The Bargain Hunt List

An Example
My aunt Peggy never completed her O levels. She was always very playful and lazy during her school days. Even now as an adult, she always seem to be job hopping once every few years. She claims that most jobs are a bore to her and doesn't bring in much money. In addition, she doesn't like to attend courses to upgrade her skills to look for a better or position. In fact, everything that involves exams or studies, she tries her very best to avoid.
Not much of a smart person by anyone's standard. However I consider her smart when it comes to investing. Why do I say that? Well because, long ago she and some of her friends were talking about how their friends in the financial world, were making tons of money, just by buying and selling stocks.

The prospects of making tons of money, would ignite anyones' curiosity and thus she wanted to find out more. After attending many many technical analysis, trading , timing the market and guru courses, much to her displeasure, she came out of those courses even more confused and unconvinced. Then one afternoon, after she got fired from a job because she was always late, she came to my house to chit-chat with my mum.

During their conversation together, my aunt asked my mum these very simple questions... "Jas, do you know how to play the stock market? In the whole wide world, who is the best in making the most money from the stock market?" And of course the person that my mum mentioned, turned out to be none other then Mr Warren Buffett.

To cut the long story short, my aunt forced herself and me to the library to hunt for books written about or depicting the essence of Warren Buffet. I still remember vividly, that we had to argue with the librarian regarding borrowing 10 books, when the library’s policy was that only one person's entitlement is to four books.

As seasoned investors, we all know that Warren Buffet focuses on value investing and that he is well known for a lot of good timeless principals on investing. Knowing my aunt, she of course didn't practice all the principals that was taught by Buffet ,like understanding the company business or ensuring that the company has good free cash flow, all these principals was just too "Chime" (Difficult) for her to understand.
But the principals she applied was these two "Buy when fear is the greatest" and "holding it forever". Of course she was quite annoyed with the latter, saying "Siao arh...as if I can forever".

How a mere $7,000 can turn into $98,000

My aunt, started stock picking during the end of 1997, what stocks she fished out, she wasn't willing to share. But she hinted that most of the stocks she picked up during that terrible Asian financial crisis were quite well known and she cannot imagine them delisting as they are too important and too big to fall. (Possibility DBS,Datacraft, Singtel, ST Engineering)

The important point here , is that she had the encourage to apply the principal of "Buying stocks when fear is the greatest". Even though everyone warned her not too. It takes real courage to apply this principal and im sad to say even i had my own doubts buying up stocks now. But value investors take comfort beacuse even though
my aunt applied this principal back then, she didn’t exactly buy at market bottom (STI then was 1090 at end of 1997). As the Asian Financial Crisis reached it's worse from march 1998 to Oct 1998 (STI bottomed around 807), my aunt's stocks fell even further and of course the temptation of selling was great.

But she also applied this principal to her investments "Hold forever notion", which she did and of course this principal not only saved her from realising paper loss but turning that paper loss to a huge paper gain in the coming years.

She of course she finally realise that , "Hold forever" simply means hold for like 10-30 years and not literally forever. And being a very practical aunt, she sold all her stock holdings 10 years after she bought at the end of 1997, this of course was just last year 2007. Just so happens that last year was probably the last peak of the Bull market in this decade.

She managed to cash out just in time before the huge Bear market appeared '08. Suffice to say she reaped gains of 1300% from $7000 to $98,000 this not including tax, inflation and dividends earned, just by applying two techniques taught by Buffet and with a bit of luck involved.

Aunty Peggy now sits right besides me with a big grin on her face , as I blog down her successful stock investment story. Her story is a shinning example that proves, if any investor who have the guts and ability to apply these principals in their investing, one can really reap huge benefit when the next bull comes out.

Summary in Singapore's context
>Invest when everyone around are sitting at the side lines, too fearful to move.
>Invest when taxi uncles and coffee aunties no longer talk about equities (because they too busy queuing up to get back their mini bond $ or liquidate their AIA polices).
>Invest , when everyone thinks its the end of the world

What Now?
Now I know that my aunt's success had to do with a bit of luck, because all the stocks she bought during the 97 crisis are still around up till now (so she claims), the fact that she didn’t even study the fundamentals of the stocks she bought, is already a risk itself.
To reduce the reliance of luck and risk, I painstakingly created Four portfolios, that I’m sure will be able to ride out the current Turmoil and fasten your hands around the next bull run.

Each portfolios have their own theme and reason that I gathered them for and using Low PBV and High ROE data as additional filter for value.

In other words these portfolios are created for people who are just too lazy to study what they invest just like my aunt. And for people who are young but have limited capital to invest.

