Market crash during the week 15th May to 19th May 2006

On Monday, the STI has its largest drop...don't know since when and on Thursday, it has its 2nd largest drop.  While most of the stocks I hold are not included in the STI, they were sold down too.  I see my cash portfolio dropped by approximately 6k over the week.  The unrealized gain has gone into negative territory.  My CPF portfolio is more resilient, fluctuating as per normal trading day.

So what was my response to this?

When I first read the headline on Monday before going to school, I was a bit gutted.  As last week, I was thinking of cutting my loss on YHI this week and switched the cash to other counters.   Reason being I think I have purchased YHI too expensively and other counters probably provide a better return in the same time frame.

I have already regretted making a too hasty use of the gain that I have earlier made on three new counters; I thought I could have been more patient.  This crash compounded my error and makes the lesson slightly more painful especially when I do not have much cash to take advantage of this weakness in the market.

In any case, I was thinking of selling China Flexible Packaging to raise funds to purchase other counters but after considering the low valuation the market is giving CFP at the moment, I decided against it.  I do feel that the market has over reacted to the raising oil price and “punished” my two plastic related counters: CFP and Full Apex too much.  With the two companies still expanding their top line and with ROE around 15%, the potential upside when the oil price stabilizes is at the very least interesting.

After overcoming the disappointment of the lack of funds to purchase more shares, I’ve decided to stay put with my counters and continue to track their business.

My investment strategies III - Company screening for CPF portfolio

Unlike my cash portfolio, I do not go through all the steps.  Dividend yield is an attraction to me and if the company can provide me with consistently high dividend yield, I will consider purchasing it.  So these are the few factors I look for.

Either:
Dividend yield of at least 5%
There are some large cap that provide such yield and of course the higher it is, the more entice I am to it.

Potential growth in dividend yield due to growth in company
These can be either through acquisition like REIT or organic growth oversea.  The minimum is that the company must not show deterioration in its fundamental.

Or

Very interesting business with huge growth potential
These are companies more like those in my cash portfolio but it must be a business which I can recognize with and strongly believe in.  Unlike my cash portfolio, I would not simply invest into a so-so business with cheap valuation.

My investment strategies II - Company screening for cash portfolio

How does a company enter my radar?  This is the initial part of the homework.  I do not actually specifically go look for companies but I stumble upon them through various means.  These means include recommendations on investment websites, “The Edge” magazines and simply coming across brands in my daily life.

So what kind of companies do I invest in?
i)    Business which I found to be interesting with potential to grow, valued reasonably.
ii)    Companies which are valued cheaply with its fundamental intact.

Based on what I read from different books and websites, these are the criteria I look for when I screen a company.

1) Company has shown consistent growth of 15% in both revenue and net profits over the past 5 years
Since I am looking for growth companies, this is important.  I can accept a year where revenue or profit is flat.  However, there must be a trend that the company is growing over long terms.

2) Company’s net profit should be around 10%
A higher percentage of net profit ensures that the company is not too badly hit when they cannot pass the cost to customers.

3) Company’s ROE around 20%
ROE shows how the company manages its equity.  A high ROE shows that management put to good use of their equity and not makes silly investment.  If the company is not able to sustain a high ROE, it should return the net profit to investor as dividend.  The amount of debt a company carries must be taken into consideration when using ROE.  With a high amount of debt, ROE will be higher.

4) Company’s cash position and cash flow
The company should carry little long term debt unless it is necessary for expansion.  I would avoid companies that requires large amount of capital expenditure (capex) regularly.  The operation cash flow of the company is also important.  It should mirror its earning.  I would avoid a company that consistently shows a must lower cash flow as compared to earning without investment/capex.

5) Management credibility and ownership
This is hard to judge but I would take it that if management is able to keep his promise or target and not afraid to come out to justify the company’s poor performance as creditable.  It would be a plus point if senior managements hold shares of the company; this will align their purposes with the investors.

6) PE less than 10 and PEG less than 0.7
I am attracted to company with a PE ratio of 10 and below.  Alternatively, if its PE ratio to Growth rate is less than 0.7, it will be a possible candidate.

My investment strategies I - Cash Portfolio

So what are my strategies in picking the stocks to invest?  As I mentioned earlier, I will use a fundamental approach instead of technical analysis.  There are two things I am looking for:
i)    the past performance of the business and its outlook in the future; 
ii)    the valuation of the company at its present price.

There is no specific industry which I will concentrate on but I will look into a company with a simple business model.  This means I will most probably not going into banking, properties and technology counters.  I am also more inclined to look into small to mid cap companies with potential to grow.  To me, this means that the company must have exposure to oversea markets and China is one country where there is a lot of potential.  Of course this does mean that risk is higher since I will not be able to have an actual feel of the market and there is always an inherent risk of creditability of China companies.  However, this is the risk that I will have to take and be more prudent in analyzing the companies’ reports.  This again works on the assumption that the reports are genuine and there’s no manipulation of figure.  How would I know?  I won’t but if I don’t believe the creditability of the report, then there’s no point in carrying on with the analysis.

My investment goal

When I started investment, I take it as a tool to generate alternative income.  As I learned more about investment and especially from Wallstraits, I like the idea of having a target of 15% CAGR because, with such a return, your portfolio doubles every 5 years.  It makes tracking easy.  It happened that I have about $25 k in liquid assets 1999 and thus by using the rule, I will have $1 mil in 2024, after 25 years.  I was able to double my liquid assets to $50 k in 2005 even though marriage preparation took up some parts of my savings.   So it seems that I am on track with my goal.

With the decision to be more analytical about my investment, I recently re-look at my cash-flow and verify if my goal is achievable or if the growth rate is sustainable.  The picture does not look as rosy as I have in mind.  Reason being my earlier projection has been made due to a lower equity base.  Also, I need to set aside a sum of money for renovation in this 1 ½ year which reduces the amount of money available for investment lesser.   As I put in the new factors, I will need to achieve a CAGR of 15% on my investment to achieve $1 mil by 2024.  At this current moment, I have little confidence of hitting that target.

Instead, I aim to achieve a liquid asset of $650 k by 2024 (CAGR of 14.5%).  This will be attainable through increase of both cash portion (including $40 k from insurance by 2023) and investment return.

With some planning from 2025 to 2029, I will probably achieve my $1 mil target by 2029 when I am allowed to withdraw from my CPF with the option of not working from 2025.

Translating all these figures to my investment goal means that I would need to achieve a return of CAGR of 10% from my stocks from 2005 to 2024, with an injection of $80 k into the portfolio from 2007 to 2024.

Why not 8% or 5% CAGR?  With such return, I do not think I am able to be financially independent by 2024.