Mini Super bull run in the making before Chinese New Year?

Friday, November 5, 2010
Mini Super bull run in the making before Chinese New Year ?

Comparing the circumstances back in 1993 against the current situation.

In the early 1990s, despite slowdown in the global economy, as the third largest economy in South-East Asia, after Indonesia and Thailand, Malaysia was supported by relatively strong macroeconomic fundamentals and resilient financial system. With the real GDP growing at 9.9%, ringgit appreciation, strong export growth and the Government’s measures to hold inflation low at 3.6%, the local stock market became an attractive alternative to foreign investors.

In 1991, Tun Dr Mahathir Mohamad unveiled the philosophy of “Malaysia Incorporated” which was a development strategy for Malaysia to achieve a developed nation by 2020.


Before 1993
Foreign investment in Malaysia was - long-term direct investment in manufacturing sector.
However, massive influx of foreign capital inflow helped fuel the super bull-run in 1993.
Within the year, the market increased by 98% to reach an all-time high of 1,275.3 points and foreign investors’ participation accounted for 15% of total trading value of our local bourse. Lured many retailers into the market

1993
Government planned several mega projects, such as
KL International Airport (RM8bil), Johor-Singapore Second Link (RM1.6bil) and Kuala Lumpur Light Rail Transit (RM1.1bil).
Government planning on privatising its own corporations, such as Petronas, KTM and Pos Malaysia had also driven these counters into prime trading targets.
Besides, the ease of accessing bank credit by investors also contributed to the market rally.
High percentage of loans was channelled to broad property sector as well as the purchase of securities.

1994.
Bank Negara introduced a number of selective capital controls in early 1994 to stabilise the financial system,

2010
Economic Transformation Programme (ETP) with the aim to boost our gross national income (GNI) to US$523bil in 2020 from US$188bil in 2009. GDP growth is anticipated to increase by 6% this year.

September 2010 saw net inflow of foreign funds again in our equity market. Over the past few weeks, the average stock market daily volume had been hovering above one billion shares per day.

According to Andrew Sheng in his book titled From Asian To Global Financial Crisis, there were two main indicators to irrational exuberance during the super bull run in 1993. The first was the amah (domestic maid) syndrome. We need to be careful when amahs got excited about the stock market. This was because they did not know what they were buying and would always be the last to sell. The second indicator was when businessmen began to speculate stocks in the stock market. This was because they might neglect their businesses and use some of their cash for speculation.

Comparing our current market situation with the 1993 bull run, there are certain similarities that we see, such as strong economic growth, ringgit appreciation, inflow of foreign capital and ease of credit.
Local retailer participation may be the last push factor towards the bull run.

( source : The star )


http://acnews101.blogspot.com/2010/11/mini-super-bull-run-in-making-before.html


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Is there a super bull run in 2010?
Personal Investing – By Ooi Kok Hwa

Although the economic situation now compares with that of 1993, the last push must come from local retail investors

THE recent rally in our local bourse has prompted many seasoned investors, especially those who experienced the super bull run in 1993, to wonder whether the current rally is about to turn into a real bull run. Of course, nobody can tell for sure what will happen next, but we certainly can do some homework, comparing the circumstances back in 1993 against the current situation.

In 1991, Tun Dr Mahathir Mohamad unveiled the philosophy of “Malaysia Incorporated” which was a development strategy for Malaysia to achieve a developed nation by 2020. In the early 1990s, despite slowdown in the global economy, as the third largest economy in South-East Asia, after Indonesia and Thailand, Malaysia was supported by relatively strong macroeconomic fundamentals and resilient financial system. With the real GDP growing at 9.9%, ringgit appreciation, strong export growth and the Government’s measures to hold inflation low at 3.6%, the local stock market became an attractive alternative to foreign investors.

Before 1993, foreign investment in Malaysia was mainly dominated by long-term direct investment in the manufacturing sector. However, as a result of measures taken to develop our domestic equity market, coupled with the strong economic backdrop, we saw a massive influx of foreign capital inflow, which helped fuel the super bull-run in 1993. Within the year, the market increased by 98% to reach an all-time high of 1,275.3 points and foreign investors’ participation accounted for 15% of total trading value of our local bourse. This had also driven the market into a highly speculative one, which lured many retailers into the market, thinking of making fast and easy money.

With the presence of new and unfamiliar players, the market became a huge “casino”. Retail investors bought into stocks based on rumours rather than company fundamentals. Among the hottest topics during that time were the awards of government mega projects, privatisation candidates, sector play and regular news on upward revision of corporate earnings. Examples for the highly speculative stocks were Ekran, Ayer Molek Rubber Co, Berjuntai Tin Dredging and Kramat Tin Dredging.

In 1993, with the economy booming, the Government planned several mega projects, including the KL International Airport (RM8bil), Johor-Singapore Second Link (RM1.6bil) and Kuala Lumpur Light Rail Transit (RM1.1bil). The news of contract awarding immediately sent the market into speculative mood on those potential candidates. Similarly, the news of the Government planning on privatising some of the its own corporations, such as Petronas, KTM and Pos Malaysia had also driven these counters into prime trading targets.

