Wealth Coaching 31st December 2017

I saw my friend post in a closed group for eCommerce and I privately messaged him. I asked how has he been and what sort of questions he has for eCommerce. I spent some time trying to answer him on the specifics of drop shipping business in terms of the challenges I experienced previously with my friends.

He shared that now he has two children and he wants to discover different sources of income to supplement his main stream of income. He has started online MLM and Shopify eCommerce store. In addition, instead of watching Korean dramas, he is spending time in front of his laptop thinking how to improve his sales. I applaud him for his attitude. I encourage him not to give up and continue to develop other sources of income. 

We chat using Facebook messenger to discuss about wealth and business.

I felt that I need to help more people to improve their lives, change their mindset, improve their financial literacy, create more businesses and crave their own destiny. This will make my life meaningful as well.  

Reflections 2017 and Plans for 2018

Reflections on 2017

This was the most turbulent year for me as I experienced retrenchment twice in a single year. Nevertheless, it was one of the most prosperous year. Looking at the start of 2017, JC Fund was standing at SGD 870k in total for cash and cash equivalent and at the end of 2017, JC Fund is at SGD 1,200k. I am estimating the capital gain (inclusive of dividend) to be about SGD 170k. Total return is approximately 19.5%. I took a very "kiasee" (afraid to lose) approach, trying to be conservative when everyone is aggressive. I hoard cash and re-balance portfolio. I don't think 2018 will be a stronger bull and I will be happy to consistently do a 10% return on JC Fund.

We have moved to our house for almost a year and we have fully redeemed the mortgage loan. It feels good to be debt-free as we do not have any stress on liability. At certain times, without the fear of a mortgage to pay for, I can raise my voice at my immediate bosses when I do not agree with them. Maybe that is the reason I will be seating at home in April 2018 without a job haha. Please do not follow what I have done unless you want to lose your rice bowl too. 

My priority towards work has also changed as I want to focus more on creating our wealth as we have our first pot of gold. I feel that I do not want to create assets for others by working as an employee. As an employee, I will be building their empire, making them wealthier at the expense of my time and health. 

Time is the most scarce element. We have limited time on this Earth. Please stop thinking linearly, exchanging time for money. Think non-linearly. Think leverage. 

My mentor approached me after knowing that I was retrenched on 22nd December 2017. He offered me the option to join him to start a hedge fund. The timeline is to apply for Registered Fund Management License in January 2018.

I am going to pump in 250k for working capital and the remaining JC Fund will be injected into the AUM. I will be one of the founder, taking the role of an investment analyst.

Currently we started discussion with fund platforms to understand in depth on the CAPEX and OPEX. My mentor has already started the process to understand various cost half a year ago. 

Next we need to draft out a compliance plan and business plan.

I spoke to my Managing Director on 28th December and he is a personal friend who brought me into the company. His uncle was the one who terminated me. He felt that this hedge fund business is feasible but I need to think of it the internet way where everything is free. He suggest the approach of “You make money then I make money.” 

1) make your business trustworthy- compliance and systems in place to safeguard the investors 

2) run the day to day business smoothly

3) bring in funding

4) continue to perform in terms of portfolio

5) set up processes to create a system

However, today on 31st December 2017, my mentor told me that his return this year is close to 30% after including dividends and his networth is close to SGD 4m. He is thinking of just retiring and manage his own fund. If that is the case, I need to rework my plans for 2018.

2018 Personal Goal

1. Improve investment skills 
• Read newspapers, books, articles, scientific/business magazines
• Key target for 2018 is to finish reading all my books
• Search and study companies on Qualitative and Quantitative 
2. Health - Exercise 
• Skipping x 300 x 3 times a week 
• 3 x rounds of training cycles x 3 times a week
• Chin ups x 10-20 x 3 times a week
3. Friendship 
• Meet friends to catch up for coffee

2018 Family Goal

1. Spend time to date wife 
• Have in-depth conversations
• Have couple time
• Plan short trips with wife to nearby getaways e.g. Penang, Bali 
2. Spend time with ah boy
• Teach and lead him
• Introduce him to play group
• Learn swimming
3. Family Dinners and Trips 
• Meals with Parents-in-law
• Trips with Parents 
• Monthly dinner with Family

December 2017 career update

I felt fortunate at times because I have met my mentor in army, he was the one who introduced me to the realm of investment. I lost my confidence in stocks in 2007 due to market crash, wiping out more than 40% in a single day. I continued to invest together with him, buying a lot of rubbish companies as we learnt. Fast forward to 2017, I have built a portfolio which gives dividend. I am always grateful towards him. This portfolio gives me the peace of mind on what happened today.

