Friday, October 27

Overview of Investment Product: REIT

There have been a big wave of REITs from Asia in the last couple of years, and we expect to see new ones springing up from UK to India to Israel. What exactly are they? and how are they compared to other types of investments?

What is REIT?

  • REIT, or Real Estate Investment Trust, was created by the US Congress in 1960 to give general public an opportunity to invest in large-scale commercial properties. The structure has since replicated in many countries around the world.
  • REIT is an entity set up to hold a portfolio of real estate properties (can think of it as a mutual fund). The entity makes money by receiving rental income from these properties, and to a lesser extent, selling properties for capital gain.
  • REIT is required by law to distribute at least 90% of its taxable income to its shareholders as dividends. In return, it pays none or little income tax.

Global development of REIT

North America and Australia are mature REIT markets with REITs capturing 95%+ of total property markets. Meanwhile, Europe and Asia are emerging, with REITs capturing 27% and 15% of total market respectively.

Fun fact: timeline of the passage of REIT legislation around the world

  • 1960s: USA, Netherlands
  • 1970s: Australia
  • 1990s: Belgium, Turkey, Greece, Canada, Brazil
  • 2000s: France, Japan, Singapore, Hong Kong, Thailand, Taiwan, South Korea, Malaysia, Mexico
  • Expected: UK (Jan 2007), Germany, India, Israel

REIT vs Property company stocks

  • Tax efficient. In general, REIT pays little income tax under the mandatory 90+% dividend payout policy. (note that while this is the case in US, it may or may not be applicable to specific countries)
  • Diversity: While you can only buy a couple of houses or a handful of property stocks, you can buy a unit of REIT which comprises of hundreds of property investments.
  • Stable income: since REIT is a portfolio of real estate properties and the income stream is mostly in the form of rents, the volatility of this investment is much lower.
  • But less explosive growth potential: Because of the 90% dividend payout policy, a REIT may not have enough cumulated capital to make substantial property investment for further growth, thus limiting the ability to maximize a booming property market.

REIT vs other non-property investments

  • Diversification: In general, REIT and other property investment have a low correlation to the other asset classes.
  • Inflation hedge with income: as property prices and rents rise with inflation, REIT and other property investments can protect your investments from losing value due to rising prices.

What to watch out for

  • We have seen a few REITS promising to pay a large dividend yield in the first 1-2 years as a way to attract investors. For example, the dividend could be >100% of its normal income stream, financed by a loan from the parent company.
  • While tricky, the company does fully disclose the information (using the tiniest font). Therefore, investors have to read the fine lines and see if the dividend yield promised in the first few years can be sustainable long-term.

Further reading

  • Reita (based in UK) provides a wealth of information on REIT.

Thursday, October 26

Parkway: Best Healthcare Idea in Asia

As a number of my clients / readers are in the medical profession, I guess it would be nice to write something on healthcare as an investment opportunity.

Parkway Holdings (ticker: PARM.SI), based in Singapore, operates the largest network of hospital and healthcare centers in Asia. This includes 3 hospitals in Singapore -- the venerable East Shore, Gleneagles and Mount Elizabeth Hospital, as well as the Pantai Hospital chain in Malaysia (31% ownership). In addition, Parkway has a joint venture in India, a government partnership project in Brunei and recently, a specialty medical center each in China (Shanghai) and Vietnam. Parkway is listed in the Singapore Stock Exchange and is currently trading at S$2.73.

What I like about Parkway

  • Focus on high-end market: Parkway is selective in focusing on the high-end, high-margin business. This is a smart strategy as there is an acute demand of high-quality healthcare services in the relatively poor region of South East Asia.
  • Well positioned in health-tourism: The Singapore hospitals are boasting a good proportion of foreign patients (35% of total), and increasingly capturing patients from non-traditional region such as Middle East. The company is well positioned to ride the big wave of health-tourism, and at the same time diversifying risk e.g. a repeat of the Asian Financial Crisis.
  • Strong fundamental: healthy operating margin of 18% and net profit margin of 11%. Return on equity is also increasing every year.
  • Government support: The Singapore government is eager to develop the country as the regional healthcare hub and has a number of favorable policies towards healthcare and pharmaceutical companies.
  • Owned by smart investors: Newbridge, one of the best private equity firms in Asia, is a major shareholder of Parkway. Looks like a big stamp of approval to me!

Potential risks

  • Sensitive to recession: Parkway saw its margin squeezed considerably during the Asian financial crisis. Another recession will certainly affect the profitability (although not a problem long-term).
  • Competition intensifies: Malaysia and Thailand are actively promoting their respective healthcare industries. In particular, Thailand, a world-class tourist destination and a substantially cheaper place to operate, has great potential to capture the health-tourism boom. Parkway has reacted by “buying out the competition”: Pantai Hospitals that Parkway bought 35% in September 2005 is the largest private healthcare provider in Malaysia.
  • Shortage of nursing staff: This seems to be a global phenomenon. Parkway is trying to mitigate by operating a nursing school in Malaysia.
  • Stock getting expensive: with 2006 P/E of 24x and 2007 P/E of 20x, it looks expensive as an Asian stock (average: mid teens). However, it is expected to give out a nice dividend at 5%.


  • Healthcare industry in Asia is one of the most attractive investment proposition because it captures (1) the general trend of aging population, (2) regional acute demand (lack of good quality service in South East Asia), and (3) increasing popularity of health-tourism.
  • As the largest and most established player in the region, Parkway is an obvious buy. The company is rather expensive, but considering its potential it's worth the premium.

Australia: higher CPI, higher chance of rate hike

For those who own Aussie dollars and investments:

The Australia CPI data released today surprised on the upside by rising 0.9% quarter-on-quarter vs consensus of 0.8%. The biggest contribution to inflation is food (2.3% q/q), while housing cost also increased due to higher housing rates and housing price. The housing market in Sydney and Melbourne is easing but the rest of the country is still up, up and up.

Looks like another rate hike is coming. The market is currently priced in a 90% chance of 25bp rate hike in November.

