One Sunday Morning

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I woke up today, did my morning rituals and went straight to our balcony. As I opened the door in our veranda, the glorious and magnificent sun welcomed me and hugged my whole being. It was a refreshing and invigorating moment that I fully embraced. I basked in its splendor and the sun’s radiance was truly captivating that for a second I thought I was in my favorite holiday hotel in Ras Al-Khaimah.

I opened my book The Purpose Driven Life. Oh how many times did I read this already and yet here I was reading again the first chapter of the book. The first chapter “It All Starts with God” was just refreshing as it was when I first read the book. The wisdom that comes through it revitalized and energized my whole being. The feeling never gets old and I never got tired of reading it again and again. 

Just yesterday, the book is collecting dust from my bookshelf. Every day when I go into my bookshelf and pick up a book to read, the book never got my attention. It was a silent, nonexistent and absent book. Today, upon glancing on my bookshelf, the book was there waving its hands frantically, its dark brown color glowing brightly amidst the collection of books and finally shouting at me and telling me to pick it up. I obliged with its commanding power and went straight to our balcony.

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I wiped off the dust that covered the book with a piece of white cloth. Then I turned on its pages where traces of cobwebs were scattered as I flip from one page to another. I shake off the cobwebs inside the book and the dirt flew all over my room. The book looks clean, unsoiled, fresh and is readable again. I read the first chapter, resisted going on to the next chapter, and closed the book. I reflect, I paused, and I did some introspection. I took my journal and checked my goals and dreams written on it.

I realized just how busy I am making myself busy instead of living a simple, deliberate and purposeful life. The worries that bug me everyday are nonsensical and at best should be ignore rather than focus on it because it zapped a lot of my energy from doing meaningful things.

As I go out from our house and kissed my wife for good for the rest of the day, I walked through the streets of which I am very familiar for the past two years. There are restaurants, buildings and supermarkets that surround the lane along the way. I noticed that there are birds chirping while moving from one tree to another. The flowers are blooming in their bright yellow color along the pavement. Oh how beautiful the red roses are in the roads. They seem to be inviting me that I should need to take a closer look at them. I did and I just noticed that one of the flowers has eight dazzling white petals. I was mesmerized with the beauty that surrounds these streets.  I stride glancing at every flowers and trees that my eyes can see, while listening to the sounds of the birds chirping endlessly. I felt like they are music to my soul.

In this hectic pace of life where everybody seems to be running on a frenetic tempo circling around a direction that seems to point nowhere except going back to where they started.  Today, I am taking a pause from the daily rigors of life. I am taking a step backward in order to make two steps forward later. I am going back to the basics.

The dust and cobwebs that try to infiltrate my book bring with it the rustiness of my soul, the cobwebs in my mind and the fragile state of my being.

Together with the dust and cobwebs that were removed and eradicated from the book are the unnecessary worries, the crippling uncertainties, and the lingering doubts that filled up my whole being...at least for a day.

How Much is the Interest Rate in Stock Market?

Chris asked me “Sir, how much interest po ba ang makukuha mo sa blue chips stocks?”

To give you a straight answer Chris, there is no permanent interest rate in stock market. If your savings account is earning 1% per year or your deposit account is earning 5% per year, in stock market, the “interest rate” is not predetermined. If in savings and deposit account you know what interest rate the bank is giving; in stock market you don’t know what “interest rate” the market will give to you.

Rate of Return

I know some of us mostly know the word interest rate while growing up. Well, if you happen to pick up a book or magazine discussing about investments then the word interest rate may already be obsolete to you because in the investment world and in particular the stock market, we call the interest rate the “Rate of Return”.

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Chris you need to familiarize yourself with this word “Rate of Return”. Instead of uttering interest rate, you can say rate of return.  Rate of return according to Investopedia is the gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains.

While we do not know what rate of return the stock market will give us, history tells us that the average return for the past 20 years is 14%. With regards to the future, nobody can predict how much will the returns be but the past can give us a glimpse on what the future returns will be.

Interest Rate in the form of Dividends and Capital Appreciation

If the stock market does not provide a fixed rate of return, then why do investors “risk” their money into it? Why don’t they just put it in Treasury bonds and T-bills? These instruments issued by the national government have a fixed rate and are relatively safe compared against the stock market?