Besides, the ease of accessing bank credit by investors also contributed to the market rally. We noticed that a high percentage of loans was channelled to broad property sector as well as the purchase of securities.

As a result of massive inflow of foreign funds and the super bull run in stock market, Bank Negara introduced a number of selective capital controls in early 1994 to stabilise the financial system,

Recently, our Prime Minister Datuk Seri Najib Tun Razak unveiled the Economic Transformation Programme (ETP) with the aim to boost our gross national income (GNI) to US$523bil in 2020 from US$188bil in 2009. The programme is to attract investment not only from the Government, but also (more importantly) from domestic direct investment as well as foreign direct investment. In view of strong economic growth, our GDP growth is anticipated to increase by 6% this year.

In September, we notice that there was a net inflow of foreign funds again in our equity market. Over the past few weeks, the average stock market daily volume had been hovering above one billion shares per day. Almost every day, the top 10 highly traded stocks were those speculative stocks with poor fundamentals. In addition, we noticed that some retail investors had started to get excited again in the stock market.

According to Andrew Sheng in his book titled From Asian To Global Financial Crisis, there were two main indicators to irrational exuberance during the super bull run in 1993. The first was the amah (domestic maid) syndrome. We need to be careful when amahs got excited about the stock market. This was because they did not know what they were buying and would always be the last to sell. The second indicator was when businessmen began to speculate stocks in the stock market. This was because they might neglect their businesses and use some of their cash for speculation.
Comparing our current market situation with the 1993 bull run, there are certain similarities that we see, such as strong economic growth, ringgit appreciation, inflow of foreign capital and ease of credit. However, our local retailer participation is yet to get boiling, which may be the last push factor towards the bull run. Hence, once the participation of the local investors starts to get heated up, together with more inflow of foreign fund, that may be the signs of the market heading for a ‘mini’ super bull run.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
fr:biz.thestar.com.my/news/story.asp?file=/2010/11/3/business/7348793&sec=business

Understanding Malaysian REITS

Thursday October 21, 2010

What is REITS and how to get monthly dividend payments from it

Personal Investing - By Ooi Kok Hwa

A LOT of investors, especially senior citizens, are hoping to get consistent and regular dividend payments from stocks.

In this article, we will look into constructing an investment portfolio, which consists of real estate investment trusts (REITs), to get monthly dividend payments.

A REIT is a real estate company that pool investor funds to purchase a portfolio of properties. Normally, it has two unique characteristics: investment in income-producing properties, with almost all of its profits distributed to investors as dividends.

From the table, based on the latest stock price (as at Oct 18) and on assumption that the same dividend payments will be paid over the next 12-month period, almost all REITs will provide about 7%-8% dividend yields. Based on our observations, most of the REITs will try to pay higher dividends over the years. Hence, if the overall economy continues to recover, some REITs may pay even higher dividends for the coming few years.

Due to them only listing at the middle of this year, we have excluded CMMT and Sunreit.

As mentioned earlier, a lot of retirees would like to invest in investment assets that can provide a consistent and regular dividend income. Therefore, we think that REITs can provide a good alternative to the retirees. From the table, except for Arreit, Atrium, Axreit and Hektar, all other REITs will make dividend payments twice per year. Most of them will pay their dividends in the month of February and August. Hence, if an investor would like to receive his dividends other than the above two months, he may need to diversify their REITs into holding many types of REITs.

Based on the list of REITs in the table, we can see that, except for the month of January and April, dividend payments were being made at different months throughout the year, thus investors can receive a stream of dividend income by buying into different types of REITs.

Investors can build a REIT portfolio consisting of a few REITs which make dividend payments at different months of the year. The following is just one of selection options available for consideration.

Based on the current price dated on Oct 18, assuming that the same dividends will be paid in the next 12 months, a portfolio with AMfirst, Arreit, Atrium and Hektar can generate a dividend yield of more than 8% (see table). Besides, by buying with equal amount into these four REITs, investors can get dividend payments for almost every month, except for the month of January, April, July and October.

Nevertheless, investors need to understand that the above selections are solely based on the assumption that these REITs will reward investors with the same dividends and pay during the same month as shown in the table above.

We also understand that apart from the above four REITs, some other REITs may reward investors with even higher dividend payments.

OoiKokHwa is an investment adviser and managing partner of MRR Consulting.

Click here too:

http://boyboycute.blogspot.com/2010/10/why-bother-investing-in-malaysian-reits.html
This blogger expressed concerns over Malaysian REITS.

THURSDAY, OCTOBER 21, 2010

Why bother investing in Malaysian REITs?

Today, i read an article on The Star by Mr. Ooi Kok Hwa regarding REITs. Take a lot at the article here.

What makes me furious is that Mr. Ooi who is an investment adviser and managing partner of MRR Consulting,has misled the public by not discussing the real issues in Malaysian REITs(MREIT).I guess a consultant is still a CONsultant.

MREIT is full of crap properties.If you look at their portfolio,most of these properties are actually dumped by developers/owners since they cannot sell their buildings in the market to professional institutional investors.For example,SUNWAY REIT (which i wrote earlier) is one of them.Creating a REIT is the best way for developers/owners to either 'sell their building at higher valuation' or 'unload their poor quality properties to the market'.