My boss sat down with me today and told me that I am being made redundant, I will start serving 3 months notice and my official last day should be end of March 2018. I did feel lost when the realization set in. I was walking across the zebra crossing when suddenly I paused and stand in the middle of the road. I felt lost. I was contemplating should I go for a cup of coffee, so that I can spend some quiet time thinking about my future. I returned home and sat on the toilet bowl (feeling down), with my palm over my face, thinking why must my boss break this news to me before Christmas and why I need to experience two redundancies in a year. I knew this will happen. 

Worst case scenario, my family can live on the dividend based on a simple lifestyle. I do not need to fret over expenses immediately. I can spend some time to think clearly what I really want in my life. 

Recently, I was reading this book by Robert Kiyosaki's "Guide to Investing". At first, I thought this is a book on investment but it is not. Overall, it is still a good read, teaching several theories which are true in today's context in terms of an abundance mindset of the wealthy. There is no security as an employee and true security comes in running your own business. When you are self employed or in the business quadrant, it is your own business and you have control over your expenses, taxes and income. In the business quadrant, you will get more relaxed when your business is self sustaining when there is a system. This free you up with more time and cash flow so that you can pursue the next project. 

I was toying with the idea of seeking new employment for another 5 more years, with our combined income, JC Fund should reach SGD 3 million in terms of net worth. We should be financially free by then. Now, I think I need to put then plan on hold and try different paths. 

Insanity is doing the same thing over and over again and expecting different results.

A message to myself, "Stop looking for employment and let employers squeeze you on your salary to reduce cost, this will not work. Sooner or later, they will use a younger and cheaper employee to learn what you know and replace you." 

Now, go forth and do not despair.  Be courageous and take bold moves in 2018.

ThaiBev + Sabeco

Recently, the share price of Thai Beverage dropped from 0.97 to 0.935 within 2 days. 

Vietnam Beverage wins 53.6% of Vietnam's largest brewer Saigon Beer Alcohol Beverage Corp (Sabeco). ThaiBev paid 109.97 trillion dong (S$6.5 billion or Thb 158 bn ) and through indirectly owned Vietnam Beverage will own 26.3% in Sabeco.

From previous post, Net Interest Bearing Debt to Equity Ratio 0.23 times in September FY17 will be increased to 1.5 times for FY 2018 after consolidating Sabeco, KFC Thailand and Myanmar Distillery acquisitions.  

The positives
1) Complete story of market acquisition - move strongly into Vietnam market
2) On its journey to fulfill its vision 2020 - Top company in F&B

The negatives
1) Overpaid for the acquisition 
2) Take on a lot of debt through all these acquisitions

Short-term wise, the market will continue to over-react, I believe the share price will test 0.91, follow by 0.89. 

All these price range provides buying opportunities.

The Value Investors - Lessons from the World's Top Fund Managers by Ronald W Chan

This is a very good book on value investing. The below is a summary of what I like to apply to my own investment philosophy and processes. 

From Chapter 1 - Free to Choose in Value Land - Walter Schloss

"I also learned that life is short, so you need to be confident in yourself and stick with what you like to do rather than do something you don't like but that will make you money"

Schloss' duty was to find stocks that were selling below their working capital - net net. The idea behind net net is to value a company based on its current net assets by taking cash and cash equivalent at full value then giving a discount to accounts receivable and inventory, and finally deducting all of the company's liabilities. The net net value is then derived by dividing the resulting sum by the total shares outstanding.

Schloss always like to find companies with no to low debt because debt complicates things. He also like to see whether management owns enough of company's stock to serve its best interest. You have to often have to keep track of management's actions, digging into the footnotes of financial statements to see if they are honest people.

"When it comes to investing," Schloss advised,"my suggestion is to first understand your strength and weakness and then devise a simple strategy so that you can sleep at night! Remember that a share of stock represent part of a business, and so you need to understand its financial before making a judgment. When you have made a sound decision, make sure you have the courage to stay true to your conviction and not let the market affect your emotions. After all, investing should be fun and challenging, not stressful and worrying."    

Chapter 2 - Once upon a time on wall street - Irving Kahn

His motto:" There is alway something to do. You just need to look harder, be creative and be a little flexible!"

"I understand that that net-net stocks are not too common anymore, but today's investors should not complain too much because they were only a handful of industries in which to look for stocks in the old days. Now there are so many different types of businesses in so many different countries that investors can easily find something. Besides the Internet has made more information available. If you complain that you cannot find opportunities, then that means you either haven't looked hard enough or you haven't read broadly enough!"

A voracious reader, Kahn devours everything except fiction, which adds little value to his search for investment ideas. In addition to reading several newspapers a day, he also read scientific journals and technology magazines regularly. A close follower of the latest news and trends, he has read thousands of non fiction books - most of which are heavily marked with his apt comments.

