Categories
Finance

Notes on The Intelligent Investor by Benjamin Graham

Those who do not remember the past are condemned to repeat it.

George Santayana (1863—1952)

The “Intelligent Investor” is defined as someone who is patient, disciplined and eager to learn; he must be able to harness his emotions and think for himself. This kind of intelligence is more trait of character than of brain.

Defensive Investor

A defensive investor is someone who is chiefly interested in safety and freedom from bother.

The portfolio allocation between high-grade bonds and leading common stock should never be less than 25% or more than 75% respectively. E.g. 25% bonds / 75% stock or 40% bonds / 60% stock.

The simplest is to maintain a 50:50 ratio between bonds and stock.

Rules for Common Stock Component

  • 10 – 30 different stocks
  • Each company selected should be large, prominent and conservatively financed
  • Each company should have a long record of continuous dividend payments
  • Be priced at not more than 20-25x earnings. This pretty much eliminates all “growth” stocks.

Enterprising Investor

An enterprising investor takes a more proactive role in managing his portfolio in hope of getting better returns. To obtain a better than average return over a long period of time requires a policy of selection or operation possessing a two-fold merit:

  • It must meet objective or rational tests for underlying soundness
  • It must be different from the policy followed by investors and speculators

This leads to three investment approaches that meet this criteria.

Recommended Investment Fields

  1. The relatively unpopular large company
  2. Bargain issues
  3. Special situations/workouts

Stock Selection

Criteria for Defensive Investor

  • Diversification – 10 to 30 stocks
  • Adequate size of the enterprise – at least $700m in annual sales
  • Sufficiently strong financial condition – current ratio of least 2
  • Earnings stability – positive earnings in the last 10 years
  • Dividend record – no missed dividends in the last 20 years
  • Earnings growth – earnings growth of 2.9% annually
  • Moderate price-to-earnings ratio – P/E < 15
  • Moderate price-to-assets ratio – P/B < 1.5

P/E * P/B < 22.5

Factors Affecting Capitalisation Rate

“Capitalisation” refers to the factors that influences a company’s long term earning potential. Graham feels 5 elements are decisive:

  1. Long-term prospects
  2. Quality of its management
  3. Financial strength and capital structure
  4. Divided record
  5. Current dividend rate

In determining value of growth stocks, capitalisation rate is a multiplier on earnings.

Value = Current Earnings * [8.5 + 2(Expected Annual Growth Rate)]

Simple Formula for Valuation of Growth Stocks

Example: SATS Ltd.

Current Earnings (EPS) = $0.2010
Expected Annual Growth Rate = ?
Current Value = $2.62

2.62 = 0.2010 * (8.5 + 2x)
8.5 + 2x = 2.62/0.2010
2x = 2.62/0.2010 – 8.5
2x = 4.53
x = 2.265%

The expected growth rate based on current earnings and share price for SATS Ltd. is 2.26%. Now, is this realistic?

Margin of Safety

Price < 2/3 Value. Or trading at a 33% discount.

Useful Metrics

Return on Invested Capital (ROIC)

Categories
Finance

Notes on ETF

S&P500

The three most popular ETFs that track the S&P 500 are offered by State Street (SPDR), Vanguard (VOO), and iShares (IVV).

Expense Ratio:
SPDR: 0.09%
VOO: 0.04%
IVV: 0.04%

SPDR has much high trading volume making it preferable for traders.

Returns

1 yr3 yr5 yr10 yrSince Inception
SPDR0.73%8.89%8.99%11.56%9.24%
VOO0.73%8.97%9.07%12.98%
IVV-7.01%5.07%6.68%10.47%4.91%
The difference in returns for 1 yr number is probably due to when the numbers were last updated.

Sources

Bond ETFs

Two significant bond ETFs are the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG) and the Vanguard Total Bond Market ETF (NYSEARCA: BND). Both have exposure to U.S. investment grade bonds.

