Wednesday, April 9, 2014

5 Years of Challenger Technologies - My Most Rewarding Investment Journey

In 2009 I was pretty new into value investing, having read a few Warren Buffett related books I followed his advice and started reading annual reports beginning from companies starting with A!

When I came to C I stumbled across this IT retailer called Challenger Technologies, I have been to their retail stores before and I was surprised that they are a listed company.

This was what their numbers looked like

I couldn't help but notice their explosive revenue growth, as revenues more than doubled from 2004 to 2008, profit after tax also nearly doubled. 2008 was the global financial crisis but Challenger stood well despite a fall in profits (many companies were doing a lot worse), I felt it had a defensive business selling needs instead of wants (everyone needed IT gadgets, funny and weird isn't it?)

Other things that I liked was the high return of equity (20-30%), I kept reading about how Warren Buffett likes high ROE stocks but at that point I still didn't understand it that much. However I also found out that Challenger had Zero Debt! It was a net cash company with no long term debt (meaning low risk) and was selling for only 5 times earnings!

Although I knew that IT retailing was a highly competitive industry (I was a nerd, I knew Sim Lim Square, Courts, Harvey Norman etc). The stock was cheap and the business was within my circle of competence (I also studied electronics and computer engineering... well nerdy me liked IT stuffs). So I ended up buying some shares of this little company.

As the years progressed, its results improved and I slowly accumulated more shares of Challenger over the next few years and steadily built up my position. At some point Challenger was almost 80% of my stock portfolio!(Yup like a true poker player, I didn't believe in diversifying. When you pick up Aces you bet all your $$ and pray it holds up. A true gambler puts $100 on AA rather then $20 each on AA/KK/QQ/AK/AQ)

Over these years I bought it from as low as 5 times earnings and paid as high as 10 times earnings. Today it trades at about 12 times earnings (I guess more people are taking note of it thus the stock price moving in closer to its fair value)

5 years later here are the results.

                           (do note that in 2009 they gave a bonus issue of 1 share per 2 owned)

The trend continued as Singaporeans from kids to old folks picked up on IT products, Challenger members grew from 200,000 back in 2008 to 500,000 today! Over the last 5 years, revenues doubled again but profits grew slower but still a decent 1.5 times (this is due to the more intense and competitive IT retailing land scape which lowered everyone's profit margins. As you can see net profit margin fell from 5.8% to 4.5%)

ROE was great over the last 5 years which averaged above 30%! Today its balance sheet has become more solid than before, with ever more surplus cash (still net cash position and no debt at all). Of its NAV of 17 cents most of it is still cash which would come in very handy on a rainy day (say another global financial crisis or crazy recession)

Over the last 5 years, its stock price gained a whopping 400%!!!

In the beginning I only had a very small position but I was fortunate to keep believing in the company by adding more shares year after year, its been the best ride I ever had and I do hope the next 5 years will be good too.

By sharing this story, what I'm trying to say is that value investing works!

Look for great businesses that you understand and is within your circle of competence, has honest management that have a good track record and financial numbers that passes your standard.

Lastly if valuations are cheap with a good margin of safety don't be afraid of pushing all in.

Monday, March 3, 2014

6 Reasons Why You Should Buy The Index

1) Because Warren Buffett Says So!

"The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal."

2) Because Indexs are Low Cost and Unit Trusts are High Cost

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."

If you purchase the STI ETF you are only paying 0.30 of a percent each year as compared to 1-3% for Unit Trusts.

3) Even Warren Buffett Himself Has a Hard Time Beating the Index

Take from his recent letter to shareholders, over the last 5 years the Index has outperformed him 4 times! However Warren Buffett is still a master that I respect, considering that his long term returns are twice of the index. Sadly I know I'm not him and I can never produce such amazing results.

4) The Index Provides a Decent Return

Over the period from 1965 to 2013 the S&P gave investors an average annual returns of about 9.8%, that's great! Looking at our local STI ETF, it gave about 7.89% annual returns since 2002 which is pretty decent too.

5) The STI is Cheaper than the S&P 500

The STI is only selling for 13 times earnings, which is cheaper than the S&P which is selling for over 17 times earnings. The dividend yield is getting close to 3% which is also higher than S&P's 2% yield.

6) Because its Easy to Invest in the Index

You don't have to spend a lot of time analyzing the business nor the economics, the time saved can be well spent doing the things you love.

Over the last 5 year the S&P 500 gained over 170%, that's about 25% compounded returns.

When will this bull end? I really don't know. But as long as the music keeps playing, we dance.