For Contrarians: Apollo Group

Fellow value investors and contrarians: Apollo Group is shouting for your attention!

Who is Apollo?

Apollo Group (ticker: APOL) is one of the largest for-profit companies in educational services, offering degree and career-enhancement programs for working adults. The company operates 100 campuses and 159 learning centers in the US; among them are the University of Phoenix, Institute for Professional Development, and College for Financial Planning.

Given a multi-year 20%+ earnings growth track record, the company has been a high-flyer, with share price zooming from $30 to $90+, and at one point commanding a P/E of 105x. Since mid-2004, the valuation has started to go back down to earth, stabilizing at $50 in 2006.

On October 18, Apollo announced its 4Q results (fiscal year in August). Earnings dropped the first time in many years. Investors got panic and dumped the stock. Now trading at $35.65.

Is it a good buy?

As contrarians we look for undervalued opportunities, that is, when most research reports stamp a big SELL on the stock and everyone is getting out and then ignoring it. If we believe the company is fundamentally strong and is only suffering from temporary hiccups, it would be a great buying opportunity.

Let's look at the fundamentals

According to an estimate by US Dept of Education, the US education industry is worth US$250 billion, with no major players dominating the market. As baby-boomers retire and have more time for education courses, the demand can only go up.

On a global scale, the most promising is, again, China and India: not only because of their size, but also because both cultures put heavy emphasis on education and learning. The increasing popularity of online/long-distance education is also very positive for companies planning to expand abroad.

We see that the education is quite an attractive sector. Now let's look at the PROs and CONs of Apollo Group:


  • Experienced in an attractive niche market: Apollo Group has 30+ years of experience in the niche of working adult education. The demand has kept increasing as the economy becomes more knowledge-based.
  • Strong financials: Even with the recent earnings drop, Apollo has a very respectable net profit margin of 18%, estimated earnings growth at 15%, and a return on equity of 63%.
  • Reasonable valuation: at 15x 2006 P/E, it is a good deal when compared to an industry average of 22x.


  • Sudden expense increase: it is natural to get worried about a rather sharp increase in expense, the main reason of the drop in earnings. One of the main items is bad debt expense: currently 4% of revenue is uncollectible. While not alarming, we would like to see the level going down to a normal 2%.
  • Uncertain if Ad spending is effective: The other major cost increase is advertising. We do not know if this is an ineffective attempt to curb a foreseeable, long-term decline in enrollment (bad spending), or a proactive approach to build reputation and further increase enrollment (good spending). We have to wait for at least a few months, look at the employment numbers, and see the results.
  • No dividend: if the stock price remains flat or negative, our loyalty will not be rewarded. However, no-dividend policy is quite typical for high-growth companies e.g. tech.


  • In my opinion, a break in a multi-year earnings growth is actually good news: at least management is not cooking the books.
  • At this point I cannot identify major problems such as fraud or significant litigation that would permanently damage the company. Given the strong fundamentals for both the company and the industry, I see the current price level a good entry point to this attractive market.

Wednesday, October 25

Thoughts on Telecom - still a good buy?

Having been a finance person in the telecommunications industry for 7 years, I would like to share my thoughts on this very dynamic industry. The obvious question is: Are they a good buy? Let’s have a brief introduction as a start.

Once a Pearl under the Straws

The telecom industry was once considered a “strategic” asset by government of many countries. Therefore, the fee and cost structures were closely guided and the operations normally run by pseudo-governmental monopolies.

To the outside world, telecom is a stable, low-profile, if not the most boring business, just like one of the utilities. In fact, the telecom was then a ridiculously profitable business – once the copper wire is in place, the company can charge the customer forever. Without competition, innovation was unnecessary and thus the R&D/maintenance cost was very low. The companies also charged the customers at a tolerable but unreasonably expensive level. Remember how much a long-distance call cost 10-20 years ago?

A darling in the late 90s, then…
As the deregulation of industry swept through the world in the 80s and early 90s, telecom companies went public and became darlings in the investment circle because of high profitability and bright future (read: Internet in the late 90s). But of course, money, greed and pride led to stupid mistakes: many telecom companies used their big pile of cash to buy unnecessarily huge capacities and bid up the 3G licenses to outrageous level. When the market crashed, they ended up in a bunch of state-of-the-art but rather useless fiber-optic pipes, an even more useless 3G license, and a very real, big pile of debt. Many of them almost went bankrupt.

In the 2000s, they became low-profile again, working hard to reduce the debt. By end of 2003 billions of debts were repaid and most companies were back in good shape.

Question: Have they become good buys again?

Probably not in my opinion, because:

  • Competition means lower profitability: Now that the telecom industry is fully deregulated (in developed countries at least), new nimble players have sprung up and profitability has become a lot lower.
  • Internet is the killer: New, smart companies have introduced better, cooler and virtual free service via the internet. Examples: Skype and other providers of VOIP service. The traditional telecom service has become totally commoditized.
  • Constant innovation is tough: Facing competition and threats from new technology, telecom companies need to find even better product to survive. 3G was a big thing, but no one so far can find a “killer” application that can realize the potential of 3G technology. Now, the “convergence” (combining telephone, broadband and television/media) is the latest theme, but any big innovation involves substantial capital spending and big risk.
  • Market is saturating: In the past, the telecom industry has been quite successful in growing beyond its traditional products, e.g. mobile phones in the early 90s, and broadband in the late 90s. However, mobile phones markets are now saturated in developed countries (many Asian countries have >100% penetration rate), and broadband growth is slowing down. The next “thing” is supposed to be 3G, but it is a long way from critical mass.

Should I ignore the sector completely?

Well, no, because:

  • Everything depends on timing and price: If you get in when everyone is getting out, e.g. in 2001-2003, you will get a pretty good return.
  • Pick emerging markets: Telecom companies in emerging markets may still in the “honeymoon” phase, i.e. limited competition and tariff level (fees charged to customer) being protected by the government. At the same time, the emerging market has a lot of room to grow. Good examples are telecom companies in China and India, as well as Orascom, an Egyptian-based and London-listed company specializing in telecom operations in emerging markets around the world.

