My Investment Philosophies

1. Invest Value-added BiZ
2. BiZ with excellent track of record, excellent management and sustainable products
3. Understand what I invest in
4. Invest for Long Term
5. Gd blend of Active & Passive investments
6. Being a BiZ analyst, not a stock analyst
7. Know my costs and keep them low
8. *Diversify* through proper asset allocation- invest in stocks of different industries, economies

#1 STEP TO CREATING WEALTH

A PART OF ALL YOU EARN IS YOURS TO KEEP

• Do not overstrain or try to save too much
• Be content with what you keep
• Enjoy Life

ACTION2008:I shall save $500/month into my investment account for which I would not touch for any expenses. Target: $10K in my investment account.

CONTROL YOUR EXPENDITURES

• Live below your means

ACTION2008:I shall not spend on unnecessary things.

LET MONEY WORK FOR YOU

ACTION2008:I shall use my investment account to invest in stocks.

GUARD YOUR MONEY FROM LOSS

• "Risk comes from not knowing what you are doing" by Warren Buffett
• Understand an investment before trying it
• Seek advice from expertise of each field

ACTION2008:I shall do in-depth research on stocks before buying it. Long-term investment is ideal. No harsh movement! Give reasons why I am buying this stocks.

INSURE A FUTURE INCOME

• Save for the rainy days

ACTION2008:My insurance with monthly premium of $90 has insured me. I need at least a month's pay in my expense account for any emergency use.

INCREASE YOUR ABILITY TO EARN

• Desires must be SIMPLE and DEFINITE
• The more of wisdom we know, the more we may earn

ACTION2008:I shall continue to increase my knowledge on finance. I shall give tuitions, 4hrs/week to increase my income, hence my savings.

reflection of The Richest Man in the Babylon

circle of competence

Outstanding businesses

• are understandable
• have strong balance sheet
• have good economics (i.e., free cash flow that will grow, pricing power, high return on equity, and bright prospects)
• have competitive advantages

Competent management

• capable management
• rational capital allocators
• appropriate incentives
• a shareholder orientation
• share ownership by management

Great price

• companies that trade at 75 percent or less of economic value
• competitor analysis
• multiple comparisons
• present value of future owner earnings

Phil Fisher's simple investment philosophies

1. Invest for the long term
2. Diversify your portfolio through proper asset allocation
3. *Blend passive with active management*
4. Know your costs and keep them low

*I shall invest in both Stocks and Index funds/ETFs/Bonds/REITs*

Warren Buffett's Investment Principles

1. Know what you own
2. Research before you buy
3. Own a business, not a stock
4. Make a total of only twnety lifetime investments
5. Make one decision to won a stock and be a long-term owner

Market's versus Buffet's Approach to Investing

Financial Statement Part 2

The Balance Sheet

• tells you how financially strong a company is. companies that are financially strong are able to recover from recessions and business mistakes the management might make.
• ASSETS=LIABILITIES + EQUITY
• When Assets increase, (Liabilitiy + Equity) must increase.

Contents in a Balance Sheet consist of ASSETS AND LIABILITIES. There are CURRENT ASSETS and LONG-TERM ASSETS, and vice versa for liabilitiies.

Current Asset

• Cash & Equivalents- having too much cash is bad as it shows the management is not fully utilising the investors' money to good use.
• Accounts Receivables (AR) - money owed to the company by customers who have yet to pay for their purchase of the company's products or services.
• Inventories-important to watch in manufacturing and retail companies. They include products yet to be sold.

Long Term Assets

• Property, Plant & Equipment (PPE) - it form the company's infrastructure and includes buildings, land, plant, machinery equipment and so on.
• Long-Term Investments-includes money invested in long-term bonds or stocks in other companies.
• Intangible Assets-include the value of intellectual property the company owns as well as its goodwill. It is something like a brand which investors are willing to pay over the book value of the company's equity.

Current Liabilities

• Account Payables (AP) - bills that a company owes to individuals (like staff salaries) and other companies (suppliers) that are due to be paid within a year.
• Short-term Borrowings- money a company borrows for less than a year.

Long-term Liabilities- long term debt that company has borrowed from bank or bonds that it has issued to the public.

