Thursday, 14 September 2017

A Strategy for Losing Money

A Strategy for Losing Money
Thursday, July 14, 2016

I can give you a name of a fund trading with the equivalent of a 23% sales charge. It’s actively managed by a company that’s incurred large outflows from its signature mutual fund following the departure of its star chief investment officer. Interested in owning it?

You probably aren’t, but some investors were. PIMCO’s Municipal Income Fund (PMF) , a closed-end fund, traded at a 23.4% premium to the underlying value of its net assets last Friday. Put another way, some investors were paying $1.23 for $1.00 worth of net assets. One doesn’t have to know much about investing to realize this isn’t smart.

PIMCO Municipal Income Fund wasn’t the only offender. Eight other closed-end muni bonds funds ended last week with premiums of 10% or more. In comparison, the average closed-end bond fund traded at a 2.32% discount (meaning investors paid just under $0.98 for every dollar of assets), according to the Closed-End Fund Association (CEFA). The average stock closed-end fund traded at a 7.49% discount.

For those of you who are curious, here are the highly priced bond funds, sorted in descending order by their premium based on data for last Friday (July 8) from the CEFA:

PIMCO Muni Income (PMF), 23.40% premium
PIMCO NY Muni Income II (PNI), 21.62% premium
PIMCO CA Muni Income III (PZC), 16.78% premium
BlackRock VA Muni Bd Tr (BHV), 15.27% premium
Pimco CA Muni Income II (PCK), 15.27% premium
BlackRock MuniYld AZ (MZA), 14.71% premium
PIMCO CA Muni Income (PCQ), 12.52% premium
BlackRock MuniVest II (MVT), 11.97% premium
PIMCO NY Muni Income (PNF), 10.59% premium

The premiums on several of the funds have come down since last Friday, but still remain high. As of yesterday, PIMCO Muni Income trades at an 18.89% premium.

Closed-end funds differ from mutual funds and exchange-traded funds (ETFs) by having a fixed number of shares. As money flows into and out of mutual funds and exchange-traded funds, the number of outstanding shares is adjusted. Mutual funds directly issue shares to and redeem shares from shareholders. ETFs adjust their share counts through creation units, which are large blocks of shares issued to and redeemed from institutional investors and large traders. If there are more investment dollars flowing into a closed-end fund than the net value of its assets, shares of the fund will trade at a premium to their net asset value (NAV). It’s the law of supply and demand. More dollars will drive up the share price because transaction proceeds go into the pockets of selling shareholders, but never into the closed-end fund. (New investor dollars only flow into a closed-end fund when an offering occurs, which is not very often.)

This fact invokes the greater fool theory. When a premium, particularly a high premium, is paid, the investor is hoping there is someone willing to pay an even higher price for the same shares. Two events could cause this investor to incur a loss. The first is the fund’s net asset value declining, which should cause the share price to decline and is an inherent risk with any type of fund. The second is a decrease in the premium. Should the premium decline faster than the fund appreciates in value, the investor could lose even though the underlying net asset value of the shares increased in price. The worse-case scenario, of course, is for the fund’s NAV to decline and its premium to shrink—a double whammy.

How do you avoid such a scenario? Check the Closed-End Fund Association’s website. They list a closed-end fund's premium or discount right on the quote page. I also find their screener to be very helpful. (Click on "fund selector" near the top of any page.) You can screen by type of fund as well as by other characteristics, such as premium and discount.

Wednesday, 13 September 2017

Warren Buffett lives in a modest house — here's what it looks like

NOW WATCH: Warren Buffett lives in a modest house that's worth .001% of his total wealth — here's what it looks like

The 'Warren Buffett of Sweden' gives his best advice on building wealth

The 'Warren Buffett of Sweden' gives his best advice on building wealth
Tom Turula, Business Insider

Roughly one in ten Swedes are millionaires in Swedish crowns, according to data from SBAB, a Swedish bank. (A million Swedish crowns, when converted to US dollars, is worth about $125,000.)

Per H. Börjesson, the founder and CEO of Swedish investment company Spiltan, thinks there could, and should, be many more.

Börjesson's bestselling book "Here's how all Swedes can become millionaires" draws from his experience running his company, an investment firm with $3.4 billion (27 billion Swedish crowns) under management.

