Somebody to Love

Video wasn't that good but the song is.

~deyao~

The Great Opportunity

An Arsenal fan would tell you it has been forever since we last saw any silverware. Season after season with a few cup semi-finals and finals along the way, it has been the story in short. For the past few years, having even a little sniff at the League would be an overstatement. Yes we have not been close enough to make a decent challenge. The memories come pilling in when we were winless after Eduardo had that horror injury. We were top of the league on that day, but we surrendered everything as if we were held at gun point. Then came some form of redemption earlier this year when we were in two cup finals. We were beaten quite comprehensively by Chelsea and Man Utd. But they were the team with all the good foundations and stability and the result was predictable. Arsenal just got back captain Fabregas and the now departed Adebayor for a handful of games before the encounters, and when it came to defining the best to second best, Arsenal were declared the pretenders.

Summer's gone and we are well into the new season, we lost two of our top players and only brought in one replacement. When a person sees such "progress" at the beginning of the season, there would be more reasons to write us off. "In Wenger we Trust", even I was getting a bit agitated by the lack of signings and was starting to lose confidence. However, I knew the team we have was a lot stronger that what people would have imagined. Without the injuries to this current team, we might have saw a much stronger campaign last season. I looked into the team again, Fabregas,Diaby,Van Persie, Arshavin, Eduardo, Rosicky, Nasri, Walcott, Bendtner and a few that are not far away. I saw each and every one of them being signed and playing their first senior games . Not all of them are world-class as people would put it, but they formed a team which is like no other. When you watch this group of players with that much of talent waiting to explode on the training ground everyday, you just couldn't betray what you just saw. Thats Arsene Wenger for you. He believes that the waiting is over and he just might get it right this season.

Crossing my fingers on more injuries after Van Persie's, if the team stays fit, the challenge this seasons turns a lot more serious. We are in a pretty good position right now, but November and December will be the biggest acid test on our resolve. We've lost points to Man Utd and potential top four team Man City. We've passed a somehow large test of Spurs but it comes to Chelsea in the fortnight, who are regarded as the biggest threat this season. We also got Liverpool who must return to the top four spots in a hurry. With Ronaldo departed, Man Utd are having a bit of a problem trying to recreate what he has done. The star-man Rooney desperately needs support and they need something in January or else they just might find themselves in an uncomfortable position.

Chelsea are the top team with all guns blazing, but they just might be slightly battered for the game against Arsenal. Terry, Lampard and Drogba might miss the crucial tie. Arsenal are battered as well, missing Van Persie and Bendtner. So who comes out on top of "Battle of the Battered"? Chelsea are still not short of firepower with Anelka, Ballack Joe Cole, Essien, Malouda and Kalou. Arsenal have the rest of the team back. A win would be a boost to both teams in a very significant way, Chelsea extending their lead on top or......a new leader on top of the league? The game is worth 3 points like any other game, but both teams are desperate to get one over the other. Both managers have everything to prove especially Wenger. With the position both teams have put themselves in this season, fans might get to see their team reclaim the title back to London. A win would give more than just a morale boosting or bragging rights, it could that little stepping stone along the way to once again bring back the trophy Chelsea has not seen for 3 years and Arsenal for 5 years!

Chelsea inflicted the heaviest defeat on Arsenal in the new stadium last season and you bet Arsenal would have every incentive to win this one.


~deyao~

Risk and Diversifying

Is investing risky? The answer is yes if something is anything but risk-free. People come out saying investing in certain investments are risky, but why would they consider it risky? I will be using shares as an example today to explain risk. It is very clear that when we take higher risk, there is possibility we will be rewarded accordingly.

In general, why would we consider something risky? It may be because its outcome is very uncertain, hard to predict or even out of our control. This is exactly the same when you evaluate shares. We think it is risky when it is hard to make a good prediction that comes out right most of the time.

Okay, I have to use some financial terms, but I will put it in the simplest way. There are two types of risk a company/business faces, internal and external. It's pretty common right? Which risk is harder to evaluate? I would say the external risk because the external factors are the ones we lack control of. Internal risk are called firm-specific risk (only that particular firm faces that risk) and external risk are called systematic risk (all companies will face this risk).

