Power of Compound Interest

Ein55 Newsletter No 061 - 2017-03-10 - Compound Interest

Albert Einstein is my idol, his scientific mindsets could be applied in investing world (inspiring me to establish Ein55 Styles of investing). He said “Compound Interest is the 8th Wonder of the World”.  It is important for an investor to know which role to play, receiving or paying the compound interest.  The results can be very different.

 

1) Receiving Compound Interest

Growth stocks receive compound interest with growing business and share price.  An investor could become richer at faster rate because the growth stock may not pay dividend. Instead, the earning is invested back to the business to enlarge the market share, revenue and income.  Even after a business has reached its maturity, the excess income could be redistributed as dividend to shareholders who could invest in other growth companies.

 

2) Paying Compound Interest

Junk stocks pay compounding interest with declining business and share price.  An investor could become poorer at faster rate because the company business could be in crisis, not making money but still need to pay high interest of debt yearly. The worst is the company may still pay dividend to the shareholders with past saving while the company is still losing money, need to borrow more money externally at highest interest rate.  This is a process of burning money.  Eventually, the company could go bankrupt and the investors could lose all the money invested in a short time.

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Compounding interest is a double-edged sword, if we use it correctly, the business could grow faster, an investor could benefit from larger capital gains and passive incomes from dividends.  If this weapon is generalized, it is not limited to “interest” literally, it could be any method which could give the special edge to an investor or trader, eg:

1) Optimism Strategy – Reward/Risk ratio

2) Fundamental Analysis (FA) – Business Strength

3) Technical Analysis (TA) – Momentum / Trend Following

4) Personal Analysis (PA) – Contrarian to Herd Mentality

Ideally, we could integrate all the 4 weapons of (Optimism = FA + TA + PA), into a mega compound “interest” to accelerate the growth in investment.

Poker Game vs Investing

Ein55 Newsletter No 056 - image - poker game

There are many similarities between Poker Game and Investing. In fact, we could have more special edges or unfair advantage in investing but most people do not know.

1) Technical Analysis (TA) – Reward / Risk, Following Trend

For both poker and investing, we bid or invest more when the reward/risk is higher.  If we play Black Jack (total = 21 points), if you have 12 points, likely you will take the risk to add 1 more card because your chance (a card with 9 or less points, so that not exceeding 21 points) is high. Similarly, for trading or investing, eg. when stock price is near to the support, we would start to enter as the reward (upside) is more than the risk (downside).

Similarly, when a poker player has smooth win (good trend in winning), eg. facing a weak opponent, may add more position to maximize the gains.  This is similar to a trader who follows the market trend which is an edge.

https://en.wikipedia.org/wiki/Blackjack

 

2) Personal Analysis (PA) – Manage your emotions

A good poker player is calm, even holding lousy cards, will show confidence, so that opponents could not tell.  There is a poker game Bluff, the player could have lousy cards but pretend to have perfect cards. Opponent who challenges the truth could suffer as sometimes the player will purposely tell the truth. Similarly, a good investor will use the market greed and fear as a weapon, doing differently from the majority.

https://en.wikipedia.org/wiki/Bluff_(poker)

 

3) Fundamental Analysis (FA)

This is the main difference between Poker game and Investing.   Poker is a pure probability game, therefore TA & PA are the main edges. For investing, we could be selective to only consider strong business as they are more likely to grow in share price.

 

4) Optimism Strategies = FA + TA +PA (integration of all into strategies)

Strategies formation is important, integrating all the critical factors. Each poker player and trader / investor has own unique strategy, aligning to own personality, based on learning from positive experiences.  The strategies could change when the opponents (market) may be different, could be weaker (bear market) or stronger (bull market) opponents, which one would adjust the strategies accordingly.

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So, knowing the similarities and differences of poker game and investing (stock, property, etc), we understand that we could have the special edges or unfair advantage like Casino (more than 51% winning rate) if we know how to position Optimism + FA + TA + PA, aligning with own unique personality.

Make Friend with Billionaires in Investment

Ein55 Newsletter No 053 - image - Richest Billionaire

A multi-billionaire could become super rich mostly because they they have a profitable business or they invest in other people’s profitable business.  Their wealth is growing over the years, some could be as rich as the wealth of a small country.

We may not be able to establish the same business as them but we could make friends with these multi-billionaires by becoming a shareholder of their business.  Alternatively, we could also study their stock portfolio because they also invest in other businesses.