The book has a simple message: The key to becoming financially independent is to follow a number of simple savings advice, and stick with them through thick and thin.

Börjesson is a big fan of investor legend Warren Buffett. His strong track record with Spiltan, one of Sweden's foremost investment companies, combined with his affinity for the Sage of Omaha has earned Börjesson the informal nickname "Warren Buffet of Sweden."

He has even made Spiltan's annual shareholder meetings into spectacles modeled on Berkshire Hathway's.

Moreover, Börjesson is often seen quoting Buffett's advice in the media, such as: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes."

Here are Per H. Börjesson's 5 key pieces of advice to young people starting out today, and to anyone else for that matter, according to Veckans Affärer (VA).

1. Start each month by saving 10 percent of your income.
"Absorb the oldest and best investment advice there is: save 10 percent of your salary each month, before you do anything else. Don't wait," Börjesson told Dagens Industri.

2. Live within your means, i.e. don't let your costs surpass incomes.
Börjesson said: "I notice all the time how people spend money on things that are not necessary, such as eating lunch in a restaurant instead of preparing your own, buying coffee on your way to work, or lottery tickets, cigarettes, etc."

3. Buy shares or equity funds.
"If you buy equities, then investment companies are a good alternative. When it comes to funds, choose index funds with low fees, or active funds. You can also buy individual quality stocks."

4. Hold on to your assets.
"The best thing is to never sell all of your shares. But you can use some of your assets for an apartment or for that dream holiday."

5. Be very careful when listening to investment advisors.
Börjesson said that you shouldn't rely too much on "experts", but instead make independent decisions when it comes to your money. When buying your index funds, make sure that fees are low. That way, you will be able to keep most of the fund's returns.

"The most tragic thing is that even people who do a good job of saving each month, cannot possibly become millionaires if they accept bad advice from advisors who are really just salesmen," Börjesson said.

Tuesday, 12 September 2017

Pentamaster’s PIL valued at RM321mil

Pentamaster’s PIL valued at RM321mil

Proposed IPO in Hong Kong involves sale of 23% stake in the unit

PETALING JAYA: Pentamaster Corp Bhd is planning to list its most profitable subsidiary, valued at RM321mil, on the main board of the Hong Kong Stock Exchange to raise funds for the expansion of its smart home applications and Internet of things (IoT) business.

The proposed initial public offering (IPO) involves the sale of a 23% stake in Pentamaster International Ltd (PIL) to investors at a price to be determined at a later date, the company said in a filing with Bursa Malaysia. Pentamaster owns 92.6% of PIL.

The share sale will reduce its stake in the unit, which generated all its profits in the financial year ended Dec 31, 2016, to 63%.

Pentamaster will be required to seek its shareholders’ approval in a general meeting for the proposed dilution.

The IPO exercise is expected to be completed in the first quarter of next year.

“The proposed listing will provide the company and its automated solutions business with a diverse fund-raising platform in the future, which, in turn, will increase its financing flexibility to fund its future growth,” Pentamaster said in the statement yesterday.

The company said the offer price for PIL would be determined at a later date.

Pentamaster had announced the plan to spin off its unit in June this year. The planned fund-raising scheme had helped propel the stock 250% higher this year at yesterday’s close of RM4.73.

At this level, the company has a market capitalisation of RM693mil.

The valuation for PIL was ascribed by McMillan Woods Partners in Singapore.

McMillan Woods was appointed as the independent valuer to provide its valuation on the fair market value of the PIL Group to the board.

Pentamaster said it intended to use the proceeds from the share sale exercise to pay for future expansion of the group’s smart building solutions or building management system, and/or property development projects applying such solutions and system, as well as the IoT solutions with applications covering digital mobile software, payment gateway, secured software and/or building construction applications and solutions.

In addition, the fund will be utilised for technology-related investments in business applications covering healthcare, bioscience, aviation, information and communications technology, finance, social environment, energy and infrastructure.

The proceeds will also be allocated for working capital to carry out the new initiatives, including research and development, the hiring of employees, marketing and administrative expenses.

