Beliefs to Hold Dear During a Bull Market

Business doesn't change from week to week.

When prices goes up, so does the risk.

When prices goes up, it doesn't necessarily reflect on the credibility of the company, nor the reliability of its earnings.

Good times will follow bad times; just like bad times will be succeed by good times. Nothing last forever. 

Bulls do charge slower than a bear slide-- investors, like any human beings, prefer cash in the hand over unrealized profits (and certainly unrealized loss!!!).

Will the economy do well? Your guess is as bad as anyone's. 

 

And finally, debts don't disappear during a bull market. 

Invest wisely.

This too shall pass.

ISR Capital, A Ticking Timebomb?

In Oct 2013, three companies, Liongold, Blumont and Asiaons crash after a heavenly ascent of 800% within months, and crashed. Within 3 days, 8 billion worth of capital evaporated.

The MD of ISR Capital, Datuk Md Wira Dani Bin Abdul Daim, is the son of ex-Finance Minister of Malaysia, Tun Daim Zainuddin. He was also involved in Liongold, being its Executive Deputy Chairman. The CEO is Quah Su-Yin. Thanks to Google, you can find out if they are truly reputable or trustworthy.

So who are the major shareholders?

You can download their annual report from http://www.isrcap.com/attachment/201605041716311781353157_en.pdf or from SGX (which is the preferred choice).

Both Datuk Jared Lim Chih Li and Mr Ng Teck Wah were involved in the penny stock crash of 2013, under Asiason Capital (which is renamed ISR Capital!)

http://business.asiaone.com/news/were-not-bunch-cowboys

Seems like a tightly knitted group if you ask me. All of the investment companies listed appears to be related to one another, with no reputable outsiders vested (or trusting) this company.

Assuming you are not interested in the history of a company's board members nor its senior management, have a look at the annual report.

Auditor's Statement

Emphasis of matter
We draw your attention to Note 34 to the financial statements, which states that in April 2014, the Company with five of its wholly owned subsidiaries (one of which has since been disposed of), and two funds (including two subsidiaries of one of the funds) managed by the subsidiary of the Company that has since been disposed of, were served notices by the Commercial Affairs Department of the Singapore Police Force (“CAD”) for an investigation into an offence under the Securities and Futures Act, Chapter 289 (“SFA”). In the notices, the Company and those entities were asked to provide certain information pursuant to an investigation to be conducted by the CAD.
On 4 February 2015, the CAD confirmed to us that their investigation is still ongoing. As informed by the Board, apart from certain key personnel being requested to attend further interviews by the CAD in 2015, there have been no further new developments in the ongoing investigations.

In view of the above, there exist a material uncertainty, whether the ongoing investigation, the outcome of which is unknown, may have an impact on the Group’s ongoing business operations. Accordingly, the extent of adjustments, if any, that may arise from the ongoing investigations, may have an effect on the financial statements of the Group and the Company for the financial year ended 31 December 2015 and preceding years, if any.

Our opinion is not qualified in respect of this matter.

The contents of an annual report are prepared by the company in question, not the auditor(s). The auditors' role is to audit the contents and give an opinion, as well as write the auditor statements produced on page 39 of the annual report. 

In short, the auditors' statement is the only portion written by the auditors.
 
The last 3 paragraphs are important-- it tells us that investigation is on-going, and there is an uncertainty involved with this company.

The Revenue
The company booked a revenue of almost 3 million compared to a paltry sum of 131,000 the year before. How could a company made such ridiculously high improvements within a year?The ROE and ROA were -500++% and -300++% the year before, and now we have 22.2% and 11.6%?
If we look under note 4, the company claims that it makes the entire revenue from consultancy, with only about 70,000SGD from interest income from debt securities. There are no further breakdown on revenue.

The company's segment information, on page 119, said that the company's main operation are split to

• consultancy (IPOs?)

• investment management (no revenues recorded this year!?)

Geographical markets are split primary between Singapore and the British Virgin Island (Tax heaven? Opaque banking systems!?), in which 800,000 is from Singapore and the other 2M with BVI.


The Balance Sheet
This is the craziest part of this company

Let's look at current assets, which means assets that can be convert to cash within 1 year.
This company has only 20k of cash, and bulk of the assets (3million) comes from Trade Receivables. Which means sums that is owe to them by customers.

Note 13 (page 89) reveals

• about 3.171M of receivables

• After impairment (which means probably, not going to get these sums), it stands at 2.8M

• Amount already due by less than 90 days, the full sum of 2.8

• Page 90 says
  

  These receivables are not secured by any collateral or credit enhancements.

  Which means, this company is screwed if those "customers" don't pay!

So who exactly are those people that owe this company money?

Note 14 shows you that in the past year, 30M was owe but 27M is already impaired. Erm...

The true entertainment comes from Non-Current Assets, Debt Securities, which contribute to 2.2M of the balance sheet. Under note 18, it says

A debt facility with a principal amount of S$2,350,000 has been extended to a third party in 2015 for a period of five years. Interest is charged at 12% per annum with a 5% arrangement fee deducted upfront at each disbursement. The effective interest rate is computed at 13.4%.

What kind of rubbish credit rating is this 3rd party that will necessitate it taking a loan of 12% per annum? And the next paragraph says:

 

The debt facility could be drawn down by the third party for up to S$5,000,000 with maturity due 2020. The undrawn balance as at 31 December 2015 was S$2,650,000

It is telling you: This 3rd part can borrow from us another 2.65M.

