More Questions, less answers

I was engaged to set up a training system for a financial planning firm, therefore, i did quite a bit reflections and reserach into investment issues. Interestingly, I found that as i dwell deeper into the subject, i have more and more questions, and less and less answers.

I guess such is life.

Reflection on Std Chart Marathon 2009

I ran the Std Chart Marathon last Sunday (6/12), and completed the race in 4hr 0 min 31 sec. This is my personal best timing ever. The last time I clocked such timing was in 1996, when I was 27 years old, and presumably at the peak of my fitness. Even then, that timing was 4hr 15min. Therefore, I was overjoyed this time round.

I run for R & R (Relax and Reflect) reasons. As my work requires discipline on time management, therefore I run whenever the day's work is over, and relax my mind (and soul) and keep my BMI within healthy range.

As my foot pound on the road, it also gave me an opportunity to reflect on issues of my life (family, work, finances etc). Every race, I learnt something.

Lesson 1: Subtle and gradual improvement produce unexpectedly great results

I am 40 years old now. Never in my wildest dream I can imagine I can be as fit as when I was 27. This year, I do my runs consistently and systematically increase the milage gradually. I don't run wth a watch, therefore it allows me to pay close attention to my heart beats and foot strikes.

Without me knowing, my body has build up more muscles and my pain thrashold has increased. Without me knowing, my foot strikes have become more productive and efficient. Without me knowing, my lungs have become more effective in processing the oxygen intake.

Interestingly, as I was at the 32km mark (McDonalds - Stadium Road), i thought my foot strikes were slower than last year; and was a little discouraged because more runners seem to overtake me rather than I overtake them. I talked to myself: "Well, stop comparing, just do it and finished the race".

At the 42km mark (Singapore Cricket Club), I saw the clock flashed: 3 hr 59 min 10sec! I ran the last 195m with all my breath and crossed the finishing line clocking 4hr 00 min 31sec. I was overjoy!

I learnt that our conscious self will sometimes (or rather in most times) make us believe that we can't, and subconciously limits our life on the real world. With gradual and consistent preparation and work, improvement will come subtly, and yield results we never dream we are capable of.

Join me at the starting line next year.

*special thanks to my racing partners for 2009

a. New Balance 383

b. Brooks Racer ST 3

My Sundown Marathon 2009 reflections.

I ran the Sundown Marathon yesterday (30/5). This is my 7th completed marathon. As i am writing this blog, my body is aching all over, but my soul is well pleased with the run for two main reasons.

First, my lovely wife, Linda, participated along side with me. She did the 10km run. As this was her first run, she was naturally overwhelmed by the anxiety about whether she could complete the race, what time that will be etc. We targeted a 2 hour to 2.5 hour completion time, and I would be at the finishing point to receive her. (The woman 10km is a all-women only category, and start at 8.30pm)

As it turned out, Linda completed the race in 1 hr 17 min! It was a good timing considering this was her first race. She even had the stamina to post a cheeky V-sign with her arms while charging towards the finishing point.

Second, I had changed my running philosophy this year by not wearing a watch when I run (both in training and competition). Instead I rely on my foot-strikes and heart beats to gauage the sense of time. But more importantly, I want to use running to appreciate life: the view (nature has its ways to surprise me with its subtle beauty), the people (what's their story?). I found that I am more calm and relax running this way as compared to previously as I was so stressed (pretending to be competitive...haha) when I kept looking at my watch as I pounded the road.

The week before, I was planning for my race. Last year, I hit the wall at the 22km mark, and was struggling all the way to a 5 hr 56 min race. Therefore, my objective this year is to defer hitting the wall to as many kilometer as my body could take it using the new running philosophy. In the midst of over three thousand marathon runners, I was the only one that started the race without a watch. I managed to defer hitting the wall all the way to the finishing point at 42.125km!

Objective achieved!

(* My timing this year, for the sundown marathon ('09) , is 4 hr 52 min.)

23rd letter to friends of Brunei [Warrants (Part 1)]

A warrant gives its holder the option to buy a stock at a specified exercise price before an expiry date. After the expiry date, the warrant is worthless. We can understand warrant by contrasting with other similar product.

a. Compared to stock option, warrant has a longer life-span. Most stock options are less than a year, whilst it is common for a warrant to have a 5 or more years life-span.

b. Compared to stock future, warrant holder has no obligation to exercise option.

c. Compared to convertible bond, warrant does not pay coupon interest or a maturity value.

Warrant is usually issued as a sweeterner for a share or debt issue of a company. Its price, compared to convertible bond, is much lower. For example, Flextech, a once SGX-listed company, issued a warrant at $0.14, which allow the holder to buy the stock for $1.50 before 2 Oct 2022. At that time of issue, the stock price of Flextech was trading at $0.78.

Let's do some mathematics on warrant.

Assuming ABC company has a warrant trading at $4. The conversion ratio is 1:1 (i.e. 1 warrant can buy 1 stock of ABC Co.), and the exercise price is $5. ABC stock is now trading at $8.

1. Intrinsic Value of Warrant

Intrinsic value = [Stock price - Exercise price] / conversion ratio

Intrinsic value(ABC warrant) = [$8 - $5] / 1 = $3

It is possible that the stock price is trading below the exercise price. In this case, the intrinsic value is zero.

