Some Thoughts on Foreign Currency Time Deposits

Image: www.businesscafeonline.com

A friend asked me this question:
What is your view of RMB time deposit offered by bank of china? The offer is found here.

My answer is: Dear Mr. A,

I had a brief look at what the offer is. I can't say I know too much about currencies and of this specific deal. And what I am about to say, might be factors that might be already obvious to you. But here goes:

You are taking on 2 main exposures by doing it. 

First, currency exposure, i.e. the fluctuation of the RMB versus your home currency (I presume you are thinking of changing SGD to RMB, but it could also be USD/RMB or some other currency pair). 

The appreciation or depreciation of a foreign currency depends on a few factors, which are affected by macro-economic policies which might be unforeseeable, and also the relative strength of the 2 economies, their interest rate differential and their inflation rate differential (this is actually Fisher's interest rate parity theorem). And of course if the current pricing is inefficient, then there are also sentiment driven factors. But let's assume the currency market is efficient (in the parlance, we'd call that the null hypothesis), which it likely is, since the currency market is one of the most liquid, if not the most liquid market in the world. 

Where any of these factors are going, and the relative strength of it versus Singapore is hard to predict, and the interaction of the factors are complex. So, you have to ask yourself whether you believe that the RMB is going to appreciate against the SGD. If it depreciates instead, it could offset the yield that you were getting from the RMB time deposit.

Disclosure: My experience in forex is limited, I have used currency swaps structured similar to forex time deposits before, as I was posted aboard for a period, and of course the usual forex transactions when travelling. I currently have no direct or derivative positions on forex but have foreign asset holdings denominated in foreign currencies and some tiny amounts of paper currencies.

Is Microsoft a Good Value Play?

Image: Microsoft

Microsoft used to be THE company everyone loves to hate (now it's the banks), complaining about its blue screens of "death" and just disliking its dominance of the PC market. 

Today, MSFT seems almost like a lost cause, having floundered for 10 years with its share price going nowhere. With its PE ratio this cheap (10.4x trailing twelve months), coupled with strong cashflows, MSFT is a monopoly priced like a sunset industry. 

With its products spanning a wide range from the X-box for the gaming crowd, to its ubiquitous Windows OS and Office suite for the business people, and consumers too, MSFT seems extremely cheap for what is among the most universal of all brands and products. And we haven't even factored how it might dominate in cloud, which is lauded as the next big thing. Is MSFT a good value-play? 

DR Horton: Buy, Hold or Sell?

If you want to play the housing recovery theme, first read the post that's just before this one.

If stocks are your favoured instrument, one place to start is to examine the major homebuilders in the USA and examine which among them is best managed and positioned to ride this potential recovery. 

Image: Dr Horton

The biggest among them is worth investigating - DR Horton (NYSE: DHI). With its operations spanning the entire continental USA, its use of land parcel options to hedge its  purchases for its land portfolio, and its decent financials, DHI is well positioned to benefit from an upturn. The land options are real options, i.e. they are not financial derivatives but ones that involve the receipt of actual plots of land and can be viewed as call options.

However, if the housing market double-dips or crashes, DHI would naturally follow the industry's downturn. So first decide if housing is going to make a comeback (which it has not yet failed to do before since we actually all need housing and not "eyeballs" or tulips), or not.

Disclosure: I have direct holdings in DHI.

I use the term direct holdings because for some companies, I might have indirect holdings for example in an indexed ETF. I do not use derivatives, though I might in future. A direct holding is a very specific investment or "bet" and stockpicking is not for those not versed in financial analysis. 

A widely diversified ETF or mutual fund might be a better instrument for those wanting to ride with the market, or even to play specific sector themes. In this case, housing sector ETFs are available, but as with all investments, you should conduct your own research to determine its suitability for your portfolio.

Contrarian on Housing?

For those considering a contrarian play on housing in the US market, you might do well to read this on Seekingalpha.com. It discusses whether you should use physical real estate or homebuilder stocks as your instrument and its pros and cons.  

Mean Reversion?
Source: Seekingalpha

The real difficulty of being contrarian is that while it might seem obvious as a "fantastic" opportunity on hindsight if homebuilder stocks see a strong recovery on the back of an improving housing market, there are also 1001 reasons why there might not be such a great recovery, all seemingly very logical. 

It never is easy being contrarian, which is why while everyone knows the dictum to buy low and sell high, or Warren Buffet's famous phrase, "be fearful when others are greedy and be greedy when others are fearful" seems like a truism, it is actually extremely difficult to execute.