When hot ideas fall into his value territory during economic recessions and market corrections, Khan buys. "Real investors should never feel bearish because the time to buy value is when markets go down!"

Kahn believes that successful investing requires patience, discipline, and skepticism. An undervalued investments are not usually recognized by the broader market in the beginning, patience is required to see how they play out over time. Discipline is crucial because allowing others to suggest what stocks are worth breeds lazy thinking. The wise investor must be disciplined enough to do the hard work necessary and to look into the numbers before making any investment decisions. In this respect, discipline breeds independent thinking.

2. Don't depend on recent or current figures to forecast future prices, remember that many others knew them before you did.
3. Prices are continuously molded by fears, hopes and unreliable estimates, capital is always at risk unless you buy better than average values. 
4. Remember that many complex factors - such as accounting choices and the human problems within management and with large shareholders - lie behind accounting earnings
5. Disregard the competition at your peril - they are always attacking your company's trade position and earnings.
6. Don't trust quarterly earnings. Verify reports through the source and application statement. Figures can lie and liars can figure.

Chapter 3 - Thomas Kahn 

It's important to have capital working for you instead of you working for it!

Kahn's father taught him that if he wanted to control his own destiny, he would have to delay immediate pleasures and save and invest wisely for the future!

Investment is more of an art that involves having the right temperament and an understanding of companies.

He focuses less on current earnings and more on what earnings could be in a healthier environment in the future. He elaborated," Corporate health provides a much better margin of safety than good current earnings! We would rather invest in a company with a solid balance sheet, strong working capital, and little leverage than in a company with a lot of debt but strong earnings at present. In fact, we often favor companies that have near-term weak earnings or even no earnings but still have good corporate health because these types of companies offer better value.

Value investing is essential contrarian approach. It involves buying something that is currently unpopular and waiting for it to become popular again.  

Chapter 4 - William Browne 

Investing is a social science, investing is driven by people and people are not rational most of the time. You need to do is to find businesses that have high probabilities of surviving in the market. Then you implement a methodology to buy them at the right price so you can be more often right than wrong. Browne is about building an investment process. The ideals of the process are that it can be passed on, and it can be applied at any point in time and in different places because logic is timeless and universal.

In value investing, there is the danger of what is known as the "value trap" which occurs when a beat down stock is mistaken for a value stock.

Chapter 5 - Jean-Marie Eveillard

Every stock represents a business which has its own intrinsic value. To determine that value, you have to estimate what is a knowledgeable buyer would be willing to pay for the business in cash. It is important to understand that the intrinsic value is not an exact figure but a range that is based on your assumptions. Because you have to review your assumptions from time to time to reflect business and market conditions, intrinsic value fluctuates over time and it can go up or down.

"I always start off my research by reading companies' annual reports and then the footnotes to their numbers. I need to be satisfied about the integrity of the numbers and the honesty of the accounting before I look further. If there is any number that is incomprehensible, I throw the report in the wastebasket and move on.

The meaning of value - we prefer to use EV/EBIT because it introduces the balance sheet to the multiples. The main goal of the analysis is to find out approximately how much the business is worth in a reasonable range, if a knowledgeable buy were to take over the company. By using EV, we include both cash and debt in the calculation, which is better than just looking at market capitalization. Then with EBIT, we see how much interest the company is paying. Since we prefer companies with little to no debt, we expect minimal interest expenses. Then tax is also a concern because if a company pays a lower tax rate, then either the company is cheating the authorities or it is overstating its profits.

After the business is valued, the next step is qualitative analysis. This exercise focuses on the strengths and weakness of the business not from the standpoint of whether the company can increase sales or earnings over the next quarter or two, but from whether it has any sustainable competitive advantage over the next five to ten years. List three to four strengths and weakness of the business.

Permanent capital impairment is a pure mistake. It occurs when the value investor misjudges the strengths and weaknesses of a business and comes up with a deteriorating intrinsic value . Then the loss is not temporary but permanent. Hence, the value investor should cut loss, learn from mistake and move on.

Eveillard argued that gold has no intrinsic value , just as paper currencies, gold is a substitute currency because there is too much paper money and too little gold out there, gold can fluctuate, investors need to be careful even if their aim is to seek protection.

As a value investor, you can be bottom up all you want but you need to remember to pay some attention to the top down because government policies are having a severe impact on the health of the world's financial markets.

Chapter 6 - Francisco Garcia Parames

Parames read a lot, and never use investment screens to generate ideas. Our ideas come from reading newspapers, books, magazines, analysts' reports and even our competitors' investment holdings.

IT is not how sophisticated you are in your valuation model but how well you know the business and how well you assess its competitive advantage. This cannot be modeled mathematically but has more to do with the investor's own experience.