To evaluate risk is not complicated, if you have some accounting knowledge, you've already know more than half of it. In accounting we use ratios to determine the well-being of a company. We use profitability, liquidity and solvency ratios. First of all, what is the worst thing that can happen to a company? I would say going bust or bankruptcy. How probable is a company going to face the worst? Well, we use liquidity ratios like current ratio and quick ratio. As most people would know, these ratios tell us whether a company is able to pay off its short term debts with its liquid assets. If it is yes, then the worst is unlikely to happen short term.

Secondly, can the business meet future obligations like interest payments in the long term? Well we use the interest cover ratio. Technical definition is"Measures the ability of the company to meet its fixed interest obligations. It equals the earnings, before interest and tax, divided by the interest paid". Usually there is a rule of thumb about 5 times as a comfortable level.

Then we also see whether a company is highly geared/financed by debt? Well it is quite obvious a company with high gearing faces a higher risk of repayments. And if the company defaults on them, they might be wound up/declared bankrupt. So there is the use of the debt/equity ratio, which calculates what proportion of assets are financed by debt/borrowings. There are many good companies which are highly geared, so it no real indication whether it is a good company or not. And we also have the earnings stability ratio to tell us whether earnings are stable enough to pay off debts and maintaining the level of dividends . Many shares are priced based on their dividends so any fall in dividends may indicate the company may not be performing well (assuming the same dividend payout percentage). And that's all for firm-specific risk. Based on the company, independent of external environment, is the company risky to invest in? Those are the few ratios that will tell you that.

And now, an equally important part, the external risk/systematic risk. Economic conditions make up most if the systematic risk any business faces. From inflation, commodity prices to consumer spending. So since every firm faces systematic risk, will it be sound to ignore it? Of course not. Everyone IS affected, but the magnitude of that effect varies across companies. In a recession or boom, the healthcare sector thrives , but does this happen to the energy sector? No, energy sector usually is cyclical which means it fluctuates according to economic activity. So is the healthcare sector less risky than energy sector? If you look at the sector as a whole then YES!. How do we measure it? The most common ratio is Beta. It "Measures the stock prices sensitivity to fluctuations of the market as a whole. A beta greater than one indicates greater volatility, and a beta of less than one indicates lower volatility, than the market". So in short, the higher the beta, the higher the risk. If the beta is 1.2. Then it means the stock is more responsive to market conditions than normal. If the market rises by 1%, then on average that stock will rise by 1.2 %.

So if an investor wants to achieve above average returns and has high tolerance for risk, a high beta stock would be ideal. If a person is risk adverse and just wants to protect capital, the person should choose a low beta stock/investment. This is also why people buy gold and silver, these metals have beta close to zero and thereby the investor is unlikely to lose any money in any market condition.

You want a higher return, then you need to undertake more risk. It also means you need to be able to withstand large swing in prices. If you can watch your holdings fall by 50% and not panic, you are ready to invest . This was one of Buffet's quotes. But think about this, if a stock has a high beta, when market conditions are poor, you get to buy it lower than it should be, and when things turn better, you get to sell it higher than it should be (compared to a stock with beta of 1). In the long term, historically, stocks head upwards, and if you are a long term investor, there is every reason you should be holding/buying a high beta stock.

In my case today, I try to achieve an above average return. This means I take a more aggressive approach. I only buy up to 5 stocks which I think are the best through my analysis. I believe if you want to outperform the market, you need the best firms in your portfolio. You can pick the best 10 or 20, but why not best 5 ? This is just a personal opinion which in my case hasn't proven to work yet but I think it makes good sense.

There's another case of diversifying. We are encouraged to diversify to reduce risk. There is nothing wrong with doing that. Have a thought about this, if you identified the top 50 firms. How many of them would you buy? Would you buy 30, 40 or all 50 firms? The most aggressive method is obviously buying ONE firm, because it is simply the best and will outperform any other company. But the problem is , it is not quite sound to put all your money in one stock (although technically right). In this case I recommend up to 10 stocks for a portfolio. The return of the top 10 firms will of course give you a better return the top 50 firms. You should remember, if you diversify risk, this would almost certainly lead to diversifying away your returns. If you seek very good returns, I would say buy up to 10 shares. If you seek security, you can do a mixture of high beta and low beta stocks and you can go up to any amount you like but just keep in mind of brokerage fees for each trade.