IBM: Buy, Hold or Sell?

Since IBM sold off its PC business, moving away from the "commoditised" consumer computing sector into the more high end consulting and analytics business to serve the enterprise customer, its growth rate is nothing short of startling.

IBM might not be as hot as Google or Apple, but with a CAGR since 2006 greater than 17% and pre-tax income margins at 19.7% in 2010, IBM's modest PER of 14.6x might seem like a bargain.

Here's what they have been up to recently:

After Deep Blue vs Kasparov, IBM's engineers have been looking for the next challenge and found it in this supercomputing powering natural language processing Jeopardy showdown. But it isn't all fun and games at work. They believe that this technology can help businesses work better and they want to create a "smarter planet". They also have an ambitious plan to execute with their 5 year roadmap (to 2015). With a track record to boot, is IBM a growth company priced like a mature one?

Disclosure: At the time of post, I did not have open positions in IBM. Since then, I now have direct holdings in IBM.

Preferred Shares: The Worst of Both Worlds?

Is this worth the paper 
it's printed on?
Image: www.greekshares.com

In light of a slew of offerings for preferred or preference shares on the Singapore bourse, and after a few enquiries from friends, I thought it might be good to touch on what this class of securities represent and how a prospective investor should look at it. 
 

I have heard several people compare preferreds to bonds or to even fixed deposits, but that is a gravely mistaken way of looking at it, since the risks are higher (in some cases, much higher).

Disclosure: I do not hold any preferred stock of any firm.

Walmart: Buy, Hold or Sell?

Until recently, Walmart's dominance on the supermarket retail space was practically unchallenged. With the advent of the financial crisis, bargain shops have begun to encroach on WMT's territory, and online retailers like Amazon also has similar ambitions. However, WMT still is a gorilla in retail, and its business model of providing cheap groceries and other household items, with "Low Prices. Everyday. On Everything"  essentially sums up why its market share would be hard to erode. WMT is still cheap due to the headwinds from a recovering US economy but the defensive nature of the company and its leadership in retail  positions it well when the economy stabilises, best seen when unemployment sustains its downward trend.

But as with all investment analyses, the question is, what is the right price?   As usual, click read more, to, read more!

On a seperate note, I have discontinued placing the spreadsheets of my calculations online. I typically only keep 1 version of these sheets and update them or use them in scenario testing. Hence the data might have changed since the original time of analysis. If you do wish to obtain my calculations, please email me and we can also discuss the analysis offline.

Disclosure: I have direct holdings in WMT, but not in AMZN.

Medtronic: Buy Hold or Sell?

Medtronic is the leading maker of medical devices, with its string of innovative products that can be powering a failed heart, or valves, and basically while I know little about medicine, the company does seem to have a good set of financial metrics worth examining further.

Dreamworks Animation: Love the Movies, Not So Hot on the Stock

Shrek - who has not seen it, in fact, all 4 increasingly bad installations of it. But love it or hate it, Dreamworks Animation has created a huge green monster franchise from it. With its string of other box office successes such as How to Train A Dragon and Megamind, DWA's 3D animation legacy looks sealed in concrete, and a viable competitor among the other movie studios. Great movies! But does it make for a great investment?


Disclosure: I have no holdings in DWA.

Gold and Its Mechanics

Everyone has an opinion about the shiny metal, with its allure and its investment value. Gold serves as a currency and a store of value, albeit more out of convention than anything else. However, gold is used by the central banks as a reserve asset, and so long as they don't abandon it (which they have no reason to), gold would remain the ultimate safe haven currency. 

More than just shine

Here's an article covering the mechanics of gold, what it is, how it is traded and what determines its price. Surprisingly though, during periods of crisis, "in the wake of the September 11^th attacks and the 2008 financial crisis, gold remained flat or fell in tandem with the stock market. “When such an event takes place, most people want to be long cash,” he said. That includes selling their investments across assets – including, gold." 

If you click read more, there is another article based on some research I did on the topic. I had considered using an option to bet against gold, but decided against it for the meantime. Find out why.

Stamford Tyres: Buy, Hold or Sell?

Image: Stamford Tyres

Now that I have posted 1 piece on a US company, here's one on a Singapore company. Vehicle owners might find the brand familiar, Stamford Tyres. 

