Do You Have the DG Factor in Your Equity Portfolio

My investment philosophy is rather simple as i believe that less is more.

As an employee, who doesn't like salary increment? 

As an equity investor who invests primarily for dividend income, who doesn't like to receive an increasing amount of sustainable dividends?

DG plays an important role to enhance an investor's portfolio income.

DG is the Dividend Growth factor that is critical to compound our wealth.

Why is Dividend Growth Important?

1) Average inflation in Malaysia is around 3%, if we receive the same amount of dividend income every year, the purchasing power of the dividend income is likely to be eroded, hence result in weaker purchasing power. 

2) If the company that we invest into is able to increase its dividend payout on a long term basis and the dividend growth rate is above the inflation rate, that means we will be receiving a growing stream of dividend income. If dividend growth is 5% and the inflation rate is 3%, your net real dividend growth will be 2% which is decent.

3) If the company is able to pay higher dividend every year, it is like receiving 'salary increment' from these companies. Sounds wonderful?

4) If you receive increasing dividend income, you could use the income to buy more shares of the same company in order to earn MORE dividends. 

5) If you receive increasing dividend income, you could invest these cash-flows into other promising companies to boost your wealth.

6) If you receive increasing dividend income, you could use some of these extra cash-flows to fund your holiday trip. This is exactly the method that my friend is using to fund her holiday trip via dividend income! Sounds wonderful?

If you manage to invest into good companies that pay increasing amount of dividends, you would have successfully created a good money making machine.

While you focus on building your career, just let these money making machines work for you!

Hopefully, the rising amount of dividend income will improve our overall well-being as an investor.

Lessons that We Could Learn from Wells Fargo Scandal

How would you feel if your bank "help" you to open additional savings account or credit card facility without your authorization and annual fees are incurred on those extra accounts? Yes, you will feel mad!

That exactly what happened to one of the BIG FOUR banks in US, namely Wells Fargo. 

2 million unauthorized accounts were found during investigation and Wells Fargo was slapped with USD185 million penalty! Although the sum is very small when compared against Wells Fargo's market capitalization (market value of the bank)  of USD230 billion as at 19 October. 

The bank is likely to suffer reputation damage and it will take some time to restore its reputation.

The Ex-CEO and Chairman John Stumpf has resigned. Prior to his resignation, he has been grilled by Senator, Elizabeth Warren in a tense exchange over the scandal and she even called him a 'gutless' leader as John Stumpf pushed for high cross selling number and imposed sky high target on his employees. Wells Fargo pushed for 8 accounts per one customer of which the target is way higher compared to peers.

If the Ex-CEO and other personnel behind this scandal are not criminally investigated, the same issue is likely to recur in the future in the absence of strict punishment as downside risk is absorbed by the bank while the executive would have reaped the rewards i.e high bonuses, stock options etc ! 

Apart from Wells Fargo, there are a lot of global banks which are in trouble with regulators as well due to their involvement in subprime financial crisis and other bad practices.

2 Key Lessons:

If i would like to be a shareholder of a bank, i would prefer the bank to possess at least the following attributes:

1) Ethical Leadership

Ethical leadership starts at the top. I would only invest into a bank which is run by top management with strong ethical values. How could we assess the bank's ethical leadership?

Look at their track record in managing the bank, their past experience, the performance of the bank, talk to the bank's staff to have some insight into how the bank is being run. Are the staff happy working for the bank?

Start to invest even just 1 lot (100 shares) of the bank's shares, attend the bank's AGM to ask question and observe how the directors or top management answer shareholders' questions. You can gain a lot of insight by just observing how the top management answer the questions from minority shareholders. Are they being transparent? or trying to avoid certain questions?

2) Bank's Ownership Structure

John Stumpf is not a founder of Wells Fargo, he was merely an employee of the bank. Sometimes, employee may make short term decision to boost the company's performance and hopeful for share price to increase, so that he could make more money by exercising stock options. 

