market should be able to take this correction and resume its bullish path.