One of the things a casual reader might find interesting is how from my initial analysis, I actually rated it as a sell, and then after relooking and rethinking it and working harder at it, I changed it to a buy. Well, that's real life investing, isn't it? In a way, there are no absolutes in investment, what can appear bad today can appear great tomorrow. The only thing is that you must have a strong basis for the change, and also know that you are backing your analysis with cold hard cash. If the trade turns awry, there's only 1 person to blame and that is yourself. On the flipside, if it does work out right, you also are the sole beneficiary. 

Also note that the report is presented chronologically, from the date research is initiated to the most recent review. Hence please do not be turned off by the early date at the start of the report. As of the date of the post, the report is current. Anyway, click read more to see my analysis.

Disclosure: I have holdings in Stamford Tyres.

Warren Buffett Tap-Dancing?

If you are in need of a little inspiration in your work or in your investments (which in a way is also work), listening to Warren Buffett, only the greatest investor of all time, might perk you up.  He is a pretty funny guy (for more humour, check out his letter to his investors at Berkshire Hathaway.)

For me, the most memorable bit I still can recall, despite having watched this video years ago, is the following:

"If you think of the difference between me and you, we wear the same clothes basically (SunTrust gives me mine), we eat similar food—we all go to McDonald’s or better yet, Dairy Queen, and we live in a house that is warm in winter and cool in summer. We watch the Nebraska (football) game on big screen TV. You see it the same way I see it. We do everything the same—our lives are not that different. The only thing we do is we travel differently. What can I do that you can’t do?"

Seems strange that when compared to the among the richest man in the world, our lives really aren't that different. He still stays in the same house before he got rich, he doesn't drive like a Lamborghini or anything like that (it's a Cadillac DTS), and he only switched to private jet because he got harassed on commercial planes. I like how he says he "still tap-dances to work every day".

For those more inclined to reading, please find the transcript here.

Best Buy (BBY): Buy, Hold or Sell?

Image: Best Buy

Best Buy is the largest electronics retailer in the US. It does have some international presence though 75% of its revenue is from the US. With stiff competition from bargain stores like Walmart and online giants such as Amazon.com, BBY's share price has experienced huge volatility and is treading at 52 week lows. Does this present an opportunity or is this a proverbial falling knife? Is BBY going to go the way of Borders (essentially bust)?

Some explanations of my investing method is due. My inclination is towards value investing, though hardcore value investors would say that I deviate from it. I won't touch a stock unless I figure that there is a 20% safety margin (i.e. the target price is 20% higher than my entry point). I maintain a satellite portfolio of a maximum of 10 stocks, of which I would sell the weakest holding when I find a good 11th candidate. This helps me take money off the table and also creates a certain discipline. 

Click read more to find my analysis. I have published it without embellishments from the time I wrote it, and would update it when I review the company. I only removed the size of my position. 

Disclosure: I have direct holdings in BBY and WMT, but not in AMZN.  

There is NO Free Lunch

In a continuation from What IS The Right Price and Time is Money post, if there weren’t any comparable companies to benchmark against, we would then not be able to employ relative valuation techniques to give an indication of fair value or the Right Price.

Absolute valuation (AV) would then come in useful; AV can of course also be used as an additional tool when comparables are available, after all, it might be that all companies in the same industry could be overvalued or undervalued at a given time. What AV does is to find a value for a stock by examining the fundamentals of a company. A word of warning, I am going to attempt to explain the AV methods, which are discounted cash flow methods below, but in an abbreviated fashion. While it isn’t rocket science, it is not trivial and for more details, you would do well to refer to a finance textbook to get a thorough run down of these very important concepts.

Where Do Good Ideas Come From?

During the Age of Enlightenment, cafes serve as a great meeting place for people to come together and talk and in that way, great ideas have been generated and born. Watch the video above, it's an interesting and fun explanation of where good ideas come from. Also, I invite you to comment, participate or even email me ideas which I can then form into an article. 

Commodities as an Asset Class

Commodities have become an important though perhaps still alternative investment to consider. This review gives a broad summary of of the Little Book of Commodity Investing.

Even for those who are not ready or wish to participate in commodities investment, "the book is premised on the belief that a basic understanding in commodities can help good investors become better investors – not just in commodities, but across other asset classes, because, as Stephenson put it, "you will be better able to understand markets, whole economies and the world we live in"." For those so inclined, the books offers some suggestions as to how to participate, for example, through ETFs, buying the common stock of the mining companies, or through derivatives like futures.

Does Diversification Make Sense (for Professionals)?

While I agree with the idea that for a full time professional investor, it might not make terribly much sense to have too many holdings, just because it will be next to impossible to monitor many companies, I do think that indexing makes the most sense for non-professionals, since to select the best fund managers to earn that elusive alpha might take just about as much effort as selecting the best investments to own, and the laymen might just not have enough knowledge or information to be able to do either.