Various newsflow suggest that he has indeed made some profits by selling shares at higher prices while the scandal was going on.

I would prefer to invest into a bank which is largely owned by its founder. The founder would make sure the bank is well run because the ownership structure makes perfect sense for the founder to take a long term approach to grow the bank's business.

If Tony Fernandez 'destroy' Air Asia, there goes a big chunk of his wealth. hence it makes sense for him to make sure that Air Asia will perform well in the future in a responsible manner. If a CEO screws up at an airline that he is working for, the worst case that would happen will be ....yes, he would just resign, that's all.

If the founder put in a lot of efforts to grow the bank's business in a responsible manner, we should just sit back and enjoy the profit sharing from the bank in the forms of dividends and higher share price.

Conclusion:

The above are just 2 key lessons that i would like to share. By investing into bank which is largely owned by its founder, the risk of the bank getting itself into a scandal is likely to be lower, albeit it is impossible to remove the risk.

Banks that are enthusiastic in uplifting its corporate mission, are likely to win the heart of its customers (borrowers and depositors), hence better profitability and shareholders wealth is also likely to increase over time.

Which bank do you like to bank with? 

this could be the first step to identify the potential bank to invest into!

Remember to Study the Distribution Network of a Business!

According to Investopedia, supply chain refers to steps that need to be taken for a company to get the products or services to customers.

In our quest to understand a listed company which is involved in selling of tangible products, do not just analyse how the company procure raw materials to produce its products. 

Understanding the company's production process is important, but how the company market or distribute its products is also very important. This is where the concept of 'market reach' comes into picture. 

The key question to ask:

How widely distributed are the company's products and can the consumers purchase the products easily?

For example, Nestle produces Milo, Nescafe drink, Maggi and other products through its factories in Malaysia. Can we purchase Nestle's products easily?

When we crave for Maggi noodles or Nescafe drink, where can we purchase these products?

1) Sundry shop

2) 7-Eleven Stores- 7-11 carries wide range of Nestle's products, the higher the number of 7-11 stores nationwide, the better it is for Nestle because the products could reach larger number of the population. 711 has reached 2,000th store milestone in 3Q this year and the company will continue its rapid store expansion. This expansion will further strengthen the market reach of Nestle.

3) MyNews.com- A press and convenience store in Malaysia which is expanding aggressively with its new stores expansion at places with high footfalls. Mynews.com opened its 24 hours store in 2015 and has at least 250 stores at the moment and the company plans to open at least 70 stores per year. The expansion of Mynews.com is likely to strengthen the market reach of Nestle as well.

4) 99 Speedmart- started as a sundry shop in Klang and expanded overtime to around 600 stores nationwide. 99 speedmart is also carrying a lot of Nestle products.

5) Petrol Kiosk- Any expansion of petrol kiosks in Malaysia would also strengthen distribution network of Nestle Products. While you are travelling along highway and stop by R&R, you will notice a lot of people will stop by to freshen up and some may even end up buying Nescafe to boost energy & reduce sleepiness!

6) Online channel- Nestle Malaysia has also made some of its products available through Lazada and 11 street as online shopping platforms gain momentum. The opening up of this channel will be interesting to watch over time.

Apart from the above, there are also other channels such as Hypermarket (Tesco, Aeon Big, Giant and etc), Jaya Grocer, Village Grocer and many more.

On the other hand, even expansion of Nasi Kandar outlet would also improve the market reach of Nestle Products as people enjoy Maggi Goreng at these outlet.

When we study a company in the future, do study the whole ecosystem and supply chain of the company. The more confidence you have in the company, the higher is the probability of investment success.

Note: The company mentioned above is merely to illustrate the concept of 'market reach' and it is not an investment recommendation.

The Breaking of Your Self-Limiting Beliefs

Beliefs could influence our action and behavior! Beliefs could either empower us to achieve greater success in life or limit our potential. 