Meanwhile, the net proceeds to be raised by PIL from the public issue of new shares are proposed to be utilised for capital investment and costs in relation to the construction of a new production plant in Batu Kawan Industrial Park, Penang, and the expansion of its existing production plant in Bayan Lepas, Penang.

The net proceeds will also be used for working capital, business expansion into the Greater China region (comprising China, Hong Kong, Macau and Taiwan), the establishment of an office in California in the United States, as well as for marketing, branding and promotional activities.

The details of the proposed listing, including the size and structure of the proposed share offer, the offer price and the amount of proceeds to be raised, will be determined at a later date upon approval being obtained from the Hong Kong Stock Exchange, closer to the launch of the prospectus of PIL and after taking into account the prevailing equity market and industry conditions in which the PIL Group is operating.

Pentamaster, which closed 0.4% higher at RM4.73, traded on a volume of 405,000 shares.


Pentamaster to list automated solution arm on HK exchange

PETALING JAYA: Pentamaster Corp Bhd (PCB) proposes to list its automated solution business, Pentamaster International Limited (PIL), on the main board of The Stock Exchange of Hong Kong Ltd (HKEX).
While the exact details of the proposed listing, including size and structure of the proposed share offer, the offer price and amount of proceeds to be raised, are yet to be determined, PBC did say that its equity interest in PIL is expected to reduce from 92.60% as at Aug 30, 2017 to 63.10% upon completion of the exercise.
The entire exercise comprises of a share award scheme for eligible employees of PIL and its subsidiaries; proposed listing of the PIL and proposed dilution of PCB’s equity interest in PIL.
Profit after tax attributable to owners of PIL amounted to RM17.77 million for the financial period ended June 30, 2017.
The proposals are subjected to approvals being obtained from the shareholders of PCB at an EGM to be convened.


Wong Ee Lin/
July 17, 2017 21:43 pm MYT

KUALA LUMPUR (July 17): Pentamaster Corp Bhd plans to inject three of its automated solution subsidiaries into Pentamaster International Ltd (PIL), which it intends to list on the Hong Kong Stock Exchange.

The three wholly-owned subsidiaries are Pentamaster Technology (M) Sdn Bhd, Pentamaster Equipment Manufacturing Sdn Bhd and Pentamaster Instrumentation Sdn Bhd.

The three units will be injected into PIL for a collective RM86.78 million, which will be satisfied via the issuance of 999 PIL shares to Pentamaster.

"The internal reorganisation will facilitate a more efficient group structure by way of promoting a better segregation of business responsibilities and operations for Pentamaster’s existing automated solution business and its other smart control solution system business," said Pentamaster in a filing with Bursa Malaysia today.

"This will in turn enable the management of the automated solution business and smart control solution system business to efficiently allocate resources and focus on their respective businesses.
"In addition, the internal reorganisation will also facilitate PIL to act as the listing entity for the proposed listing," it added.

Following the internal reorganisation, Pentamaster will proceed to dispose of a 7.4% stake in PIL to Singapore-based private equity fund GEMS Opportunities Limited Partnership RM25.5 million.
The proposed disposal is expected to result in a gain on disposal of RM19.08 million.

Pentamaster said it intends to use the proceeds from the proposed disposal for expenses in relation to the proposed listing, to repay borrowings, for staff and other general administrative and operating related expenses and sales and marketing expenses.

The disposal consideration of RM25.5 million in PIL represents a price to earnings (PE) multiple of 10.4 times to the audited combined net profit of Pentamaster Technology, Pentamaster Equipment and Pentamaster Instrumentation of RM33.14 million for the financial year ended Dec 31, 2016.
The PE multiple falls within the range of the high (17.96 times) and low (6.45 times) of Pentamaster’s traded PE multiple for the past 12 months up to the date of this announcement.
Barring any unforeseen circumstances, the proposals are expected to be completed by the third quarter of 2017.

In June, Pentamaster announced that it is pursuing a separate listing for its automated solution business in Hong Kong.

Pentamaster shares closed down eight sen or 2.13% to RM3.68 today for a market capitalisation of RM539.37 million.


