Why Qualitative Analysis is Important

Whats the story
When evaluating a stock, one has to consider both qualitative and quantitative factors. The qualitative factors tend to be regarding the business model of the company, its risks and opportunities as well as the quality of its products. As such, it can be really subjective. In this regard, I find the quantitative factors quicker and easier to analyze as figures do not lie (unless they are being manipulated, which in this case qualitative factors like the quality of its management would come into play). However, it is important not to be blinded by numbers alone, as numbers on its own do not tell the whole story.

When I was starting out, I used alot of financial metrics like ROA, ROE, debt to equity, increasing trend of sales and earnings, etc. to filter stocks. These churned out a number of companies of which many turned out to be solid businesses. Convicted by many of their financials, I paid less attention to the qualitative side. This proved to be a costly mistake. Some which I have personally invested in are China Minzhong, Food Empire and Challenger Technologies. All three companies had strong financials, growth, and a sturdy balance sheet. However, I did not understand the risks of each investment completely. In China Minzhong, I did not understand the industry, its competitors, and the quality of its goods. For Food Empire, I did not comprehend fully the currency and country risks of the business itself. Its two main markets were Russia and Ukraine, and as such, the performance of the business could be affected by political situations, along with economic problems. We have seen how the Russian rouble depreciated massively against the USD this year due to political issues and the tanking of oil prices, which brought turmoil to the oil industry – a major contributor to Russia’s economy. As for Challenger Technologies, I was able to pay visits to its stores, and get a first hand feel of its business and products, but I did not fully apprehend the risk of online retail. Granted, all three may still be great businesses to some, and better investments to others, but the point I would like to highlight would be that qualitative analysis is crucial in any investment.

In 2014, we have seen how companies with fantastic financials perform badly, for eg. Biosensors International, Cordlife Group. I had been keeping up with these two companies for their strong financials but I was not able to understand their business model from a qualitative standpoint. I had no experience with the medical industry, and thus it was not in my circle of competence to analyze Biosensors. As for Cordlife, I have had exposure to its products but could not understand the complexity of their investments and holdings in other associates. Moreover, their deal with CCBC was confusing to me. It is important to understand what one is getting into, and if things seem too hard to understand, it might just be better to stay away.

Saying ‘no’ to an investment when you are unsure of it qualitatively is an important thing we all need to practise if we are to get better at investing. In essence, always ask yourself – “What’s the story?” behind this investment before pulling the trigger.





An Introduction to CPF

CPF (Central Provident Fund) is Singapore’s social security savings plan for citizens old age. I will try to summarise the salient points that I have learnt while studying more about it in this post.

One’s CPF is made up of 3 main accounts – Ordinary Account, Special Account, and Medisave Account. A diagram explaining how the CPF works is shown below. The minimum sum that one currently needs when he is 55 years old is $155,000 in the OA and SA, and $43,500 in the MA. One will be able to withdraw excess savings at 55 after setting aside the minimum sum. Upon reaching the drawdown age, which currently stands at 63, he will start to receive monthly payouts.

CPFHowItWorks                               *Taken from CPF’s main website at http://www.cpf.gov.sg

Ordinary Account

Earns a risk-free interest of 2.5% per annum. This rate is based on the higher of the 12-month fixed deposit and month-end savings rates of the major local banks or the legislated minimum of 2.5%. Savings from this account can be used for housing, insurance, investment and education purposes.

Housing – It is important to note that for property purchases, savings can only be withdrawn till the valuation limit, which is the lower of the purchase price or market price. However, buyers must pay 5% of the valuation limit in the form of cash. Should there be excess installments which are yet to be paid despite the valuation limit being reached, one can utilise the OA account until the available housing withdrawal limit; which is the available OA account balance after meeting the minimum sum component. The maximum that one can use from his OA to pay off his mortgage cannot be more than that approved by one’s banks, which is usually up to 35% of one’s income.

Investment – If one has more than $20,000 in his OA account or more than $40,000 in his SA account, he is able to use the excess funds to invest. The range of investment options can be found on CPF’s website. One difference to highlight between investing from one’s OA and SA is that the savings in the OA can be used to invest in stocks while those in SA are not allowed to.

Education – One is allowed to use funds in his OA account to pay for his tuition fees. The amount withdrawn has to be repaid in cash, along with interest accrued.

Special Account
Earns a risk-free interest of 4% per annum or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is the higher.

The funds in SA is usually used for old age and investment in retirement-related financial products. It is important to note that it cannot be used for housing purposes.

Medisave Account
Savings here can be used for hospitalisation expenses and approved medical insurance, ie. Integrated Shield Plans under private insurers, and one’s Dependent Protection Scheme (DPS).


As part of the government’s efforts to enhance the retirement savings of CPF members, an additional 1% per annum will continue to be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the OA. This works out to be 3.5% per annum earned on the first $20,000 in a member’s OA, and 5% per annum earned on the first $40,000 (up to $60,000 if no OA savings) in a member’s Special & Medical Accounts (SMA) and Retirement Account (RA).

One is allowed to transfer funds from the OA to the SA account. However, the amount in one’s Special Account must not exceed the current CPF Minimum Sum after the transfer. This will allow one to build up your retirement savings, and enjoy the higher interest rate of the SA at the same time. A key point is that once funds are transferred, they cannot be transferred back. As such, careful consideration needs to be made, especially if there are uses for the funds in the OA, eg. housing. The member can top up his SA account and enjoy tax relief of up to $7,000 per calendar year, if he uses cash to make the top ups.