So, what are the billionaire stocks to buy?  The Billionaire Index is a compilation of stocks owned by global billionaire investors

https://www.ibillionaire.me/ibillionaireindex/

Based on a homework done by Ein55 Graduate, many (but not all) of these stocks by billionaires are strong business. So, it it is critical for us to know what are the truly giant stocks which make these billionaires richer over the time. Even we may not become a billionaire, we could share a profit by becoming a millionaire one day, if we know their investing mindset.  More importantly, many of these stocks are at high price due to high optimism of US market.

We only make friends with these billionaires when their net worth is reduced by more than 20% one day during global financial crisis due to falling down in share prices but the strong business still make money consistently yearly for them and for us.

Dr Tee: Successful Trading & Investing with FTP Analysis in Optimism Strategies

Ein55 Newsletter No 037 - image - Taiji

First things first, what kind of investor would you describe yourself as? Conventionally, we classify investors into two groups—long-term and short-term.

Long-term investors also tend to identify as value investors, who typically base their decisions on Fundamental Analysis (FA). In other words, they are not so into day-to-day trading, or watching stock charts closely as stock prices go up and down. Instead, they prefer to read company reports and seek stocks which they believe are trading for less than their intrinsic values.

Short-term investors…well, it is still debatable whether short-term trading can be called investing, but we know that it’s a much faster game with less waiting time, but more technicalities or Technical Analysis (TA) involved.

So, quick, choose one between the two, which type are you? It’s hard to stick completely to one choice, isn’t it?

Each side has its limitations!

I too would find it hard to just pick one and leave the other one out entirely, because I don’t believe that the two investing styles should be mutually exclusive.

In fact, each style comes with its own set of blind spots and shortcomings.

For instance, one could still lose money by buying a fundamentally-strong stock at a sky-high price.

In the case of short-term trading, it might easily turn into over trading, i.e. excessive buying and selling to increase the probability of successful trades. Such gambling behaviour, coupled with a lack of discipline, could cost investors heavy losses.

Therefore, I think it is advisable and even important to make use of both FA and TA, to enjoy the “best of both worlds”, and in other words, buying giant stocks at cheap prices and at the right time.

On top of that, the investor would also need to develop a kind of inner discipline. Thus, I would like to add another school of thought—personal analysis (PA) as well.

I have integrated 3 schools of thought: FA+TA+PA (FTP analysis) through the unique Optimism Strategies.

 

Ein55 Newsletter No 037 - image - FTP

More about FTP Analysis

People who are new to investment may ask the question, “So what is FA, TA, or PA? What can I expect to learn under each category?”

This is how I look at it.

When it comes to Fundamental Analysis (FA), it is more than just assessing a company’s business performance or intrinsic value (though that will be covered as well). We should also have an understanding of the macro economy (e.g. how countries/ economies are doing on the whole) as well as microeconomics concepts (e.g. demand and supply). I believe that the stock market and the economy are related like how the teeth are related to the lips—without the lips, the teeth will feel chilly.

As for Technical Analysis (TA), ideally we want to buy low and sell high, but it is not that straightforward. In order to enter and exit markets at the right timings, we need to look into trade volumes, values, patterns, trends, etc. I will also be sharing key points that include: relative and absolute technical analysis, as well as bull and bear market interpretation.

Personal Analysis (PA) is essentially a study of 4P: Investor Psychology, Political Economy, Winning Probability and Personal Indicators. It might be the most overlooked part, though I feel that it can even be more important than FA and TA sometimes. Market forces may be uncontrollable and unpredictable, but we can overcome our own emotions and also form personalized investing strategies.

How do we connect these three schools of thought together then? Having been an investor for 20 years myself, I think it can be summed up in one sentence: Identify strong FA stocks, and buy/sell at a time aligned with TA indicators, as confirmed by PA.

The unique Optimism Strategy developed by Dr Tee provides a special advantage to know which investment (stock, forex, property, commodity, bond, etc) to buy safely, when to buy, when to sell, including option of long term holding.  So far over 10,000 audience have benefited from Dr Tee high quality free courses to the public.  Take action now to invest in your financial knowledge, starting your journey towards financial freedom.

 

Top 10 Singapore REITs for Passive Income and Capital Growth

Ein55 Newsletter No 038 - image - REITs

There are total of 40 REITs in Singapore, a popular investment option for retirement through passive income. By law, 90% of disposable income from REITs must be redistributed back to shareholders through dividends.  However, not all the REITs are profitable, an investor could lose money if choosing the wrong one, eg. pursuing the highest yield REIT.  REIT is an integrated investment between stock market and property market, knowledge of both markets are required to be successful.

