May 2006 Singapore Sale

I wanted to get more serious with investing. I began to pour over books, either introduced by fellow value investors or search results from google on the subject matter.

But I couldn't complete much (I was busy, yes, excuses) before great Singapore sale arrived. When STI corrected about 10% over a few weeks, almost everything was going for discounts. Sale! Sale! Sale! That's what I heard then and I got in again to grab some bargains.

My financial knowledge was still quite shallow. However, I just learnt a new ratio, Return on Equity (ROE). I knew (but still couldn't understand why) that good ROE means good performance.

Hence by May 2006, I was screening stocks based on:

1. price to NAV
2. ROE

(ROE greater than 20 was impressive, 10 to 20 was good, less than 10 was mediocre)

As far as buying shares was concerned, my strategy was to allocate the same amount of cash to each counter. Even if I'm very sure of one counter, I won't buy more. My aim was not to maximise profit if I'm right. I'm more afraid of aggravating any loses if I'm wrong. This was still the strategy I adopted today.

I acquired Radiance at 12.5 cents, 2nd Chance at 21 cents and United Food at 25 cents. Radiance, an EMS solution provider, was about 40% below NAV, yet its ROE was greater than 15. 2nd Chance, involved in retailing, was trading 20% below NAV but with a ROE greater than 15 too. Unifood was trading at 35% below NAV, ROE slightly below 10 but was cash rich (though not as rich per share as Armarda). Somehow, I love counters with lots of cash. Then, I was thinking that shares were trading at a discount if they were neglected or simply because they were doing well. If its the latter, then chances for turn around are higher with cash rich companies compared to those in debt right? It was much later,that I found out things were not so simple after all.

However, when I did a more thorough research (due to my limited financial knowledge, I could only read up on the companies, their business etc) on these 3 companies, I decided to dump Radiance (at 13 cents) and 2nd Chance (at 22 cents). This was a mistake that I vowed never to make again (so far I haven't), i.e. to research a company before buying, not after!

However, when I did a more thorough research (due to my limited financial knowledge, I could only read up on the companies, their business etc) on these 3 companies, I decided to dump Radiance (at 13 cents) and 2nd Chance (at 22 cents) after their price recovered in July 2006 (By then, STI had also recovered). This was a mistake that I vowed never to make again (so far I haven't), i.e. to research a company before buying, not after!

Radiance was more than 80% owned by Goldtron. The latter was heavily in debt. I was afraid Goldtron would force Radiance to pay out all its earnings as dividend in order to repay its debt. I think I was right. Radiance subsequently paid out 0.026 cents of dividend against 0.019 cents of earning per share, i.e. give more than it earns???!!!

2nd chance had 3 business segments. One dealt with apparel, one in gold & diamond jewellery. The last in rentals from properties it owned. The reason I sold off 2nd chance was when I discovered it took a hefty bank loan to acquire REITs because it couldn't find properties to acquire at reasonable price! Why park my cash with 2nd chance if I could buy REITs myself! On hindsight, I think I was wrong then, somehow, 2nd chance could ensure its dividend from REITs more than offset the interest from the bank loan to make it a worth while venture.