This is a brief summary of the CPF scheme as I wanted to keep the post short and simple for now. For more information, one can check out the CPF website at http://www.cpf.gov.sg or the Ministry of Manpower (MOM) website at http://www.mom.gov.sg/employment-practices/employment-rights-conditions/cpf/Pages/default.aspx.



What should I invest in?


Before stepping out into the investing world, one has to note that there are many different ways that one may go about investing his hard-earned cash.

Some of these include:
1) Stocks
2) Businesses
3) Real Estate
4) Precious metals
5) Commodities
6) Currencies
7) Others

Let’s take some time to go through them one by one:

1) Stocks
These are businesses listed on a public exchange (stock exchange) where you can buy an ownership in the companies that appeal to you. The upside is unlimited as these companies may grow beyond your wildest dreams while the downside is limited to your initial capital. This is only true where you do not use leverage (borrowing of money) to invest.

2) Businesses
Not to be confused with stocks, the difference here would be that businesses tend to be privately owned by a few people, and that it is being run by you or your partners. It generally requires more time and commitment to manage it than investing in stocks. Research has shown that most startups fail in the first year, and most of those that succeed, fail in the years to come. However, if run well, businesses can generally help to turn the fortunes of one more quickly than any other forms of investment.  Many of the richest men in the world were businessmen – Bill Gates, Carlos Slim, Li Ka Shing, Robert Kuok, etc.

3) Real Estate
Real Estate tends to be a longer form of investment for one, as it is more illiquid than stocks. It also requires a higher initial investment than stocks, and one is most likely to tap on his banker to finance the purchase. However, since most people will generally buy a house to live in during their lifetime, it is usually one of their largest investment. Real estate has made countless of people more wealthy, as land prices tend to move up in the long term. The real estate’s value is also never likely to fall to zero, as compared to stocks which might become worthless when the company goes bankrupt.

4) Precious metals
Precious metals include primarily gold and silver. These metals are seen as a hedge against inflation and a form of security when financial markets crumble. The prices of gold and silver tend to rise when the USD falls and vice versa. They tend to underperform when the economy is doing well, as investors are more optimistic than fearful. One can buy the precious metals in physical form through the likes of bullion bars, or through paper holdings like ETFs or future contracts. Since it is a form of protection against inflation, many investors tend to hold gold and silver for the medium to long term.

5) Commodities
Commodities which we can invest in refer to agricultural products, metals and oil like coffee, sugar, corn, wheat, hogs, iron, copper, crude oil, etc. They are bought on a futures exchange, where an investor usually decides on a cash settlement rather than the delivery of the physical good itself. Futures contracts tend to be leveraged as well.

6) Currencies
Currencies are usually known as FOREX. The FOREX market is the largest market in the world, and one which never sleeps. In simple terms, the investor gains when the currency he buys appreciates against the currency he sells and vice versa. Trading FOREX is also on leverage, and it tends to be short term in nature. However, one can still take a long term view to FOREX by investing in ETFs that track a country’s currency, or in the different products that banks offer.

7) Others
Other forms of investment include paintings, luxury watches, rare stamps, wines etc. These are generally termed exotic investments, which are not practised by many people. However, if done right, one stands to profit greatly as well.

In conclusion, that there are many forms of investment which we can use to build our wealth. I strongly believe that all investments can prove to be profitable if we are willing to spend time to learn, and to acquire knowledge about that particular field. A strong understanding of the different risks that each investment holds is also important. For me, I am more comfortable with the first three forms of investment: 1) stocks, 2) businesses, &  3) real estate as a means of building my wealth as I do not currently possess the knowledge to invest in the rest.

Fundamental or Technical Analysis?


Fundamental analysis is in essence, the study of the financials of the company, its business model, and the industry in which it operates in. The end goal is to identify whether the company is a strong company, and whether it exhibits characteristics of a durable competitive advantage. To me, it involves a comprehensive understanding of the business of the company, its risks, and its future potential. Value investing is a form of fundamental analysis, in which a value investor identifies a strong company that is trading below its intrinsic value, ie. selling at a bargain. In value investing, the crucial point to note is that one has to treat each stock as a business, and approach it from a business mindset. Like what Benjamin Graham once said, “Investing is most prudent when it is most business-like.”

Technical analysis, on the other hand, is the study of price patterns, charts, and trends to time entry into and exit out of positions in stock. Momentum trading is a form of technical analysis, where one trades based solely on identifying short term trends and timing entry and exit based on the trend’s strength or weakness.

In both analyses, different risks are taken on. In FA, the main risk is company risk- the risk that the company you invested in encountering obstacles and problems in its business. In TA, the main risk would be leverage risk as traders tend to use leverage more often than investors do to amplify their gains. In addition, FA practitioners tend to have a longer term view while TA practitioners tend to be more focused on the short term.

So, which is better and what does the restfulfarmer use? Honestly speaking, one’s man poison is another man’s meat. I feel it all depends on the mindset and character of the person. Value investors tend to take a patient approach, and it can get boring at times, while traders tend to prefer the excitement of being in and out of the market. Personally, I believe value investing is more suited for me, as I do not enjoy tracking stock prices everyday. However, I believe that using TA to time my entry into the market for a value stock could help to improve my returns as well. As the Chinese would say, “FA and TA will help you to 发达!“. At the moment though, my knowledge on TA is lacking, and it will definitely be useful to learn more about it.