I think I am done with this post. Sorry I think I jumbled around the word shares/stocks/firms/business/companies, but they actually mean the same thing. I hope this helps solve some questions about risk. Please tell me of any errors you think I could have made. Again, everything are mostly based on what I went through so there could be cases that I am wrong. Anyway, I hope this was informative for everyone. Thanks for dropping by!

~deyao~

2nd Part to Starting Things Off

There has been many times when I look back at posts I wrote and assignments I did, and for a particular few which I am quite happy with, I question myself whether I could reproduce something like that again.(Yes, I tell myself, don't be silly of course I can). Many years ago, I wrote an extremely long essay about football and a few years back, an essay about Dubai. I got some good praises for them and I would love to back and look at what did I do back then. The only explanation I could find is,doing something in the moment you feel like doing it. I think it works particularly well for me.

By the way, I would reiterate, not everything I said can be backed up by documentation and the things I write about is based on what have learned along the way. I always ask myself what sort of contribution I can make in general. All I can think of is to educate people and create better people. Am I making a significant contribution? Not at the moment, but I think it's the least I could do. It would be great if someone actually benefits from the things I write. But at worst , I am summarising what I know.

This post will talk about a few important areas outside investment decisions. Yes, the book tells us that our investment decisions should be independent of other decisions we make, hence preventing it from bias. But in the actual situation, as an individual investor (in most of our cases), we do everything ourselves. A-Z, we need to know our stuff. It is a privilege to have someone guiding us but in most situations we are on our own.

The first is not actually not related to the topic I just mentioned but rather just an opinion based on experience. Investing in mutual funds.

If you're familiar, it is also known as unit trust or managed funds. The investment simply happens when people hand over their money to a fund manager and expects him/her to invest them for a better return compared to market returns. Firstly, I will say there are many fund managers who have delivered very good returns in the past and many are consistently "beating the market". It has been a good investment for some people, especially for those who aren't involved in investing. On the contrary side, I don't invest in mutual funds and I won't recommend them. Why? Because I believe we should be in control of our money and we can make the best decisions for ourselves.

A few key disadvantages
- A huge chunk of the profits made goes to the mutual fund company
- You play no part in the investing decisions
- Having a large pool of money doesn't give the fund manager any advantages being an investor.
- "An advantage of being able to have a large porfolio"....it really means nothing.

In short, if you want to become a good investor, mutual funds are no good for you. I don't think you'll learn much. You can't actively track what the fund manager does and the closest you get is a the price of the mutual funds and the summary of the holdings at a few points of time. I think it is very possible to deliver above returns on your own and you don't even need to be in the a investment field to do it.

Alright, now we go to a few areas outside the investing decisions. It will be independent of which investment you think is good but it may change the pattern and considerations. First, taxation. Always be familiar with the rules in taxation because it will affect your money. Different countries have different rates and rules, so make sure you know them well.
In Australia, you declare ALL your capital gains of stocks within a year of purchase and only half if you held it for more than a year. And as Australia has high tax rates, you might make certain considerations to your strategy. For dividends, some corporations have dividend reinvestment plans, you still pay taxes on them so do you take them up, look at the pros and cons? You also need to consider whether dividends are fully franked as this will also affect tax paid.

In Malaysia and Singapore, there are no capital gains tax. This makes it more attractive right? So ditch the Aussie market then? Well,you think about it. So this might alter the strategy of being able to buy and sell more frequently ?(I am neutral on this strategy). Tax rates on dividends are different too, so there's when you need to do your homework.

Brokerage charges. Firstly, the market is competitive but its not efficient, some firms CLEARLY charge a higher rate and yet provide exactly the same thing, you wouldn't want to pay more, would you? Are the brokerage fees based on per trade or as a percentage of the trade amount? This is certainly different in Malaysia, Singapore and Australia. Over the phone orders? Are they charged the same rate as online orders? Well most firms do charge a higher rate, but some actually don't. If firms charge the same rate, are their services comparable, do they place trades for you in less time, how much research do they provide, is their trading interface user-friendly, are their customer service helpful? Those questions got nothing to do with what stocks you buy but there's a definite need to find out. I am rather less helpful on which firms to recommend because I've only used the least required. But I hope I gave a useful guide.

