Rambling about Bull Call Spread on ROK

NYSE:ROK current price: $61.70

APR 12 BUY TO OPEN 1 CALL @ $35 for US$28.2 = $2,800
    Break Even = $35 + 28.2 = $63.2
        vs
    Current Price of $61.7. Difference = US$1.50

SEP 11 SELL TO OPEN 1 CALL @ 65 for US$1.2 = $1,200
    Break Even = $63.2 - $1.2 = $62
        vs
    Current Price of $61.7. Difference = US$0.3


At expiry,    
        if price is above $65, SEP 11 is called.
            I have to exercise my APR 12 call, need to pay US$35.
            Total paid so far = Break Even = $62
            I will be called SEP 11. Credit $65. Earn $3 * 100 = $300

        if price is below $65, SEP 11 expired worthless.

            If say the price is $57, I will have paper loss of $5.
            By then, the price of next-month's $60 will be around $1. If I sell next month CALL @ $60 for $1, I run into the RISK of $62 (break even) - $60 (called assignment price) - $1 (call premium) = $1 at risk if the price jumps above $60 and I get my call assigned.

            If each month for the next 7 mths (from Oct '11 - Apr '12), I get to sell for $1 credit, Final Break Even Price = $62 - $7 = $55

Disclaimer: I am not promoting an analysis on any stocks. The example on ROK is purely for illustration purpose. I could have used any stocks for this exercise and achieve somewhat similar probability outcome. If you want to use this for real life trade, do so at your own risk.

Vehicles of Investment.

Dear Readers,

How many forms of investment vehicles are you exposed to? How many of these are you employing in your financial plan?

I have gotten a fair bit of exposure to different kinds:

1. Savings
• I bet almost all my readers do have a savings account. This is by right the best capital protected form of investment available. Capital protection does not mean safe, though. Main reason because the interest paid is normally meager compared to the rate of inflation. Thus, your money decays away as the cost of goods increases.
• These days, there are more and more financial banks offering competitive enhanced savings account with higher interest rates. To name a few are POSB My Savings, OCBC Monthly Savers, Standard Chartered XtraSavers, Citibank Step Up Account and a few others.
• However, this form of investment is mainly for my daily uses substitute of cash. Not for interest sake
2. Fixed Deposit
• This vehicle is normally offered by banks. The interest rate is slightly higher than Savings but your money is locked in for a couple of months or years. 
• Again, Return on Investment is not significant.
3. Mutual Funds/Unit Trust
• I started on this in the year 2007 via Fundsupermart. Financial crisis year? Tough luck...
• Lesson learned from this mode of investment is that if you do not want to actively manage your money, you let others' do it. But, there is a price to pay. Those fund managers can be pretty costly.
• Why do I say so? In the financial downturn, your funds goes downwards, you suffer paper loss and at the same time still have to pay those "hardworking" fund managers who cannot do much to bring the fund to give you some gains.
• So, early 2011, I moved on... cutting loss and leaving the Unit Trust world.
4. Stocks
• Large population of Singapore residents are into this baby. I ventured into this mode of investment because Unit Trust costs money. Why let fund managers manage the funds if you can get your hands dirty with stocks investment itself?
• I started my trade with penny stocks which I have regretted to this date. It is a lesson learned not to own stocks you do not want to hold for long. Because, you will end up holding onto them with losses.
• I have ventured into US Stocks as well. There are generally more volatility in US market as compared to SG market. More gains and/or more losses.
5. Warrants
• Similar to stocks, this instruments are time-bound and are leveraged. With small amount of money, you can win big or lose big.
• However, since it is time-bound, there is time decay. As time goes by, your warrants loses time value, thus it loses money.
• With warrants, you can buy either call (similar to having a long/buy position of the underlying stock) or put (similar to having a short/sell position of the underlying stock)
6. Options
• This mode of investment is very similar to warrants. While warrants allow you to be on the buyer side for call and put, options allow you to be on the side of either the buyer or the seller side of both call and/or put.
• Options are time-bound and are leveraged, too
• However, I learned many strategies with options which can put you into gambler hat or conservative Scrooge McDuck (Donald Duck's uncle)
• Let's talk a little on the conservative side:
• Capital secured Put: With this, you place money into the brokerage house in view to buy a stocks at a certain strike price with a certain expiry date. You Sell To Open a put option and get paid some premium (^$-$^) . If the stocks goes higher than your strike price at expiry date, you get to keep the premium and nothing happened. If the stocks goes lower than the strike price, you get assigned the stocks. Note: Do NOT place this bet on stocks you do not wish to own.
• Covered Call: If you own some stocks which has options chain (or assigned a stock because of the Capital Secured Put strategy), you can "rent out" these stocks using covered call. Here, you Sell To Open a call option on the stocks you own with a certain strike price (choose strike price higher than your cost basis/average price, or you will end up losing money on the trade). With this trade, you will also get paid some premium (^$-$^)
• I shall update some other strategy which can be done with options.
7. There are many more investment vehicles which I have yet to get my hands into (not in order of importance)
• Forex
• Treasury Bill and Govt Bonds
• Land Investment
• Wine Investment
• Antiques
• Property investment