This is exciting because I don't think ISR has that capital.

What can probably happen is that this mysterious 3rd party can keep borrowing from ISR Capital, as long as ISR keep issuing new shares, and then ISR can write off these "bad" debts?

And it is already happening. Look at Note 22

CONVERTIBLE REDEEMABLE BONDS
The proposed issuance of 2% convertible redeemable bonds due 2018 (the “Bonds”) with an aggregate principal amount of up to S$35,000,000 comprising seven tranches of bonds was approved by shareholders at an Extraordinary General
Meeting held on 8 September 2015. Each tranche comprises five equal sub-tranches of S$1,000,000 each. S$3,000,000 of the Tranche 1 Bonds were issued in September and October 2015. As at 31 December 2015, Bonds with a face value of S$750,000 have been converted into 187,500,000 ordinary shares. The present value of the Bonds after conversion amounted to S$2,053,672, which was arrived at using 5.5% per annum, an average rate compiled from interest rate quotations of 10 leading banks and financial institutions. The Bonds that remained outstanding as at 31 December 2015 were subjected to an interest rate of 2% per annum, payable in arrears on 31 December in 2015. Please refer to Note 20 for bond interest payable as at 31 December 2015.

As at 31 December 2015, the Company allocated approximately S$2,200,000 for investments in debt securities and approximately S$480,000 for general working capital (such as payment of remuneration of directors and employees, office rentals, insurance premiums and professional fees).  

Stay away from this company.

As of writing, this stock has gain another 10% or so in a single day. Just because the price goes up, doesn't mean that the company is doing well. For those speculating, do question yourself on the ethical aspects. 

Investment Rudder

A rudder is a vertical piece of wood that steers the boat. Small, and largely concealed by water, you will largely go nowhere without it. You don't usually see it, and neither do you hear investors talking about it.

Is it important to have an investment principle?

Graham, Schloss, and Buffett (in the early years) largely lived by the same principles, which is to look for $1 companies priced at 60 cents. The big difference in the early years is that Buffett is so sure of his analysis, that he is willing to dump a large part of his net worth into a single stock.

I think it is necessary to be stubborn as a value investor. When Schloss passed Graham a nice little company to Graham, the latter replied that it isn't the type of company that he is interested in. That nice little company was call Xerox, and they could have term it a growth stock then. Graham remain successful and beat the market by 2 percent or so for 20 over years.

***
Of all investors, I aligned myself to Walter Schloss's principles the most.

I am not great at evaluating a business (this is something I need to add to my toolbox), hence, sticking to the balance sheet can be a smart move.

Two of the companies that I missed out during the correction this year were Spartan Motors (NYSE:SPAR) and Midsouth Bancorp (NYSE:MSL). Both got on my radar during their dips, and both have a good balance sheet. Spartan Motors however did not have great earnings.

Both companies went up by almost 80% as of this writing, despite being small companies.

The idea is that earnings are unpredictable, but balance sheet is. I don't find companies that are heavily leveraged, attractive. Unless it is a failing business with many years of negative cashflow, companies usually trade above their book value.

While both Schloss and Buffett do not disclose their holdings (during the early years), each have their own reasons for doing so. Buffett did not want anyone to ride on his coattails, while Schloss has a bunch of companies which many will be afraid to invest in.

For instance, someone like Schloss might be interested in Noble (SGX:N21), but he will diversify his risk.
***

I live frugally and have no great lust for the luxuries of life. I do find myself an odd-ball for not knowing the movements of watches, no desire for a nice car, salivate the thoughts of dining at the best restaurants.


One day, I might just become a full time investor, living in a small room in Vietnam (to keep costs down, and I love the food there). There will be

• A shelf with all the books to keep my investment rudder intact.
• Another shelf with all the annual reports of companies I am keen of. 
• A little printer to print these annual reports.
• A bean bag to sit on while reading the reports.
• A small notebook and a fairly large U shaped desk (made of wood of course)
• A modest steel chair.
• A large erasable whiteboard
• A tatami mattress to sleep on
• A space for my cat to live in.

Perhaps. One day when I am old and alone. Perhaps.

The Best Long-term Investment

I made the plunge recently and invest on a course, conducted by Mr SS Sandhu. The course is Analyzing Financial Statements and is hosted by SGX Academy.

First off, the changes it made to my attitude to investing.

It might changes my approach to investing. My main strategy in investing is looking for $1 companies that cost 60cents. Hence, my first step is to look at companies that have recorded a significant drop. However, perhaps this time round, I should be reading the news a little more proactively, as they might spell an improvement to a company that has not suffered a discount.

I have taken a significant interest in the board and senior management. I used to look at management as something generic, but now I realize they could bring certain value to the company:
- They could have ties to important government/ financial institutions
- They can have (or not have!) experience that is useful.
- Their background can suggest if they have the competence for the job.

I adopted a deeper appreciation to the balance sheet, the quality of its assets, and the details of its liabilities. Not all assets are equal; every liability deserves a closer look. Hidden assets (and liabilities!) are actually recorded in the annual report.

One can understand the business better just from reading the annual report. For instance, I understand now how low margin a property development company is, and most of them should at least have another branch of income available.

I highly recommend this course for the instructor is extremely experienced and intrinsically passionate in teaching his self-developed materials. However you will need to have a rudimentary understanding of the financial statements in the first place, in order to fully adsorb majority of the materials. Annual reports are a toughie-- it will pay for you to study some AR before going for this course.