2. Speculative Value

Speculative value = warrant price - intrinsic value

Speculative value (ABC warrant) = $4 - $3 = $1

3. Conversion Value

Conversion value = Exercise price + (Warrant price x Conversion ratio)

Conversion value (ABC warrant) = $5 + ($4 x 1) = $9.

4. Warrant Premium

Warrant premium = Conversion value - stock price

Warrant premium (ABC warrant) = $9 - $8 = $1

5. Gearing (or leverage) Ratio

Gearing ratio shows for each dollar invested in the warrant, how many dollars of the stock it lays claim to:

Gearing ratio = Stock price / (warrant price x conversion ratio)

Gearing ratio (ABC warrant) = $8 / ($4 x 1) = 2 times

I.e. for every one dollar in ABC warrant, two dollars of the stock it lays claim to.

22nd letter to friends of Brunei [Convertible Bond (Part 3)]

In the previous blog, we learnt about why invest in convertible bond. Now, we look at why companies issue convertible bond. 

There are few reasons, but the main one is : "This is the lowest cost way to raise fund."

During 2004 - 2007, the Singapore's booming property market has led many developers rush in to buy over old apartments (hence set up the en-bloc craze) to build new property projects. The bank lending rate was around 5.25% p.a. (prime). During this period also see many developer companies, such as Soilbuild Group and CapitaLand, issue convertible bond. Why? Because the coupon rate was issued to as low as 1% p.a.  

The differential in interest rate is substantial, for example, for every $10M, the interest cost at 5.25% is $525,000, compared to 1% at $100,000.

The second reason, by fixing the conversion price at certain level, the company can fix the share price at a premium. For example, if the current share price is trading at $3, the conversion price is $4, the company can receive $3+$1 for its share price.

The drawback for company is the dilution of earning per share after the conversion, as more shares are in the market. 

Secondly, in the bull market, the mass conversion of bonds into shares and then immediate mass selling of these shares can cause the share price to plunge.  This usually happen when the business cycle turns from peak to recession. Recent huge drop of share market index is the result of this happening. 

In summary, company issue convertible bond for

1. low cost financing

2.Guarantee value of share price 

The drawbacks are

a. Dilution of EPS (earning per share)

b. Potential downward pressure on share price if mass conversion and mass selling happens

21st letter to friends of Brunei [Convertible Bond (Part 2)]

2 common questions on convertible bond. One, if you are an investor, "Why invest in convertible bond?" Two, if you are a company, "Why issue convertible bond?" 

Let me first explain:

1. "Why invest in convertible bond?"

I will explain using my experience. Let's take a look on CapitaLand, which share price is currently $4.28. If I were to buy 10 lots (10,000 shares), I need $42,800. My future dividend is not certain. The other way of conservative investment is to buy a convertible bond issued by CapitaLand. I get regular fixed coupon rate and the right to convert the bond into share if I perceive the share to be bullish. 

As compared to warrant, using the convertible bond method will cost substantial capital outlay, but I got to enjoy the fixed income from coupon, and if I don't exercise the conversion right, i still get the maturity par value of the bond. Hence, the downside risk is limited, but the upside potential is unlimited. 

Of course, compare to a normal bond, convertible bond pays me lesser coupon interest. This is fair as I get to have the conversion right. In fact, most corporate bonds issued in the Singapore market are convertible bonds.

In summary, we invest in convertible bond for

1. Fixed income from coupon.

2. Par value at maturity

3. Right to convert into company's share (and profit from it)

4. Limited downside risk (i.e. falling share prices)

And these are the drawbacks:

a. Lesser yield or coupon interest than normal bond

b. Convertible bonds can be "called back"(i.e. redeem) by company before maturity. And in the real world they do get called back frequently. 

20th letter to friends of Brunei [Convertible Bonds (Part 1)]

On 26 May 2007, CapitaLand (a listed government-linked firm which is also the biggest property company, by assets, in Singapore) raised $1 billion through a convertible bond sale. It was then the biggest convertible bond sale in Singapore.

The 15 year bond (face value $1000) pays 2.95% allows investor to convert into CapitaLand shares at a conversion price of around $10.

Let's use this example to study the convertible bond valuation.

1. Conversion Ratio

Conversion ratio is the number of shares you are entitled to receive on conversion. The formula is as follows:

Conversion Ratio = Face Value / Conversion Price

In CapitaLand's example, the conversion ratio = $1000 / $10 = 10 shares

2. Conversion Value

Conversion value is the market value of the shares obtained when the bond is converted. The formula is as follows:

Conversion value = Conversion ratio x Current share price. (let's use current share price of $4.48)

In CapitaLand's example, the conversion value = 10 x $4.48 = $44.80

3. Conversion Premium (or Discount)

This is the difference between the market price of the bond and its conversion value.

Conversion premium ($) = Market price of the bond - Conversion value

InCapitaLand's example, the conversion premium = $1000 - $44.80 = $955.20

(note: As the market price of bond fluctuates, the conversion premium also changes over time)

4. Bond Price Parity (BPP)

BPP answers the question : "What should the price of the convertible bond be such that there is no difference in price between buying the shares directly and buying the convertible and then converting?"

This value is actually the conversion value. Assuming CapitaLand's share is now $5,

the BPP = 10 shares x $5 = $50.

This is the price which investor can either buy the shares direct or convert the bond.