In general, a good REIT should have strong fundamentals and DPU (Distribution per Unit) should grow over the time.  At the same time, we could also profit from good REITs through capital appreciation of share price and net asset value of properties.  A good REIT investor not only knows how to choose the REIT, but also masters the investment clock to buy / sell / hold the REIT.  Let’s learn together with the case study below on Capitaland Mall Trust.

Capitalmall Trust (SGX: C38U) is one of the Top-10 REITs in Singapore, based on Optimism Strategy with consideration of FA (Fundamental Analysis), TA (Technical Analysis) and PA (Personal Analysis).  The DPU, dividends and operating cashflow are increasing over the years, current dividend yield is about 5%.  At the same time, an investor could have profited 3 times in capital gains of share price ($0.75 to $2.25) from IPO till now (see chart below).

Ein55 Optimism of Capitamall Trust is 35% now, implying the upside is more than downside for its share price in long term perspective.  When Optimism is below 25% for Capitamall Trust (Level 1), Singapore REITS Index (Level 2), Straits Times Index (Level 3) and MSCI World Index (Level 4), it will be an ideal time to become REITs investor.  The dividend yield could be significantly increased if an investor could wait patiently for this REIT giant to fall down in share price during the next regional or global financial crisis.  After buying low, when the REITs have recovered again, an investor will have an option to sell high to take profit for capital gains or hold long term for passive income.

Ein55 Newsletter No 038 - image - CMT

We should learn to find the top 10 REITs in Singapore with excellent business for our investment portfolio, buying at discounted price at low optimism, ahead of other potential big buyers who are also looking for these valuable assets.  Certain REITs stocks could be in crisis when the interest rates are higher and the property cooling measures last for another few more years.  Therefore, we should only consider giant REITs stocks with strong fundamentals, not just any stock with price discount, buy low and sell high or hold patiently for both capital appreciation and passive income.

The safest time to buy a stock is when everyone is afraid the sky will fall down while the business is still operating normally with consistent performance. This could be a rare opportunity to buy during a crisis, we should learn how to take this advantage to truly buy low sell high.

When Optimism Strategies are combined with Fundamental Analysis (value investing & growth investing), Technical Analysis (support / resistance / trends), and Personal Analysis (mind control of greed and fear), it is very powerful when one is able to take the right action (Buy, Hold, Sell, Wait or Short) at the right time aligning with own personality.

The unique Optimism Strategy developed by Dr Tee provides a special advantage to know which investment (stock, forex, property, commodity, bond, etc) to buy safely, when to buy, when to sell, including option of long term holding.  So far over 10,000 audience have benefited from Dr Tee high quality free courses to the public.  Take action now to invest in your financial knowledge, starting your journey towards financial freedom.

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How to Capture Falling Knife Safely for Stocks in Crisis?

Ein55 Newsletter No 035 - image - Falling Knife image

Every crisis is an opportunity.  We have learned to be greedy when others are fearful.  However, not everyone is mentally prepared to buy low and sell high following one’s personality.  When a business is in crisis, the stock price is like a falling knife, one could get hurt when enters too early, buy low and may get lower, emotionally affected with the endless falling prices.

For example, over the last 2 years of crude oil crisis, stock prices of global oil & gas stocks are significantly corrected. Singapore oil & gas stock index is at 9% optimism (see chart below), a very attractive price level over the last 10 years, upside is much higher than downside from a long term perspective.  However, whenever there is a technical rebound due to good news (eg. recovery of crude oil price), there could be another negative news who correct it down further (eg. Swiber plans to wind up the business recently).

Ein55 Newsletter No 035 - image - Falling Knife

 

Here are a few important considerations for us to safely capture the falling knife of a stock in crisis:

1) Fundamental Analysis

Some weaker stocks may not survive through the crisis. It is critical to always consider giant stocks with strong fundamentals.  Based on the survival of the fittest, after the winter is over, these strong stocks will grow stronger, especially there are less competitors with higher demand then.  For more conservative investors, one could wait patiently for signs of reversal in the business performance.

 

2) Technical Analysis

While long term view of a stock could be at attractive low price, the intermediate price trend usually is bearish for a stock or sector in crisis, eg. commodity, shipping, casino, etc.  It is important to follow the trend before entry, waiting for the falling knife to drop the floor first, before pick it up safely.  Confirmation of uptrend is required, aligning Level 1 (individual stock), Level 2 (sector / industry), Level 3 (country / region) and Level 4 (whole world).