To determine competitive advantage, Parames determines whether a business will still be around in ten years' time and whether its business model undergoes frequent change. If it fulfills these two prerequisites then his evaluation process revolves around what makes the business special. For example, does it enjoy strong pricing power? Or does its industry have a high entry barrier to new threats? Although it is always ideal to speak to a business' management team, talking to its competitors, customers, former employees, and business suppliers is just as crucial.

Reducing risk is not about adding assumptions and complicating your investing model but about simplifying by investing in what you know best.  If you believe that a business is sustainable, then you should think like an entrepreneur and try to calculate how much the business is worth, as if you were taking it over. If it is selling at a discount, then you have found value.

Parames employs simple valuation multiples to evaluate his investments. He likes to use price to free cash flow ratio, which is a company's market capitalization divided by its free cash flow (FCF) that is the cash flow available for distribution to stakeholders.

We like to buy good quality business with FCF mutliples of less than 11 to 12 times. Our target price is usually set at 15 times. This means FCF yield of about 6.67%. Of course, we always play around with the sensitivity of our assumptions to come up with a comfortable multiple. For example, if a business is good, then we use 17 times, if it is cyclical then maybe 13 times.

Although this type of analysis sounds too simple to be true, it requires a prudent investor to come up with a reasonable estimate of the long term FCF figure before assigning a fair multiple to it. Thus applying such a method takes considerable skill and judgment.

The FCF method focuses on the valuation of a business. To determine its quality, Parames employ return on capital employed (RoCE) which measures the efficiency and profitability of its investments. He looks for consistent RoCE of 20%. It is a moving number and no ideal figure.

We quite frequently buy and sell our portfolio stocks but the names of our stocks don't change! We may move a stock from a 2 percent weighting to a 5 percent and then move another from 7 to 4 percent. When a stock has gone up 20 percent, it is 20 percent less attractive and so we mix and match our stock weighting to create a comfortable balance for the portfolio.

The greatest joy in investment is finding an investment that is undervalued!

Chapter 7 - Anthony Nut

You cannot compare dividend yields across companies and make a simple investment case out of it. You have to analyse the prospects of a business and see if they can grow their dividends over time. With growing dividends, you get growing income, which effectively allows you to reinvest your capital so that you can have compounding effects for your investments.

When attempting to identify investments, he looks for undervalued businesses with strong and sustainable cash flow. At the same time, he make sure that the businesses have a standing commitment to distribute income in the form of dividends, special dividends or share buybacks.

He applies Porter's five forces to his analyses. He will not overpay for growth. He like to see efficient balance sheets rather than worry if a company has no debt. He has seen business with high debt yet their balance sheets are efficient. It is acceptable to have modest debt at a reasonable cost.

Chapter 8 - Mark Mobius

By being humble, you are more open to new ideas and can be more objective in your investment research. With an open mind, you can accept that the world changes and that you must constantly lean new things to keep pace with it.

What keeps me going today is my passion for investment research. It allows me to research the world, which leads me to understanding the meaning of life. To be a good investor, you need to open your mind and be ready to accept whatever the world has to offer.

Chapter 9 - Teng Ngiek Lian

When it comes to valuation, we must first distinguish which growth phase a company is in, and then play with its upside and downside sensitivities. If it is in a high growth stage, then value comes from the company's prospects but if it is no-growth company, then value may comes from its share price discount. 

Value is relative. When I do quantitative analysis, I do not have strict criteria regarding the numbers, such as the P/E ratio has to be less than 10 times, return on equity to be over 15 percent or debt to equity ratio has to be such and such. I think a sensible investor has to take into account the characteristics of a business, the economic conditions, the investment environment, and valuations among different potential investments. Flexibility is the key and it requires experience. No objection of buying businesses at the forefront of the new economy as long a they show proof of generating real cash flow. Without real cash flow, good businesses are nothing but good concepts. We do invest in business with high PE if it is just a passing phase or short term mishap. We like to buy fallen angels or companies going through growing pains before their earning potential is developed.

If a stock in a portfolio drops, what concerns me most is whether it has fallen along with the broader market or whether it has fallen against its sector. It is natural to fall with the broader market, but if it falls against its peers, then this means the market has concerns about this individual company. I would drill right into the reasons and find out why. Sometimes , a stock gets sick for different reasons. If it has only caught a cold then it may be an opportunity to buy more and average out but if has terminal cancer then I have no hesitation in cutting the stock right away. Because my strength lies in evaluating businesses, I am not affected by the noise in the market. What I care about most is whether the drop is due to normal business issues or business structural changes.

Chapter 10 Shuhei Abe

In addition to focus, an investor also requires vision. You need to be visionary in times of opportunity or crisis because you cannot analyse the world in a linear fashion. While you have facts, which are based on the past, you need to visualise the consequences, which will take place in the future. The scientific or quantitative aspect of investing is a skill set that you can nurture.