Those are just the few niggly things you just need to do and know once and for all. After that, it's all up to you doing what you can. If anything else comes up, I will put it in future writings. I hope it made sense and tell me if I haven't. Sorry it is not that interesting to read.

Thanks for stopping by and reading.

~deyao~

Reflections on Britney Spears

A little over 10 years ago, Britney Spears became a pop icon and one of the biggest ever artist in the world. Today, she still is, but right in the middle of that 10 years, there was so much right and also too much wrongs that happened. I am not a big follower of her, but she has made a lot of headlines the right and wrong way. To become so huge at the age of 17 rarely happens,it did happen to her but it was no smooth ride. Just when everything seemed too perfect, the worst of the worst happens.

I attended her concert a few days ago, and believe me she was quite good. Yes, she lip-synchs and there was so much controversy. She has done it over 80 times and it was no secret. But the dancing was great, the performance was so well-planned and the shine in the performance just made the story that was worth writing. She is not a natural dancer, but the amount work she put in really showed. Seeing her right in front, just made me go through a timeline of everything I know abt her, and I just couldn't imagine she was performing right there, I just couldn't believe it.

After "that" horror period, from all the bad examples she set (that was considered kind words) to divorce and battling for child custody, we thought she was finished. And when her comeback at one of the awards went south, many thought that Britney they hoped to regain was gone forever. And yet, miraculously, things turned around, she made two great albums, sold-out concerts, settled her child custody and she is back on top. How old is she? 28 this year. To get all crap sorted out and to getting back on top and be at this age. She is incredibly lucky.

I've always been a fan of comeback stories, and this one is admirable. Getting back on your feet when hit rock bottom, continuing all the way back on top. It is a great example to follow. I think I am bigger fan of her than I was before.


~deyao~

Getting Started and Fundamentals

Exams are finally over...A lot of weight off my shoulders. Over the past weeks, I kept trying to find that defining moment that created the lifelong investor in me and what sorts of knowledge I've acquired in the process. Teaching yourself is a long hard painful process, but in the end it is all worth it. I had a friend who played golf for 3 times and went right into the golf course. He wasn't given any preparation for playing in the it. At the end, the experience was good one, he saw and did everything and that learning curve had a very steep surge. You learn by playing and its probably the best way of learning , getting into the action.

I question myself over time, if a person comes up and ask me" What do I need to start investing?". Its a very good question because I went through months of learning on my own,from how to doing it and to actually doing it.It took me quite sometime to find a starting point. You can know how to read financial reports and analyse companies , but to transform it into investing requires quite some work. Today, I've prepared a few tips on skills and knowledge potential investors should acquire to start things off. I will have a few posts, and this one would be the first of a few.

1) Information
As an investor you need tons of information. Getting the information is not very hard but you need to get information that is timely and comprehensive.It is quite obvious you need as much information to make the best decisions. Here are the places I get my information on a daily basis. Being updated is very important.

Share prices - You can choose to go to the stock exchange's website to access the prices. But I STRONGLY recommend opening a trading account with a good brokerage firm. All of them are free of charge by the way. In Australia it takes on 3-4 days to open one. Once they receive your signature of agreement, its 2 days. Look at the features they offer before registering and also what the brokerage fees are like. Banks usually have their brokerage arms so just about any recognised bank will offer brokerage services. With the account, you can access all the information you need in a more simplified form. You can set up a list of your favourite stocks and this makes tracking much simpler. Here are the sites I go to.

Yahoo Finance - Here I set up a portfolio of stocks I watch and it comes out in one list which makes it easy to look at.Thus you only see the ones you want to know and it saves a lot of time. The prices are on 20min delay except for US stocks. This site gives me the daily news and this is where I track the US market.