Profit and Loss Statement

Sales Revenue

• known as just 'sales' or 'turnover', represents how much money the company has brought in over the eriod.
• Revenue= Price per unit x Quantity of units sold.

Cost of Goods Sold (COGS)

Gross Profit

• Gross profit = Sales Revenue - COGS. it tells you how much a company is able to mark up its product or services over the cost of producing it.
• Gross margin (known as profit margin) = gross profit/sales revenue x 100%
• companies with high GM above 25% over five to ten years indicate that they have highly differentiated products and have a strong competitive advantage against competitors.
• company with falling margins is a sure sign that it is facing greater and greater competition.

Operating Expenses

• Research & Development & marketing ensures the company continues to innovate better products and build its brand name.
• Depreciation is when a company buys a physical asset to last a long time (e.g. factory) and expenses its cost over a number of years.
• Non-recurring charges/gains are one off chages or gains that are not part of ongoing operations and not likely to be repeated.

Operating Income

• shows the profit the company made from its actual operations.
• Operating income= Sales Revenue - COGS - Operating Expenses.
• company may also make additional profits or losses from interest income (from money it puts in the bank) or from one off non-operational activities like selling an investment for a profit (known as extraordinary items).

Net Profit after Tax (Net Income)

• the actual profit the company has made.
• it shows how much goes to you as dividends or goes to retained earnings, which will then increase the company's value and hence share price.
• Net Profit after Tax= Operating Income +/- interest income/expense - Taxes

Earnings Per Share (EPS)

• EPS = Net Profit After Tax/Number of Shares Outstanding
• increasing EPS leads to higher intrinsic value and higher share price

PE Ratio

• PE = Current share price/EPS

The Statement of Cash Flows

• records all the cash that comes into a company and all the cash that goes out.
• tell you how much cash the company actually generated and how much it has used up over the accounting period.
• gives a true picture of the company's profitability & stability.
• a company can show good earnings report on its income statement, but cash flow tells extactly how much cash was received.

Cash Flow from Operating Activities

• how much cash goes in and out of the company as a result of it selling its goods and services.

Cash Flow from Investing Activities

Cash Flow from Financing Activites

Increase (decrease) in cash equivalents = Operating cash flow + Investing cash flow + Financing cash flow

Very Good Business?

1. history of consistently increasing sales and earnings
2. sustainable competitive advantage
3. future growth drivers
4. conservative debt: long term debt< (3 to 4) xnet profit
5. ROE(>15%) must be consistent and high
6. low CAPEX required to maintain current operations
7. honest & competent management

Financial Statement

PROFIT & LOSS STATEMENT-reveals the management of a company and how well $ is generated.

Profits VS Expenses- gross profit margin.
Gross Margin (profit margin) realates to EPS.
increase G.M. over past 5-10yrs-highly differentiated products & have strong competitive advantage against competitors, or vice versa.
Gross margin=gross profit/sales revenue x 100%= (sales revenue-cost of goods sold)/sales revenue x 100%.

Operating Income= sales revenue-cost of goods sold-operating expenses.
operating expenses includes R&D, marketing, salaries, depreciation etc.

Net Profit After Tax-dividends or retained earnings-company's value.
EPS= Net Profit After Tax/No. of shares outstanding.

PE ratio- no. of yrs to break even.

BALANCE SHEET- financial health of the company.
ASSET= LIABILITY+EQUITY.

STATEMENT OF CASH FLOW-company's profitability and stability.
Increase(decrease) in cash equivalents=operating cash flow+net cash from investing activities+ net cash from financing activities.
Free Cash flow= cash flow from operations-capital expenditures.
free cash flow/sales revenue > 5%, great company with lots of cash left over.

Stock Selection Technique

• Consolidated Profit After Tax- compare stock price with earnings.
• NTA- financial foundation of a company. Ideally, reccommended stock is priced 33% below NTA.
• ROE- company's ability to utilise its assets to generate profits.
• Leverage ratio=long term liabilities/total shareholder's fund. It measures the degree of indebtness of company. Increasing leverage ratio, increasing company borrowings. However, company may depend on loans to large extent to finance new investments & growth. L.R increase, sales and profits increase, means a form of growth. L.R increase, sales & profits decrease, financial trouble.