For other telecom ideas in the emerging markets, stay stuned to our next topic: Telecom in China.

Friday, October 20

Overview of Investment Product: Forex

The foreign exchange market (also known as forex or FX) may sound mysterious to you, but it is actually the largest financial market in the world, with daily average turnover of US1.9 trillion, or 30 times larger than the US equity markets.

What exactly is forex?

  • Forex is simply the trading of currencies, and they are always done in pairs, i.e. buying one and selling the other simultaneously. Examples: EUR/USD, USD/JPY.

What are the characteristics?

  • A “true” 24-hour market
  • Most sensitive to economic, social and political event
  • 85% of the transaction volume involves the “Majors”, i.e. US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar
  • Although forex trading is needed for normal running of multi-national business, the majority (95%) are trading for profits
  • Forex provides more leverage than stocks or futures, which makes forex trading attractive to many traders

What is leverage?

  • Leveraged trading (or trading on margin) means that you are not required to put up the full value of the position of the trade.
  • In forex, you can leverage up to 200 times. This is possible because the volatility of major currencies are usually within 1%. Without leverage the traders cannot capture higher returns on a the small market movement.
  • This is, however, risky business -- while you can have substantial gain with a small amount of capital, you can easily lose in the same magnitude. Afterall, the market is a zero-sum game.


  • Leave it to the advisors -- retail investors simply do not have the time to monitor the positions.
  • FX-linked structured products are available but are mostly for sophisticated investors.
  • However, if we are bullish on a particular currency, we can participate in forex indirectly by buying stocks and bonds. For example, if we like euro and we buy the shares of a retail business that have significant exposure in Europe, it would be a relatively safe and smart way to play the game.

Investment: why now?

Simple question, simple answer:
The earlier you start, the bigger impact there will be on your investment.

Let us have an example.

You are now 35 years old. You will need the money at 60 when you retire.

  • Money available now: US$50,000 (or $50K)
  • Long-term bank deposit rate is 3.5%, slightly above long-term inflation
  • Long-term investment return is 8%

Note: for simplicity, the final amount is not discounted for inflation for all 3 cases, but this does not affect the comparison.

Case 1

  • Do nothing, i.e. money sitting in the bank for 25 years.
  • The $50K will turn into $114K.

Case 2

  • Keep the money in the bank and start putting it into investment when you are 50.
  • The $50K will turn into $184K (61% more than Case 1!)

Case 3

  • Put money into investment when you are 35.
  • The $50K will turn into $317K (73% more than Case 2, and 178% more than Case 1!)

The impact is more pronounced if you include the money saved every month.


  • The decision of investing early, if at all, significantly impacts your asset size in the future.
  • Although there are bound to be ups and downs in the investment returns throughout the years, a consistent, non-speculative investment program (set by either yourself or your adviser) will give you a much better return than the deposit rates.

I am happy to send you an excel sheet if you would like to play around with the cases illustrated above.

For related investment topics, please visit our workshop "Smart Investment for Beginners".

Daily Commentary: Oct 20

Good morning.

US Treasury
  • 10 year UST fell to 3-week low at 100 24/32 (4.78%, +0.02%) on inflation concerns. Reason: Philly Fed new order index climbed to +13,4, vs -1.3 last month, and the initial jobless claims fell to 299K, below the psychologically important 300K level.
  • Please note that 2 yr and 5 yr UST are to be launched shortly and traders are thought to push down the overall UST price now for better performance later. Could this be the real reason?


  • Euro broke through the 1.2580 key resistant level and hit a high of 1.2642, almost touching the next resistance at 1.2650. The Euro strength is likely due to the weaker than expected stats from Leading Indicators and Philly Fed index of business conditions in the US.
  • Meanwhile, Yen is quiet because the market is see-sawing between the Japanese importers (e.g. oil companies, wanting to push down Yen) and Japanese exporters (e.g. trading companies, to push up Yen). As a result, Euro/Yen is also relatively quiet.

US Stocks

  • The Dow finally closed above 12,000 for the first time, thanks to a wonderful result from Coca Cola (KO) with14% growth in its 3rd quarter (haven't had double-digit quarterly growth for years). This is partly due to increased China sales, which is great, but also due to a one-off effect from the World Cup. Therefore, I would not expect the double-digit growth story to continue.
  • The story isn't as happy for commercial banks. Citigroup (C) fell 0.32 to 49.87. Similar to JP Morgan (JPM) yesterday, the actual results beat forecast's but the core commercial bank business is experiencing slight negative growth, which is a worrying sign. Wachovia and Bank of America (BA) seem to have the same issue in 3rd quarter. Meanwhile, brokerages e.g. Merrill Lynch (MER) and Lehman Brothers (LEH) are doing well.
  • In tech, Dell fell 6.4% to 23.12 while HP (HPQ) rose 1.4% to 39.56 as HP reclaimed the title as the world's top PC market after 3 years.

Japanese stocks

  • Sony's stock price dropped closer to its recent bottom level after warning its profit will drop to the lowest level in 5 years. Reason? Playstation 3 price cut and recall of millions of computer batteries... Tech business is a tough one to be in!

Hong Kong stocks

  • The ICBC IPO, the world's largest so far, has broken many records including the highest number of retail subscribers (~1m), highest subscription fund held in deposits (HK$420bn / US$54bn), largest number of warrants launched for IPO (40), etc. It is almost certain to be priced at the top of the range. Hearing grey market price at $3.45. Trading starts next Friday.
  • Interestingly, stocks of ICBC peers e.g. China Construction Bank and Bank of China rose despite the huge hold-up of capital, whereas stocks of non-China-theme banks e.g. Standard charter fell.
  • By now, the overall valuation of China banks is considerably higher than the venerable global banks such as HSBC and Citigroup. I wonder if people know that these Chinese bankers were not even fit for IPOs just one year ago? Don't get me wrong -- they have a bright future as an attractive business operating in an attractive part of the world, but when things get way overvalued we have to be careful.