Let's hope that as time goes by, these vehicles can provide me with smoother rides into the RICHER destination

~ Erwin Liong ~

Comeback

Finally, after almost a year of not writing an entry, I think it is time for a comeback and being more disciplined in writing on my financial adventure.

So that, perhaps, the future me or anyone in the virtual world can learn from my story. 

8 Money Secrets From Warren Buffett (Extracted off Facebook)

Posted by S.Zschoche on December 19th, 2009

We all have someone whom we admire and respect. For me one person on my shortlist is Warren Buffett who is sometimes referred to as the “Sage of Omaha“. I first heard about Buffett back in 2001 when I first started getting serious about investing and so I started reading all the titles with his name on it.

Of course Buffett hasn’t actually written any of them but they were priceless none the less.
If you have never heard of Buffett, Forbes currently ranks him as the third richest man in the world and he is arguably the world’s greatest investor. He has amassed his fortune by making astute investment decisions and investing in businesses. Here is what I have learnt from Buffett:

1. Rich Is A State Of Mind

“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” – Warren Buffett
The difference between being poor and being rich is really just a state of mind. Poor people think thoughts of poverty and lack, rich people think thoughts of abundance and prosperity. Your beliefs are going to determine the way you perceive wealth, the decisions you make and the way you act towards it.

2. Success Is More Than About Your Bank Balance

When asked by CNBC what is the secret to success, Buffett replied “If people get to my age and they have the people love them that they want to have love them, they’re successful. It doesn’t make any difference if they’ve got a thousand dollars in the bank or a billion dollars in the bank… Success is really doing what you love and doing it well. It’s as simple as that. I’ve never met anyone doing that who doesn’t feel like a success. And I’ve met plenty of people who have not achieved that and whose lives are miserable.”

3. Spend Less Than You Earn

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” -Warren Buffett

It seems like common sense advice and you’ve no doubt heard financial experts preaching about it for years. You can’t possibly get ahead financially if you’re spending more than your paycheck. Buffett is famous for living a simple and frugal lifestyle.

He is the only billionaire I know that still lives in the same house he bought back in 1958 for $31,500. He drove a 2001 Lincoln Town Car for years which he bought second hand. Buffett has a net worth in excess of $52 billion and yet lives off an annual salary of $100,000. The relative percentage of his spending based on his overall net worth is minuscule.

4. Avoid Consumer Debt

The sooner we realize that consumerism is a social plague that has been propagated by billion dollar marketing machines to keep you shackled to your job, the sooner we can stop spending money on useless stuff. It is a fool’s game to spend today so that you can work tomorrow to pay it off. It is a losing proposition because one day your working days are going to be over but the debt is still going to be hanging over your head.

Clever marketing has convinced our society that to be happy you have to have more, be more and do more. Buffett abhors consumer debt instead choosing to use debt wisely by leveraging it in investments. To help you deal with your debt consider reading “How To Get Yourself Out Of Debt“.

5. You Are Who You Associate With

“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” -Warren Buffett
If you want to succeed financially you need to associate with people who are most conducive to encouraging and cheering on your financial journey. If the people you associate with see money as evil, object to capitalism and find wealth a foreign concept then your financial health and well being is going to be influenced by their views.