You know in stock market, you can earn through capital appreciation and dividends. Mind you, these are not fixed returns.

Dividends

There are different types of dividends. We have cash dividends, stock dividends, and property dividends. The most common dividend being shelled out by companies to its shareholders is the cash dividend. There are companies who give annual dividends at 7-8% of your investment depending on the performance of the company. PLDT, Globe, ABS-CBN and GMA are part of the few companies that give high dividends to its shareholders. I have written an article before to show you a real example of cash dividend. Please check it here. http://theofwinvestor.blogspot.com/2011/12/real-example-of-cash-dividend.html

Capital Appreciation

Aside from dividends, as the company continues to grow and earn more profits, its stock price increases also. When the stock price increases, your rate of return increases. For example, you bought PLDT at 2,674 per share yesterday. If after a year, the price went to 3,000 per share then your investments have increased already by 12%. That is called capital appreciation. My friend told me that he somehow understood what capital appreciation is when he read my article on how the stock market works. Here you go. http://theofwinvestor.blogspot.com/2011/11/how-stock-market-works.html

In summary, the rate of return in stock market is not fixed unlike the interest rates in your savings account or deposit account. Since the interest rate is not fixed, the rate of return can go as high as the market wants and of course, it can go as low as the market wants also.

Deferred Gross Profit

What is deferred gross profit? I’ve been reading and analyzing PHES financial statements for the year 2011 and I’ve come across a balance sheet term which is kind of familiar to me but I thought I lost the grasp of it already. So obviously since I wanted to know PHES financial statements and then interpret the results of its operations for the year 2011, I dig in further. I went to my books and reread again, went to Google and check the latest accounting treatment of it. In short, I refresh my mind on what this Deferred Gross Profit is all about.

For one thing, Deferred Gross Profit of PHES is 77% of its total liabilities and thus needs our clear and undivided attention in understanding its meaning, or perhaps at least its basic terms.

Oh man, I remember my professor here now. Did I learn something from him? Well I think I slept too much then during his class and the thing that I remember is daydream what the future holds for me. Okay, so much of that crap. I really need to restudy. I thought refresher courses and seminars are great.

Deferred Gross Profit is being used when a company is using Installment Sales Method. Under the installment sales method, the sale is recognize when the cash is collected. Okay somebody shouted at the back” Of course when you receive cash, you recognize a sale! It’s simple, stupid.” My friend, in accrual accounting, a sale is recognized when services are rendered or goods are transferred with or without cash.  

Aling Tonya’s Sari-Sari Store

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Let us take Aling Tonya’s sari-sari store as an example. Yesterday, you bought a shampoo sachet worth 5 pesos at Aling Tonya’s sari-sari store. That is called cash sale and the sale is recognized because the shampoo is already transferred to you. Today, you bought your favorite shampoo Palmosilk sachet again at Aling Tonya’s store but this time you don’t have money. You requested Aling Tonya if you can pay her next week. She agreed because you are handsome. She gave you the shampoo and you went home. That is called an account sale and the sale is recognized even though there is no money involved. You see, revenue recognition is easy.

Real Estate Business

Now, what about in real estate business, do the same principles apply? Unfortunately, the answer is no. When you talk about construction of buildings, condominiums, houses, airports, hospitals, schools, roads, highways, etc., we have different methods in order to recognize revenue. We have percentage-of-completion method, completed-contract method, Installment sales method, Cost recovery method, and Deposit method.

Below table shows how PHES recognize its sales from real estate business.