As we aim to achieve success in our equity and REIT investments, we need to discard the following limiting beliefs:

1. No time

We only have 24 hours a day, we need to make time to research on companies or REIT that we would like to invest into. Serious investing doesn't happen overnight. We need to invest our time effectively.

According to Jim Rohn (motivational speaker), he cited that we can skip a meal, but don't skip the half hour learning or 1 hour learning on daily basis that will propel us to greater height.

We could spend at least 1 hour a day to learn about companies, REIT, economics, history and etc. We could even motivate ourselves to do homework on investment by reflecting on our ultimate investment objective. 

Print out your objective statement and stick on somewhere that is visible to you such a refrigerator, working desk or living hall. Whenever you see the goal statement, it might motivate you to launch into action and invoke your positive emotion!

2. No money

Our seed capital is very important. Make no mistake, we will face uphill task to grow wealth if we have cashflow deficit (expenses > income) on a consistent basis. Before we talk about bombastic investment terms or ideas. Do remember the importance of budget surplus:

Active Income= Savings= Purchase Assets=Capital Gains + Dividend Income.

Financial discipline is important so that we could generate surplus in cashflow. It might not be easy to reduce expenses, hence it will be great to work on increasing our income instead. 

3. No finance background

We do not need advanced math or complicated theories to earn positive return from investment. 

Background in finance might help to certain extent provided we apply what we know, otherwise the knowledge is just an awareness. Only applied knowledge is powerful knowledge. 

Invest in your personal library, buy selected books on equity investment such as those from Warren Buffet, Peter Lynch, Philip.Fisher, accounting for non-accountants, the little book on economics and many more. Start to learn on fundamentals of investment from business perspective and how to read financial statement as a start.

Read, learn, read, learn. Then apply the knowledge to earn.

Some people may associate learning with schools and learning stops once they leave school. Don't fall into this category and let's strive to be a lifelong learner.

Be like Soichiro Honda who is a learning machine!

Talk to someone who has invested successfully, he or she is likely to be happy to share knowledge and experience with you.

4. Too late to invest

The best time to plant a tree could be 20 years ago. the second best time is NOW- Chinese Proverb

Do study the concept of compounding interest which is the 8th wonder of the world, harness the power of compounding interest to your advantage.

If an investor with 30 years of age invests RM100k  today and earns 10% compounded return a year, guess how much will be the future value in 25 years time?

Your RM100k would have grown into RM1 million in 25 years time.

We could also start with regular saving and scale-up the saving amount as our income grow!

5. Afraid of losing money

Acquire the right knowledge and refrain from being a speculator unless we possess specialized knowledge and the capital that we speculate is capital that we could afford to lose in the worst case.

Investing into good companies at reasonable price could minimize the risk of losing money.  What we need to learn is what companies or industries to invest into and at what price?

We need to have a positive mindset that equity investment is one of the asset classes that could boost our wealth and help us in achieving our financial goals or financial freedom.

Some investors might want to see the result first before they believe that equity investment could generate wealth. But sometimes, we have to believe in the asset class first before we could see the result.

So break through the limiting beliefs today and let's progress together as a successful investor!

Have You Found Your Investment Mentors?

Wouldn’t it be nice if we can have a mentor who will guide us in our equity investment journeys?

While we could network with other like-minded investors to learn from each other, why not put in effort to learn from some of the successful equity investors in the world as well?

One of the fastest ways to accelerate our learning curves in equity investment is learning through a Neuro-liguistic Programming (NLP) method called “modeling”.  NLP has been practised by many people around the world to achieve peak performance. In short, we could programme our mind to think in certain manner to achieve a desired outcome.

Simplified steps in using modeling technique:

Step 1: Begin with the end in mind

We need to have awareness of our desired outcome; it could be an outcome such as being a successful investor. How do we define successful investor? It varies by individual. We could set our own target such as the desire to have RM1 million equity portfolio in 10 years’ time with potential dividend income of RM50k a year based on 5% yearly dividend return from our portfolio by then.