Whether we like it or not we are all influenced to some extent by the people we spend our primary time with. If you aspire to achieve financial security then you need to find a mastermind of people in your life whom you can all encourage and help each other.

6. Gambling Is A Fools Game

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett
While we are young and naive we choose to take risks with our money that are dumb and stupid. Trying to hit a home run with your money every time is a losing proposition with long term consequences. To chase investments that offer a high rate of return you must also assume that it also comes with a higher rate of risk.

Bill Gates once quipped “Warren’s and my betting has always been confined to $1 bets” when talking about them paying poker together. If two billionaires take risk management this seriously, it’s time we average punters did the same thing.

7. Give Back To The Community

“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.” – Warren Buffett
They say that to have more you need to give more. A contradiction in terms, maybe, but it’s a simple truth that is as enduring as time.

As the bible says “It is more blessed to give than to receive -Acts 20:35”. Buffett has announced in 2006 that he was giving away over $30 billion to the Bill and Melinda Gates Foundation making it at the time of writing the largest charitable donation in history. He also contributes large sums to his children’s charitable foundations.

8. Generosity and Abundance Goes Hand In Hand

“Even though Ben Graham [Buffett's mentor] had everything he needed in life, he still wanted to give something back by teaching, So just as we got it from somebody else, we don’t want it to stop with us. We want to pass it along too.” – Warren Buffett

A famous bible quote goes: “What benefit will it be to you if you gain the whole world but lose your own soul?” – Mark 8:36. The path to wealth isn’t a solo endeavor. How sad would life be if you come to the end of your life and there is no one to share it with.

So as you journey on your path to financial abundance remember that there will be many people who generously helped you on your journey so it is only fitting to pay it forward when the opportunity arises. Generosity with your time, with your money, with your resources are great virtues to have. The greatest ally to building a strong friendship is to help others achieve what they want from life.

I leave you with this last quote “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

STI Components Evaluation CY2009 ending 30th Dec 09

Company	Price (31/12/08)	Price (31/12/09)	Capital Gain	Capital Gain (%)	Dividend	Dividend Yield (%)	Total Yield (%)
Kep Corp	4.33	8.22	3.89	89.84%	0.36	4.38%	47.11%
Jardine C&C	9.39	26.72	17.33	184.56%	0.47	1.76%	93.16%
CityDev	6.37	11.46	5.09	79.91%	0.075	0.65%	40.28%
Capitaland	2.507	4.2	1.693	67.53%	0.07	1.67%	34.60%
CapitaMall	1.185	1.76	0.575	48.52%	0.101	5.74%	27.13%
ComfortDelgro	1.45	1.63	0.18	12.41%	0.0503	3.09%	7.75%
SIA	9.866	14.88	5.014	50.82%	0.2	1.34%	26.08%
Starhub	1.94	2.14	0.2	10.31%	0.185	8.64%	9.48%
DBS	8	15.3	7.3	91.25%	0.56	3.66%	47.46%
GoldenAgri	0.226	0.505	0.279	123.45%	0	0.00%	61.73%
Wilmar	2.79	6.43	3.64	130.47%	0.075	1.17%	65.82%
CoscoCorp	0.95	1.18	0.23	24.21%	0.07	5.93%	15.07%
F&N	2.95	4.22	1.27	43.05%	0.115	2.73%	22.89%
Genting SP	0.508	1.26	0.752	148.03%	0	0.00%	74.02%
NOL	1.174	1.63	0.456	38.84%	0.04	2.45%	20.65%
NobleGroup	1.02	3.17	2.15	210.78%	0.064273	2.03%	106.41%
Olam	1.15	2.63	1.48	128.70%	0.035	1.33%	65.01%
OCBC Bk	4.99	9.08	4.09	81.96%	0.28	3.08%	42.52%
SembMar	1.68	3.67	1.99	118.45%	0.11	3.00%	60.72%
SMRT	1.59	1.92	0.33	20.75%	0.0775	4.04%	12.40%
SIA Engg	1.89	3.35	1.46	77.25%	0.16	4.78%	41.01%
ST Engg	2.37	3.24	0.87	36.71%	0.158	4.88%	20.79%
SGX	4.925	8.28	3.355	68.12%	0.262	3.16%	35.64%
SPH	2.93	3.67	0.74	25.26%	0.25	6.81%	16.03%
UOB	12.72	19.68	6.96	54.72%	0.6	3.05%	28.88%
SembCorp	2.21	3.68	1.47	66.52%	0.11	2.99%	34.75%
Singtel	2.55	3.1	0.55	21.57%	0.131	4.23%	12.90%
HKLand US$	2.48	4.81	2.33	93.95%	0.13	2.70%	48.33%
JMH 400US$	18.5	29.98	11.48	62.05%	0.76	2.54%	32.29%
JSH 500US$	10.4	17.74	7.34	70.58%	0.191	1.08%	35.83%
STI ETF	1.84	2.95	1.11	60.33%	0.09	3.05%	31.69%