Expense Ratio
AGG: 0.04%
BND: 0.035%
BNDX: 0.08%
BNDW: 0.06%

Returns

1 yr3 yr5 yr10 yrSince Inception
AGG8.804.76%3.28%3.79%4.18%
BND11.03%5.19%3.78%3.91%4.48%
BNDX6.15%4.71%3.83%4.20%
BNDW8.56%7.93%

Sources

Tech Focused ETFs

Expense Ratios
QQQ: 0.20%
VGT: 0.10%

Returns

1 yr3 yr5 yr10 yrSince Inception
QQQ6.61%13.75%13.59%15.90%7.11%
VGT14.81%21.79%19.08%16.79%11.07%
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QQQ

Invesco QQQ (previously known as Powershares QQQ) tracks the Nasdaq 100 Index. TQQQ is the leveraged version of this ETF and is an intra-day instrument.

The Nasdaq 100 Index is composed of 100 of the largest international and domestic companies, excluding financial companies, that are listed on the Nasdaq stock exchange, based on market capitalization. Therefore, QQQ is heavily weighted toward large-cap technology companies and is often viewed as a snapshot of how the technology sector is trading.

As of Dec. 31, 2019, the sector breakdown of QQQ was:

  • Information technology: 47.35%
  • Telecommunication services 20.88%
  • Consumer discretionary: 14.70%
  • Health care: 7.23%
  • Consumer staples: 5.98%
  • Industrials: 2.68%

The top 10 holdings of QQQ, as of Dec. 31, 2019, were:

  • Apple (AAPL): 11.59%
  • Microsoft (MSFT): 10.69%
  • Amazon.com (AMZN): 8.14%
  • Facebook (FB): 4.39%
  • Alphabet (GOOGL) Class A shares: 4.09%
  • Alphabet (GOOG) Class C shares: 4.08%
  • Intel (INTC): 2.95%
  • Cisco Systems (CSCO): 2.31%
  • Comcast (CMCSA): 2.31%
  • PepsiCo (PEP): 2.17%

VGT

  • Seeks to track the performance of a benchmark index that measures the investment return of stocks in the information technology sector.
  • Includes stocks of companies that serve the electronics and computer industries or that manufacture products based on the latest applied science.

Month-end 10 largest holdings
(59.70% of total net assets as of 03/31/2020 )

1Microsoft Corp.
2Apple Inc.
3Visa Inc.
4Intel Corp.
5Mastercard Inc.
6Cisco Systems Inc.
7Adobe Inc.
8NVIDIA Corp.
9salesforce.com Inc.
10Oracle Corp.

Sources

World ETFs

VT

  • Invests in both foreign and U.S. stocks.
  • Seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.
  • Has high potential for growth, but also high risk; share value may swing up and down more than U.S. or international stock funds.
  • Only appropriate for long-term goals.

Expense Ratio: 0.04%

Region Allocation

10.00%Emerging Markets
17.30%Europe
12.60%Pacific
0.20%Middle East
59.50%North America
0.40%Other

Top Holdings
(12.80% of total net assets) as of 03/31/2020)

1Microsoft Corp.
2Apple Inc.
3Amazon.com Inc.
4Alphabet Inc.
5Facebook Inc.
6Berkshire Hathaway Inc.
7Johnson & Johnson
8Alibaba Group Holding Ltd.
9Nestle SA
10Tencent Holdings Ltd.
Categories
CPF

CPF Notes

CPF Contribution Rates

Up to 55 years of age:

  • Employee – 20%
  • Employer – 17%

Example

A person with a salary of $5,000 has a take-home pay of $4,000 of which 20% or $1000 is contributed to CPF. On top of which, the employer contributes a further $850 for a total of $1,850 per month.

CPF Overview

  • ​Ordinary Account (OA)
    • ​For housing, insurance, investment and education.
  • ​Special Account (SA)​
    • ​​​For old age and investment in retirement-related financial products.
  • ​MediSave Account (MA)​
    • ​​For hospitalisation expenses and approved medical insurance.
  • ​Retirement Account (RA)
    • On your 55th birthday, a fourth account, the Retirement Account (RA), is automatically created which is a combination of the OA + SA.

