Subject: Volatility Versus Risk

Some investors confused between the difference in volatility n risk. I have shared with everyone the different between the real economy n the stock mkt. as an investor we focus on the investment risk associated with the business in the real economy where else fluctuation of share price in the stock mkt are volatilities which will be iron out given time.

So what are the investment risk in the real business? Buying a company with high debt, insufficient cash in bank n low operating profit margin is definitely risky. I have explained the benefit of buying a company with high operating profit margin before, thus who are interested to find out can refer to history.

How do we considered a company of high debt. Some analyst will compared with its peers within the industry n some analyst will set a standard debt ratio margin. For myself I do both. There is nothing wrong for a company to engage in debt so long the money borrowed are used for investment to generate cashflow to the company n not for the purpose of keeping the company alive. Due to the reason that debt can be roll over or refinance to another bank, most companies assume their financing can be xtended forever. For example, during my employment with the bank, company that took a loan for an investment property can always refinance to another bank, even if they don' t refinance, they can mortgage other assets to cover it or earmark their existing credit line to cover it, there r many ways to do it, so long the borrower continue to pay prompt interest to the bank.

However when we compared two companies that perform equally well, the one that have zero or low debt will be preferred. Reason being is as a value investor we always do things directly opposite with the majority of investors. We buy when everyone is dumping their shares vice versa, famous quote by warren buffett when everyone is fearful I' m greedy n when everyone is greedy I' m fearful. The prc also have their own similar quote n that is  人 弃 我 取 ， 人 取 我 弃 .  Thus to safeguard ourselves for being wrong we will invest in a company with strong balance sheet becos during recession firm business will be significantly affected n they could run into cashflow problem to service their debt. Hence that' s the reason y I will never buy a company with high debt.

Cash on hand held by companies are greatly important during times of recession. It is becos when firm run into cashflow problem they will have to rely on their cash on hand to service their debt. Analyst like to use current n quick ratio which include inventories, receivables n etc to measure a company ability to service it' s liability. I find it not conservative enough thus I developed my own ratio whereby I uses only cash on hand to service it' s debt. I will take the total cash on hand divided by total borrowings n my first preferred scenario is a coverage of 100%. If the company can' t meet this criteria (very few companies can meet this standard) I will look at total cash on hand divided by short term borrowings of less than one year n I expect at least a two times coverage. Thus company like swiber n others are shouldering high debt n low cash on hand. Once it' s operating cashflow cut off n have no cash on hand to service it' s obligation it will bankrupt n when that happen we can say goodbye to our capital, this is RISK. On the other hand volatility in the stock mkt are just like pendulum swing that are affected by sentiment in the short run. So long the company that we invested is good company it will always reflect its valuation given time n our capital will always be safe when we bought it at an adequate margin of safety. Just like my first purchase of DBS in Q1 at sgd14.68, lowest price went down to sgd13 n I' m now still steady like a rock. In the short run prices can be temporary lower than what we bought but over time it will definitely go higher to realise it' s valuation. No doubt about it. Thank you :)