How To Read An Annual Report

Good read from Tee Leng of InvestingNook.

In the previous article, we touched on what you should be looking out for in an annual report. We shared with our readers that many investors skim through the annual report and perhaps only go into detail in 1 or 2 sections of the annual report, namely the financial statements.

However, we argued that they are not fully exploiting the utility of analysing annual reports. We believe that the annual report reveals much more than such numbers and figures. Hence, we highlighted three large segments that investors should be focusing on, in order.

1. Letter to shareholders
2. Comments and remarks about financial performances
3. Financial Statements

We believe that understanding the story first before interpreting the numbers is very important to gain a complete picture of the company’s profile. Only then will you be able to compare the company with others to determine investment suitability.

In this article, we will be taking a step further and highlight how you should be reading the annual report.

Know what you read
Before reading the annual report, we strongly urge you to do your homework first. To fully understand and reap maximum insights from the annual report, you need to first know the technical skills necessary to read them.
Would you dare to read a masters-level engineering textbook without first learning the basics of dynamics? Even if you do, you probably won’t understand a thing.

First, read widely and gain the pre-requisite knowledge to interpret annual reports meaningfully. If you do not know what to look out for, it will be pointless to read financial statements after statements.

Reading it actively
Most investors have heard of how great value investors like Warren Buffett who read hundreds of annual reports within a short span of time. Naively, they believe that by skimming through hundreds of reports themselves, they can achieve market-beating performances too.
The annual report reveals a lot about the business, the industry and the management. However, we are not going to lie to you, this information isn’t readily observable to the naked eye. You need to put in conscious effort to analyze the statements, interpret them and question everything.

This is so important to reduce the number of mistakes made. Having a good understand enhances your judgement. Some companies are cheap because they are deservingly so. These are otherwise known as value traps. The investments value investors look out for are cheap quality stocks and are often confused with value traps.

To know the difference is to fully understand the inner- and outer workings of the company. The only way to do this is to read annual reports actively.

Reading it repeatedly
Believe it or not, reading the annual report second and third time will provide you much greater insights than the first time. The first glance will provide you a superficial sense of how everything clicks but repeated times will reveal invaluable insights the lazy won’t bother.
Of course, putting in too much effort may be unnecessary. 80% of the information can be acquired using 20% of the time while the remaining 20% information is not worth the other 80% of the time.

Most investors, however, can’t even spare that 20% to dig out the 80%. By putting in sufficient effort, you have already gained an edge over the rest.

Conclusion
Undoubtedly, everyone has their own style. My method may not work for everyone, however, I believe it is a good starting point. I have seen some dissecting every detail, right down to the english used in the corporate governance act, I kid you not.
One thing certain is that reading your 100th Annual Report is easier than your 1st Annual Report. An Annual Report is like a book with its own plot and climax. Boring as it may seem, one has got to better learn to love it if they wish to be a better investor. Often, I would load up Annual Reports dating back 10 years on my iPad to accompany me on the plane trip to read.

CPF Minimum Sum changes: Why I will not top up my CPF (and when should you)

Good write up of CFP by this writer with a good background.
https://financialhorse.com/cpf-minimum-sum-changes/

US-China Trade War

What exactly is the real motive behind the trade war with China? Is this the start of a larger battle for dominance between the two rival powers?

https://www.channelnewsasia.com/news/video-on-demand/insight/us-china-trade-war-10736066

SINGAPORE BANKS SERIES (UOB, OCBC, DBS) – HOW DO THEY REALLY MAKE MONEY?

Layman way explanation this writer (Richard Tay-Junhao THE ASIA REPORT)👍
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Most people have an intuitive understanding of how banks money given their daily interactions with it. In this post, we are going to break it down for investors so that they can better analyze the financials.

THE BIGGEST MONEY MAKER – NET INTEREST INCOME
At their heart, banks are quite easy to understand and most people do have an understanding of how they work.

Let me use a simple analogy. Imagine you were a money lender – lending money out at let’s say 10%. In order to raise the money that you lend out, you borrow it from your family who trusts you at 5%.

The difference between your cost of borrowing from your family, and the money you lend out is 5% – which represents your spread between the two.

Banks function quite similarly.

Their “borrowing cost” is dictated by bank deposits and money they raised from the markets (bonds, preference shares), and the money they earn is derived from the interest they get from loaning this money out.

The difference between the interest they pay and the income they generate from interest on their loans is known as net interest income.

Net interest income = Interest income – interest expense

NET INTEREST MARGINS
We use net interest margin as a a measure of profitability relative to their loan book (i.e. total loans).

