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.