STI Components Evaluation CY2008

If you feels like comparing the result of CY2008 and CY2009. Here are the data:

Company	Price (31/12/07)	Price (31/12/08)	Capital Gain	Capital Gain (%)	Dividend	Dividend Yield (%)	Total Yield (%)
Kep Corp	13	4.33	-8.67	-66.69%	0.69	15.94%	-25.38%
Jardine C&C	21.69	9.39	-12.3	-56.71%	0.46	4.90%	-25.90%
CityDev	14.2	6.37	-7.83	-55.14%	0.2	3.14%	-26.00%
Capitaland	4.613	2.507	-2.106	-45.65%	0.15	5.98%	-19.84%
CapitaMall	2.071	1.185	-0.886	-42.78%	0.1298	10.95%	-15.91%
ComfortDelgro	1.83	1.45	-0.38	-20.77%	0.0525	3.62%	-8.57%
SIA	15.229	9.866	-5.363	-35.22%	1	10.14%	-12.54%
Starhub	2.81	1.94	-0.87	-30.96%	0.18	9.28%	-10.84%
DBS	15.187	8	-7.187	-47.32%	0.8	10.00%	-18.66%
GoldenAgri	0.99	0.226	-0.764	-77.17%	0.013	5.75%	-35.71%
Wilmar	5.39	2.79	-2.6	-48.24%	0.054	1.94%	-23.15%
CoscoCorp	5.78	0.95	-4.83	-83.56%	0.07	7.37%	-38.10%
F&N	5.9	2.95	-2.95	-50.00%	0.135	4.58%	-22.71%
Genting SP	0.704	0.508	-0.196	-27.84%	0	0.00%	-13.92%
NOL	2.769	1.174	-1.595	-57.60%	0.14	11.93%	-22.84%
NobleGroup	2.025	1.02	-1.005	-49.63%	0.0248	2.43%	-23.60%
Olam	2.779	1.15	-1.629	-58.62%	0.025	2.17%	-28.22%
OCBC Bk	8.29	4.99	-3.3	-39.81%	0.28	5.61%	-17.10%
SembMar	4.04	1.68	-2.36	-58.42%	0.1016	6.05%	-26.18%
SMRT	1.62	1.59	-0.03	-1.85%	0.0775	4.87%	1.51%
SIA Engg	4.36	1.89	-2.47	-56.65%	0.21	11.11%	-22.77%
ST Engg	3.75	2.37	-1.38	-36.80%	0.1788	7.54%	-14.63%
SGX	13.265	4.925	-8.34	-62.87%	0.385	7.82%	-27.53%
SPH	4.32	2.93	-1.39	-32.18%	0.27	9.22%	-11.48%
UOB	19.7	12.72	-6.98	-35.43%	0.65	5.11%	-15.16%
SembCorp	5.69	2.21	-3.48	-61.16%	0.15	6.79%	-27.19%
Singtel	4	2.55	-1.45	-36.25%	0.125	4.90%	-15.67%
HKLand US$	4.94	2.48	-2.46	-49.80%	0.15	6.05%	-21.87%
JMH 400US$	27.7	18.5	-9.2	-33.21%	0.69	3.73%	-14.74%
JSH 500US$	15.7	10.4	-5.3	-33.76%	0.183	1.76%	-16.00%
STI ETF	2.9	1.84	-1.06	-36.55%	0.12	6.52%	-15.01%