For example, if you were to make a net interest income of $1 on a  $100 loan, your net interest margin would be 1%.

If you were to make a higher net interest income of $2 on a $100 loan, your net interest margin would be 2%.

The higher the net interest margin – the more profitable a bank is.

Net interest margins (also known as NIMs) for banks work exactly the same way (except with more zeros at the back of course).

As interest rates start to revert back to normalized levels – net interest margins are also starting to trend up.

The market expectation is that this will continue into next year as the Federal Reserve continues to hike interest rates – something that bodes well for banks considering the importance of net interest margins to them.

EQUALLY IMPORTANT – NON INTEREST INCOME
Non interest income is exactly like what it sounds like – income generated from other activities such as credit card fees, unit trusts etc.

Although not as large in magnitude than interest income – these profit lines were extremely important to the banks when interest rates were compressed at artificial levels posts 2008 Great Financial Crisis.

Ending thoughts:
Understanding what drives the top line of banks is useful in understanding their financial performance.

In the next article, we will be talking about non-performing loans and provisioning. We will also highlight why this is one of the most important things that people miss out and that catches them off-guard during a market downturn.

WHAT IS ENTERPRISE VALUE AND HOW CAN IT HELP YOU AVOID LOSING MONEY?

Layman way to explain Enterprise Value by this writer (Richard Tay - Junhao from THE ASIA REPORT)...👍
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WHAT IS ENTERPRISE VALUE AND HOW CAN IT HELP YOU AVOID LOSING MONEY? [CASE STUDY: ASIAN PAY TV]

As a recap, the market capitalization or market cap is just:

Current Price of shares  x shares outstanding

Using a simple analogy, the price per share is the price of a slice of pizza if it is sold individually. The market capitalization is the price of the whole pizza (i.e. price of each pizza slice x total number of pizza slices).

WHAT IS ENTERPRISE VALUE?

Enterprise value or EV is a measure of a company’ total value.

It is a much more accurate measure than just using the share price or market capitalization.

Enterprise value provides an even more accurate measure because it includes in the price the debt, minority interest, preferred shares and subtracts out the total cash and cash equivalents. 

HONING IN ON THE DEBT

Minority interest and preferred shares tend to be less significant so we are going to ignore that for now and focus on the debt and cash element.

If you were to buy 100% of any company on the market, not only would you acquire its assets but also its liabilities. 

So imagine if you bought a company for $1,000 which had $500 in its bank account – naturally you would subtract that $500 from your purchase price.

Similarly, if the company had borrowed $500 from a bank, you would also add that “obligation” to the purchase price.

THE CASE OF ASIAN PAY TELEVISION

Ironically, businesses with more stable cash flows are normally able to leverage up their balance sheet more. They typically entice investors buy paying high dividends initially.

However, these dividends are rarely sustainable simply because of the company’s debt load. 

A change in business climate will force them to divert their cash flows to paying down their debt or higher interest charges – leaving less money for dividends which was exactly the case here.

KEY TAKEAWAY:

Companies that have extremely high enterprise values relative to their market caps are normally highly geared. This makes them particularly vulnerable to disruptions in their business.

Leverage magnifies outcomes. In good times, it can add a significant boost to your earnings. In bad times however, it can be devastating to the company.

Always assess the net debt position of a business – especially companies which are dividend plays to assess how sustainable the dividends are.

Negative Rates 'Distort' Everything: Warren Buffett | CNBC

Teach Your Kids to Spend, Save and Share

Great article on parenting, to teach your children about financial literacy.
#1 Spend
Buy things that you need and want now.

#2 Save
Set money aside to buy things in the future.

#3 Share
Donate money to help people or buy something to share with your siblings or friends.

Japanese Buddhist Master reveals 21 rules of life

Powerful rules to cultivate acceptance are through continued practice in your actions and your attitude. The two things we actually have control over.

And these rules give you the necessary guidelines to do just that.

It might take months to rewire your brain, but it’s well worth it.

Check them out:

1) Accept everything just the way it is.

Acceptance is perhaps the most important attitude to overcome mental challenges in life.

It’s a state of mind. There’s no destination or goal with acceptance. It’s simply the process of exercising the mind to be tolerant of anything life throws at us.

Why is it powerful?

Because instead of fighting against negative emotions like anxiety and stress, you’re actually accepting them the way they are. You’re not bitter, and you’re not creating more negativity out of your negativity.

Through acceptance you pave the path for negative emotions like anxiety to become less powerful. You’re not fighting against them and making them worse.