The portfolios' ROE figures are based on all the company's past performances and I took the average out of that 4- 5 years of data. Like wise for the PBV figures, they are based on trading price when the portfolios were established on 20th Oct 2008.
Without further a do , I present to you the first of four portfolios:

Best of S-shares

This portfolio was created due to the very fact that investors in Singapore are literally scared of these China Based shares and they have good reason too, giving example like the high debt issue with FerroChina, the dishonest quality of their products, scandals and the runaway CEOs of China Dye. But we must not assume that all China shares based here are of that quality, some companies are indeed of good value and good growth prospects coupled with strict governance. And if you realise, all these S-shares I gathered have products and services related to a need, instead of a want. Businesses involving basic support function for society in China like cultivating potatoes related products for industrial uses (China Essence), creating farming equipment for farmers (China Farm), huge presence in shipping (Cosco) and providing foundations for railway works (Midas). This portfolio invokes the most fear among investors and if you’re too scared to invest in these China firms, then diversify across like buying just one lot for each firm will only cost you around $3632. Excluding commission and tax. Estimated upsidethis portfolio could be very high in the coming years. My top favourites : China Milk, Sino Tech and China Essence.

>Estimated Fear Level for this portfolio: 80%

>Recommended for people with nothing to lose and limited capital to invest

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Avoided Sectors Porfolio

The next portfolio compromises of value stocks whose industries have been shunned away by investors here. We have shipping industry stocks like ASL, NOL being sold down to ridiculous level because of the high expectation of a deep global recession that will affect sea transport, we also have Banking stocks like OCBC and Hong Long (I picked only these two, because their strong balance sheet and not very well known to investor due to their banking presence in Singapore) whose industry are expected to remain in a downturn due to lower loans rate, and the recent credit crunch effects. Property stocks, with the falling demand and prices recently add no cheer to this sector as well. And finally the S-share sector, that have fallen greatly due to incompetence of similar S-shares, complete fear of these stocks.

This portfolio is better suited for investors who want to diversify across sectors where different fears for different sector are present, instead of just piling your money into one sector like the "Best of S-shares portfolio"

>Estimated Fear Level for this portfolio: 60%

>Recommend for people who want to invest in accordance with different fears in different sectors.

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The Blue Chips portfolio

This is where my aunt becomes very interested in. But I caution investing in this portfolio too early , as the full effects of an uncertain recession has yet to be factored into these stocks even though the market has already fallen greatly. Nevertheless, I gather these few well known stocks and see how well they do in the coming years. The reason I picked these stocks is because, of their size, presence, importance and support they provide to Singapore's economy as a whole. I just can't imagine any one of those stocks going burst, etc: If SembCorp were to delist, that would mean that all our trash and rubbish have to be kept at home , because the business in charge of our waste system has gone bankrupt.

Should there be a bull run in late 2009 , this portfolio will be the first to rise in value beacuse they are well known and well documented by Analysts. Lastly , I ranked them according to their importance in Singapore. So if you do not want to spend so much capital investing, then choose the top 4 blue chips as stated in the chart. My good guess is that this enitre portfolio will mimic that of the STI index ETF.

>Estimated Fear level :30%

>Recommended for people with decent capital

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Broker Recommendation Portfolio

This portfolio consist of stocks that are well recommended by brokers all over Singapore's investment realm. Out of so many well recommended stocks, I chose the best among the rest, simply by using the lowest status given by the brokers
According to them a status of

Less than 1.5 means Buy

Less than 2.5 but more than 1.5 equates to Outperform

Less than 3.5 but more than 2.5 refer to hold

4.5 And above relates to underperform and sell.


A whole list of recommended stocks can be found on Business Times Newspaper every Monday.

The reason why I created this portfolio is because, I want to test, can anyone without doing any research at all ,who relied solely on the very best recommendations by the Brokers at that point in time, can he or she reap big gains in the future? How much more or less returns this portfolio can achieve as compared to the other fear related Portfolios and of course the Blue Chip portfolio? After there is always a perception that brokers and analyst know what’s best right?

>Estimated Fear Level: 35%


>Recommended for people who love to listen to brokers and analysts

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Information on ROE and PBV

A ROE of 15% or more is considered in general as high, in a range of 8-14% considered decent and below 8% is considered low. However this ratio is best used when compared with another similar natured stock within the same industry.

A PVB of below 1 is considered undervalued, according to Benjamin Graham (Warren Buffet's mentor), a PBV of 0.7 and below is considered very cheap, and likewise a PBV of above 3 or 4 is considered high in general. Again have to compare with other stocks of a similar nature and industry.

All you need to look out for is a high ROE >15% and Low PBV <1

Finally I 'll explain more on the combination of these two ratios on another blog entry. As for value investors, these portfolios serve as a general guide only, more needs to be done in researching the stock's quality management, business goals concepts, future prospects, doing up and adjusting the NAV,PVB,ROE,PE, calculating FCF, forcasting etc.

With that said, I encourage anyone who reads this to invest, yes invest!! Because since this is a once in a lifetime crisis, wouldn’t it present a once in a lifetime opportunity?! Think about it.. Happy investing :)
Portfolios will be reviewed every 6 months, on this blog, until the next major bull comes.