Are remisiers still necessary?

Wednesday June 2, 2010

Are remisiers still necessary?
Personal Investing - By Ooi Kok Hwa


Online trading cheaper so remisiers should offer better and value-added services


MEMBERS of the general public have been complaining about the services of remisiers as they feel there is no difference between buying shares through remisiers and online trading. They feel that remisiers do not provide any value-added services.

Whenever they call to buy or sell shares, remisiers let the investors decide themselves whether to buy or sell stocks at the current prices.

They say remisiers seldom provide their views on whether to buy now or later as sometimes investors may be able to get better prices if they purchase the stocks later.

Some investors prefer online trading as some stockbroking firms provide the minimum brokerage cost of about RM10 per trade compared with the minimum brokerage cost of RM40 per trade if they use the services of remisiers.

On the other hand, a lot of remisiers have been complaining about their business. Some complain that the minimum brokerage cost of about RM10 per trade for online trading has put them at a disadvantage as their services are more expensive at the minimum brokerage cost of RM40 per trade.

In addition, despite the high stock market trading volume, they also notice that not many retail investors are actively involved in the stock market.

As a result, some remisiers are quite negative about their own profession.

The Securities Commission launched the Continuing Professional Education (CPE) programme and has made it mandatory for all licensed persons in the Malaysian capital market since 2001.



'You still need me'? asks a remiser.

Given that remisiers are licensed holders and have been attending classes over the past 10 years, we notice that their investment and financial knowledge has improved over the years.

At present, remisiers are looking for more advanced courses instead of simple courses like introduction to investment or financial knowledge or products. Hence, we feel that remisiers have the ability to provide better and value-added services to investors.

There are two main transaction costs when purchasing stocks, namely explicit and implicit costs.

• Explicit costs refer to direct costs of trading like brokerage commissions, stamp duty and clearing fees whereas 
• implicit costs refer to indirect costs of trading like market impact (or price impact), delay cost and missed-trade opportunity costs.

Market impact refers to the price movement caused by placing the trade in the market, delay cost is the inability to complete the trade immediately due to the order size and market liquidity, while missed-trade opportunity cost is related to the unrealised profits or losses attributed to the failure to complete the trades.

For example, Stock A is currently selling at RM1.98 (buying price) to RM2 (selling price). Mr B intends to buy 50 lots of Stock A and to save on brokerage commission by buying online. However, he is not aware that there is some good news on and strong buying interest in Stock A.

A good remisier should be able to advise Mr B to give market order and buy Stock A at the best available selling price of RM2, rather than give a limit order of RM1.98. If the day’s closing price for Stock A is RM2.10 and Mr B did not manage to accumulate the stocks at RM1.98, the missed-trade opportunity to Mr B is 5% ((RM2.10-RM2)/RM2).

This missed-trade opportunity cost of 5% is much greater than 0.6% that he pays on the brokerage commission.

We tend to agree with the general public view that not all remisiers are willing to commit themselves to get the best prices for their clients. One reason may be the difficulty in judging whether the buying interest will persist throughout the whole day.

As a remisier, his key role is to get the best execution prices for his clients. We feel the minimum brokerage cost of RM40 per trade is fair to the remisier as the implicit cost of buying a stock is much greater than this explicit cost.

The RM40 is also used to cover the time required to monitor and to get the best prices; time spent on reading market developments and corporate news; costs required to acquire market information and attend classes; and administrative work involved in helping their clients on rights issues or any other corporate exercises.

In Malaysia, we have about 8,000 remisiers and dealers with a population of 28 million versus 3,000 remisiers with a population of about 4 million in Singapore. We strongly believe that the remisiers’ services are still required and have the potential to grow.

Nevertheless, remisiers need to upgrade and add more value to their services, on top of providing the best execution of trades to their clients, to differentiate their services from online trading.

The writer is one of the active CPE course trainers. He is also an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/6/2/business/6381518&sec=business

Should losses cause worry?

The Star Online
Wednesday May 19, 2010
Should losses cause worry?

PERSONAL INVESTING
By OOI KOK HWA

MANY long-term investors always look for companies that can provide consistent growth in earnings and, more importantly, stable growth in earnings. They dislike companies that appear to be “accident-prone” and have “extraordinary” losses every year or every few years.

Given that they will hold on to their investments for a very long period of time, their key returns from the companies will be highly dependent on the dividend payments.

If a company always shows high “extraordinary” losses every few years, long-term investors may not want to invest in this company since it cannot pay stable dividend payments. Nevertheless, some may still buy the company for trading rather than for long-term investment.

An earnings surprise occurs when there is a material difference between expected and actual financial results. In this article, we will look into earnings surprise as a result of unexpected huge losses incurred.

There are two main types of “extraordinary” losses:

• one is related to the recurring items or due to their normal business operations; 
• the other to non-recurring items.

Charles W. Mulford and Eugene E. Comiskey, in their book entitled Financial Warnings, defined non-recurring items as revenues or gains and expenses or losses that are not reasonably consistent contributors to financial results, either in terms of their presence or their amount. Examples of non-recurring items are

• gains and losses on asset sales, 
• foreign currency and debt retirement gains and losses, 
• foreign currency gains and losses as well as 
• the costs incurred in restructuring activities.