But to be clear: Acceptance is not the following: It’s not indifference or apathy. It does not involve giving up or not trying. It’s simply about accepting things without judging them.

It is what it is. Whatever happens. It’s about being patient and allowing the natural flow of things to take place.

2) Do not seek pleasure for its own sake.

As humans, we’re unhappiest when we become dissatisfied with what we have, and decide that we want more.

When we seek pleasure for pleasure’s sake, we put ourselves in an endless loop of desiring that’s only temporarily satisfied when we experience that pleasure.

But feelings don’t last forever. And before you know it, you’ll back desire again.

This doesn’t mean you can’t have fun and enjoy pleasure when you experience it. It just means you won’t be constantly seeking pleasure for its own sake. You appreciate what you have in every moment, and sometimes that will be pleasurable emotions.

But you also won’t be unhappy when you aren’t experiencing pleasure.

3) Do not, under any circumstances, depend on a partial feeling.

Same as above, feelings don’t last forever. Emotions are transient. You won’t be happy all the time, and wanting to be so will only make you unhappy.

4) Think lightly of yourself and deeply of the world.

When you think of yourself too much, you amplify your ego and your insecurities.

Happy people are the ones who focus on helping others. There’s a beautiful Chinese Proverb which describes this perfectly:

“If you want happiness for an hour, take a nap. If you want happiness for a day, go fishing. If you want happiness for a year, inherit a fortune. If you want happiness for a lifetime, help somebody.”

In other words: Be humble, don’t take yourself too seriously and focus on helping others.

5) Be detached from desire your whole life long.

Buddhism says that desiring leads to suffering. Why? Because when you’re desiring, you’re dissatisfied with what you have right now.

And when you get what you want, this leads you down an endless loop of desiring.

If you can forget about the idea of wanting, you can learn to be comfortable and gratefulfor what you have right now, which is key to inner peace.

6) Do not regret what you have done.

Regret is a useless emotion, isn’t it? You can’t change what’s happened. Yes, you can learn from what happened, but that doesn’t involve experiencing regret.

I know that sometimes we can’t help but regret things in life, but it’s important not to dwell on it. It’s useless to do so.

7) Never be jealous.

Another useless emotion. It also means you’re insecure with yourself, because you’re envious of someone else.

Instead, look inside yourself and be grateful for who you are and what you have.

8) Never let yourself be saddened by separation.

It sucks to separate from someone you want to be with. But getting sad over it won’t help you or them.

Sometimes you just need to toughen up and appreciate what you have, not what you lose.

9) Resentment and complaint are appropriate neither for oneself nor others.

Again, complaining without action doesn’t help you achieve anything. It only serves to raise your toxic energy.

And don’t let what other people do affect you as well. You’re not in control of what they do. But you are in control of how you react to what they do.

10) Do not let yourself be guided by the feeling of lust or love.

This one’s probably a controversial one for many. For me, too. I think we can all agree that you don’t want to be guided by lust. It’s similar to chasing emotions that don’t last forever and will only give you temporary fulfilment.

Love, however, is a different story. I don’t know about you, but I think that love is one of the most important emotions to be guided by. Your family is everything, whoever they are, and your life is much more fulfilled when you do whatever you can for them.

11) In all things have no preferences.

Similar to desiring, by having preferences, you’re not happy with what you have right now. You’re dissatisfied and unable to enjoy the present moment.

So if you can, try not to prefer something over something else, especially if you can’t control it.

12) Be indifferent to where you live.

If you can change where you live, then by all means go ahead. And don’t stop looking for opportunities to do so.

But besides doing that, it’s more fulfilling to appreciate where you are right now, rather than wishing it were different.

13) Do not pursue the taste of good food.

Interesting one. Focus on eating to be healthy and for nourishment. Desiring delicious food can lead to addiction and attachment. This goes for alcohol and drugs, too.

14) Do not hold onto possessions you no longer need.

It’s easy to get cluttered with junk that you don’t need. But if it’s not benefiting your life, get rid of it. More space and clear thinking is what’s needed. Not more stuff.

15) Do not act following customary beliefs.

Follow your own common sense. Do what makes sense to your own values, not what other people think. Decide for yourself.

You know what’s right and wrong. You don’t need someone else to tell you.

16) Do not collect weapons or practice with weapons beyond what is useful.

A tribute to his swordsman time, but we can apply this for our lives, too. It’s better to be an expert in one thing, than okay at everything.

17) Do not fear death.

Extremely hard to do. But it’s something none of us will escape. We can either learn to accept that our own and our close one’s time will eventually come, or fight against it causing anxiety and sadness for the rest of our lives. The human body is fallible, after all.