Condominium units and developed lots in progress (kasalukuyang ginagawa pa ang condo o pagaayos ng lote)	percentage-of-completion method
Material improvements on condominium units (mga customer na gustong magpadagdag ng kung ano ano sa kanilang condo)	percentage-of-completion method
Virtually completed residential lots and housing units where sufficient down payment has been received and when collectibility of the sales price is reasonable assured (tapos na ang paggawa ng bahay o pagaayos ng lote at sapat ang downpayment, may kasiguruhan ang pagbayad sa kabuuang presyo ng bahay )	full accrual method
Completed residential lots and housing units where sufficient down payment has not been received or when collectibility of the sales price is not reasonable assured (tapos na ang paggawa ng bahay o pagaayos ng lote ngunit hindi sapat ang downpayment,at walang kasiguruhan ang pagbayad sa kabuuang presyo ng bahay )	installment method
If any of the criteria under the percentage-of-completion method is not met (none of the above)	deposit method

  

 Installment Sales Method

 As you can see in the above table, PHES uses installment sales only when the housing units and residential lots are completed already. I repeat, completed already. For example, you bought a house from PHES for 1 million pesos to be paid in 15 years. Since PHES do not know if you will be able to faithfully pay your monthly due to them, they will not recognize the sale immediately in their books due to the considerable uncertainty of collection. Instead, they will recognize sale based on your payments to them. Yes, sale will be recognized when you pay PHES every month.

Computation of sale is based on your payment to PHES and its gross profit percentage to your house. If on your 1^st year, you paid 66,666 to PHES, PHES will recognize sale as 26,400 pesos (66,666x40%). That’s it, it’s very simple.

One second, where did the 40% came from? 40% came from the internal computation of PHES on the gross profit of the house they sold to you. Based on our example, the selling price of the house is 1 million and the cost it needs to build the house is 600,000 pesos. The remaining 400,000 pesos is called gross profit. Gross profit percentage is 40% (400,000÷1,000,000).

Deferred Gross Profit

 Finally, we are at the Deferred Gross Profit (DGP). DGP is an integral part of the installment sales method. So how did the DGP appear in the Financial Statements?

Here is how a Deferred Gross Profit is being computed.

You have decided to live on a house you can call your own instead of renting an apartment. Your sheer hardwork and determination in your job has made your salary triple for the past five years. You have enough money to buy a house already.

Mang Ben Real Estate is a real estate company. Anybody who wants to buy a house and lot can contact the company. Since Mang Ben is your preferred real estate company because of their keen eye in identifying superb location, you called them and asked if they can build your dream house. The contract price for all the land, labor, materials and overhead will be shouldered by Mang Ben. He will just bill you every year. Downpayment is 200,000 pesos and starting Year 2013, you need to pay 100,000 pesos for ten years. The total price is 1,200,000 pesos.

You initially paid 50,000 pesos downpayment so that Mang Ben can start constructing your dream house. Below is Mang Ben’s record.

Contract Price	1,200,000
Cash Received	50,000
Balance to Received	1,150,000

After a few months, financial crisis sets in. Most of the companies are having a hard time pulling out the inventories from the shelves. Sales are so slow. News have spread about various companies closing down. Business is not good. And so Mang Ben is thinking whether you can pay him reasonably at the agreed payment terms for the remaining balance. Your house is virtually complete by end of 2012 with Mang Ben shelling out 720,000 pesos for your house.

By December 31, 2012 you paid Mang Ben another 50,000 pesos downpayment because you just received your bonus.

Below is Mang Ben’s record as of December 31, 2012.

Contract Price	1,200,000
Cash Received	100,000
Balance to Received	1,100,000

So for the year 2012, how will Mang Ben record his transactions in the books?

1.     Dr. Installment Contract Receivable (Non Current)      1,000,000

Dr. Installment Contract Receivable (Current)                 200,000

Cr. Real Estate Sales Year 2012                                           1,200,000

      To record sales of house to Juan Masipag

2.     Dr. Materials/Labor/Overhead (Cost of Real Estate Sold)  720,000

Cr. Cash in Bank or Accounts Payable                                 720,000

      To record materials/labor and direct overhead

3.     Dr. Cash                                                                 100,000

Cr. Installment Contract Receivable (Current)            100,000

      To record cash collected from Juan Masipag

4.     Dr. Real Estate Sales Year 2012                               1,200,000

Cr. Materials/Labor/Overhead (Cost of Real Estate Sold)       720,000

Cr. Deferred Gross Profit                                                     480,000

      To close 2012 accounts

5.     Deferred Gross Profit                                              40,000

Cr. Realized Gross Profit                                                     40,000

      To record realized gross profit

The first three entries in the books are straightforward. You just record the transactions as they occur. The 4^th and 5^th entry requires computation at the end of the year.