In 2009, as a result of low asset prices, a lot of companies reported high impairment losses on their assets. Even though high losses incurred from non-recurring items can affect the dividend payments and write off a portion of shareholders’ funds, most analysts will exclude the above losses in their earnings forecast as they are more concerned with the losses from their normal business operations.

In the computation of intrinsic value, analysts will look into the earnings power of the companies – the companies’ abilities to generate future earnings.

Analysts are less concerned with non-recurring items as the companies are not expected to incur this type of losses every year. For example, if a company incurs huge losses due to the disposal of certain assets, analysts are less worried as the company will not dispose of its assets every year. Furthermore, asset disposal is not part of its normal business operations.

Companies cannot avoid incurring losses from non-recurring items, which might be due to

• changes in economic situation or 
• changes in business cycles, 
• changes in accounting treatments or 
• some unforeseen events.

However, based on our analysis, companies that tend to show frequent losses from non-recurring items in almost every financial year are normally fundamentally unhealthy. The quality of their management is almost always in doubt.

Some companies may claim that they cannot avoid incurring these losses. However, they are unable to provide a satisfactory explanation on why their competitors do not seem to be similarly affected but are instead able to show consistent growth in earnings despite difficult business cycles or environment.

As mentioned earlier, analysts are more concerned with the losses incurred as a result of the normal business operations. If a company incurs high losses due to

• cost overrun on certain projects, 
• sharp drop in revenue or
• sudden increase in operating costs, 

analysts need to determine whether the above phenomenon is due to

• the overall country economic situation, 
• industry specific or 
• only unique to that particular company.

If it seems to be the only one that shows losses while its competitors have been performing well, we need to investigate the causes behind these losses and the effect on the bottomline of the company.

It is very important to take note of the subsequent corrective actions suggested by the companies to overcome the issues involved. Besides, we need to check the possibility of the company repeating the same mistake in the near future.

In short, besides focusing on generating higher sales and profits, the company needs to pay attention to risk management on cost control and take the necessary steps to hedge against business risks.

Companies need to understand that investors look for stability and predictability in future earnings.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

The risks of buying into IPOs

Wednesday May 5, 2010

The risks of buying into IPOs
Personal Investing - By Ooi Kok Hwa


Investors may not necessarily make quick gains from share offerings

AS our economic outlook is getting more promising, there are growing interests from companies to list on Bursa Malaysia.

However, despite the higher number of initial public offerings (IPOs) and bigger, broad trading volumes lately, we noticed that the general public’s buying interest, especially of retail investors, in recent IPOs remains low.

If we were to scrutinise IPO prospectuses, we will seldom come across one that states the main purpose of the company seeking to go public is to share its profits with the investors. Instead, most companies would want the investors to share the risks involved in running the companies.

Hence, more often than not, the first few sections of the prospectuses will highlight all the risks involved in buying into those IPOs.

Investors need to understand that buying into IPOs does not necessarily mean investors can make quick gains. Sometimes, they may need to hold on to those investments for medium to long term.

There are two main types of share offerings:

• public issue and 
• offer for sale.

Public issues involve companies issuing new shares to investors and the money raised will be channelled into reducing companies’ borrowings or used for future expansion.

As for offer for sale of stock, the shares that investors subscribe to are from existing company owners. Therefore, the money raised from the new investors will be channelled to existing owners, which also means the existing owners will have cashed out a portion of their investments in those companies.

The Table shows how the owners of a listed company, Company A, are able to get back their original investment through an IPO. The total shareholders’ funds of RM800mil represent the total original investment cost of Company A’s existing owners.

Let’s assume Company A offers 25% of its shares to the general public (line f) and the type of offering is offer for sale. If the IPO price to book value per share is about four times (line e), the offer for sale of 25% of its outstanding shares will allow the existing owners to recoup all of their initial capital invested in the company (Line g, h and i).


Even though this does not imply that Company A is not able to perform in future, investors need to understand that the remaining 75% of the shares or 1,534 million (0.75 x 2,045 million shares) owned by the existing owners are in effect “free” to them.

If Company A is fundamentally strong with good future prospects, then investors should not be too worried about the existing owners cashing out.

However, if the fundamentals of Company A start to deteriorate, investors need to be extra careful as the remaining 75% of the shares owned by the existing owners are now costless to them. Under such circumstances, every share the existing owners manage to sell into the market, regardless of the price, is extra gain for the owners.

Therefore, the existing owners can afford to sell the shares at any price they wish. However, if the price is below what retail investors had paid, it will mean a loss to them.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/5/5/business/6190058&sec=business

Insight into stock trading

Wednesday April 7, 2010

Insight into stock trading
PERSONAL INVESTING

By OOI KOK HWA

ooi_kok_hwa@hotmail.com

A LOT of retail investors like to trade in stocks. As a result of high losses incurred over the years, especially on stocks that have been delisted, they do not believe in holding stocks for the long term.

They believe stocks are suitable for trading and not for long-term investment.

Stock trading is not as simple as trading based on tips and market rumours. Most retail investors actually rely on tips from their remisiers to help them make quick gains from the stock market.