 

3) Personal Analysis

One should know own’s personality before deciding whether short term trading or long term investing is a more suitable approach.  It is hard to force a trader to buy low and wait for several years to have tremendous capital gains.  At the same time, a true investor could grab an opportunity even with counter trend in prices, ignoring the daily market news, using strong holding power to reverse the trend eventually, buy low sell high.

 

Temasek Acquisition of Eu Yan Sang at Low Optimism

Ein55 Newsletter No 028 - image - Eu Yan Sang

We have learned from Dr Tee to buy giant stocks at low optimism for investing. However, nowadays fund managers have become competitors for retail investors for such investing opportunities.  Recently a consortium including Temasek, has offered to acquire Eu Yan Sang.  Let’s analyse further based on optimism strategies.

The earning ability of Eu Yan Sang has declined over the past few years due to slowdown in local and regional economy but still it is profitable. Net Asset Value (NAV) of Eu Yan Sang has increased consistently over the past 10 years since IPO (see chart below).  Temasek and partners made the offer when Eu Yan Sang share price is still at low optimism (<25%). Even at current share price of $0.63 (slightly higher than offer price of $0.60), the Optimism is only 26%.

Ein55 Newsletter No 028 - image - Temasek Acquisition

This implies that Temasek and partners have acquired a valuable business at a relatively low price with consideration of its value.  Although the current stock price is 3 times compared to IPO price 16 years ago, it is still relatively cheap for a growing business. We could not compare with only the historical low price based on technical analysis, the fundamental of the business has to be considered as well.

 

Personal Investment Plans vs Singapore Budget 2016

Ein55 Newsletter No 022 - image - Budget 2016 v2

Lao Zi: “Govern a Great Nation as You would Cook a Small Fish.”

老子: “治大国若烹小鲜

Singapore government just announced the national budget 2016 with surplus of $3.45 billion.  In fact, without inclusion of investment return from Temasek, this could be a budget deficit.  This shows the importance of investment in all levels: from national level, company level to personal level.

A nation sometimes is like a mega corporation with many departments (ministries).  At the level of personal finance, we could also learn from planning of national budget:

1) Budget Surplus

Our total personal income of the year should always be more than total yearly expenses to generate a positive net yearly income. If the projected income is unstable, personal expenses should be reduced accordingly based on the priorities, aligning with personal goals.  Alternatively, we need to find ways to increase the income by keeping the same level of expenses.  A life with budget deficit could not last long, personal saving will be depleted eventually.  When we buy a stock, also look for business with sound financial planning to generate positive net income and positive cashflow.

2) Bonus

Government has to redistribute the wealth, helping more for those needy people or motivating certain practices with financial reward.  Company pays bonus or dividend to share the earning with shareholders during good time.  At personal level, we could also pay bonus to ourselves, eg. going for an overseas vacation, buying a luxury handbag, dining in a high-class restaurant, etc.  Similar to a nation and company, bonus can be paid only if there is a surplus, either there is positive net income or positive free cashflow, meaning your personal bank account $ figure in year end should be higher than in beginning of the year.  If a person, a company or even a nation, paying bonus while making loss, this is a danger signal.  Do not assume a company or stock which pays dividend yearly is a good company, this could be a value trap.

3) Investment

Although we may not be able to control our own profession to have consistent income, we could look for investment partners who could make money consistently.  These partners could be found by carefully buying stocks of excellent businesses.  The passive income from investment will help to supplement the possible budget deficit at personal level, especially when our own jobs could not earn enough or consistent active income.  Even after retirement, the return from investment will help to grow our wealth, we could continue to enjoy our lives by paying bonus to ourselves.

 

 

High Dividend Investing with Bank Stocks

Forum - 2016-03-04 - mentor - CT - Bank Analysis

An investor could invest safely for passive income through dividend earning from various global banks such as ICBC, OCBC, Public Bank, etc, which have very consistent business performance each year.  The 3 major banks in Singapore have corrected more than 20% in share price over the past 6 months, presenting excellent opportunities to the investors and traders.  Let’s learn how to invest in banks:

Invest in bank is like saving in Fixed Deposit in bank. The difference is one will only gain interest from bank for the money in saving account.  If invest in the bank, one will receive the interest plus potential capital growth.

Bank is the most important sector that drives the economy of any countries. So long the country is continuing developing and the population keeps growing, the economy shall continue the growth. The banks in the country will benefit because any activities will need financial support.  The big thing to focus on bank is the 2 different types of bank income that form the total income of the bank.

