Hitting Rock Bottom

Here's one advice in a recent article:

"... if the stock has hit rock bottom, but is set to rise aggressively, then it is better to just invest a lump sum to take advantage of the rise."

Oh right, that is so obvious. Surely.

But ...

How does one know that the stock has hit rock bottom? Only hindsight can tell.

How do you know that it is set to rise? That requires clairvoyance. God mode needed.

Conclusion: Got say like never say. Smart sounding piece of utterly useless advice.

Pathways to Investment Options or How to Get Rich Without Being Scammed

Giraffe has done an awesome job collating the various investment means available in Singapore, and has even provided some step-by-step guides on how to get going for each of them.

This is really awesome. Have a read: 17 Investment Options (by GiraffeValue)

I think it's a most useful source of reference to help somebody embarking on the "doing" part. The closest I ever got round to was this weak attempt in 24 Tales in the Journey to Wealth.

On reflection, I recall that I never had much of an interest to do such things till age 39. Up till then, I had effectively outsourced the job to insurance agents. The wiser me has realised the foolhardiness (and laziness) of yesteryear's, and that a little bit of effort in DIY can reap a far greater difference for the future me.

My very first significant step started when I opened a Fundsupermart account. What a journey since. Have a go by taking the first step forward.

Related:
Expectations of returns on investment
On Investments
On Financial Planning

Mortality - Are We Well Protected?

Oh dear, oh dear. It's been one death after another ever since the start of Chinese New Year. It was a spate of half a dozen who passed on in recent weeks. In all cases, they were aged parents of friends and colleagues.

Most recently, I found out that a friend had suffered a tragic medical incident. He's in very bad shape and I fear he may not make it. As a single income family with two teenagers, it is a situation that will be of grave concern and worry.

I can totally empathise with the implications as my family is likewise dependent on me as the single bread winner, with a pair of teenagers going through the paces of education. The exact situation as my friend. It led me to ask myself, how will my family tide through should anything happen to me? *touch wood* [major wood]

A quick review suggest that with my holdings in shares and unit trusts, Supplementary Retirement Scheme investments, CPF, cash in bank accounts, and insurance upon death, it would amount to $1.7m. Would that be enough?

Assuming a 4% dividend payout with $1.7m invested, it would be $68,000 per year. Wifey has her own portfolio that is generating $6,000 worth of dividends per year. So in total, that's $74,000 of passive income per month.

The car is fully paid up, although it will eventually reach its 10-year mark within a few years. The house is almost fully paid up, with less than $50,000 principal outstanding. No other debts, beyond the monthly credit card bills. I think, $6,000 a month should be enough. Worst case, wifey may have to pick up some work to supplement.

ONE major problem though: Will wifey know how to invest that $1.7m to generate a steady and safe 4% dividend return? Got to work on that. Perhaps the simplest solution is to teach her how to buy STI ETF?

Meantime, whatever faith and beliefs you might subscribe to, wish my friend and his family well. They need all the help, physically and spiritually.

Wishing all, and especially my family and me safe, healthy and happiness in the year and years ahead. Cherish what we have.

Mortality, am once again reminded.

10 Traits of Top Stocks

Came across an old issue of "Money" magazine (I think it's a Aussie edition) with an article titled "10 Traits of Top Stocks". The 10 traits connect well with my thoughts on what constitutes factors for a good stock to invest in, when it is at the right price.

[Note: 10 traits are from the article, but comments are mine.]

1. Rising earnings. It's been making more and more money. Provided it's real and not fraudulent accounting!

2. Profits cover dividend payout. It's not paying out dividends from borrowings/debts, so the dividend is sustainable.

3. Capital raising aren't needed. Doesn't collect money from shareholder - i.e. the reverse of dividends! REITs tend not to do well in this regard when times are bad though.

4. Debt is minimal. I take that to be debt-to-equity at less than 40% (<0.4) - i.e. not overly leveraged.

5. Plenty of cash for interest bill. Has the cash flow to pay the interests on their debts - i.e. wouldn't default.

6. Profits are rising. Suggests an ability to price a premium in its product and services. Either that or it is increasingly more efficient.