When an idea comes to you, you need to brainstorm, to be creative, think about the past and future and test your thesis. Then you need a systematize way to analyze the potential worth of the investment and how much return you can generate from it. I will try to find out how much it will worth two or three years' time. We will test assumptions, play with sensitivities of our assumptions, and set a target for the investment.

Chapter 11 V-Nee Yeh

In many situations, economists have proposed good ideas for how things can be done but political constraints as well as different political motives have always ruined these good ideas. Although the world has become more uncertain and global markets have become more interconnected than ever before, market volatility is really just a change in degree rather than ever before, market volatility is really just a change in degree rather than a fundamental change. in this respect, I think the value investing methodology is just as pertinent and relevant to day as it was when I started my career. 

The essence of value investing, to me, is the development of a sense of fairness and integrity because, ultimately, you are looking for a margin of safety by starting off from a point of conservatism. If you do not start off conservatively, you can have a high margin of error which deviates from being a true value investor. If you look for the downside first, you tend to be more prudent, and this quality helps you form your own opinion rather than following the crowd. Then, when you are not easily swayed by others, you gradually gain a sense of fairness, not just as an investor, but also as a person. This school of thought really helps to develop the right temperament, which indirectly cultivates your investment process and strategy.

Chapter 12 Cheah Cheng Hye

The two partners quickly settled into well-defined roles. Cheah focused on investment analysis and stock picking whereas Yeh concentrated on fund raising. "There is a big difference between being a good analyst, a good fund manager and a good chief executive. Just because you have the skill to analyze investments does not mean you have the killer instincts or decisiveness needed to pull the trigger as a fund manager. Even if you are good at both that still does not mean you can raise capital and run an investment fund properly.

We have proven that we can beat the market as a team so maybe our process is repeateable and transferable.

In formulating investment ideas, Cheah and his team look for the three Rs: the right business operated by the right people and selling at the right price. In the process, they think as contrarians and divide the Asian stock universe into three categories:

1) Undervalued and out-of-favour stocks

2) Fairly valued and highly recommended stocks

3) Overvalued concept stocks

Our main job is to invest in stocks in the first category and perhaps in those that  fall between the first and second. Sell side analysts tend to recommend a lot of Category 2 stocks, which we are always skeptical about. As for Category 3, they are always recommended by the media and taxi drivers. We aim to buy Category 1 stocks consistently and wait for them to become Category 2 stocks. When they begin to approach Category 3, we sell.

Cheah elaborated," We are increasingly focused on qualitative research rather than quantitative analysis because in Asia, stocks that are selling cheap are likely to be in a lousy business, that is, they are nothing but cigar butts stocks. Even if bought at a good discount, these businesses can still go under because they lack sustainability and competitive advantage. They are now focus on business strength and core competence.

To outperform the market, we must minimize our losses on mistakes by constantly monitoring our portfolio and distinguishing the good and bad stocks within it.

As the leader of the company, I must constantly learn new strategies and ideas to take the company to the next level. Not only do I have to consider the structure of the company, but also how we can evolve as a whole in line with the broader macro environment.

As a diehard bottom up value investor, we focus on businesses. But at my level, I must also pay attention to top down factors, such as the state and outlook of the economy so that I can guide my team in asset and portfolio allocation. For example, if you know the economy is softening, you need to increase your cash holdings or at least allocate your positions to more defensive sectors. You cannot simply focus on a company and ignore the surrounding environment!

Cheah is a ferocious reader who never stops learning.

Conclusion

All in all, investing should be fun and challenging, not stressful and worrying. In an uncertain world, the practice of value investing is a way to maintain a peaceful mindset. By focusing a margin of safety, thinking for the long term, and having patience, the goal is to achieve investment stability over time. In the process, investors may well achieve happiness and satisfaction in life.

JC Options Fund - December 2017 update

I am using options to create another stream of income through premium income and capital gain using buy call.

It has been a roller coaster trying to sell put SP 30 on BZUN, I sold 5 put when it first started to drop and another 5 put to reach average premium of 1.2 per contract. The share price drop below 30, reaching 28 at one point. When the share price comes back up on 13th December, I close the trade and pocket USD 1,050. 

I also sell put 5 contract on Chinese Tinder :) 

My target is to maintain USD 2k per month and I am satisfied. 

JC Fund 2018
Dividend Income (Passive) say SGD 3k per month (conservative)
Option Income (Active) USD 2k x 1.35 = SGD 2.7k per month
Rental Income (Passive) SGD 0.5k per month
Planning to start - Tuition Income (Active) SGD 1k per month
Target Additional Income SGD 7.2k

I do not think my day job can last for much longer. There will be some turbulence in Q1 or Q2 2018. 