Volume Chart & Analysis

1. Heavy Volume with Rising Price- substanstial of selling is being absorbed & price is likely to go highly.
2. Declining Value with rising price- price dipping soon.
3. Heavy Volume with stable price- sign of accumulation and more upside potential as heavier volumes develop.
4. Record Volume after decline-suggest price has reached bottom and it is entry point for bargain hunting.

Financial Reports-Accounting Ratios

LIQUIDITY RATIO measures the ability of a company to meet its short-term finance obligations.

Current Ratio=current assets/ current liabilities.
A ratio of 2 is healthy as to ensure LIQUIDITY.
The greater the ratio, the greater the company's ability to meet its short term debt.
However, a current ratio of greater than 4 may imply that company is underutilising its assets.

Acid test ratio=( Current assets-inventories)/current liabilities.
It's a better reflection of company's liquidity than the current ratio.

SOLVENCY RATIO is the ability of company to service its long term debt obligation.

Debt-to-assets ratio=total liabilities/total assets=total liabilities/(total liabilities + shareholder equity).
Low ratio indicates that the owners are providing more funds for the business than the creditors.Hence there is a lower risk of bad debts as company will be able to pay its debts.

StockMarketAnalysis- Choosing the Right Share

To pick the right share, you should examine the company in the following areas:

• potential growth
• quality of management
• finanacial health
• nature of the business

POTENTIAL GROWTH

The factors that will affect the potential growth of a company are as follows:

• the country in which the company has investments and businesses.
• the nature of business the company is engaged in, which implies, i the new economy context, the level of technology it commands.
• how innovative the company is (most products are becoming commodities, hence profit opportunities arise more readily with more innovative companies).

QUALITY OF MANAGEMENT

The factors to look for in judging the quality of management are:

• past performance of the company under the management.
• qualification and prefessionalism of management.
• staff turnover rate.
• track record of management.

FINANCIAL HEALTH

the common figures to look for in assessing the financial health of a company are:

• historic net earnings per share (EPS).
• historic price earning ratio (PE ratio)
• net tangible asset per share (NTA).
• net profit after tax.
• net profit margin.
• intangibles such as innovation capabilities; too much emphasis on numbers alone is not advocated.

The ratios should be compared not only across time, but also among the different companies with the same industry. Comparison across time gives an evaluation of the performance of the company with respect to that of the previous years. Comparison across firms in the same industry helps to judge the competitiveness and performance of the company in the industry.

these figures can be obtained from the following sources:

• annual reports of the company (the US companies are the best).
• prospectus(if it is an IPO).
• Newspapers, e.g. The Business Times
• SGX publications
• Others, e.g. BusinessWeek

Annual Reports

The company's annual report is a good source of infomation. It tells you what's going on in the company at a particular time and what its prospects for the future are. When studying annual reports, note the following:

• start from the back of the auditors' report. do they qualify their report or are they satisfied?
• read the footnotes. is anything hidden in the small print?
• what does the chairmna say in his statement?
• examine the profit & loss accounts. look particualarly at turnvoer, expenses, pre-tax profits and earnings per share.
• look at the Balance sheet. is the company burdened by too much debt?
• look at the cashflow statement; this is very important. is the company maximising the use of its cash?
• compare annual reports.

A Quick Guide to Buying Shares

DO

• buy low and sell high
• monitor the share price of the company whose shares you want to buy.
• understand market sentiments.
• do your homework and find out basic information about the comapny.
• diversify your investments.
• view shares as medium to long-term investments.
• condsider transaction costs.

DON"T

• buy more than you can afford
• speculate and buy shares based on rumours.
• buy shares that have appreciated a great deal recently. share price can never just move upwards only.
• try to cut losses by buying shares at a lower price. the price may drop further and you will lose even more.