Sunday, March 2, 2014

Warren Buffett's Annual Letter to Shareholders

To read the complete letter please go to

I have always been a fan of Warren Buffett and his annual letter is completely free yet priceless.
Here I leave you with the most valuable part of it, I hope you will enjoy and learn as much as I did.

Some Thoughts About Investing

Investment is most intelligent when it is most businesslike.
— The Intelligent Investor by Benjamin Graham

It is fitting to have a Ben Graham quote open this discussion because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small non-stock investments that I made long ago. Though neither changed my net worth by much, they are instructive. This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath than in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me
$280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and
potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the
company’s CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a bubble had popped – this one involving commercial real estate – and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

Income from both the farm and the NYU real estate will probably increase in the decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.

I tell these tales to illustrate certain fundamentals of investing: You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”  Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake. If you instead focus on the prospective price change of a contemplated purchase, you are speculating.

There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time.
Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small investments and an investment in stocks. Stocks
provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations
placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power. I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal. That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory
results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long term results than the knowledgeable professional who is blind to even a single weakness.
If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm. My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.

Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.

In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek
letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. (The original 1949 edition numbered its chapters differently.) These points guide my investing decisions today.

A couple of interesting sidelights about the book: Later editions included a postscript describing an
unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and – brace yourself – the mystery company was GEICO. If Ben had not recognized the special qualities of GEICO when it was still in its infancy, my future and Berkshire’s would have been far different.

The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington and Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days. I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

Thursday, February 13, 2014

Comfort Delgro FY2013 Results

I mentioned about comfort delgro last year and it turned out to be one of the top 5 performers among blue chips last year. For the full year of 2013, we saw earnings per share improving by 4.5% and revenues going up by 5.7%. A defensive stock with solid growth indeed! I think their results are probably in line with most analyst's expectation. I personally do believe they should have no problems growing earnings at 3-5% annually, along with paying half or more of their earnings as dividends.

Let me repeat Warren Buffett's quote, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Comfort Delgro, like Challenger Technologies are very good businesses that you wanna hold for long term. They have the same basic characteristics of constant EPS and revenues growth. Also looking back in history, these companies have also been profitable every year in operation even in years of a major crisis or recession.

Comfort Delgro currently trades at around 15 times earnings and 3.5% dividend yield. As with the case with Challenger, I think both of them are fairly priced. Challenger deserves a lower PE multiple of 12 times because its a small cap stock and has much less liquidity.

Tomorrow OCBC will report their full year 2013 results. I had previously mentioned about OCBC a couple of times, I would like to reiterate that it currently trades at only 11.5 times earnings, a solid blue chip with also a long record of growing earnings for shareholders and rewarding them with healthy dividends (estimated dividend yield is about 3.5%).

If you have been following my blog for sometime, you will notice that these are the kinda companies that I like to own. To summarize their characteristics.

1) Constant growth in Revenues and Earnings (5% or more is good enough)

2) Pays a decent portion of earnings as Dividends (so that you know the earnings is real cold hard cash, not just accounting earnings like accounts receivables)

3) Long track record of profitability even in times of recessions and bear markets (5-10 years at least, so that you can read their annual report to see how the business fared during 1 down cycle)

4) Management that has integrity (this one is really hard to explain, I will leave it for another chapter)

Let me end by giving you another quote

"In our view, though, investment students need only two well-taught courses-How to Value a Business, and How to Think about Market Prices. Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business who's earnings are virtually certain to be materially higher five, ten and twenty years from now." -Warren Buffett

Wednesday, February 12, 2014

Challenger Technologies FY2013 Results


FY2013 revenue grew by 14% to $385.4M and gross profit margins remained consistent compared to FY2012.

FY2013 net profit increased by 6% to $17.3M. The percentage growth has not been as much as revenue due to higher expenses.

Proposed final dividend per ordinary share of 1.42 cents gives a total of 2.52 cents of dividend per ordinary share for FY2013, which is
50.8% of total Group’s net profit attributable to equity holders of the Company

My view:

4Q was pretty bad as earnings fell 6% from 1.40 to 1.32 cents, historically 4Q tend to be good so I wonder what when wrong.

Full year earnings came to 4.96 cents which was close to my expectation of 5 cents. Dividends improved by 12% so 2.52 cents is pretty decent.

I think higher rentals and staff cost would likely to continue to put pressure on retailers such as Challenger. For FY14 I would be fine if they can maintain earnings or grow it at 5% or so. Currently its trading at 12 times earnings and 4% dividend yield, as such I think Challenger is fairly priced.