Asian Financial Statement Analysis

Asian Financial Statement Analysis is a book written by Tan Chin Hwee and Thomas R. Robinson. This is a highly recommended book which lays out proven framework for detecting irregularities in profits, financial positions and cash flow. I wanted to read this book because I found a company listed in HK that has fabulous financial results yet the stock price keeps dropping. As I scrutinize the numbers, they look too good to be true. Therefore, I want to know what are the key things to look out for in financial statements so that I can be better informed before I invest in the company.

There are a few categories for accounting scandals. 

1. Overstating Earnings
2. Overstating Operating Cash Flows
3. Overstating Financial Position
4. Corporate Governance/Related Party/ Auditor Issues

Income statement can be manipulated by:
1. Aggressive Revenue Recognition
Most of the cases of aggressive and fraudulent revenue recognition result in large increases in receivables.
2. Understatement or Deferral of Expenses
Understate expenses or losses either by avoiding reporting them altogether or deferring them to a later period.
3. Classification of Non-Operating Income
Inappropriately report non-operating gains as part of operating revenues
4. Classification of Non-Operating Expenses
Another option is to move expenses down the income statement and classify them as a "special" or "extraordinary" loss to make normal operating earnings look larger.

Overstated Financial Position
Excluding both assets and liabilities from balance sheet is the easiest technique to employ and current accounting rules permit some ways of achieving this result. Understating assets also improves some financial ratios - most importantly Return on Asset.

By leasing the asset using an operating lease, the company gains use of the asset without reflecting it as a liability on the balance sheet. This is off-balance-sheet financing, which results in better return on asset and debt to equity ratio versus what would be shown if the asset had been purchased and financed.

Another method of understating both assets and liabilities involves shifting accounts receivables off the balance sheet in a borrowing transaction.

A company may understate liabilities without having an impact on asset.

Overstating Valuation of Assets on the Balance sheet
PP&E are initially recorded at cost upon acquisition. Subsequently, company can choose to measure the asset under cost model or revaluation model. Intangible assets are initially recorded at their acquisition cost. Subsequently, the company may report using cost model or revaluation model.

The most interesting category is agricultural assets - living plants and animals. Generally, these assets are required to be recorded at fair value less expected costs to sell during the growth, production and procreation period. Fair value would increase over time as crops or cattle grow. Gains and losses from changes in fair value over time are reflected in net income and retained earnings For fair value, it is easier to manipulate and you must assess the likelihood that this is happening.

Checklist of Warning Signs and Analysis Techniques for Earnings Management   

Allowance for Doubtful Accounts

• Examine the allowance for doubtful accounts and bad debt expense relative to accounts receivable and revenue over time. Look for irregular patterns
• Examine the level of actual bad debts over time relative to the company's estimate in prior years.

Deferred or Unearned Income

• Look for accounts labeled deferred revenue or unearned revenue. 
• Consider whether advance collection is normal? Does deferral make sense?
• Examine the balances from ear to year to determine if their use increased or decreased revenue for the current year.
• What would the company's revenue and profit have looked like without this deferral?

Accrued and Deferred Taxes

• Are there significant accrued expenses relative to net income, and do they fluctuate by large amounts?
• Are there any deferred expenses listed as an asset on the balance sheet?
• Are there any unusual assets or unexplained large increases in assets, particularly relative to the increase in revenue?

Deferred Taxes

• Does the company's net deferred tax impact on net income fluctuate from a positive to a negative impact?
• Does the company have a significant deferred tax assets? Is it plausible that they will be usable in subsequent years?
• Did the company establish a valuation allowance for deferred tax assets, and has it fluctuated in value over time?

Contingencies and Reserves

• Scrutinize disclosures both on the balance sheet and footnotes for
• Contingent loss
• Contingent liabilities
• Reserves
• Derivative liabilities
• Similar terminology
• Consider whether the company appears to be creating a cookie jar reserve.

Cash Flow Games

Typical cashflow games are aimed at increasing either total cash flow or the subtotal for operating cash flow since that is a key indicator of value for a company.

• Aggressive encouragement of customers to pay their balances sooner than required.
• Sale of accounts receivables in a factoring arrangement
• Delaying payments to suppliers, employees and others. 

Companies can engage in activities that convert any borrowing from a financing cash flow into an operating cash flow. 

A common method to boost operating cash flow is to misclassify normal operating expenses as capital expenditures. This boosts operating income and operating cash flow.

Wilmar

Wilmar's business activities include oil palm cultivation, oilseed crushing, edible oils refining, sugar milling and refining, manufacturing of consumer products, specialty fats, olechemicals, biodiesel and fertilisers as well as flour and rice milling. It is an integrated agribusiness model encompassing the entire value chain in agricultural commodity business. It has over 500 manufacturing plants and an extensive distribution networks covering China, India, Indonesia and 50 other countries. 