Five Simple Steps to Investing Like Buffet

1. Buy businesses, not stocks
Think like a business analyst, not a stock analyst. Look into the company's prospect and management, not just the stock price. Remember, when you buy the stocks, it represents the ownership of the businesses.
2. Focus on companies with wide economic moats
Companies that have their cash flows structurally protected from competition should fare much better in an economic downturn, while also increasing in intrinsic value at above-average rates over long periods. Examples include being low cost producer, or have intangibles like patents and brands.
3. Let intrinsic value be your touchstone
The value of a business is the value of all the cash that business can generate for its owners in the future, discounted to today's terms. And since stocks represent ownership stakes in businesses, it makes perfect sense to value stocks via discounted cash-flow analyses. "Value is what you get, Price is what you pay." by Warren Buffett.
4. Always require a margin of safety
Any intrinsic value estimate is based on projections of future cash flows. And since the future is inherently uncertain, it is highly beneficial to only buy at a discount to fair value to account for that uncertainty.
5. Think independently, and be patient
To be greedy when others are fearful, and fearful when others are greedy, is some of the best advice Warren Buffett has ever given.

Warren Buffet Way of investing

INVESTING RULE #1: NEVER LOSE MONEY.

INVESTING RULE #2: NEVER FORGET RULE #1.

Quotations by Warren Buffett.

"Risk comes from not knowing what you are doing."

"When there's nothing to do, DO NOTHING."

Risk Profile EQUIVALENT to How much are you willing to lose?

Good & Affordable Stocks

Guildlines for Investment System and Finding Yours

Basic knowledge of Stocks

this is the current compilation of what i have learnt so far about stocks and some of the important technical terms that you need to know.

P/E Price/Earnings Price per share:Net earnings per share
When P/E is low, stock is undervalued & vice versa. Traditionally, P/E lies between 18-20.
If P/E<10, must do further analysis of the company before buying the stocks are it is likely to go lower.
Stocks accumulate Wealth. Bonds Preserve Wealth.
Stocks offer compounding of returns free of most taxes until you sell the stocks.
FACT:There are no ten-year periods in which stocks didn't do better than anything else.
Stocks reflect the dynamic growth & change of a country.
LONG TERM: Price Appreciation & Dividends.
Company's intrinsic value: company's worth when its ASSETS, EARNINGS, DEVIDENDS, OUTLOOK & MANAGEMENT are all taken into account.
Intrinsic value a reflection of Stock price.
If intrinsic value far above stock price, buy it, or vice versa.

Market Capitalization is the product of PRICE OF STOCK AT GIVEN TIME and AMOUNT OF SHARES OUTSTANDING.

• Large Cap: $10Billion and above-Low risk
• Mid Cap: $2Billion to $10Billion-Intermediate risk
• Small Cap: $500million to $2Billion-High risk

Paying who First?

reference to Rich Dad Poor Dad

Why the Rich gets Richer & Poor gets Poorer

reference to Rich Dad Poor Dad

Financial Statement

reference to Rich Dad Poor Dad

Person with zero Financial Knowledge

reference to Rich Dad Poor Dad

Cash flow pattern of different class groups

reference to Rich Dad Poor Dad

Cash flow pattern of an asset and a liability

reference to Rich Dad Poor Dad

Pyramid of Investments

1. Savings/CDs
2. Stocks
3. Mutual Funds/Bonds
4. ETFs/REITs

REITS

I just found out that there is an even MORE BETTER real estate investment. It's called Real Estate Investment Trusts. The difference is REITS is a paper asset of real estate. It's a fund actively managed by fund managers who invest in commercial properties. Conventional real estate investment involves buying the physical property and this requires lots of money and it's also time-consuming.

What's good about REITS? It functions exactly like a stock. You profit through it's appreciation in price and through it's quarterly dividends.

Hence if you do not have enough cash to buy properties for investment and rental purposes, try it out at REITS.

Start NOW!

Earned Income

• have 3 bank accounts, 1 for expenses and 1 for emergency/opportunity uses and 1 for investments.
• have a Regular Saving Plan. $100/month?
  
• start a part-time job that takes up six hours/week. giving tuition? waiter?

Portfolio Income

• Put a fixed amount of money every month into an index fund for 30 years without missing a single month. Method is called Dollar Cost Averaging.
• Purchase a personal saving insurance for yourself when you are young like me. Lumps sums of money will be given to you upon maturity of approx 30yrs.
• Buy good fundamental stocks with good management and brand names when there is a BEAR market. Reason being, they will bounce back high after the down period.
• Reinvest your dividends or profits from your portfolio investment.
• Put a fixed amount of money every month into 2 well-established blue-chip stocks for 30 years without missing a single month. Singtel?

