[Has the drama ended already?]

“America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.” Abraham Lincoln

Just two days ago, US market went into a free fall. Analysts were screaming at the tops of their lungs saying the end is near, it is time to bail out and save yourselves! Dow Jones fell 635 points in a single day of trading. One of the worst day for many traders but may be one of the best days for investors. Some of the analysts commented that the Feds is running out of option, Ben Bernanke will lose all his hair in trying to find a viable solution to save the economy.

However, the market started off pretty bullishly today, DJIA registered a rise close to 200 points. So what changed over the past 2 days? Did the Feds found the magic pill for the economy in US? Economists speculated that the Feds will do the following to save US from going into another cycle of recession or worst depression: (Or is it just to save those speculators’ from losing everything in the market?)

1. 1)   The unveiling of QE3 (Qualitative Easing III)?
2. 2)   Maintain low rates or even cut the interest rates down from 0.25 to 0?
3. 3)   Maintain balance sheet at USD3 trillion?

Okay, looks like the Feds doesn’t have much option left to save the market from falling further but how much further will it go before equilibrium is achieved? Do you think that the economy is really in such a bad shape that there are financial institutions like Lehmann Brothers filing for chapter 13 or too big to fall type of companies waiting to be bailed out?

2008 had been a year which helped to trim off the fat on many companies which helped to make them much leaner and versatile. I believed that the economy will grow very sluggishly over the next few years but that does not warrant for a recession. However, I think we can just apply what Abraham Lincoln had said to the market, it doesn’t take any external force to destroy it, just some internal analyst and economist will do.

[Time of Kairos and Drama!]

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffett

About a week ago, all the financial news was focused entirely on Italy and Spain (Eurozone) but thanks to the S&P’s downgrade, the whole world is catching the flu from this sneeze!

Although many have anticipated the credit downgrade on US’s credit rating, but who could have guessed that global market lost more than USD2 trillion within this short period of time? However, only during this time of chaos, fear and uncertainty will give birth to time of “Kairos” (in Greek). This message had been preached very recently in my church and I truly believed that this is true!

Every financial analyst on Wall Street is now trying to give their own version and opinion on why the market is crashing. Most of them were blaming the president for not being able to come up with a better resolution in trying to save US’s economy. Some were saying that US will never be able to pay back its debt [1]. Last but not the least, some were even blaming S&P’s for downgrading US’s credit rating! As an investor, what should we do? Get out of the market right now or do we take this time to evaluate our portfolio and grab a couple of stocks which we’ve been aiming at for a long time? What else can we do? There are some who suggest that we should transfer our funds into commodities like gold and oil or even bonds (Wait a minute, weren’t we afraid earlier that US might not be able to repay its debt? Could it be that those analysts know something that we don’t here?).

Before we try to solve this enigma on credit rating, I supposed it would be good that we spent some time and effort trying to understand it. This is what I’ve gotten from S&P on the definition of credit ratings.

Credit ratings are forward-looking opinions about credit risk. Standard & Poor’s credit ratings express the agency’s opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time [2].

So, in short it means that it is an opinion from S&P on the capability of a party (US government for our case) to repay its “debt” on time.

Okay, what about those AAA, AA+, and BBB represent?The general meaning of S&P’s credit rating opinions is summarized below [2].
‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.
‘AA’—Very strong capacity to meet financial commitments.
‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.

Looks like the downgrade to AA+ wasn’t too bad I guess. But why then the market is reacting so badly towards this downgrade? I’ve no idea, but I think I will stick to Warren Buffett

“As the richest nation in the world with a GDP of $48,000 per person, America should have no problem meeting that obligation (paying off their debt). And, of course, there's also the benefit of having a Federal Reserve that can print money. I can go out drinking all night, but if I've got a printing press, my debt is good," says Buffett [3].

My reaction would be almost the same, fetch a cup of tea and enjoy this financial drama!

[1] http://www.cnbc.com/id/44054257
[2] http://www.standardandpoors.com/ratings/definitions-and-faqs/en/us
[3] http://www.cnbc.com/id/44056326

[Stock Picking 101]

“Risk comes from not knowing what you’re doing” Warren Buffet

If we spent enough time drilling across investment books, we will come across 2 types of analysis techniques that investors use and apply in stock picking. There are known as fundamental and technical analysis.

What’s technical analysis? Well, the main theory behind technical analysis is “History repeats itself”. It is more like a crystal ball technique which stock pickers used to try and guess the market’s direction. As a novice investor, I was very open to this technique as well. Most of the books which are related to this technique will be based on the use of charts such as Japanese candlesticks and special indicators such as MACD (Moving Average Convergence-Divergence), %D, %K, moving average (10,50 or 200 days) and momentum. If you ask me how do I apply them today? I think they are quite useful when I try to access when is the best time to buy and sell. However, it doesn’t really help me in understanding or finding which stock should I buy or sell.

So now we need to understand and apply fundamental analysis in picking which stock or company which has the potential to grow and generate passive returns for us. The most commonly used ratio is Price to Earnings ratio (PER) and NTA (Net tangible asset). PER indicates how expensive the stock we are purchasing today is and NTA will give you a general idea of how much the company is really worth.

What is PER?
Price of the stock / Earnings per share (EPS)
So for instance, if Public Bank Berhad (PBB) is trading at RM10 per share and the EPS is RM1, the PER is 10. So let’s say if PBB is giving out RM0.50 of dividend for every share, the dividend yield will be approximately at 5%. (There is a certain amount of tax imposed on dividend gain). So why did I say that it is used to gauge the expensiveness of the share?

Imagine this, if the price of PBB share is trading at RM20 but the EPS is still at RM1, it means that you are paying RM20 for RM1 of earnings or 5% instead of the initial 10%. Besides that, what happen to the dividend yield by this share? It will fall to 2.5% now instead of the initial 5%.

How then will we be able to identify good stocks? For that, we need to understand the Forward EPS. Where do we get this number? From the analyst! Is it really that simple? Too bad, no it isn’t but we can definitely get a general consensus when it comes to forward PER but it is really up to us as an investor to make the call whether if that Forward EPS is viable or not. They (the analyst) can simply pluck a number out of some future revenue growth and market estimation/consensus which may tell you that, for instance in this scenario, PBB’s EPS will turn up to be RM10 soon! So at RM20 per share, you are actually getting a real bargain for it. Do remember that, it is OUR MONEY that we are investing, not theirs. They will still get a good bonus from commission from trading regardless of whether we are earning or not.

What is NTA?
Simply means Nett Tangible Asset per share. It means the company’s total assets minus off all intangible assets and liabilities divided by the total number of stocks.

To me, if the P/NTA or Price over NTA is too high, it means we are paying too much for the stock as well. Why is this NTA important? Let’s say we are buying a plantation stock, KLK for instance. We would want to know how much palm oil estate this company has. Asset is important when it comes to leveraging, mergers and acquisition and privatisation. So far, I’ve seen 2 companies getting privatised and both of their offers weren’t too far from their respective NTA.
1. Titan Chemicals offer was RM2.35, NTA was RM2.46
2. Eng Technology offer was RM2.50, NTA was RM2.21

If bigger companies are also looking at NTA before generating their offers, shouldn’t we do the same? Being a little paranoid is good I guess to avoid losses in the future which cause more heartache.

So, what should we do, if we couldn’t find a stock that matches these 2 main ratios? My personal advice, patience is very important. Continue to focus on the market and build up your war fund through saving.