  • Net-interest income
  • Non-interest income

The core business of a bank is to make money by borrowing at one rate (via deposits and debt) and lending at another higher rate (via loans and securities). The spread is net interest income.

Meanwhile, non-interest income is the money the bank makes from everything else, such as fees on mortgages, fees and penalties on credit cards, charges on checking and savings accounts, and fees on services like investment advice for individuals and corporate banking for businesses.

In addition, 2 key ratios that indicate the strength of capital position of a bank:- 

  • Capital Adequacy Ratios (CAR)
  • Non-Performance Loan (NPL) v.s. Allowances

Capital adequacy ratios (CARs) are measures of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset.  MAS required Singapore-incorporated banks to meet a minimum CAR to ensure local banks are safe even under stress condition

‘Non-performing Loan (NPL) – A sum of borrowed money upon which the debtor has not made payments for at least 90 days. A non-performing loan is either in default or close to being in default. Once a loan is non-performing, the odds that it will be repaid in full are considered to be substantially lower and allowances should be provided. Similarly, MAS provide guidelines on loan grading and provisioning for local banks.

The amount of NPL and provision made by the bank will directly affect its net earning declared. Hence, it will affect its dividend payout. 

We should learn to find the top 10 global bank stocks with excellent business for our investment portfolio, buying at discounted price at low optimism, ahead of other potential big buyers who are also looking for these valuable assets.  Certain Bank stocks could be in crisis when there is global economy slowdown with high debt.  Therefore, we should only consider giant Bank stocks with strong fundamentals, not just any stock with price discount, buy low and sell high or hold patiently for both capital appreciation and passive income.

The safest time to buy a stock is when everyone is afraid the sky will fall down while the business is still operating normally with consistent performance. This could be a rare opportunity to buy during a crisis, we should learn how to take this advantage to truly buy low sell high.

When Optimism Strategies are combined with Fundamental Analysis (value investing & growth investing), Technical Analysis (support / resistance / trends), and Personal Analysis (mind control of greed and fear), it is very powerful when one is able to take the right action (Buy, Hold, Sell, Wait or Short) at the right time aligning with own personality.

The unique Optimism Strategy developed by Dr Tee provides a special advantage to know which investment (stock, forex, property, commodity, bond, etc) to buy safely, when to buy, when to sell, including option of long term holding.  So far over 10,000 audience have benefited from Dr Tee high quality free courses to the public.  Take action now to invest in your financial knowledge, starting your journey towards financial freedom.

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Buy a Stock is a Business Partnership

Ein55 Newsletter No 020 - image - Biz Partner

 

 

 

 

 

Throughout our lives, we have to make several critical decisions, eg. choosing our own profession and life partner.  We may not understand that buying a stock is actually same as finding a business partner, an important decision in life, especially if we want to grow our wealth.

Why some people become richer over the years?  This is because they get to know good business partners.  When we buy a stock, it actually means we are in partnership with someone doing business together, could be short term or long term partnership.  If our business partners could make money, we would also profit from them because the company earning could be shared with us in the form of capital gain (higher share price) and passive income (dividend).  If we make friends with partners who are losing money quarterly and yearly in business, this is as if burning money, we will lose out in the long run with these junk stocks.

Therefore, it is important to learn how to choose the right business partners who could make us richer over the time.  One could perform fundamental analysis to analyze the company performance through studies of 3 financial reports: income statement, balance sheet and cashflow statements.  However, choosing the right partner (stock) also requires the right timing.  We have to pay different prices to make friends with them, depending on how many friends they have now.  When there are many “likes”, usually the friendship is very costly, one has to pay a high price to buy a desired stock in bullish market.  On the other hand, when a good business is emerging or when the investment market is bearish, they will have less friends, it will be easier for you to make friends with these giants stocks or business partners at low cost because you pay relatively lower share price.

After we choose our career or life partner, it is hard for us to switch.  However,  we could have many choices for business partners because we could choose what stocks to buy.  A wise investor would review the investment portfolio regularly, ensure the business partners are strong, occasionally could be replaced with new blood to strengthen the future performance. When you like any good fund or business in the world, as long as they are listed in stock market, you could make friend with them easily by buying their stocks, just wait for the right timing.

Both traders and investors should learn the unique Optimism Strategies developed by Dr Tee to choose strong global stocks as the right business partners will help you to grow your wealth.