Investors need to understand that trading involves high discipline, commitment of time and skills. Based on interviews with some top traders, Jack D. Schwager concluded that all successful traders are serious about their trading and are willing to spend a lot of time on market analysis and trading strategies.

The secret to their success is usually a methodology that worked for them, together with having very rigid loss-control.

They always act independently of the crowd and have the patience to wait for the right timing for trading. In addition, all the successful traders understand that losing money from trading is part of the game.

A lot of traders always say that trading in stocks has a lower risk than buying stocks for the long term. Many retail investors like to buy stocks for trading because they do not have the patience to hold stocks for the long term.

But whenever they incur losses, they tend to change their original objective of stock trading to long-term investment, not knowing that the majority of those stocks for trading are not suitable for long-term investment.

While some of them may be aware of this important fact, due to their unwillingness to admit their mistakes by cutting losses, they choose to continue to hold on to the stocks. As a result, they get stuck with a lot of poor fundamental stocks in their portfolio for the long term. Most of the time, they will hold those stocks until they get delisted!

'Investors' need to understand that stock trading involves constant locking in of gains and cutting of losses. They must always set target profits (profits per trade or PPT) and maximum loss (loss per trade or LPT) for every trade. They need to set the target number of trades that are supposed to bring gains, which is also known as trading success ratio (success ratio or SR).

They then need to set the target number of trades that they are willing to be involved in per month (trades per month or TPM).

Hence, profits that can be made by a trader will very much depend on his SR as well as TPM. Most of the time, the target PPT and maximum LPT are relatively constant and are dependent on individual risk tolerance level and skills.

For example, an investor has set his PPT at RM500, LPT at RM300 and SR at 60%. If he sets 10 TPM, based on SR of 60%, of the 10 trades that he has made, six trades will make gains of RM500 each and four trades will incur losses of RM300 each. The net gain for 10 trades will be RM1,800 ((6xRM500) – (4xRM300)). If the trader intends to increase his profits, he needs to do more trades per month; in other words, increase the TPM.

Given that the movement of stock prices is random, the probability of stock prices moving up or down is 50%. We think it is a great achievement if a trader can achieve an SR of 55% to 60%. Most retail investors hope for 90% because they are not willing to cut losses.

As a result, they will wait for the stock price to break even whenever it drops below their purchase prices. However, the longer they wait, the more losses they will incur. Most of the time, of the 10 trades done, they may achieve SR of 90% where nine trades may give them gains but the one trade that incurs loss may wipe out all their nine gains!

We agree that the above methodology is easier said than done. A lot of times, investors may have the discipline to lock in their gains, but do not have the discipline to cut losses.

Besides, investors need to allocate a certain amount for their trading capital, which is the amount that investors are willing to lose in stock trading. It should not cause financial problems to investors if they lose all the trading capital.

Lastly, investors should not average down their losing position. If they have incurred losses in the past three to four trades, it means they may have lost touch with the market timing and sentiment. In this case, it may be good for them to take a break from trading and analyse the reasons behind those losses before continuing.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.


http://biz.thestar.com.my/news/story.asp?file=/2010/4/7/business/6003482&sec=business

Dividend-paying companies: major shareholders must be willing to share their profits with their investors through good dividend payments.

Wednesday March 24, 2010

Dividend-paying companies

Personal Investments - By Ooi Kok Hwa

Despite investing in profit-making companies, a lot of investors have been complaining that they are not getting the desired returns from the companies that they have invested in.

One of the main reasons is that these companies usually pay very low dividends or no dividends to their investors.

Hence, even though these companies make good profits from their businesses, they are not sharing the profits with their minority investors.

Companies that pay good dividends to their investors imply that the major shareholders of these companies are willing to share their wealth with minority investors.

Given that minority investors have no control over these companies, they have only two sources of returns from their investments, namely 

• dividend returns and 
• capital gains.

If the companies refuse to reward their investors with good dividends, then investors need to make sure that they buy low and sell high in order to get capital gains.

Warren Buffett proposes one concept, which is called the one-dollar premise - for every dollar profit that a company makes, it either pays one dollar dividend to its shareholders or if that dollar is being retained, it needs to bring additional one dollar market value.

Companies with good management will always try to maximize the wealth of their investors.

The following table will show the importance of dividends to an investor.

Assuming you have invested in Company A with an average cost of RM15.

Company A generates earnings per share (EPS) of RM1.00 with price-earnings ratio (PER) of 15 times and pay out 80% of its profits as dividends or dividend per share of RM0.80.

Hence, with the purchase price of RM15, the dividend yield (DY) is 5.3%.

We also assume that Company A has a constant PER of 15 times and dividend payout ratio of 80% for the next 20 years.

Annual growth rate of EPS is 8% based on our country’s average nominal GDP growth rate of 8%.

For the first 10-year period, given that our original cost of investment is fixed at RM15, our dividend yield will be getting higher and higher.

For example, first year DY of 5.3% is computed based on DPS of RM0.80 divided by RM15.

And second year DY of 5.8% is calculated based on DPS of RM0.86 (RM0.80 x 1.08) divided by the same original purchase price of RM15.0.