European stocks

  • Nokia announced its earnings yesterday, falling almost 6% intra-day and ended up falling 3.4%. Reason: they are selling more phones with lower margin in China and India. Sounds like this is a big trend -- expect Nokia's stock price to stay at this range before any positive news.

Thursday, October 19

Overview of Investment Product: Stocks

Stock markets are wonderful. Stocks markets are nightmares. Should we love them or hate them?

Embrace them! but be patient and consistent. As every statistics will tell you, stocks (also known as equities) is the best performing investment products available, on a long-term basis.

What exactly is Stock?

When you own a stock or a share, it means you own a piece of a company. For public companies, you can buy and sell their stocks freely in the stock market. Depends on demand and supply (which is driven by factors such as the business model, historical earnings, growth prospect, success or failure of new products, lawsuits, political instability and many others), the stock prices move up and down.

Why stock gives the best long-term investment return?

As one of the owners of the company, it is natural to see that you and fellow shareholders capture the most upside when the particular company is successful. On the other hand, if the company is in trouble, you take the most risk. For example, if the company is bankrupt, the remaining money is distributed in the following order: customers, creditors, shareholders, i.e. you are at the bottom of the line.

As you can see, stock is a high-risk, high-return type of investment. The level of risk also depends on the nature of company itself: stock of Citigroup is less volative than, say, Yahoo.

If I am not a long-term investor, should I get into stocks?

Yes, but you can adjust the risk by adding other lower-risk investment product into your portfolio. You are safe as long as a comfortable level of cash is always available and ready. At the same time, inclusion of some stocks will give you a boost to your overall asset long-term.


It's true that stock markets can be like roller coasters; but stock markets, if you ride it long enough, do not bring you back to where you start -- it brings you to the next level.

Overview of Investment Product: Cash & Money Markets

I guess everyone knows what cash is. Cash can also be seen as the safest type of investment product: it gives return in the form of interest income.

However, on a historical basis, interest income barely beats inflation. Therefore, a smart investor will look for alternatives.

Here comes the money market funds.

What is it?

It is a type of mutual funds that invest in USD denominated, high-quality, short-term (90 days or less) debt instruments issued by the US government, municipalities, banks and big corporations. Similar to other mutual funds, money market funds can be traded once a day.

Because money market investments are considered less volatile than individual stocks or stock funds, investors can adjust their portfolio's volatility by including a portion of money market funds. They can also "park" their money here in between investments.

As a low-risk investment product, how does it compare to cash/CDs?

  • Higher return: the yield is competitive with (if not slightly better than) many savings accounts and is more liquid than bank CDs.
  • Tax benefits: For US citizens and residents, municipal money market funds can provide state and federal tax-free income, which can be beneficial for those in higher tax brackets.

  • Fluctuating yields: Short-term yields have been much more volatile than long-term rates over time, while interest income from a bank gives you a more stable return.

I don't want to bear much risk. Should I invest fully in money markets?

Yes, but without any higher-risk investment products your portfolio's return may not keep up with inflation. That is, your money will worth less than today, and you will be worse off.

Therefore, most investment advisors suggest inclusion of different investment products. We are going to talk about them in the next session.

10 Excuses of Not Investing & How to Tackle It

Let's continue our workshop on "Smart Investment for Beginners".

You and me have inertia; that is, we tend to procrastinate, especially when the subject in question look new and foreign to us.

However, some people are financially very successful because they win over their inertia. Do you want to be successful? Let’s tackle together the top 10 excuses of not investing. Now!

#10. I am too busy. Yes, of course. Let's see investing as a job! Investments can test your instinct, and learn more about the world. They can also be interesting conversation piece. Not a bad "job" afterall?

#9. I don’t have money. That is certainly a possibilty. You may even be negative in assets (read: debt). No worries. Take care of the debt first, and learn more about investing to get yourself prepared. You can start as little as US$50 each month.

#8. I am not a finance person. It doesn’t matter, because the most important skill is the ability to judge what is a bargin in the market, whether it is stocks, bonds, real estates, gold, fine arts, or that antique clock in the attic. Some financial knowledge is helpful, but not a prerequisite. You can also ask your friends or banker for advice.

#7. I am hopeless in math. Again, it has nothing to do with investing. Simple calculations can help in monitoring and analysis, but that’s it. In any case you can always use a calculator.

#6. I do not take risk. There is certainly risk involved in any investment, but so do anything that you deal with in daily lives. You can tailor the investment portfolio to suit your risk profile. In fact, if you do not want to take risk, you should actively monitor your own assets and make sure it matches with your appetite for risk.

#5. Investment is gambling and I don’t like it. Speculation is gambling; smart investing is not. Positive investment return is not guaranteed but you can reasonably predict the long-term trend if you do the homework.

#4. My friend got burnt in the stock market. Maybe he was speculating? Or he went for the extreme high-risk-high-reward route? Don’t be afraid of the stock market. The better you know it, the less you will get hurt.

#3. My family is not supportive. Maybe they have some misunderstanding or bad experience in investing? Show them this article and see if they will change their minds. Of course, you have to be convinced yourself first.

#2. I don’t want to deal with the investment advisers. You don’t have to! Thanks to the amazing technological advancement, all you need is a computer and an internet connection. Better yet, you can gather as much information from the web as a million investment advisers can tell you. This is a luxury unheard of 10, or even 5 years ago.

On the other hand, if a good investment adviser is available, he/she can help you track the long-term investment cycles, and introduce you to alternative investment products that could be difficult to get by yourself.

#1. You are in it anyway. Believe it or not, you are in the game before you know it. Do you own a house? Real estate is an investment. Are you working? Chances are that you have a mandatory retirement account. You can choose to ignore it, but it doesn’t mean it will disappear. It is your own money! Put it in good use for your own benefit.

Daily commentary: Oct 19

This is my first attempt to provide a daily commentary. Will try my best to keep it up!