7. Profitability strong and rising. Makes good use of its equity.

8. Cash flow exceeds profits. Cash is king! Best is a business that doesn't require a lot of capital expenditure.

9. Value has been rising. Has a business that has been of value.

10. Value will keep rising. Has a business that will continue to provide value. The boring stuff that provides bread and butter products and services that everybody require all the time are my favorite.

[Reference: "10 Traits of Top Stocks", Money magazine, by Vanessa Gilbert.]

Boredom Amidst a Dreary Market

Boredom, that perhaps describe how I feel. For some, it must be heart-wrenching, watching the drop day after day? But I go with "Boredom".

Drop, drop, drop. For me, it has been a "Buy!" opportunity. It didn't take very long for me to empty all my cash hoard to buy more shares as they dropped more with each passing day.

I soon used up the cash holdings in the trading account.

Then I emptied the reserves sitting in a money market fund. That was soon used up.

Then I received some bonus due to pay adjustments. Lucky me. That was invested. Gone.

Then I received a year-end bonus. That was invested. Gone.

Then I reduced my excess cash in my savings accounts and placed them into the trading account. [Excess being that beyond Emergency Fund holdings. I'm not going to mess with that!] That was invested. Gone.

Then I cashed out one of my insurance policy. It was planned for, so it wasn't an impulsive action. That is being invested. Will soon be gone.

How long more is this "Bear" going to last? I'm going to run out of cash hoard soon. *wail*

Bore. Meanwhile, let's celebrate Chinese New Year! Happy New Year!

A Review of Investments for 2015

2015 has actually turned out to be a horrendous year, or a wonderful year, depending on how you look at it as an investor. Checking against the STI, I realised it has actually suffered a -14.3% dropped compared to this time last year. Taking into account 3% of dividends which the STI index would not have accounted for, that would actually be -11.3% net in terms of total returns.

So if you're sitting on a 11.3% loss, you're pretty much doing market normal. You're normal. On the other hand, if you've been buying throughout the year when the market dropped, it's probably going to turn out great in the longer run. That is, provided you didn't buy a bunch of junk! You had a lot of guts and I wish you success! You're probably abnormal.

My stock investment has returned an IRR of -1.2% for 2015 inclusive dividends reinvested into the portfolio. So I guess I should take some satisfaction that I have outperformed the market for the 6th year running. Can I gloat somewhat?

However, my long term IRR has continued to slide: from ~20% (2012-13, 4-5 years), to 17.3% (2014, 6 years), and now ~12% (2015, 7 years). A case of reversion to mean? Still, 12% over 7 years is not a bad long term performance. I'm consoling myself.

The shares portfolio is taking on a more global outlook as I've started investing into other regional ETFs (esp. Europe, Asia-Pac and Japan) on top of my current holdings of Singapore and US shares. If this was a fund management company, I should probably use some other global benchmarks. But I'm not, so I will continue to reference STI as my benchmark, because that's what my opportunity cost is. I'm only accountable to myself.

Bought:
  Anheuser Busch (US)

  ARA Asset Mgt
  Aspial (bonds)
  Boustead
  Capitacom Trust
  Capitaland
  CIMB Asiapac Div ETF
  Exxon Mobil (US)
  Global Logistic
  HongKong Land
  JMH
  Keppel
  Lyxor Europe10 ETF
  Lyxor Japan10 ETF
  M1
  OCBC
  Second Chance
  The Hour Glass
  Union Pacific
  YZG
  Zagro Asia

Rights Issues Subscribed:
  ARA Asset Mgt

Sold:
  nothing!

Lots of buying, not much selling. To be precise, I've sold nothing throughout the year. I've been a stooge. Gave nothing away.

Dividend income grew marginally to $11,168 for 2015. This would have been higher of course, except that I chose to accept all options offered in the form of scrip dividends (i.e. additional shares in lieu of cash) as per previous year. I'm too lazy to figure out what the exact dividend amount would have been. But I estimate it would likely be in the region of $14,000 for the shares portfolio. That's not enough to live off my lifestyle on, yet.