18) Do not seek to possess either goods or fiefs for your old age.

What good will they do you when you’re gone? Only collect what is useful. Don’t waste your time.

19) Respect Buddha and the Gods without counting on their help.

Take responsibility for yourself. Don’t count on luck or god to pull you through. Tackle the endeavors you know are within your capabilities. Keep doing the right thing and everything else will fall into place.

20) You may abandon your own body but you must preserve your honor.

Don’t do anything that you won’t be able to live with for the rest of your life. Your actions define you, not your beliefs.

21) Never stray from the way.

Stay humble, do the right thing and always keep learning and growing.

Warren Buffett Says Integrity Is the Most Important Trait to Hire For. Ask These 12 Questions to Find It

12 questions to ask when interviewing and hiring for integrity.

Practically speaking, assessing integrity is really about asking the right questions that will get to the core of a person's character (in addition to standard tests/assessments, "job auditions," and role-play exercises). But first, whomever is on the interviewer's seat must be skilled in the science of behavioral interviewing. Here are twelve questions I have used in the past:

1. Tell me about a time when you experienced a loss for doing what is right. How did you
react? 

2. Tell about a time when your trustworthiness was challenged.  How did you react/respond?

3. Tell about a specific time when you had to handle a tough problem which challenged fairness or ethnical issues. 

4. When was the last time you "broke the rules"? What was the situation and what did you do?

5. What would you do if you suspected that an employee was stealing?

6. Describe a situation where you saw an employee or co‐worker do something you thought was inappropriate. What did you do?

7. Think of a situation where you distrusted a co-worker/supervisor, resulting in tension between you. What steps did you take to improve the relationship. 

8. When working with people, in general, describe your preferred relationship with them. (this question is used to assess honesty and the capacity for open communication.)

9. What values do you appreciate the most in a team environment? [you're looking for things like honesty, fairness, openness, transparency, and inclusiveness in your answers.)

10. If we ever got into a bind with a client, would you be willing to tell a little white lie to help us out?

11. What would your current/past manager say makes you most valuable to them? (Besides intelligence, energy or technical and hard skills, listen for clues that point to integrity.)

12. What are the characteristics exhibited by the best boss you have ever had, or wished that you have had? (A person of integrity will mirror those they follow or look up to, so listen for clues.]

Remember: No integrity = no trust. Your hiring team must ensure that, no matter how talented, experienced, and smart job candidates are, they will protect your company, your employees, and your customers by hiring people every person can trust.

Integrity, intelligence, and energy = a great hire.

VOLATILITY at Work

The stock market as measured by the Dow Jones Industrial Average fell 1,175 points on Monday, 5 Feb 2018. That was the largest one-day point drop in history.

Still, the decline was relatively tame when measured in percentage terms. The Dow Jones fell 4.6% on the day, a significant loss, but far from the 22% one-day drop on Oct. 19, 1987, and the 24% two-day drop on Oct. 28-29, 1929.

Monday was a bad day for stock investors, but the market bounced back on Tuesday to some extent. It was not the end of the world.

Yet, investors should not take too much comfort from the single-digit percentage drop on Monday and the bounce-back on Tuesday. Markets came much closer to a catastrophic meltdown than many investors realize.

The reason for the near catastrophe was the same as the reason for actual catastrophic losses in 1987, 1998 and 2008 – derivatives, leverage and opaque financial structures.

While stocks were down 4.6% on Monday, the leading measure of volatility, the CBOE Volatility Index (VIX) rose 116% on the trading day. And, an even more obscure exchange traded note (ETN) called the “Daily Inverse Vix” (XIV) fell almost 80% in the two hours after trading ended.

VIX does not necessarily trade in a linear way relative to underlying stocks. While stocks fell 4.6% on Monday, VIX rose 116%. This was indicative of the fact that traders see the stock market fall as the end of an extraordinarily long period of low volatility.

The VIX was trading on an historically low baseline. The rise in VIX reflected not only Monday’s volatility, but also an expectation that higher volatility is here to stay at least for a while.

XIV is an even stranger animal. It is a note that pays the holder a return based on the inverse of VIX. If VIX drops, the XIV note holder earns a higher return. If VIX rises, the XIV note holder suffers a loss. That much is clear. What is not as clear is why a 116% rise in VIX led to an 80% drop in XIV.

Berkshire Hathaway's 13-F filing on November 14, 2017.

Holdings are as of September 30, 2017 as reported in Berkshire Hathaway's 13-F filing on November 14, 2017