US Treasuries/Bonds
  • In US, the core CPI rose 0.2% in September, in line with consensus.
  • The Industrial production CPI, which includes energy consumption, dropped by 0.5%, which is below consensus of +0.2%.
  • The unsurprising reports leave the 10-year UST almost unchanged at 4.76% (-0.01%).


  • Yesterday there were reports on Japanese government finding ways to monitor the carry trades (which has been depressing the Yen). The Dollar/Yen shot up briefly after the news and stay at around 118.50. In my opinion, however, carry-trades are very difficult to monitor as both US dollar and Yen are freely tradable, thus I do not expect the Yen to get stronger with this single news. For short-time, expect to stay within 118.3 - 120.0 range.
  • Very quiet market for Euro. For short-term, expect tight range of 1.250 - 1.258.

US Stocks

  • DJIA rose 2.66 points to 11,992 (0.36%) and S&P rose 1.91 points to 1,365 (0.14%).
  • IBM rose $2.87 to 89.92 with its 3rd quarter earnings beating forecast. Same story for Apple, with stock rose $0.33 to 74.6.
  • Meanwhile, JP Morgan saw its stock price dropped $0.78 to 47.21 as its core business (commercial banking) delivers disappointing results. Motorola also fell 1.21 to 23.64 as its actual 3rd quarter earnings is considerably lower than estimates.
  • Healthcare/pharmaceutical stocks, e.g. Johnson & Johnson, Merck, Pfizer and Amgen continue to do well.

Japan Stocks

  • Nikkei rose 35.96 to 16688 (0.22%).
  • Stock prices of export companies e.g. Sumitomo and Matsushita Elec dropped slightly in light of the strengthening of YEN this couple of days. Meanwhile, domestic related stocks gained on expectation of higher earnings report in the coming weeks.

Hong Kong Stocks

  • Guang Da Financial (ticker: 165) rose 19% after news on capital injection (sign of imminent IPO). Be careful and don't jump into the IPO story too quickly: there are lots of China big banks in the IPO pipeline and Guang Da (being a smaller bank) may not be the favorite among institutional investors.

European Stocks

  • Together with the rest of the world, European stocks have been rising for most of the last 3 weeks.
  • In particular, EADS (manufacturer of Airbus) rose 2% to 21.7 euros as the Russian investor continues to buy the stock. However, given the uncertainty surrounding Airbus A380, expect the stock to trade at tight range of 20-25 euros.

Wednesday, October 18

Smart investing - a Path to Financial Freedom

This is Section 1.1 of our "Smart investment for beginners" workshop.

OK. Let's start our series with the obvious question: What does it mean by smart investment?

It means: make your money works harder for you.

Putting your money in a bank is one type of investment -- the deposit gives you an interest income. But it is not efficiently utilized.

Smart investment would mean putting your money in:
  • Cash or money markets
  • Stocks
  • Bonds
  • Forex
  • ETF (exchange traded funds)
  • Mutual funds
  • Real estate / REIT
  • Commodities
  • Structured products
  • Hedge funds
  • Private equity
  • Rare collections e.g. antiques and fine arts...

... at the right proportion and at the right time.

The porportion of each asset class depend on your age, number of dependents, job stability, spending behavior, debt level, your risk appetite and so on. The less you are depended upon, the more risk you can take, and the more reward you can get in a long-term horizon.

Why do I want to invest? I think I have enough.

Because it will give you the financial freedom sooner. While it doesn’t guarantee a big pile of cash, successful investment can give you an option of retiring sooner, travelling all over the world, or open your dream business.

Stay tuned for the next topic:

Overview of Investment Products

Welcome to the second section of our "When and How to Invest" series. Today I would like to write a introductory piece on investment products.

In general, they can be divided into two categories:

  • Available to all: easily traded on the internet or a retail brokerage account
  • Available mostly to high net-worth individuals

1. Available to all

Cash and money market funds

  • Cash or CDs generate returns in terms of interest income. Money market funds, which comprise of high-quality, short-maturity debt instruments, give a yield similar to CDs but can be traded once a day. While they are the safest instruments, the return may not be high enough to compensate for inflation. >> more

Stocks / Equities

  • Owning a stock means owning a piece of a company. As an owner, you get the most benefit at good times, but take the most risk when bad. Statistically, this "high-risk-high-return" investment gives the best investment return on a long-term basis. >> more

Bonds / Fixed-income products

  • A bond is a loan made to the bonds' issuer (e.g. government or corporations) by an investor (e.g. an individual). In return, the investor receives regular interest payment (the rate is called the yield) until the bond is matured, at which point the issuer repays the principal.
  • At the same time, bonds can be traded in the market. Similar to stocks, bond prices go up and down depending on many factors, and this fluctuation affects the effective yield.
  • Therefore, although bonds give fixed, regular interest income, they are by no means a riskless financial instrument.

FOREX (foreign currency exchange)

  • Economies around the world use different types of currencies, creating the need to trade and exchange currencies.
  • When we buy a stock or bond from a foreign country, we are inherently buying into FOREX. For example, you live in US and own shares in a French company. If euro is strengthening against US dollar, even if the shares stay unchanged you are already better off with a foreign exchange gain.
  • For pure FOREX trading, I would recommend leaving it to the FOREX traders who have instant news on various markets. >> more

ETF (exchange traded funds)

  • ETF is a basket of securities that tracks the performance of a stock, bond, or commodity index.
  • It can be easily bought and sold in the market (same as stocks), gives you diversity (exposure to different industry/regional indices), and generally incur lower cost than mutual funds. >> more

Mutual funds

  • Mutual fund is a portfolio of stock or bonds created for a particular industry, country or product. It can be traded once a day based on the price (called NAV, net asset value) calculated at the end of the day.
  • Unlike ETFs, mutual funds are actively managed by fund managers and their performance could vary greatly.

Real estate / REIT

  • The investment can be in the form of: (1) owing a physical property, (2) owning stocks of a publicly-listed property companies, or (3) owing shares in REIT (real estate investment trust).
  • Real estate is an interesting and complicated type of investments and has a lot of unique properties; but in general, we can expect its investment return to fall between stocks and bonds on a long-term basis. >> more


  • Commodity products were once open to private wealth clients only.
  • As energy and commodities kick into a big upward cycle, the products have become very popular and related funds /ETFs are being introduced to the mass market.