The Little Book of Value Investing by Christopher H. Browne

Balance Sheet - how much money the company owes and its net worth

• Current assets : cash and assets that can be turned into cash in a relatively short period
  • T-bills
  • Inventories that are finished products ready for sale or products that are in process of being manufactured
  • Receivables from customers who have bought their products
• Current liabilities : debts that fall due within a year or less
  • Interest payment on company borrowings
  • Account payable to the company's suppliers
  • Taxes owed but not yet paid
• Current Ratio = Current Liabilities / Current Assets
  • Companies ability to pay its short-term obligations
  • Guideline: 2-to-1 ratio
  • Compared with other companies, LOWER ratio means possible LIQUIDITY PROBLEM
  • Steadily declining year over year means SERIOUS LIQUIDITY PROBLEM
• Working Capital = Current Assets - Current Liabilities
  • Guideline : The more the better
• Quick Ratio = (Current Liabilities / Current Assets) - Inventories
  • Rising inventories may indicate a product that has decreased in popularity and will be difficult to sell at a profit
• Long-term assets
  • Real estate, Factories, Warehouses and equipment
  • Investment in subsidiaries or stocks that is not intended to be sold
  • Intangible assets such as patents, trademarks, copyrights (usually not taken into consideration because difficult to get exact valuation)
• Long-term liabilities
  • Bank loans
  • Public and private bond issues
  • Long-term leases for property or equipment
• Shareholder Equity (Book value) = Assets - Liabilities
  • Liabilities growing faster than assets means company has to borrow more and more money just to stay afloat
• Debt-to-Equity Ratio = Total Debts / Shareholder Equity
  • Guideline: less than 1
  • If number is higher than 1, company is funded primarily by debt rather than equity investment

Income Statement - how much money the company took in over a period of time (sales or revenue) and how much it paid out (expenses)

• Company's sales or revenues
  • To be compared to previous years
  • Guideline: Revenues growing over time
• Cost of goods sold : direct cost of producing product or service the company sells
  • Raw materials
  • Manufacturing or labor costs of making product
  • INCREASING % of (COGS / revenues) means rising costs that cannot be passed on to the costumers are squeezing the long-term potential for profit
• Gross profit = Revenues - COGS
• % Gross Profit Margin = Gross Profit / Revenues
  • Guideline: steadier gross profit margin means better business
• Operating expenses : selling, general and administrative expenses
  • Guideline: Lower % of (Operating Expense / Revenue) is better
• Operating Profit (EBIT : Earnings Before Interest and Taxes) = Gross Profit - Operating Expenses
  
• Net Profit (Final Earnings) = Operating Profit - Interest Expense - Taxes - Depreciation
  
• Earnings Per Share (EPS) = Net Profit / Outstanding Shares
  • Diluted EPS : taking into consideration stock options, issued bonds, preferred stock or warrants are converted to stock
  • Guideline : Diluted EPS very much lower than EPS means earning is not as cheap
  • Recommended to use EBIT instead of Net Profit
    
• Questions on Trend over 5 or 10 years:
  • Are revenues rising or falling?
  • Are expenses staying in line with revenues?
  • Are profits consistent or uneven?
  • Is there a cyclical pattern to earnings such as would be the case with economically sensitive companies?
  • Are profits growing?
  • Are there a lot of one-time charges or gains to indicate the company may be manipulating or massaging the bottom line?
  • Are shares outstanding decreasing?
    • Rising shares outstanding indicate excessive stock options are being granted to executives and will dilute share of corporate profits
    • Company is financing itself through stock offerings rather than earnings
• Return on Capital (ROC) = Earnings / Beginning Year Capital (stockholder Equity + Debt)
  • Rising ROC means company is doing a good job of reinvesting profits
• Net Profit Margin = Earnings / Total Revenues
  • Guideline: avoid companies with declining Net Profit Margin

The book The Little Book of Value Investing (Little Books. Big Profits) can be obtained from Amazon.