Real Estate sales	1,200,000	100%
Cost of Real Estate Sold	720,000	60%
Gross Profit	480,000	40%
Cash Collected	100,000
x Gross Profit %	40%
Realized Gross Profit	40,000

It’s clear? F_ck, it is clear as mud! Forget about it? Leave your questions on the comments below because I am committed in converting the mud into crystal clear water.

Trading Strategy: Average Down

Average Down is the process of buying additional shares of a stock if the price went down than when you originally purchased it. It lowers the average price of the stock you bought but it increases your exposure to the stock.


How it Works?
Le us take an example the PHES stock. On May 23, you bought 10,000 shares of PHES stock at a price of .74. After five days, the price went down to .64 and you bought 10,000 shares again. Below is the summary of your buying transactions.

Date	Price	# of shares	Amount
23-May	0.74	10,000	7,400.00
31-May	0.64	10,000	6,400.00
	Total	20,000	13,800.00

What did you noticed? The 10,000 shares you bought before at 7,400 pesos is worth 6,400 pesos now because the stock price went down. So you bought another 10,000 shares on May 31 so that you can lower your average price.


In order to compute the Average Price, just divide the total amount paid against the total # of shares you bought. In your case, the Average Price is .69.

Total Amount Paid	13,800.00
	÷
# of shares bought	20,000
Average Price	0.69

If the stock price went up to .69, you are break-even already . Whereas if you did not average down (meaning you did not purchase additional shares on May 31 at 10,000), you are still in red because you bought the stock at .74 per share.


Holding a Down Stock?

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I know a few people who are doing average down. Their reason is that they are in a position to profit already if the price go back to their original price (.74) because their average price is now lower (.69) .  Or if they want to go out and sell the stock at break-even, they average down so that they can move out from the stock easily.


Personally though, average down works if you have identified a major support (see Support) in price and the fundamentals remain intact. If the PHES major support price is .63, you need to watch that price. If it holds and bounce back after a few trading days or weeks, then you can buy near that price, perhaps the stock is just under a correction mode. 


Fundamentals like growth prospects, sound business strategies, competent management, etc. shall form part of the reasons of why you must average down.


When Hoping is not Healthy

In stock market, you buy a stock because you saw something in that stock and you think that something will propel it to go higher whether it is based on technical or fundamental basis.


On a technical perspective, if you found that the major support (see Support) of PHES is .63, then you need to buy near that price. However, if the price go down to .62 in any single trading day, then it's time to sell even at a loss. Otherwise, you need to find another reason why you must keep the stock.

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Selling at a loss is the most difficult aspect in trading. Who wants to sell at a loss? Nobody, right? It sometimes ruins your entire day and affects your relationship with others. It is an unhealthy emotional stress because you are doing something against your natural desire to profit in the stock. It creates anxiety and loss of sleep. 


A lot of people average down to make up for a bad trading decision. The fundamentals became uncertain already and the technical looks bad and yet they still hang on to their stock. They are hoping that their battered stock will go up one day. Don't put good money after bad money. Losses after losses. Sometimes, you need to jump from a sinking ship and save your life. 


Friend, if there is no more reason to hold a stock, let it go. Charge it to experience. I know it is very difficult to sell a stock at a loss because I've been there before. I just rode the experience, let it go, inhaled deeply and move on. Lessons learned.

Philippine Estates Corporation (PHES) – Non Current Assets Analysis

Noncurrent Trade Receivables and Advances to Related Parties comprises the big bulk of the Noncurrent Assets at 86% of Total Non Current Assets of Philippine Estates Corporation (PHES) for the Y2011, thus we will focus on these two accounts.