2. Available to high net worth clients - I will write more about each product later. For now, here is a list:

  • Structured products
  • Alternative investments
  • Hedge funds
  • Private equity / principal transactions
  • Rare collections e.g. antiques and fine arts

Smart Investing: a Beginner’s Guide

After throwing in a few investment thought pieces, I will now start the first "workshop" on investment. I plan to write about why, when and how to invest your hard-earned money based on my own experience so far.

Although I have soaked a bunch of finance knowledge in Wall Street, it is not until I started investing for our family fund that I understand the importance of disciplined, smart investing. You can do it, or ask someone to do it. But you can't ignore it. Too much is at stake, my friend.


  • Smart investing - a way to free yourself and bring your dreams closer
  • 10 excuses of not investing and how to tackle it
  • Investment: why now?
  • Investment: what is a good return?

How to start

How to grow further

  • How to monitor and analyze your investment portfolio
  • Further reading

Overview of Investment Product: ETF

What is ETF?

An ETF, or exchange-traded fund, is a basket of securities designed to replicate the performance of a stock, bond, or commodity index. Examples are QQQQ (Nasdaq), EWJ (MSCI Japan’s index), and IGE (Goldman Sachs Natural Resources Index). In other words, its performance relies on broad market trend and not the stock-picking skills of individuals (could be good or bad). Each ETF is listed on an exchange and is traded like any other stocks.

Why buy ETF?

ETF has pros and cons when compared with other financial products. Let’s go over it one by one.

1. ETF vs stocks

  • Better diversity: The greatest advantage of ETFs over company stocks is diversity. Buying ETF for the S&P Latin America Index, for example, is less risky than buying Telefonos de Mexico alone.
  • Better exposure: In fact, we may find it quite difficult to buy individual companies not listed in our local market. ETF gives us an easy alternative.


  • Do more homework: When picking an ETF, we should have a general understanding of the particular industry/region. What’s good about it – an economic recovery, an oil-rich region, or an industry with high margin?

2. ETF vs index funds

This is probably the most common question because both ETF and index funds allow you to buy into a portfolio of securities without your own active management. Here is my take on the difference and the pros and cons:


  • More flexibility: ETF shares can be bought and sold during the day, similar to buying individual stocks. On the other hand, we can only buy index funds based on the NAV (net asset value), which is calculated once a day after than market closes. Also, there is normally a minimum investment amount for index funds but not ETFs.
  • Lower cost: For index funds, fund managers have to buy and sell the constituent stocks more frequently to have cash available for investors' redemption (i.e. taking out their money). While for ETF, there is basically no “managers” as the ETF simply tracks the movement of the particular index. Therefore, management fee is generally lower for ETF.


  • A few index fund managers may waive the transaction commission for their funds. In this case the expense will be slightly lower than ETF.

3. ETF vs mutual funds


  • Same as above (index funds), except that mutual funds are actively managed and thus incur even more administration costs. This translates to higher management fees.


  • A few mutual funds manage to outperform their comparable ETFs, index funds and their peers on a consistent basis based on their expertise and “six-sense”. If you are able to identify such a fund manager, the mutual fund can give you a superior investment return. Be careful: for apple-to-apple comparison, make sure you pick the "after-fee" return. And remember to read the small fonts where they bury the miscellaneous fees and restrictions!

Tuesday, October 17

Legg Mason: unloved, for now?

Who is Legg Mason?

Legg Mason (ticker: LM) is a global asset management company, providing investment management services through mutual funds, insitutional management and wealth management.
Last year, LM did a transformational deal where they acquired Citicorp's asset management service, as well as Permal, one of the largest fund-of-hedge-fund providers in the world.

The company is also well-known for their flagship fund, the US$19 billion Legg Mason Value Trust, managed by the superstar fund manager Bill Miller. The fund has beaten the S&P 500 index for 15 consecutive years.

What's the story?

LM has missed its earnings guidance for 3 consecutive quarters and the stock has dropped 30% for the last 6 months. Some blame the Citigroup transaction and the fact that Bill Miller's fund has been trailing the S&P index by 10% so far.

Why I think is an opportunity

  • I generally like FIG (financial institutions) because it has a fabulous business model of "using people's money to make money". Secondly, everyone needs some sort of financial services in times good and bad. Last but not least - if you know how an average finance professionals are paid vs highly-regarded experts in other industries, you would know how profitable the business must be.
  • With the proliferation of mutual funds in the US, the asset management industry has been experienced rapid growth for many years. People have been betting a similar growth pattern in Europe (already happening) and in Asia (not yet, but big potential). With the acquisition of Citibank asset management, it shows that LM is serious about sticking to its core business and expanding beyond US.
  • In terms of valuation, the stock looks relatively cheap with 1.9x price/book ratio (this is the ratio most commonly used for FIG. Current industry average: >2.5x). With a drop of 30% of market value, it implies US$3.5 billion value of the company is evaporated. You can decide whether the recent bad news is worth this amount of money.

Further reading:

You should have no problem getting the negative news recently (search google or go to Fidelity online for news). For a contrarian view, you may want to check out this article -- they have an interesting way to value the company for the technically minded.


A friend of mine likes to throw out interesting ideas from time to time. Lately he asked me about stocks in Africa.

His thesis: Africa is mineral/commodity-rich and a number of countries have signed important trade agreements with China.

My views:

Similar to all other investments, there are pros and cons:


  • Rising with commodity prices: countries such as South Africa has experienced a big rally, thanks to both the increase in gold prices and the appreciation of its currency. This is true for 2004 and 2005, but not 2006. See "Cons" section below.
  • A good way to diversify: the stock performace in South Africa, for example, is not correlated to other emerging markets, which is attractive in reducing the risk in the overall emerging market portfolio.