CPF Interest Rates*

  • ​Ordinary Account (OA)
    • Currently up to 3.5% p.a.
  • ​Special Account (SA)
    • Currently up to 5% p.a.
  • ​MediSave Account (MA)
    • Currently up to 5% p.a.
  • ​Retirement Account (RA)
    • Currently up to 5% p.a.

*The above interest rates include 1% p.a. extra interest on the first $60,000 of combined CPF balances, with up to $20,000 from the OA.

Those aged 55 and above also earn 1% p.a. additional extra interest on the first $30,000 of combined balances, with up to $20,000 from the OA, thus earning up to 6% p.a. on their retirement balances.

This means the first $60,000 in your CPF earns 3.5%, anything above that earns 2.5%. In the ordinary account, only the first $20,000 earns 3.5%, anything in excess also earns 2.5%.

CPF Allocation Ratios

Once you’re 35 and above, the government reckons it’s time for you to start planning for your old age.

Wage Ceilings

Ordinary Wage Ceiling – your regular pay including commissions

The Ordinary Wage (OW) Ceiling limits the amount of OW that would attract CPF contributions. The OW Ceiling is capped at $6,000 currently.

Example

Ordinary wage for the month – $6,500

$6,500 – $6,000 = $500. This $500 is not subject to CPF contributions.

Additional Wage Ceiling – your bonus/leave pay

​ $102,000* – Total OW subject to CPF for the year.

Example

Ordinary wage for the year – $80,000
Annual bonus – $35,000

$102,000 – $80,000 = $22,000. Of the $35,000 in bonuses, only $22,00 is liable for CPF contributions.

Annual Limit

There is a limit to the total amount of CPF that can be contributed per year – $37,740 or $102,000 / (20% +17%) .

Example

Annual salary – $75,000
Total CPF contributed – ($75,000 * 17%) + ($75,000*20%) = $27,750
Amount left to contribute to CPG – $37,740 – $27,750 = $9,990.

$9,990 is the amount left that you can voluntarily contribute for the year. Note: if you plan to max out your CPF limit, it’s better to do the top up at the beginning of the year

Voluntary Contribution

The maximum amount that you can voluntarily contribute is the annual limit as mentioned above. There is tax relief if you voluntarily contribute to your CPF of up to $14,000 ($7,000 for self, $7,000 for family members).

https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Deductions-for-Individuals/CPF-Cash-Top-up-Relief/

Ordinary Account (OA)

  • Base interest of 2.5%
  • First 20k gets 3.5%
  • Combines with SA to form your RA at age 55

This blog post pretty much covers what you can do with your ordinary account – https://blog.moneysmart.sg/budgeting/cpf-uses-besides-retirement/

Special Account (SA)

  • Base interest of 4%
  • Combines with OA to form your RA at age 55
  • Transfers from OA to SA is a one-way operation

This blog post covers the SA: https://www.drwealth.com/cpf-special-account/

Investing with CPFIS

In order to invest, you’ll need at least:

  • $20,000 in OA
  • $40,000 in SA

https://www.cpf.gov.sg/Members/Schemes/schemes/optimising-my-cpf/cpf-investment-schemes

The new robo-advisors from Endowus seems to be have the lowest management fees. I’ll need to revisit this in a couple years time.

https://endowus.com/

Medisave Account (MA)

  • Base interest of 4%
  • Basic Healthcare Sum (BHS) is the maximum amount you can have in your Medisave which is currently capped at $60,000. Any additions in and above this amount gets transferred to your SA.

Retirement Account (RA)

  • Base interest of 4%

On my 55th birthday, a Retirement Account (RA) will be created from my SA and OA. This will my retirement sum.

This retirement sum will be used to buy CPF LIFE that will provide lifelong monthly payouts from the payout eligibility age which is currently at age 65. The exact amount of retirement sum that will be deducted as annuity premium will depend on the plan type chosen.

CPF LIFE

CPF Life is the annuity scheme that everyone from my generation (1983) will be on. It replaces the Retirement Sum Scheme.

  • Base interest of 4%
  • CPF Life payouts begin at 65
  • CPF LIFE monthly payouts will depend on the savings in the RA and the CPF LIFE plan.