Pentamaster to gain RM19mil from sale of 7.4% in PIL
Monday, 17 Jul 2017

KUALA LUMPUR: Pentamaster Corp Bhd

, which seeks to list its automated solution business in Hong Kong held under holding company Pentamaster International Ltd (PIL), is selling a 7.4% stake in PIL to GEMS Opportunities Ltd Partnership for RM25.5mil.

In a filing with Bursa Malaysia, Pentamaster said it stood to gain RM19.08mil from selling the equity interest in newly-incorporated PIL to GEMS, a Singapore-based private equity fund.

Pentamaster had on Monday signed agreements to transfer its entire equity interest in three wholly-owned subsidiaries involved in the automated solution business to PIL and, afterwards, to sell 7.4% equity interest in PIL to GEMS for RM25.5mil in cash.

It said the internal reorganisation would lead to a more efficient group structure separating PCB’s existing automated solution business and its other smart control solution system business.

Besides for raising funds, Pentamaster said its proposed disposal of PIL shares to GEMS would broaden PIL’s shareholder base by exposing it to international institutional investors.

It added that GEMS’ positioning as strategic investor of PIL, coupled with fund manager GEMS Capital Pte Ltd’s extensive investment experience and network, would add value to the proposed listing.

On the use of the RM25.5mil proceeds, Pentamaster said the bulk - RM15mil - would go towards paying the listing expenses while RM7.5mil would be for repaying bank borrowings.



Pentamaster eyes HK listing of automated solution business
Tuesday, 13 Jun 2017

KUALA LUMPUR: Pentamaster Corp Bhd is pursuing a separate listing for its automated solution business in Hong Kong.

In a filing with Bursa Malaysia, the company said it had appointed advisers for the purpose of listing the business on the main board of the Stock Exchange of Hong Kong Ltd, including financial advisory firm Altus Capital Ltd as the sponsor.

It said the automated solution business would gain recognition and corporate stature through having its own listing status, hence allowing it to expand of its customer base.

The proposed listing is also expected to enhance efficiency by way of promoting a clearer segregation of business responsibilities and operations for Pentamaster’s existing automated solution business, thereby enabling the respective management teams to focus on opportunities specific to each of the automated solution business.

Pentamaster said the proposed exercise would also unlock shareholders’ value and provide the company and its automated solution business with a diverse fund-raising platform in the future.

The group has three operating segments: automated equipment (its biggest revenue and profit contributor), automated manufacturing solution, and smart control solution system.

“Prior to the completion of the proposed listing, Pentamaster will undertake a reorganisation of its subsidiaries involved in the automated solution business and these subsidiaries will continue to remain as its subsidiaries on completion of the proposed listing,” the company said.

It said a detailed announcement would be made in due course after it had finalised and approved the structure of the proposed listing.

To facilitate the proposed listing, Pentamaster has applied to incorporate a wholly-owned subsidiary in the Cayman Islands, namely Pentamaster International Ltd (PIL), on Monday. PIL’s principal activity is that of investment holding.

Pentamaster said the board wished to highlight to its shareholders that the proposed listing was at a preliminary stage and fairly extensive preparatory work was required and that such preparatory work might involve an uncertain time frame.

“Shareholders should note that the proposed listing may or may not materialise,” it said.

The company noted that the exercise was subject to, among others, satisfactory due diligence and assessment of suitability for listing by the Hong Kong sponsor and other professional advisers, approvals being obtained from the relevant authorities in Hong Kong and Malaysia (where required), as well as the shareholders at an EGM to be convened.

In addition, the proposed listing depends on assessment of other factors such as general economic and capital market conditions.


Monday, 11 September 2017

Stock Valuation Manifesto Checklist

September 11, 2017 | Vishal Khandelwal

I had released my Investor’s Manifesto couple of years back. Now, here is my fifteen-point stock valuation manifesto that I penned down a few months back though I have been using it as part of my investment process for a few years now.
It is evolving but is something I reflect back on if I ever feel stuck in my stock valuation process. You may modify it to suit your own process and requirements. But this in itself should keep you safe.
Read it. Print it. Face it. Remember it. Practice it.