Step 2: Find a mentor

Find a person(s) who has achieved similar success or those who are able to impart the necessary knowledge that we need.

Step 3: Dig deeper

 These are the people that we might want to study in details so that we could re-create the excellence and investment success achieved by these people. As a start, we could buy books that talk about investment success and investment methodology of Warren Buffet, Peter Lynch, Philip.A.Fisher, Charles Carlson and Malaysian Investor by the nickname of “Cold Eye”.  Learn how they compound their wealth over time and how they choose which industry or company to invest into.

 

The wisdom or info shared in those books could be priceless and helpful to shape your thought process. The prices of these books could range from RM39 to RM100 per book. It will be a great investment!

We could also search for online articles to read in order to understand the wisdom shared by these investors. Another investor we could read about is Charlie Munger.

Step 4: Practise

Once we have learnt their thought process and investment methodology, we could apply what we think is relevant and monitor our progress thereafter. The modeling method is a dynamic process, so keep learning and keep applying the relevant know-how; it could at least improve our chances of achieving investment success. Not forgetting the wealth of knowledge that we learn from these successful mentors!

Lastly, REPEAT the above process in other areas that you wish to model.

Do You Cut Loss in Your Equity Investment?

As we progress in our investment journeys as an equity investor, it is important to recognize some of the emotional biases which could impede our wealth creation progress. 

For this sharing, I will briefly share on an emotional bias called "Loss Aversion" which was identified by Daniel Kahneman and Amos Tversky in 1979. 

Loss aversion is a bias in which people prefer to avoid realized losses as opposed to achieving gains. As a result, the investor is likely to hold on to his investment especially in some lousy companies and HOPE that the share price will one day, reach the break-even price. 

Scenario 1:

I suffered from loss aversion when I invested into Masterskill in 2010 without proper due diligence, the share price dipped subsequently due to weakening profitability but I refused to sell the company shares. I ended up holding a loser in my portfolio back then without realizing that any investment without proper due diligence is a mistake at the first place. In the end, the shares were sold at a steep loss.

Realizing losses is so painful! If an investor still hold on to the shares of lousy companies, the losses are just unrealized or paper losses, but the investor end up holding an investment in a loss position longer than justified by sound analysis. 

Warren Buffet once said :" time is the friend of a great business enterprise and the enemy for the mediocre business".

If we buy lousy companies' shares and suffer losses due to steep decline in share price coupled with minimal recovery prospect, we will need to CUT MISTAKE although the disposal of shares will result in losses. If we do not cut the mistake, the unrealized loss may increase if the share price continues to head south. This is damaging to our wealth building efforts! 

Do not invest into lousy companies in order to MINIMIZE MISTAKES.

I have a friend who had invested into Malaysia Airlines (MAS) for years despite knowing the fact that MAS had been in a loss making position for years without meaningful improvement in the company's financial position. He continued to hold on to the shares and hope that MAS would perform better one day. Subsequently, MAS was delisted in 2014 at a price which was way below his purchase cost, his unrealized loss became realized loss following the capital repayment exercise of MAS. 

If a company continues to perform poorly, the value of the share is likely to decline further, resulting in higher amount of losses to the investor if he continues to hold on to it.

At the end of the day, one way to minimize loss aversion bias would be via discipline approach to our equity investments based on fundamental analysis. 

Scenario 2:

If we invest into good companies at an attractive price and if the company continues to generate higher profits and operating cashflow, our investment value is likely to increase in the long run. The longer you hold on to the investment, the higher is your potential gains from its potential increase in share price and dividend payout.

If we are in scenario 2, the key issues to think about is not to cut loss or cut mistake, but rather to think of a way to increase our shareholding in the companies in order to earn higher share of profits in many years to come!