I have a core-satellite approach for my equity component of my portfolio, where the core comprises globally diversified indexed exchange traded funds (ETFs) while the satellite is a selection of 10 stocks (and I sell off the least potential stock should a better 11th company be uncovered in the course of my research). That is also yet another approach. What is your approach?

An Outlook for 2011

I had attended this talk at the Singapore Management University on a particular fund manager’s outlook for 2011, where the speaker gave a great round up of the factors that will have an impact on how markets would perform in this year. Read it here.

Her take is to be overweight equities and underweight bonds despite the unemployment headwinds in the US. Some risks to her views are potential oil shocks, especially if Saudi Arabia gets caught up in the Middle East unrest. While the future can never be read with great certainty, she certainly gave a great round up across the major asset classes such as currencies and commodities, including the metal we all love (love the glimmer, hate the price), gold. Best thing is to consider many views, read widely, and then make up your own mind. It is never a black and white situation so do not expect an easy ride for your investments. 

My personal view is that the global markets are already in the throes of recovery. Since financial markets are forward looking, and is a leading indicator, the markets has priced this in, which explains why the major indices have already recovered to levels before the Lehman crisis. Nonetheless, volatility will be present and one should expect a bumpy ride. However, riding it out might end up rewarding as opposed to bailing when dark clouds loom (think Japan’s recent earthquake + tsunami + nuclear crisis). The dark clouds might be opportunities rather than signs of a sustained downturn. But of course major risks remain (for example sovereign debt crisis) and things can change rapidly in the financial markets. Happy investing!

Time is Money

The earlier post entitled What IS the Right Price ended with a question. To answer it, we need to tackle a fundamental concept in finance called Time Value of Money (TVM).

Does money make the world go round?

What it means simply is that the same number of dollars in the future is worth less than the same number of dollars today. This may appear intuitively strange, but the explanation is rather simple. Consider this: if you were given a choice between being paid $10 today or $10 in 1 year’s time, which would you prefer?

Clearly the former is preferable since having gotten the cash today, you can then use it straight away as opposed to waiting for an entire year to utilise it. You could use it to buy a pizza (or maybe not, $10 isn’t much nowadays), or pay for a movie ticket OR invest it. If you had decided to put it in a savings bank account, in 1 year’s time, you would receive $10 + (interest rate*$10). If the interest rate were 5%, you would have $10.50 in a year’s time, which certainly beats $10.

Peter Lynch Principles

Peter Lynch, famous investment manager, has outlined some of his principles. Read it for a good laugh. Some of his ideas are actually what sounds like common sense, while some read like Yogi Berra (e.g. There's no point paying Yo-Yo Ma to play a radio). Anyway, it's worth pondering about.

Peter's Principle #1
When the operas outnumber the football games three to zero, you know there is something wrong with your life.

This first point comes from the preface, where he is talking about how busy he was, regretting being unable to spend time with his family since he was too busy trying to keep current on a few thousand stocks. Although not really a hugely important point as far as this FAQ goes, I guess if I didn't put it here you'd wonder what it was if it was the only thing missing from the list!

Peter's Principle #2
Gentlemen who prefer bonds don't know what they are missing.

This one gets a going over in this FAQ in the separate "Bonds vs. Stocks" article, Lynch just pointed out that bonds are an inferior investment to shares.

Peter's Principle #3
Never invest in any idea you can't illustrate with a crayon.

A class of seventh graders at an American primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. They sent their picks to Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch just loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of toy manufacturers, makers of baseball swap cards, clothing manufacturers and outlets, Playboy Enterprises (a couple of boys chose that one), Coke, and other stocks of that ilk. With a portfolio notably lacking in glamorous technology ventures and entrepreneurial risk taking they went for solid stocks with excellent profits, their portfolio returned 69.6% against a background of a 26.08% gain in the S&P500 in 1990/91.

Dividends, Anyone?

Those looking for something to read might do well to check out The Little Book of Big Dividends. Here's a review.

One of the rather interesting ideas in the book is how it views dividend yield:

"Given the role of dividends in the total returns of a stock, investors may consider the highest yielding dividend stocks as the best investments. He does not buy this view, for he thinks that “dividend yield is a pretty good proxy for investment risk”. Carlson’s explanation is that a high yield

might be a precursor for a dividend cut or omission. Since the dividend yield is calculated as the percentage of dividend per share over share price, a stock’s yield can rise if dividends increase, or the share price falls. Thus, if the yield is extraordinarily high, it is likely to be from a plummeting share price as opposed to a massive dividend hike. Considering that markets are generally efficient in pricing an asset, yields considerably higher than its long run average should be seen as a red flag and not an enticement to buy."