A quick overview on the Income Statements, Gross Profits have been positive and stable at around USD 4,000 million level. Interest expense in 2016 has decreased, the trend over the years show a reduction. However, EPS has decreased over the years.

In the Cash Flow Statements, investment in CAPEX is decreasing over the years. Free Cash Flow is consistent. There is a need to wait for the investment in CAPEX to be reduced, the company will be able to increase the earning power. CAPEX as a percentage of sales has seen the ratio decreasing over the years. Net Cash Flow from operating activities in 9M2017 is USD 1,559 million compared to USD 1,248 million, producing a positive free cash flow of USD 1,232 million. Inventories reduced to USD 6 billion in 9M17 from FY16 USD 7 billion, lower stockpile following end of festive season especially in China.

The dividend growth over the years are consistent. If based on $0.07/share, the yield will be 2.25% based on S$3.10 purchased share price. Payout ratio has been increasing over the years.

Debt to Equity ratio in Sep 30, 2017 has decreased to 0.72 from 0.81 as at Dec 31, 2016. Adjusted D/E has reduced to 0.30 for Sep 30, 2017 compared to 0.35 for Dec 31, 2016. 

NAV per share as at 30 Sep 2017 is USD 2.43, I am buying at USD 2.29 which is lower than NAV. 

The key moat of Wilmar is economies of scale of the business. It has total planted area of 237,212 hectares. The entire supply and logistics chain enables cost savings which other competitors cannot compete with. This is the moat I like about Wilmar.

I do not like the cyclical part of agri-commodities. Especially the business will be affected by weather and geopolitical reason.

Portfolio Movement in December

Recently, I have started to accumulate more shares.

I have bought 2,000 shares of L'occitane as I will like to observe how Q4 will affect the revenue. 

I have bought 5,000 shares of SGX at SGD 7.70 and I still don't understand why I cannot wait for a lower price. 

I have bought 10,000 shares of Wilmar at SGD 3.10. 

On Comfortdelgro, acquiring 51% of Lion City Rental (LCR), LCR becomes a subsidiary of Comfortdelgro and LCR's financial results will be incorporated into future CDG's results. I know that both Uber and Grab are burning cash. LCR owns approximately 10,000 cars. Assume SGD 5,000 for capex on each car, this will account for SGD 50m on future capex. With 10 years of depreciation and capex, next few years of financial results will be dragged down.

I was estimating intrinsic value at about SGD 1.90 and now with this acquisition, need to forecast future earnings. Let's take a look at the latest earnings post acquisition. 

I have bought 2 call options on GLD. I am trying to create a 5% GLD 5% IEF 10% TLT for portfolio purpose.

Financial Freedom and Financial Independence

Other than Thumbtack Investor,I also read investmentmoats and in one of the recent post is on Coasting Financial Independence (FI). From one of the post, it mentioned about the 10 stages of wealth. As we are frugal in our context, we have already achieved stage 7 to stage 8 of wealth through investing, savings and other source of passive incomes. 

Stage 7 is Financial Security which is defined as Wealth Asset's Annual Cash Flow covers Basic Survival Expenses. During the weekdays, we spend very little on lunch and usually eat dinner at home. We do not sleep using air condition. They are only used on occasions. We stop driving 3 years ago, taking 99% of the time via public transport. There are a lot ways we try to reduce our expenditure. Hence, our Basic Survival Expenses are low.  

Stage 8 is Financial Independence which is defined as Wealth Asset's Annual Cash Flow covers Current Annual Expenses. In 2017, with special dividends, cash flow is close to SGD 100k. This is one-off event and with SGD 100k, we will definitely be in Stage 8 with huge margin of safety. 

Coasting FI is in a good financial position that you have less impetus to aggressively push your human capital to maximize the amount you can earn. In our context, I will like to move out from the industry and pursue other interest.

I love Saturday afternoon when I can spend time reading books. I am reading this book <<现金流为王》by Starman. Just side track, I love to visit bookstores in Taiwan and Hong Kong. They have a lot of local authors who write on investment and business. In the book, it mentions one important factor which speaks to me, if we view financial freedom as our sole purpose in life and remain in a job which we don't enjoy, it will be unhealthy for our personal well being. The journey towards financial freedom is more important than the end goal itself.

Starman explained that he achieved financial freedom at a very young age. He decided to call it a day and retired. He will take his time to have breakfast, bring his daughter to school, read newspaper, swim and gym in the afternoon, bring the daughter back from school and have dinner with family. Within 2 weeks, he felt this was too boring as all his friends are working during day time. He went back to pursue new business ventures.