As the company’s businesses continue to grow and generate higher profits, as long as the company practices a fixed dividend payout policy (our example is based on a fixed dividend payout ratio of 80%), investors’ DY will increase.

At Year 10, given that our purchase price remains the same at RM15, with a DPS of RM1.60, our DY is 10.7% (1.60/15.0).

Thus, the average DY for the first 10-year period is 7.7%.

Coupled with the annual capital gain of 8% (the share price has grown by annual growth rate of 8% from RM15 to RM29.99), investors will generate an annual total returns rate of 15.7% (7.7% + 8%)!

If we keep this stock for another 10-year period, our next 10-year annual total return is 24.7% (16.7% + 8%)!

From here, we can see that if we have invested in good companies that always reward their investors with very high dividend payments, our returns will be huge if we hold it long term.

Normally, consumer-based companies and companies that do not need high capital expenditures will be able to reward shareholders with good dividend payments.

Besides, major shareholders must be willing to share their profits with their investors through good dividend payments.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/3/24/business/5919730&sec=business

Also read:

*****Long term investing based on Buy and Hold works for Selected Stocks

Dividend Yield Investing - Stock Selection is still the Key

Wednesday February 10, 2010

How to improve your investment skills

Personal Investing - By Ooi Kok Hwa

WE have been asked by many readers on ways to improve their investment skills. In fact, for all of us who invest, it is one of the essential skills that we need to acquire in our lifetime. Like it or not, we need to have it if we need to generate returns for our investment.

All investors want good returns from their investments. However, most of the times, instead of generating returns, retail investors are suffering from losses from their investments. We feel that one of the key differences between an intelligent investor versus a normal investor is that the intelligent investor will be aware that he may make mistakes in some of his investment decisions while a normal investor tend to overlook the fact that he will make wrong decisions no matter how good he thinks he is.

Despite extensive research on certain listed companies, due to some unforeseen changes in certain fundamental factors, even good value companies may suffer losses. Under such circumstances, an intelligent investor will admit that he had made a mistake in his investment decision and will cut losses fast.

However, the problem with most investors is that they refuse to face their mistakes; some are not willing to cut their losses even though they are aware of their mistakes.

Hence, rule number one in investing is that we must be fully aware that regardless of whether you are an investment guru or an average investor, everyone will make mistake in his investment decisions. That’s why some experts say: “When somebody mentions that they have more experience than you, they mean that they have incurred more losses than you in stock market.” The key is to learn from our mistakes.

In order to avoid incurring losses in stock market, we need to develop our own investing system that suit our needs, skills, knowledge and risk tolerance level.(Comment:  Time horizon, risk tolerance and investment objectives)  The investing system can be adopted from the fundamental analysis, technical analysis or combination of both. If we ask some remisiers, they will most likely tell you that they need two to three years to develop their own investing system that can help them to generate returns from stock market.

One of the fastest ways to acquire investing knowledge is through reading books relating to investment. There are many good investment books in the market. However, since every investor has different preferences, the best way is to visit bookstores and look for investment books that he or she can understand and can offer the skills needed. For beginners, always start with some basic investment books that explain well on key investment concepts.

Here are some good investment book titles for consideration: The Intelligent Investors (by Benjamin Graham), The Essays of Warren Buffett: Lessons for Corporate America (Warren Buffett and Lawrence A. Cunningham) and Rule #1 (Phil Town). For advanced investors, you may consider Security Analysis (by Benjamin Graham and David Dodd), which is still one of the best investment books in the world.

Apart from reading books, investors need to read more business news in newspapers and magazines to keep themselves updated on the latest happenings. In addition, many newspapers, magazines and websites also publish good articles for the purpose of educating general public on investment. For example, investors can get good investment knowledge from website like www.min.com.my, by Securities Industry Development Corp.

Reading analysts’ research reports will enhance our understanding on some issues and factors in valuation as well as comments on some corporate strategies and developments. This knowledge is crucial in helping us making better investment decisions. Besides, for those serious fundamental investors, they may consider buying books like Stock Performance Guide (by Dynaquest Sdn Bhd) and Shares (Pioneers & Leaders (Publishers) Pte Ltd), which will provide all the essential investment information like companies’ background and some key critical investment information.

Another way to acquire investing knowledge is through attending investment training classes. There are many types of investment training classes, for example, classes on fundamental investment, technical analysis, currency trading or option trading. Given that a lot of these classes are quite expensive, we need to check whether investment training suits our needs. We believe some of those classes may be able to help investors generating returns, however, they require higher level of discipline and commitment.

Before we start investing with “real” money, one of the ways to gain experience and at the same time test out our skills is by building up a “virtual” portfolio and investing using “virtual” money. We can always try out our investment skills through playing a simulated investment game and monitor the investment returns before putting the real money into the stock market. Besides, we should also start young. If we acquire these investment skills at younger age, the losses that we may incur will be much lower than trying them when we are getting nearer to our retirement age.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/2/10/business/5646486&sec=business 

Comment:  Find a mentor.  Coat-tail on him or her for a period of time during your early years of investing.  