How Much to Save to hit ERS (in 19 years time)?

The retirement sum currently stands at $176,00 and it will be $181,000 in 2019. On average over the last 5 years, the retirement sum has been increasing by $5,200.

I will be 55 years old in 2038 which is in 19 years (or 18 since it’s almost the end of the year).

On average we can expect the retirement sum to increase by around 18 * $5,200 = $93,600. This means the retirement sum when I am 55 will be roughly $176,000 + $93,600 = $269,600.

If you’re aiming for an Enhanced Retirement Sum, then the approximate balance required becomes: ($269,600/2)*3 = $404,400.

Assuming CPF contributions are maxed out each year and that you’re starting from a $0 in my CPF (which is close to reality since the bulk of it will be wiped out for my new apartment), I’ll hit the required amount of $404,400 to qualify for ERS around 50 years old.

But this table doesn’t take into the compounding effect of the interest.

This is my very rough estimation based on the combined total of OA + SA that with compounding interest, it’ll take about 10 years to reach the $404K amount. This calculation is obviously not super accurate – the values in the OA + SA change after 45 and the interest rate of 3.5% is just an average.

But at least now we have a rough idea that we need to max out our CPF contributions for at least the next 10 years to have a chance of hitting the ERS amount.

Note to self: Check calculations with CPF directly.

CPF Withdrawals

From CPF website:

From age 55, you can withdraw up to $5,000 from your Special and Ordinary Accounts, or your CPF savings after you have set aside your Full Retirement Sum in your Retirement Account, whichever is higher.

If you were born in 1958 or after, you also have the option to withdraw up to 20% of the savings in your Retirement Account from your payout eligibility age (65 years old). This includes the first $5,000 that can be withdrawn from age 55.

Using the above numbers as an example, this means anything in excess of $269,600 can be withdrawn at aged 55. Of course you can continue to leave it in the account to earn interest.

*This needs verifying with CPF

Sources

https://blog.moneysmart.sg/budgeting/cpf-contributions-singapore-guide-interest-rates-minimum-sum-calculator/

https://www.drwealth.com/cpf-special-account/

https://www.areyouready.sg/Pages/default.aspx

Categories
Art

Colour Theory

How to describe colour? Using the following characteristics:

  • Hue/Colour
  • Value
  • Intensity/Saturation/Chroma
  • Luminance & Brightness

Hue/Colour

Hue means colour, such as green, red, blue. The terms hue and colour are generally used interchangeably.

Values

Values describe the lightness or darkness of a color.
High values are lighter. Low values are darker.

You can change a hue by changing it’s value. To increase the value of a colour, you can add white which serves as a tint. To decrease the value of a colour, you can add black which serves as a shade. More on this blow.

Intensity/Saturation/Chroma

Intensity means how different a color is from gray, or how similar it is. When a color that would be described as dull or dirty, it has low intensity because gray has been added into it. Tints also have low intensity, because of the white that has been added into it. Very dark colors or colours that have low values are considered low intensity because they have had black added into them. On the other hand, a clear, strong color has high intensity, and we would call it a saturated color, like these three colors:

Tints, tones and shades are all low intensity. On the left is a tint – white mixed in makes the tint. The middle one is a tone, with gray mixed in. And the right one is a shade, with black mixed in.

Luminance & Brightness

Luminance describes how bright a hue or colour is. A “bright red” has high luminance compared to a “dull red”. As such, A red that has grey added to it (tone) or black (shade), will have lower luminance.

The reverse is also true, if we increase saturation of a colour, the perceived brightness is also higher. A higher level of saturation makes a color look brighter.

There are some differences between luminance and brightness but I am unable to find a good explanation at the moment. If you have one, kindly leave it in the comments.

References
http://fashionclassroom.com/blog/describing-color-value-and-intensity
https://www.sensationalcolor.com/color-theory/
http://learn.leighcotnoir.com/artspeak/elements-color/hue-value-saturation/
https://munsell.com/color-blog/color-theory-drawing-value/
http://changingminds.org/explanations/perception/visual/hsl.htm