Brokerage Firm site - Depending on which firm you are with. Their websites gives you more than just stock prices. It gives you financial ratios and historical data, comparisons to industrial average and announcements. This will save you A LOT OF TIME. You don't need to look for all sorts of financial information and doing your analysis and calculating ratios. The information are available and all you need to do is read. Earnings per share, Net Profit, Revenu and all the important ratios and numbers are there, you don't need to lift a finger. Being updated to announcements are also very important. Announcements such as releasing quarterly results, announcing entitlements, new contracts , new acquisitions and all the information the company reports to the Stock Exchange. ALL of these information affect share prices!!! Thats why you need all the required information and be updated.

There are also other websites like Bloomberg, Wall Street Journal and many others to stay updated with news. If you are interested in gold and silver, you can go to Kitco. If you want to replicate a market index, you can go to the iShares website to find your best suited ETF.

2)Fundamentals
There are two main ways of analysing a company/investment. Fundamental and Technical investing. Fundamental investing is simply analysing financial reports and financial information. Technical investing is more of looking at graphs and limits. As I always do, I don't really like to mention what we can read in books. But I just like to give you a head start to things. If you already knew, its great. But if you haven't...Prices reflect future "EXPECTATIONS". Fundamentals still has a huge weighting on the share price, but its expectations I believe make up more. Here I always observe people making errors in placing too much emphasis on either one of them and it is wrong. Both are equally important. Things work together, the fundamentals has very close correlation with expectations. So make sure you don't make the mistake of saying" Prices reflect expectations, forget about the historical data". This is plain wrong. This also links with the Efficient Market Hypothesis which I would write on my next post.

Many weeks ago, a guest speaker taught the class how to look at financial reports. I was like "Hmm, this must me pretty simple for me". And yes, just when I thought I knew how to analyse one, there were so many different aspects I missed out. Thanks to the accountants and auditors today, the reports we look at today provides very credible information. Being an investor, you need very accurate information that reflects the company very fairly. Only recently, I could learn to appreciate the importance of accounting standards and the world adopting international standards. People like us today are pretty lucky, years ago different countries with different standards and policies, you can't compare anything beyond your own country. Now we can..

I read this recently on the Singapore Exchange site. It says, if you had 10 minutes to look at an financial report, what would you do. Here is what it says...

• Glance through the Chairman / CEO’s statement. Read the first two and lasttwo paragraphs in detail. This should give you a gist of how the businessis going. Do the same for the management discussions and operational analysis.

• Check if independent auditors gave a clean bill of health.

• Look at the financial statements and check if:

1. net profits are positive, rising or falling;

2. sales are rising or falling;

3. operating cash flow after working capital adjustments is positive or negative;

4. net debt is rising or falling;

5. dividends are rising or falling (as a % of net profits).

• Look for the segmental breakdown in the notes to the financial accounts and review the sales and earnings for each segment to see if they are improving or declining.

• For all areas which suggest deterioration, look for an explanation in the discussions or seek clarification from the company.

In short, this is what you should do if you lack the time. Looking for one-offs are also important. Is the profit consisting of a one-off sale of maybe a division? Is the loss because of a one-off restructuring?

Two examples. First, AirAsia in 2008 posted a massive loss of 600million because of oil hedging and interest rate swaps. Their share price plummeted as investors had a sell-off. But is AirAsia fundamentally a terrible firm? The answer was no, they posted a profit before recording the "abnormal" loss. For investors who didn't understand and panicked, they would have made a bad decision. For those who knew it was a one-off and capitalised on the panic, their money would have doubled. Share prices went as low as 70 cents and went back as high as $1.50.

Second, DBS Bank. DBS is the largest bank in the South-East Asia based in Singapore. Almost the same thing. They offered structured investments in Lehman Brothers (now bankrupt), and when things collapsed, they had very massive writedowns and their share prices also followed. Another one-off. At the low of things, their shares were as low as $6.40, now, even after a rights issue, the share trades at $13.50. Btw, the right issue was the right to buy at $5.50, if you know DBS's fundamentals, money comes running to you.


This is it for part one, next part I will writing about some misconceptions about mutual funds, creating a portfolio, outside investing considerations and more about diversifying.

~deyao~

The Story of Vermaelen

Here's a story of Vermaelen when he didn't tick off all the boxes of the chief scout. Lifted from the Daily Mail. I thought it was quite a story.