Wednesday March 10, 2010

How to analyse company statements and reports

Personal Investing - By Ooi Kok Hwa

Analysts usually judge the quality of a company’s management team by looking at the comprehensiveness and truthfulness shown in the management statements

FOR the next few weeks, investors will start to receive annual reports for companies that have their financial year ended Dec 31. Even though the majority of investors may not look at those reports in detail (in fact, some investors may not even open the envelope containing the annual reports), some people will still spend time analysing the whole report. One of the key sections that investors will analyse in detail is the chairman’s statement and management discussion or operations review. In this article, we will label the above statements as management statements.

Most of the management statements will explain the companies’ immediate past one-year financial performance, external environment, major corporate developments as well as the companies’ future prospects.

Based on our observations, the majority of companies will try to explain and highlight a lot of positive elements that happened in the companies. It is very rare to find negative issues that affect the companies’ performances being discussed in the statements. Even though we cannot conclude that those companies that are willing to highlight their financial problems as good companies, at least these companies show their effort in trying to be truthful to their investors. This will provide a lot of plus points to these listed companies.

Analysts usually judge the quality of a company’s management team by looking at the comprehensiveness and truthfulness shown in the management statements.

Nowadays, if there are areas that a company does not comply with the accounting standards, the external auditor will highlight those areas inside the auditor report. Hence, investors need to read the management statements and financial statements together with the auditor’s report.

The management statements will normally provide the reasons driving the companies’ overall performance, whether good or bad. However, there are certain companies that tend to focus on higher sales and avoid mentioning the profitability when ever they report lower profits during the year. They will try to avoid the reasons causing the reduction in profits, for example, higher operating costs, raw material costs or stiff price competition.

Some times, some companies will claim they have managed to maintain profits at the same level as the previous year. However, if we further analyse the financial statements, we will notice that the profit had included a lot of exceptional items, such as gains from the disposal of fixed assets as well as investments. Hence, we should not rely on the explanation given by the management in the chairman’s statement.

In fact, we need to investigate further the driving factors for the profitability of the company, especially if it had included some exceptional gains or losses, which are not part of the company’s normal operations. These details can be found in the notes to the accounts. Normally, most companies will list the key items that affect their profitability in the notes to the “profit before tax”.

We can get a summary of key corporate developments that happened in the company in the “corporate development” section. If you have been following the company’s corporate developments, this section may not provide you a lot of new information.

Nevertheless, certain companies may provide the latest status of their corporate developments, such as any new projects being initiated or certain approvals from relevant parties being granted for their critical projects.
As for the section on the company’s future prospects, investors should not place too much weight on it. Based on our experience, a lot of Malaysian companies have the same statement on future prospects by saying that “the company will perform better in the future”.

There are companies that have reported losses every year but the chairmen will still say the companies would perform better next year without the backing of solid grounds to improve profitability.

Hence, a good company statement should provide a fair account of the actual happening in the company. In reality, it is quite difficult for listed companies to hide their problems as the level of financial literacy of the general public has improved over years.

There are some mature investors and analysts who are able to detect the problems faced by the company by analysing the notes to the accounts in addition to making comparison of the current financial statements versus the statements or quarterly financial statements of past years.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/3/10/business/5827481&sec=business 

Tips on How Investors Could Build a Large Portfolio

Tips on How Investors Could Build a Large Portfolio

Saturday, January 23, 2010


Owing to the global economic downturn, some investors may have to put aside their aim of wealth accumulation lately.

For now, wealth accumulation seems to be far away given their current low salary level, worsened by lower bonuses received or no salary increment.

As a result of the uncertainty arising from salary reduction or getting retrenched, some may even need to tap into their savings to survive through this period of difficulty.

We can fully understand this situation. However, we believe that we should consider building a portfolio at this time.

We may not want to rush in to buy stocks now in view of the current high prices. However, we need to prepare ourselves to “fish” good quality stocks at reasonable price levels if the market turns down again.

We will regret if we are not investing during this period because usually the best opportunities are discovered during a downturn.

Nevertheless, some investors think that it may not be realistic for them to invest now given that they are already having difficulties making ends meet.

However, we believe that we need to start somewhere. Every big portfolio always starts from a small one. If we never sit down and start thinking about building a portfolio, we will never get a big portfolio. Hence, we should start now and start small.

When our portfolio is about RM10,000 in size, a 10% return means a return of only RM1,000. However, when our portfolio grows to RM1mil, a 10% return means RM100,000!

Some investors may have the intention of building a portfolio but they do not know how to do so. In fact, some may depend on wealth advisers on this issue.

However, even if we get a very good, knowledgeable and responsible wealth adviser, we also need to equip ourselves with some knowledge in this area to make sure we make sound investment decisions; after all, we need to be responsible for our future.

We can gain this knowledge by reading books related to this topic or attending some training courses.

Know what we want to achieve

T. Harv Eker says in his book, Secrets of the Millionaire Mind, that “the number one reason for most people who do not get what they want is that they don’t know what they want.”

For example, if we want to have a good retirement, we will have to know how much we need for our retirement and plan ahead for it. To give you some ideas, there are quite a few websites that can provide free advice on how to determine your retirement needs.

Once we know how much we need for retirement and set it as an objective, we need to focus on growing our net wealth to achieve it.

