Investment strategy for the second half of 2008

This is not meant to be a long analysis article. At the point of writing, Dow is down 134 for the Friday trading. If not surprise or bargain hunting, it would most likely ended the week at the lowest point. After the relief rally, the stock market is again focusing on the bad news. Credit crunch seems to be over but the inflation worry persist.

At this point, these are the most prominent worries:
- High inflation or stagflation which erode the spending power
- High oil price and commodities price which have cascading negative effect on the overall economy
- The falling US dollar which could magnify the effect of above two

This is definitely not the situation that we are hoping for. But, now is also one of the moment where you can pick stock bargain. Look at CMT, the largest REIT in Singapore, it has acquired the Atrium at Orchard to be linked with Plaza Singapura. This would certainly enhance the rental return even more.

So, don't worry too much, just focus on evaluating the company fundamental to pick winning stock. In my opinion, there aren't many more downside risks, and the reward is favorable for the long term investor. I am definitely looking at picking up stock in my watch list when they are on sale again.

In the second half of 2008, there is only 50% chance that market would start to recover strongly. We shall see better time into year 2009.

How to accumulate 1 million?

Do you ever have the dream to become a millionaire or you aspired to retire rich as a millionaire? That's not a dream. It is certainly achievable through good financial planning. But, you have to start early. As early as possible and let the magic of compounding does its work.

Let's say you are not that investment savvy. You can still invest in a global diversified equity portfolio. If you are more adventurous, investing in Asia equity portfolio might do the job faster.

How does it work? First, you need some patience. Second, start investing now at fixed amount regularly. The following example illustrates that a person with initial amount of $2,000, investing $500 per month, for a period of 35 years at the rate of return 8%(common to equity portfolio) would be able to get 1 million dollars. If you start at the age of 30, you should be able to retire rich at 65 years old. If you are lucky enough and picked a good fund, you might be able to achieve that way ahead of time.

Banyan Tree – The luxury tree

Banyan Tree posted 38% increase in Q1 net profit for FY08. Total revenue rose 34% because of strong growth in hotel investment and property sales. The company is expanding the resort and hotel business into new location.

The hotel business remain stable despite the cloudy global economic environment. They expect good response to the branded residence sales and property sales. In the result presentation, management has shown the planned expansion strategy. It looks pretty impressive. There should be a significant growth on the number of hotel they are going to manage.

The company has 3 business segment – hotel investment, hotel residence and property sales. The company first started as resort operator in Phuket and slowly diversify the business into related area. It is now trying to capitalize on the strong brand name it has built to expand and grow. I think the growth strategy is well articulated and with the strong management focus, it is more likely to succeed in the mid term. The key risks are funding issue and demand for the luxury resort and hotel.

I once owned a few lot from the IPO allocation. Unfortunately, I am not that familiar with the hotel and property business, so I sold off my position. It looks like a wrong decision now. I am considering to add it back to my portfolio base on the following points

• Strong luxury brand. As Asia people get richer, they would find way to indulge themselves. The luxury resort business should not be affect greatly by economic condition.

• Dedicated management who is focusing on growth. Look at the expansion plan, they have lots of work to do. If everything goes nicely, we shall see a different company 3 years later.

SIA, good company in a difficult industry

I just saw the analyst report on SIA result for FY08. The key points are

Operating profit up 62%
Net profit grew 40%
Turnover up 10%
Dividend of $1

I am not a fan of SIA or the aviation industry. That's because aviation industry has traditionally being a very difficult industry to earn money. Invest your money in the sector would prove to be a tough call, because you don't know when the tide could turn against you.

Purely from the result point of view, it reminds us something. A good company in a difficult industry would still perform and deliver shareholder value. So, the moral of the story? The management capability is up most important in stock picking. You pick a good company with great management, you would be taken care of in the long run.

Hold on, but how do we pick the company with great management? That's the million dollar question! Maybe try to flip the Philip Fisher book to see the clue. I would say it is through long term observation, we can gage what is the management capability.

How they make decision?
How they treat the minority shareholder?
How they present themselves in report, analyst meeting?

Of course, ultimately, they should deliver.

Market update 11 May 08

There were few notable events for the last week:

Oil price hit record high again. This doesn't sound like a big news as most of us has get used to the record price news. However, the higher it goes, the more threat it posed for the inflation situation.

AIG big loss. AIG suffered big losses due to credit derivative linked to mortgage. Although most of the people believed the worst is over. It looks like the problem needs a longer time to settle down. Even the subprime situation has stabilized, we still don't know the full impact to other area of the market.

The inflation situation is still worrying. Citigroup announced more asset sales. Last Friday, Dow fell another 120 points. I think the recent rebound could be short lived. The economic situation is far from clear and more bad news might be coming back to market.

I still don't think it is a good time to be aggressive buyer, but depends on company situation and valuation. From the start of the year till now, I only bought some shares in FJ Benjamin. The valuation has fallen to more attractive level, the major shareholders like Peter Lim and Frank Benjamin were buying and the business still looks good for 2010. I also like the in house brand RAOUL, it might be a wild card.

Still waiting and hopefully market would correct to a more attractive level. Then, the margin of safety would be bigger.

China Oilfield Tech FY08Q1 result

I do not own the share of China Oilfield, but I did study a little bit about the company during the IPO time. Basically, it has an interesting business. That is to use the tertiary oil recovery technique to extract more oil from the mature oil well and their main business is focusing on Daqing area.

Today I saw this research report regarding the company for FY08Q1. Main points:
- No revenue
- RMB15million loss, 10million for stock option grant expense
- 2H for 80% of full year turn over
- little earning visibility

The stock expense is more accounting related and does not affect the cashflow. That means you could loss money but there is no cash outflow incurred for the company. Likewise for company which report earning increase, but there is no cash coming into the company really.

Lumpy earning is too much to my liking. Investor has to ask himself how much he understand about the company business model and whether can make an educated and reliable forecast of the earning.