Creating a team brimming with young talent relies on a scouting system that is the envy of most football clubs.

Arsenal's network of talent spotters have played an integral part in unearthing the players in whom Arsene Wenger is currently placing his faith.

But every so often even Arsenal's successful scouts are taught a thing or two by 'Le Professeur'. That is certainly the case when it comes to Thomas Vermaelen.

Two months from the end of last season, as Arsenal prepared for the departure of Kolo Toure to Manchester City, chief scout Steve Rowley was charged with the task of finding a suitable replacement.

After an exhaustive search, Rowley had drawn a blank. Nobody fitted the bill. Then Wenger told his trusted aide to run the rule over Vermaelen.

It was not that the Ajax defender was unknown to Rowley or his man in Holland, former Arsenal youth-team player Peter Clarke. Rather Vermaelen had thus far failed to tick all the required boxes.

Arsenal's scouts were not alone in their view. Aston Villa manager Martin O'Neill twice checked on Vermaelen while Manchester City made numerous visits. Tottenham manager Harry Redknapp revealed recently that Vermaelen had been recommended to him. But mediocre displays at left back and worries about his height had so far put off all concerned.

Rowley can be forgiven for wondering why Wenger thought Vermaelen could be the answer to his centre-back quandary, having seen him play left back for Ajax in a 4-0 defeat to Sparta Rotterdam and a 6-2 trouncing by PSV Eindhoven.

But Wenger had a hunch and his interest had been awakened not by Vermaelen's spat with Robin van Persie in the Amsterdam tournament two years ago, but by his display in the centre of defence under the Highbury floodlights in 2005.

Vermaelen kept Thierry Henry quiet on that rain-lashed evening, prompting Wenger to store the name of the Belgian, then 20, in his memory bank. Vermaelen remembers it well.

'My best match against Arsenal was when Thierry Henry was playing here,' he recalled.

'The atmosphere at Highbury was not really normal. The crowd was so close. If you made a sliding challenge you almost flew into the spectators.'

Persuaded that Vermaelen was worth another look, Rowley headed for the Belgian seaside resort of Oostduinkerke to watch him train with the national squad.

On a bumpy pitch, playing in a three-versus-four training match, Vermaelen made Rowley realise just what Wenger had spotted.

Vermaelen gave his all: focused, aggressive and with a leap that defied his lack of height.

'The scout told me afterwards that he had hidden in the forest,' said Vermaelen of Rowley's visit.

'They know more about me here at Arsenal than you might think.'

Arsenal's stringent background checks found that, much like Wenger, Vermaelen was a true student of the game. His nights off were not spent in nightclubs, but rather with team-mates watching games from around Europe or football DVDs.

Such dedication began in the youth ranks of Belgian side Germinal Beerschot before he joined Ajax's academy at 15. And Vermaelen's success at Arsenal has come as no surprise to Urbain Haesaert, the man behind his early football education.

'He is intelligent, has great technique and is a very coachable player,' said Haesaert, who is now Ajax's chief scout in Belgium.

'Honestly, with a player like Thomas you don't know where his limits are. He jumps like a spring, he has a terrific long pass, anticipates well. It will be a hell of a job to find a player with his qualities at that age in Europe.'

Haesaert also praises Vermaelen's character. 'He does not seek publicity. Thomas is very self-critical. He is the type who does not get carried away when he is doing well. He will never be associated with nightlife, drugs or anything like that. He is too much of a pro.'

His adaptation to living in London has been helped by having his girlfriend Aimee with him in his Hampstead Heath apartment.

On the pitch, his adaptation to the speed and power of the Barclays Premier League has been seamless. Eyebrows may have been raised by his £10million fee but Wenger has bagged a bargain

Before he arrived, former Arsenal skipper Tony Adams said: 'Thomas is a very good player but I don't think he's ready for the Arsenal. I don't think the punters would like another small one.'

He may be revising his opinion now. To be fair to Adams, Vermaelen's success has left plenty with egg on their faces. Tottenham, Manchester City and Aston Villa have been left ruing their decision not to move.

Arsenal's equally sceptical scouting staff can just give thanks that Wenger knows a future Arsenal star when he sees one.

~deyao~