Sometimes investors are too focused on their current income level and short-term gain that they end up neglecting the long-term growth of their net wealth.

High income does not mean high net wealth if your expenses are higher than your income level. Hence, we need to control and monitor our expenses in order to have a net positive cash inflow instead of outflow.

If possible, we should have a cash budget that will guide us on the expected income to be received as well as the expenses to be incurred in the coming periods. We should try our best to stick to the plan and be committed to build our wealth.

Lately, some investors have been affected by high credit-card debts, which may be due to high expenses that cannot be supported by their current income.

During hard times, we need to plan carefully for big expenses and, if possible, we should delay expenditures which are not critical.

Given that nobody will know when our economy will recover, it is safer to spend less and try to reduce our debts.

In fact, if we have cultivated good spending habits from the start, regardless of economic situation, we will not have the problem of having to trim down unnecessary expenses during bad times. We have seen a lot of successful people living below their means and being very careful in spending money on luxury items. We should learn from these examples.

Don’t look down on low returns

Sometimes, a guarantee of low returns is better than the uncertainties of high returns, depending on the risk tolerance level of individuals. Always remember that risk and return go hand-in-hand. Not every investment product suits our return objective and risk tolerance level.

Therefore, we need to understand the characteristics and nature of investment products that we intend to invest in before we make any investment decisions.

We cannot always think of big returns without considering the potential risks that we need to encounter.

For those who like to play it safe, it will be wiser to go for defensive ways of investing, which means looking for stocks that pay good dividends and have solid businesses.

Remember, we need to be patient, go slow and steady. If we can avoid making losses during this period, we should be able to achieve our financial goals when the economy recovers again.



Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.



Source : The Star

Beware of buying Private Limited Companies

Wednesday January 13, 2010
Beware of buying Private Limited Companies (PLCs)
Personal Investing - By Ooi Kok Hwa

SOME investors are concerned over the shares that they own in some private limited companies (companies that are registered as “Sdn Bhd”).

Most are just minority shareholders, owning about 10%-20% of the companies’ shares, and they have not received much dividend from the companies over the past few years.

Now that they intend to sell their shares, they do not know the right price to sell. In this article, we will look at two main key issues related to owning private limited companies’ shares, namely

• lack of marketability discount (LOMD) and
• lack of control discount (LOCD). 

Assuming two similar size companies, one public listed and the other a private limited company, the discount on the LOMD is as much as 35% (based on Mergerstat Studies in the US).

Comparing a major shareholder of a public listed company (Position A) and a major shareholder of another similar size but not listed company (Position C), the discount on LOMD is about 35% ((RM100-RM65)/RM65).

Many investors do not realise that there are big differences between owning controlling interest and non-controlling interest shares. In general, if we own 50.1% of a company’s shares, we should be in a controlling position.

From the table above, whether you are in Position B, which is the non-controlling interest of a listed company or position D, which is the non-controlling position of a non-listed company, the LOCD can be as much as 35% (based on Mergerstat Studies in the US).

For example, if you own 49.9% of a private limited company (you are in Position D) and your partner is the major shareholder of the company with 50.1% interest (he is in Position C), which is 0.2% higher than you, his shares are worth RM65 each, but your shares will only worth about RM42 each, which is at a LOCD of 35% ((RM65-RM42)/RM65).

The main reason for this LOCD is that your partner, having the controlling interest, he can pay himself with very high salary, high director’s fee and enjoy all other benefits from the company.

Since you do not have the controlling position of the company, you have no control over a lot of company’s major decisions. Given that it is not a listed company, your return will depend highly on the dividend payments from the company.

If your partner does not want to share company’s profits with you by not paying out any dividend payments, you will not receive any returns for holding this company’s shares.

Nevertheless, if you own 49.9% of a listed company, which is in Position B, even though your shares is still subject to about a 35% LOCD compared with Position A ((RM100-RM65)/RM100), given that it is a public listed company on Bursa Malaysia, you can easily dispose of your shares in the open market.

The worst case is if you are holding a minority interest and it is a private limited company (Position D), your shares’ value is only at 58% discount ((RM100-RM42)/RM42) compared with a controlling interest in a public listed company (Position A) as your shares are subject to discounts due to lack of marketability and lack of control.

Therefore, when position A is worth RM100 per share, the value per share in Position B and Position C is about the same at RM65 per share.

Hence, if you intend to invest in any private limited companies, you need to be in the controlling position of the companies. Otherwise, if you are just a minority shareholder, it is more advisable for you to invest in listed companies.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/1/13/business/5458529&sec=business

How to handle market uncertainty

Wednesday November 4, 2009
How to handle market uncertainty
Personal Investing - By Ooi Kok Hwa



AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance.  (Comment:  There were many periods in the past when market movements were down when the economy was doing well, and vice versa.)

We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.

During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.

However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies.  (Comment:  Overcome this short term uncertainties by taking a long term horizon in your investments.)

This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.

Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.

We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.

In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal. This may cause the market to overreact to good financial results as shown by some companies.

According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. (Comment:  This is to the benefit of those who are able to value the stocks and not act in folly with the market.)  He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.

Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.

The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.

We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.

Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.

One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.

As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/11/4/business/5035143&sec=business