  • Not for average Joe: The stock markets, if available to foreigners, are very illiquid. This usually means the markets are volatile and you may have a hard time getting out of the positions. In fact, for a normal guy, South Africa is the only option.
  • Roller-coaster currency: The South African currency fell 40% against the US dollar in late 2001, then fully recovered within 24 months. It continued its big upswing in 2004 and 2005, only to fall back (closer) to earth in 2006. The swing in currency significantly affects the investment return. For example, South Africa's stock market year-to-date return is 24% in local dollars, but -1.4% in US dollars.
  • Commodity -- old news? The commodity story has been going on for a few years and some people question if the upward trend is going to continue. In fact, YTD returns for Egypt is 0.8%, a significant drop from the 3-digit returns for the last year or so. (You can learn more about Commodities, an important asset class, by reading Jim Roger's Hot Commodies listed under my recommended book list)


  • We can have a small position (pick the most traded, liquid product -- see below) for the sake of diversity. Other than that, I would save the opportunity to those who have deep understanding of the local economy.

Available Products

  • South Africa is basically the only option.
  • ETF: The easiest way to buy into this market is through ETF (exchange traded funds), which is as simple as buying US stocks. Ticker: EZA
  • Mutual funds: I have not looked into the details, but Southern Africa Fund Inc (SOA) and Southern Africa Fund Inc (XSOAX) are two options.
  • Structured coupon: this is mostly available to private banking clients only. If you would like to have exposure to Africa economic growth through the appreciation of their currencies, you can ask your banker if they can structure a US-dollar coupon that captures the appreciation. For example, if the currency goes up within a certain period, you get the USD equivalent coupon at par (which captures the currency appreciation) plus the coupon interest (usually pretty high for emerging markets, e.g. 5-10+% because of the high deposit rate there). Obviously, if the currency goes the other way, you will be given the currency itself and have to wait until it appreciates again. Therefore, confidence in the underlying currency/country is crucial. In any case you still get the interest which acts as a good cushion.

Current Commentary

Keep up with the latest news and opinions!

Please read my commentary on stocks, bonds, forex in the major financial markets.


Tuesday, October 10

US / Canada Market

The US financial market is the largest and the most liquid in the world. Therefore, every investor, no matter he or she is in Canada, Germany, Indonesia or Saudi Arabia, should have a decent amount of exposure in the US securities.

The following is my articles on various investment ideas in the US:



Asian Markets

Asia is in vogue again! Since the 1997 financial crisis, the region has cleaned up its massive debt, de-linked and stabilized their currencies, and economies from Japan to Malaysia to India are booming.

Many Asian countries are arguably the biggest beneficiaries of a fast-developing China: Indonesia gaining from wood and raw material export, Hong Kong and Thailand from tourism, Japan and Korea from cheap Chinese products available to their local residents. On the other hand, the sheer size of China's manufacturing capability is overwhelming for many business owners throughout the region.

Meanwhile, India is emerging as a super-center of information technology and back-offices such as call centers and accounting services. Middle class is growing rapidly, benefiting a wide range of domestic industries e.g. banks, real estates, retail shops and media/entertainment. However, infrastructure throughout the countries needs to be improved to unleash its great potential.

In a nutshell: in Asia, risks remain, yet opportunities are everywhere! Long-term investors with a consistent strategy will be handsomely rewarded from this exciting region.

The following is my articles on various investment ideas in Asia:

  • Parkway: Best Healthcare Idea in Asia (Oct 2006)
  • Australia: higher CPI, higher chance of rate hike (Oct 2006)

European Markets

Euro is the most popular currency second only to US dollars, thus the influence of this historially and culturally important region cannot be ignored.

In Western Europe, "new kids on the block" such as Ireland and Spain have seen their economies growing spectacularly over the past few years, and Germany the "sleeping giant" is finally ready to wake up.

Meanwhile, in the East, many ex-soviet countries are emerging to be the manufacturing centres and sophisticated back-offices for Western Europe. And even further east, Turkey, a traditionally Islamic country, is eager to embrace many pro-Western values and to gain acceptance to the EU.

The latest developments have long-lasting impact to Europe and the rest of the world. The region demands our attention.

Out of the Blue Ideas

This category features investment ideas that you will be like "what?"

But it is interesting and important to learn about the unconventional products out there. Enjoy!

Financial Term Glossary

My attempt to explain the terms in the most layman way.


  • Bad debt expense: bad debt is the amount of money meant to be received (e.g. from customers) but cannot be collected. It is treated as a cost by the company.
  • Basis point (bp): 1/100 of a percent, a unit often used in the movement of bond price.
  • Bond: a long-term loan made by the issuer (e.g. government of company) to the investors. A typical bond pays fixed interest payment at a regular internal until the bond matures (i.e. a fixed date when the issuer repays the principal).
  • Bond yield: see US Treasury
  • bp: see basis point


  • CD: see Certificates of deposit
  • Certificate of deposit (CD): also known as CDs and time deposit. It is a type of money deposit at a bank that cannot be drawn for a certain period of time. In return, the interest income is higher than a regular deposit. In general, the longer the term, the higher the interest income.
  • Commercial Paper: a financial instrument issued by banks or big corporations for short-term financial needs (e.g. cashflow management), similar to getting a line of credit from a bank. The four basic types of commercial paper are promissory notes, drafts, checks/cheques, and Certificate of deposit.
  • Consumer Confidence Index (CCI) measures how people feel about the US economy based on 5,000 households. According to the publisher, The Conference Board (an independent research organization), 2 consecutive quarters with the index level below 100 would indicate a recession. Another widely-used consumer confidence index is the University of Michigan Consumer Sentiment Index.
  • Contrarian: a person, typically an investor, who holds a view opposite to the mainstream. Warren Buffet is one of the most well-known contrarians.
  • CPI: consumer price index, used to measure the price movement of a wide variety of consumer goods. This is a key indicator for inflation. Core CPI is a type of CPI that excludes the goods with high price volatility e.g. food and energy.
  • Christmas Rally, or Santa Claus Rally, refers to a phenomenon of stock prices going up in the week between Christmas and New Year (or more generally, in the month of December). Numerous explanations abound, the most popular include: general happiness in the festive season, tax considerations, people investing the Christmas bonuses, and mutual fund managers “dressing up” their portfolio by pushing up the stocks right before the year end cut off date.