Passive Income

• Use Google's Adsense if you like blogging.
• Sell your unwanted items through eBay.
• Buy a house and rent it out.
• Create a website selling products using Internet marketing.
• Create network of many small businesses in areas you are good at.
  

Start-Up Informations

Begin by educating yourself on finance. These are some of the recommendations with reference from "4 Steps to Financial Freedom" by Seah Toh.

General Wealth Awareness

• Rich Dad, Poor Dad ( Robert T. Kiyosaki )
• The Richest Man in Babylon ( George S. Clason )
• Think & Grow Rich ( Napolean Hill )
• Pay Yourself First - A Guide to Financial Success ( Jesse B. Brown )

Stock Investment

• The Winning Investment Habits of Warren Buffett & George Soros ( Mark Tier )
• The Intelligent Investor ( Benjamin Graham )

Passive Income

• Earn Revenue With Google Adsense http://www.google.com/services/adsense_tour/
• Multiple Streams of Income Second Edition ( Robert G Allen )
• Multiple Streams of Internet Income ( Robert G Allen )
  

Steps to Financial Freedom

I just read this book"4 Steps To Financial Freedom" written by SEAH TOH and I thought that some of the contents is quite beneficial to you and me. With reference to his book, I shall share some of my thoughts.

In this model, it explains that we need to maximize our incomes in the order of passive income > portfolio income > earned income in order to create financial freedom.

However, this is easier to say than do. To really make the first step, you need to educate yourself on how to pay yourself first from your earned income. Paying yourself does not mean spending on lavish lifestyle to satisfy yourself!!! It means putting aside savings for your investment accounts first before you start paying off bills and expenses.

Next, you should start educate yourself on how to create your first portfolio income and do some practise on it. Subsequently, when your become experienced, start educate yourself on how to use other people's money to drive your engine for your portfolio income. This is called good debt. There is risk involved and hence you have to be careful about it.

And finally, educate yourself on how to create your first passive income. Generally, passive income will be through real estate rental and network/internet marketing.

Therefore, for young adults like me( I am 20yrs only), my plan now would be paying myself
for my portfolio income. In the meantime, I will also continue to build up my financial knowledge. Next I'll create enough wealth to make a down-payment for a house, and then I'll rent it out. As a result, I will have created passive income through rental and portfolio income through investments.

Passive income

Everyone wants to be financially free. that goes for me too. Now, what's your own definition of financial freedom? For me, it's simple. It means the ability to live your preferred lifestyle without you having to work or rely on anyone else for money.
Hence to achieve financial freedom, you would need to earn money without working. That's when passive income comes into the picture. To be "free", you would need to generate enough passive income such that it exceeds your expenses.
There are primarily 2 types of passive income. First is "money working for you". Second is "business working for you".
"Money working for you" includes investment earnings from financial instruments such as stocks, bonds, T-bills, money markets, mutual funds, as well as assets that appreciate in value and can be liquidated for cash.
"Business working for you" includes rental real estate, owning vending, network marketing and internet marketing, just to name a few.
In conclusion, you can never achieve financial freedom through just your hard-earned income. You will need passive income to help you achieve the ultimate goal.
Work hard, But also Work SMART.

Income

today i shall discuss with you about incomes.
there are 3 types of income sources.

• Earned income
• Portfolio income
• Passive income

Earned income easily means income that you earn through hard work.
Portfolio income means income earned through investments in stocks and mutual funds etc.
Passive income means income earned through real estate investment, eg. rental fee, or internet market or network marketing.

In the following chapters, i shall touch on Portfolio and Passive incomes.
i shall relate the 3 income sources together and teach you how to multiply your NET income.
From this chart, we can interpret that wealth can be created through 3 sources of income. However, many people have only 1 dimension of income, mostly earned income. If you are going to have only 1D income, you are NOT going to be RICH.
To create wealth, we need to have these 3 basic sources of income, with Passive and Portfolio the main contributor of wealth.
Hence, my conclusion is, even if your earned income is low, you can still create wealth through portfolio and passive incomes.
Soon i'll touch on these 2 IMPORTANT incomes.

I welcome feedbacks from you readers, any additional information on income from you would be appreciated.