Non Current Assets (in millions)	Y2011	Y2010	Diff	Horizontal  %
Noncurrent Trade Receivables	148.6	266.3	(117.70)	-44%
Advances to Related Parties	365.9	345.8	20.09	6%
Investment Property	1.1	1.1	-	0%
Property and Equipment	56.5	0.1	56.41	60950%
Deferred Tax Assets	15.5	15.3	0.18	1%
Other Assets	7.7	9.8	(2.13)	-22%
Non Current Assets	595.2	638.4	-43	-7%

Noncurrent Trade Receivables – is 25% of the total noncurrent assets. It decreased by 44% in Y2011. The decrease as discussed in the current ratio blog is that portion of the non current receivables in Y2010 became current and collectible in Y2011. (See Current Ratio) All installment contract receivables are secured by mortgage on the property purchased by the buyer with an 18% to 21% interest. I think PHES is offering buyers with In-house financing with the interest rates mentioned above. The past due over 121 days is 56% of the total trade receivables (current/noncurrent) which is very uncomfortable for an investor like me. This must be reduced significantly by improving collection systems and if possible, factor the receivables (selling of receivables to others). This is one aspect of the financial statements I must monitor on the next periods to see if the collections have been improving.

Advances to Related Parties- is 61% of the total noncurrent assets. It increased by 6% in Y2011. Its balance of 366 million pesos is the biggest noncurrent asset account. According to the Annual FS submitted to PSE, the recoverability of specific receivables and advances to related parties is evaluated based on the best available facts and circumstances, the length of the Group’s relationship with its debtors, the debtors’ payment behavior and know market factors. These specific reserves are reevaluated and adjusted as additional information received affects the amount estimated to be uncollectible.

PHES is loaning its affiliates with interest. In fact, in Y2011 the interest income it generated from its affiliates is 11.3 million which makes up for 60% of Other Income.

Advances to related parties (in millions)	Y2011	Impairment	Y2011 Net	%
Plastic City Corp	160.0	22.5	137.5	38%
Forum Holdings Corp	71.6	9.7	61.8	17%
International Polymer Corp.	61.9	6.7	55.3	15%
Orient Pacific Corp.	32.4	3.2	29.2	8%
Kennex Container Corp	27.0	3.6	23.4	6%
Heritage Pacific Corp.	20.4	2.8	17.7	5%
Noble Arch Realty and Construction	16.6	2.3	14.2	4%
Metro Alliance Holdings and Equity Corporation	16.6	2.4	14.2	4%
Pacific Rehouse Corp.	13.2	1.4	11.8	3%
Rexlon Industrial Corp	0.0	0.0	0.0	0%
Weltex Industries Corp.	0.1	0.0	0.1	0%
Waterfront Cebu City Hotel	0.0	0.0	-	0%
Bataan Polyethylene Corp.	0.2	0.2	0.0	0%
Ropeman International Corp.	0.6	0.0	0.6	0%
Advances to related parties (in millions)	420.5	54.7	365.9	100%

Though some of the Group’s advances to and installment contracts receivable have no significant movements during the year, management is confident that these are collectible in full.

Advances to related parties (in millions)	Remarks
Plastic City Corp	Payment is 21,475 sq.m. Plastic City property with value at P6,450/sq.m = 138.5 million
Forum Holdings Corp	secured by Pacific Rehouse Properties,fairvalue of 219 million
International Polymer Corp.	secured by Pacific Rehouse Properties
Orient Pacific Corp.	secured by Pacific Rehouse Properties
Kennex Container Corp	secured by Pacific Rehouse Properties
Heritage Pacific Corp.	secured by Pacific Rehouse Properties
Pacific Rehouse Corp.	secured by Pacific Rehouse Properties
Noble Arch Realty and Construction	16,000 square meter in Valenzuela

Most of the advances are secured by properties. These properties can be used by the Company for their real estate projects.

Summary:

Noncurrent Trade Receivables is 25% of the total noncurrent assets at 148.6 million pesos. It decreased by 44% in Y2011. The decrease as discussed in the current ratio blog is that portion of the non current receivables in Y2010 became current and collectible in Y2011. (See Current RratioThe past due over 121 days is 56% of the total trade receivables (current/noncurrent) which is very uncomfortable for an investor like me.

Advances to Related Parties are 61% of the total noncurrent assets. It increased by 6% in Y2011. Its balance of 366 million pesos is the biggest noncurrent asset account. Most of the advances are secured by properties. These properties can be used by the Company for their real estate projects.