What IS the Right Price?

Have you ever followed a housewife to the wet-market where she does her grocery shopping (or what we in Singapore call “marketing”)? I used to accompany my mother when I was much younger, and while at that time, it didn’t seem like much to me, the wet-market really isn’t that different from the financial markets. The housewife would pick over the produce, prod the fishes to test its freshness, and then if she likes what she is prodding, she might bargain with the seller, to obtain what she thinks is a good price. If she isn’t sure what the price should be, she moves on to the next store, selling almost or entirely the same thing, and checks out the price there. 

This behaviour isn’t restricted to the prudent housewife buying seafood. When I for example, want to buy a TV, I go into a shop, and look at all the different models on offer. Shopping helps me identify what it is I am looking for, say the dimensions of the screen, the type of technology like 3D or LCD or plasma, and then also consider the brand and its reputation. And, of course the prices. After narrowing it down, based on my criteria and budget, I might settle on a particular model. I might then go to a different TV retailer to see what he is selling that model at and finally, at the cheapest shop, I might still try to negotiate a better price. Or I might have to just walk off empty handed since nothing fitted either my criteria or my budget.

Most people do have quite clear rationales when shopping for things. Ask a teenager how he chooses his smartphone and he might regale you with its features. Or an executive how he chooses his car, and he might run down a list of specifications like the size of the engine and the fantastic electronics and the design and repute of the marquee.

Should one buy stocks of companies with any less rigour? What exactly is it about stocks that can cause some people to buy it on a whim or less than sufficient understanding? Does investing for the future require any less effort compared with a TV set or a car? AND, is it that different?

Why Invest? And Is Investing Suitable For Everyone?

A pile of dollars, which could have earned from hard work and accumulated through diligent saving or a windfall, or through inheritance, will remain the same pile of dollars, if nothing is done with it. It does seem to be rather a shame, with inflation eroding the value of those dollars, and especially since by simple actions such as putting it in a bank, interest can be earned on that money, as time passes. Einstein has called compounding the most powerful force in the universe. Yes, Einstein of e=mc². He didn’t think nuclear power, the same energy that gives the sun its glory and shine was the most powerful force. He thought compounding was THE most powerful force.

A Warm Welcome to Chess Cafe Investments

Why ChessCafeInvestments? 

A café is a gathering place where people come together to have a drink and can serve as a venue where ideas ferment, or simply to hang out with other like-minded people. ChessCafeInvestments aim to be that webspace where we would be able to discuss investment ideas together and give each other brand new ideas or debate why a particular investment target has merit or should be avoided. 

Why Chess? 

Chess is a game of intellect, set on a checkered board that simulates a battle field. Investing is not dissimilar to chess - intellect is crucial, temperament is sometimes equally important, and strategy shifts the balance between a good trade and a bad one. Understanding your aims in your personal investments, and then formulating a strategy on how you intend to get there underpins successful investing. Learning how to play “the game” well requires a fair bit of study, years to cultivate your skills, and executing your strategies in the financial markets. And like in chess, you do not win every game. Losing can sometimes be the best lesson. Unlike the chess-board, the financial markets can be rather unforgiving battlefields.

Who am I? 

I am currently a full time private investor, who has been trading since the age I could open an investment account. I am not a trader, since I consider trading an activity only to execute investment strategies and not a profitable activity in its own right, for a private investor. I have in the meantime equipped myself with financial knowledge, through books, through actual investing and also through the CFA course. I was an engineer by profession, and am no longer practising it since I have decided to invest full time.  My investment interests lie primarily in US and Singapore equities, though I also do think about other asset classes such as bonds, property etc. And I intend to write primarily about investing in general, specific investing ideas in US and Singapore companies, and occasionally about other asset classes. Contact me at ChessCafeInvestments@gmail.com

Important disclaimer: 

Investing in a specific company or financial instrument involves risks. Stock-picking, or other non-diversified investment activity, is not suitable for everyone and indeed, can be downright detrimental to your financial health. None of the ideas or articles here should be considered as solicitations to invest. Further analysis should be undertaken to determine an investment’s suitability for your investment portfolios. You have been warned. We all have to take personal responsibility in our investments and our financial futures.