  • Dividend: a company pays a dividend to its shareholders as a way to distribute the profits earned. However, many high-growth (e.g. tech) companies choose not to pay dividends in order to retain cash for expansion. In this case, shareholders will have to count on the appreciation of share price instead of a stable dividend income stream as a reason to hold on to this investment.
  • DJIA: see Dow Jones Industrial Average
  • Dow Jones Industrial Average (DJIA or The Dow): a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The index, launched in 1896, is the oldest and the most widely-followed index in the world.


  • Earnings per share (EPS): mostly applicable to publicly-listed companies, EPS is the net income of a company divided by the number of shares outstanding. This info is most useful in calculating the P/E of the company.
  • ETF: a basket of securities that tracks the performance of a stock, bond, or commodity index. Similar to stock, each ETF has a ticker and is traded on stock exchange. >> more


  • Fiscal year: a 12-month period for the financial year, with the starting and ending month chosen by the entity. For example, governments in Japan and Hong Kong have a fiscal year ending March (e.g. April 2005 - March 2006). Most US/Global companies has a fiscal year ending December, same as Calendar year.
  • Foreign exchange (Forex, FX): trading of currencies, which is always done in pairs, i.e. buying one and selling the other simultaneously. Examples: EUR/USD, USD/JPY. >> more


  • Initial Public Offering (IPO): a process of taking a private company to public by offering the shares of the company to the public market via a stock exchange. See Publicly-listed companies for more info.
  • ISM survey (Manufacturing ISM Report on Business) is a purchasing survey of the manufacturing sector of the US, commonly used in monitoring and forecasting the overall economic trend.


  • Leverage: Leveraged trading (or trading on margin) means that you are not required to put up the full value of the position of the trade. It allows substantial gain or loss with a small amount of capital.


  • Money market fund: funds that comprise of high-quality, short-maturity debt instruments, giving a yield similar to CDs but can be traded once a day. >> more
  • Mutual fund: a portfolio of different securities (usually stocks and/or bonds in a particular industry or region) being divided into numerous units and then bought by investors. In other words, each investor gets a fraction of the many securities in the pool, thus diversifying risk. Mutual fund is actively managed by fund managers who actively pick and dump the securities within the portfolio in order to maximize returns.


  • NASDAQ (National Association of Securities Dealers Automated Quotations system) is the largest electronic screen-based equity securities market in the US. The NASDAQ Composite Index includes all US and non-US companies (~3,000) listed on this exchange. Many big technology companies e.g. Microsoft, Dell and Apple are traded on NASDAQ.
  • Non-farm payroll statistics is reported by the US Bureau of Labor Statistic Department and is accounted for ~80% of all workers in the US. Government policy makers and economists look at the change in non-farm payroll to predict future levels of economy activity.


  • Operating margin: operating income divided by revenue. This is a "business-oriented" measure of the profitability of a company because it excludes non-operational factors such as interest expense and taxes. For overall profitability, we look at Profit margin.


  • P/E: see Price/earning ratio
  • Price/earning ratio (P/E): Stock price divided by EPS. It is a measure of whether the value the public market assigns to the company (i.e. price) is relatively high or low when compared to its earnings. Generally, the higher the P/E, the more expensive the company is (i.e. not a bargain). However, different industries and regions have different average P/Es because of the difference in future earnings potential. It's both an art and a science!
  • Private equity firms: a firm that specializes in identifying and investing in non-public companies. They make money by fixing up the investees and then selling them to others (e.g. other corporations, or to the public via an initial public offering) at a higher price.
  • Profit margin: net income divided by revenue; a measure of the overall profitability of a company. For a "business-oriented" approach to measure profitability, we look at Operating margin.
  • Publicly-listed: a company is publicly-listed when its shares are traded on a stock exchange. In this case, shares of the company are available to anyone. The person who owns 1 or more shares becomes a shareholder and thus an owner of the company. >> more


  • q/q: quarter-on-quarter


  • Return on Equity (ROE): Net income divided by total equity (net asset). This is an important financial ratio to measure a company's efficiency in generating profit from its investments.


  • Santa Claus Rally: see Christmas Rally
  • Securities: stocks, bonds, and their hybrids in numerous forms.
  • S&P 500 Index: a list of 500 US companies that are representative of the US economy. The list is selected and maintained by Standard & Poor’s, a financial research and analysis agency, mainly based on their size and influence. This index, together with Dow Jones Industrial Average (DJIA), is among the most closely-watched indices in the world.


  • Time deposit: see Certificate of deposit


  • US treasury: Treasury bonds issued by the US Department of Treasury (responsible for revenue for government). Each bond is given a price of 100 as well as a coupon rate (rate of the interest payment) at the time of issue, and is then freely traded on the market. Generally, at time of economic growth, investors will prefer the higher-yielding stock market, and thus the bond price will decrease (<100).>

Monday, October 9


I am a private banker by profession, which means I take care of the investments of individuals with net worth over US$1 million. Previously, I spent several years in New York and Hong Kong as an investment banker at Lehman Brothers and Morgan Stanley, and has been a corporate finance specialist at a blue-chip corporation in Asia. I also mange our family fund which has so far generated a cumulative 49% return in the last 2.5 years.

Reason of starting this blog:

  • to organize my investment thoughts and to keep a record of my ideas and performance;
  • to share my investment views with people who are unfamiliar with or too busy to "deal with this kind of stuff".

Everyone visiting this blog is most welcome to add comments or questions at the end of each post.

I do believe a sound, long-term and disciplined investment is critical for everyone -- this should be your second, if not the major source of income, if you guide your assets to earn money by itself!

Feel free to leave your questions and ideas in the comment section of each post or email me at

Monday, October 2

Market Watch