[Your Name]’s Stock Valuation Manifesto

  1. I must remember that all valuation is biased. I will reach the valuation stage after analyzing a company for a few days or weeks, and by that time I’ll already be in love with my idea. Plus, I wouldn’t want my research effort go waste (commitment and consistency). So, I will start justifying valuation numbers.
  2. I must remember that no valuation is dependable because all valuation is wrong, especially when it is precise (like target price of Rs 1001 or Rs 857). In fact, precision is the last thing I must look at in valuation. It must be an approximate number, though based on facts and analysis.
  3. I must know that any valuation method that goes beyond simple arithmetic can be safely avoided. If I need more than four or five variables or calculations, I must avoid that valuation method.
  4. I must use multiple valuation methods (like DCFDhandho IVexit multiples) and then arrive at a broad range of values. Using just a single number or method to identify whether a stock is cheap or expensive is too much oversimplification. So, while simplicity is a good habit, oversimplifying everything may not be so.
  5. If I am trying to seek help from spreadsheet based valuation models to tell me whether I should buy, hold, sell, or avoid stocks, I am doing it wrong. Valuation is important, but more important is my understanding of the business and the quality of management. Also, valuation – high or low – should scream at me. So, I may use spreadsheets but keep the process and my underlying thoughts simple.
  6. I must remember that value is different from price. And the price can remain above or below value for a long time. In fact, an overvalued (expensive) stock can become more overvalued, and an undervalued (cheap) stock can become more undervalued over time. It seems harsh, but I cannot expect to fight that.
  7. I must not take someone else’s valuation number at face value. Instead, I must make my own judgment. After all, two equally well-informed evaluators might make judgments that are wide apart.
  8. I must know that methods like P/E (price to earnings) or P/B (price to book value) cannot be used to calculate a business’ intrinsic value. These can only tell me how much a business’ earnings or book value are priced at vis-à-vis another related business. These also show me a static picture or temperature of the stock at a point in time, not how the business’ value has emerged over time and where it might go in the future.
  9. I must know that how much ever I understand a business and its future, I will be wrong in my valuation – business, after all, is a motion picture with a lot of thrill and suspense and characters I may not know much about. Only in accepting that I’ll be wrong, I’ll be at peace and more sensible while valuing stuff.
  10. I must remember that good quality businesses often don’t stay at good value for a long time, especially when I don’t already own them. I must prepare in advance to identify such businesses (by maintaining a watchlist) and buy them when I see them priced at or near fair values without bothering whether the value will become fairer (often, they do).
  11. I must remember that good quality businesses sometimes stay priced at or near fair value after I’ve already bought them, and sometimes for an extended period of time. In such times, it’s important for me to remain focused on the underlying business value than the stock price. If the value keeps rising, I must be patient with the price even if I need to wait for a few years (yes, years!).
  12. Knowing that my valuation will be biased and wrong should not lead me to a refusal to value a business at all. Instead, here’s what I may do to increase the probability of getting my valuation reasonably (not perfectly) right –

    • I must stay within my circle of competence and study businesses I understand. I must simply exclude everything that I cannot understand in 30 minutes.
    • I must write down my initial view on the businesswhat I like and not like about it – even before I start my analysis. This should help me in dealing with the “I love this company” bias.
    • I must run my analysis through my investment checklist. I have seen that a checklist saves life…during surgery and in investing.
    • I must, at all cost, avoid analysis paralysis. If I am looking for a lot of reasons to support my argument for the company, I am anyways suffering from the bias mentioned above.
    • I must use the most important concept in value investing – margin of safety, the concept of buying something worth Rs 100 for much less than Rs 100. Without this, any valuation calculation I perform will be useless. In fact, the most important way to accept that I will be wrong in my valuation is by applying a margin of safety.
  13. Ultimately, it’s not how sophisticated I am in my valuation model, but how well I know the business and how well I can assess its competitive advantage. If I wish to be sensible in my investing, I must know that most things cannot be modeled mathematically but has more to do with my own experience in understating businesses.
  14. When it comes to bad businesses, I must know that it is a bad investment however attractive the valuation may seem. I love how Charlie Munger explains that – “a piece of turd in a bowl of raisins is still a piece of turd”…and…“there is no greater fool than yourself, and you are the easiest person to fool.”
  15. I must get going on valuing good businesses…but when I find that the business is bad, I must exercise my options. Not a call or a put option, but a “No” option.