I learn that I should not just focus on achieving Financial Freedom as it is just a financial  concept. Financial Freedom/Financial Independence allows you to have freedom to choose. I believe what you can accomplish during your limited time here is more important than Financial Freedom. How many lives can you improve?  How can you create more value for others? What are the big problems you can solve to make this world a better place?

Happiness is to be contented with what you have. I do not wish to commute long distances to work, I do not wish to fly so often for work, I want to come home everyday to have dinner with my family.

I sold all my watches (rolex and tag) and happy with my casio. I do not have a car or a condo. I am debt free and free to choose. 

Reflections after reading the book Mastery

The below is a personal reflection after reading the book Mastery and does not mean I am a master. I am far from being a master in investing. It documents how I can become better in investing.

Mastery is the secret to greatness in a field. Mastery is a function of time, intense focus and relationship through mentors. "Every activity of man is amazingly complicated, not only that of the genius but none is a miracle" - Friedrich Nietzsche.

The first part of Mastery is dedicated for us to discover our true calling. We possess the unlimited potential but yet we fail to fully utilise our potential. I feel that till this age, I have yet to fully harness my talent. In order to answer to our true calling, I believe you need to listen to your inner self. Your inner self will tell you how much you love this. If you are passionate about this, you can eat and breath every seconds doing the same thing over and over again without fail, I will think this is your calling. For me personally, I am passionate about investing in equities. Investing in equities is owning a part of a company. 

I have visceral reactions related to it, I am ever curious about investing. I want to learn more about investing, I want to understand how it works and how I can be a better investor. I have this tremendous hunger about investing, I have bought a library of books on investing and engross in reading them. I feel alive when I am looking at financial reports, I enjoy studying about the different industries, business strategies and management. When I find an interesting company, I will feel intrigued to dig deeper to see what competitive advantage the company has. I have been doing this every single free evening after work and on weekends as well. It is a journey for me.

I constantly remind me to avoid the false path which is to chase money, fame and glory. Investing is to grow your retirement sum, yes it is about money but the more important aspect is the process and strategies to invest. To me, it is a very fun game, money is just the by product of the process. 

Through the process, I realise my personal weakness through investing process, it helps me to see myself clearer. I am too rash in making investment decision and not patient enough. Through understanding my weakness, I aim to act on them and try to improve my investment skills.   

In order to achieve mastery, I need to undertake apprenticeship to become better than yesterday me. There are a few steps to undertake. Firstly I need to practice deep observation, I do not need to impress anyone. I just need to stay humble. Furthermore, I need to work on acquiring more investment skills. Natural learning is through observing and imitating what fund managers are doing. I can learn from reading investment books. I can watch investment videos to learn from them. After acquiring the knowledge, I need to put them to practice and this involves experimentation. Investing is through trial and error to test your investment theory. It is through mistakes then I can learn from them to sharpen my skills.

I have planned a few strategies for apprenticeship. I value learning over money, it gives me the satisfaction to grow. I have a child like attitude towards learning, I am like a blank piece of paper, trying to absorb all the knowledge. I trust the process by believe in failure and negative emotions are part of the process. Losing money has more emotional impact than winning money. I made a lot of stupid and careless mistakes which are painful, especially when you need to cut loss by selling the stocks, seeing money disappear into thin air. However, I have grown numb to losing money and realise this is part of the process. I have moved towards resistance and pain, trying to overcome my personal challenges. I will rather try then wait for the perfect timing. Through courage and venturesome, I have learnt alot about investing (more than yesterday's knowledge) and about myself.

I believe in finding a mentor to speed up my learning curve, if I do it by myself, I will take 10 years. Whereas if I have a mentor, I will take 5 years of less. Life is too short and our energy after work is limited. I admit learning through books, practice and occasional advice is time consuming. I (used to) have a mentor and the emotional relationship with mentor is crucial. The mentor needs to feel emotionally invested in progress and in return need to be useful to the mentor. In order to get a mentor interested, need to see things through his eyes. However, my mentor has moved on and he wants to start his own hedge fund. Until I invest in his hedge fund as an investor, he feels that our interest is no longer aligned and he will not advise  anymore. There is a time when you need to part with your mentor and spread your wings. The time is now.

I am still exploring to seek a higher goal of helping others to achieve financial freedom as well through investing. I need to hold various investing paradoxes as well and feel that it is ok when I have doubts and uncertainty about my investment strategies. I need to change some of my perspective and look what is missing in the entire equation. 

A brand new year is coming and I am turning 36, the feeling that I have endless time to complete my life calling has an insidious and debilitating effect on my mind. I need to create a sense of urgency, it is fight or DIE. I need to step on the next gear and pressurize myself to grow and breakthrough in terms of my investment skill to achieve Mastery.