But from an overall perspective, the total portfolio of shares, unit trust, investment-linked and cash/bonds has finally breached the 7-figure zone. The journey is progressing well. The point of "inflexion" (a.k.a. financial independence) is coming.

Despite a tumultuous 2015, here's wishing you a wonderful 2016 next. Happy New Year!

Considerations in Stock Picking

This is a reminder for myself on the considerations in selecting stocks to invest in ...

I am not a trader, so carrying out technical analysis to decide when to buy and sell by the minute isn't my thing. That is perhaps best left to a full time professional. For a working professional, a value investing approach is probably more appropriate.

Business

Business that lasts, not a flavour of the year thing.
Has products/services that is consumed again and again.
A business that is difficult for competitors to come in is best, less competition.

[I'd rather buy a company that supplies detergent than one that sells washing machines.]

Management

Reliable management, in sync with shareholder interests.
A management that owns and buy even more of their own stocks.
Not overpaying themselves as board members/executives.
Above board business dealings.

[Give me an honest management any day. One that seeks to rewards themselves exorbitantly in times both good and bad is really no different from the gold scam schemers. The only difference is that they 'steal' from investors in broad daylight without having to run away.]

Financials

Viable financials with positive Free Cash Flow (FCF).
Shows growth that is generally growing year on year. Positive earnings (EPS).
Profitable, yet undervalued. Low PE <15, PTB <1.0 (exciting)
Pays sustainable dividends; Dividends (DPS) < Earnings (EPS)

[It's hard to lie with real data. With fraud, something will not balance out, eventually. Unusual increases in Trade Receivables is not a good sign!]

"It's the business, stupid!"

Playing with the Bears of 2015 - should I be excited or miserable?

Over the weekend, the headlines were screaming death and destruction. When the headlines of two national papers start carrying headlines like this, it's time to pay serious attention!

What's with the sudden excitement? It's not as if it suddenly happened. The STI has already been declining for months from the last high of 3500 earlier this year. So 3,000 is perhaps just a psychological number, which was otherwise of no significance?

At 3,200, we were already effectively experiencing a correction (-10%) and we had already gone past that. By 2,800, we would officially be in a bear market (-20%). In fact, some of the emerging markets had already reached bear territory in recent weeks.

On, 24 Aug 2015, the local market seems to have collapsed. The board was a sea of red. Mumbles of "Black Monday" was heard. The VIX was rapidly reaching the 30s while the STI had reached 2,843.

Was it a capitulation? Judging from the many posts that it was an opportunity to buy, I guess not yet. From this point, there can only be two possible trajectories: (a) the market continues further downhill and sparks a complete capitulation before making its recovery, or (b) we are already at the bottom and the market recovers from here.

With Scenario A, there will be more regrets of "Shit, I bought too early!" or worse, "I better sell before it's too late!"  With Scenario B, there will be regrets of "I missed the bottom!" Either way, it will be a wailing wall of regrets.

Undeniably, this will be a baptism of fire for new investors who have not experienced the events of 1997, 2000, 2002/3, 2008/9 and 2011. They will look back in time and wondered what the fuss was. History tends to look a lot less terrible than today's reality.

Watching a profit of $50,000 sink into the negatives within a matter of weeks or even days can be highly demoralising for somebody with a portfolio of $250,000.

For an impending retiree, watching a retirement fund of $1,000,000 sink into $800,000 is like experiencing a firestorm that had just burned down a sizable part of the farm you're living on. It could well mean reducing a lifestyle of $3,333 a month to just $2,667 a month for the next few months or years, even as inflation creeps upwards!

What's been its effect on me? I've been dumping all my cash drawers and depositing them into my investment account. Buying and buying, day after day, as the market trended downwards. My only worry is running out of cash before it has reached the bottom of this pit. I should probably pace myself.

But two things I shouldn't touch: (a) the education funds for my kids, and (b) at least 6 months worth of expenses in cash as an emergency fund.

So what have you been doing?

Giraffe's Cafe - An Expose on LizardoRealm

GiraffeValue recently published on his blog a collection of 55 SG Financial Blogs. Seems my blog made it onto his list.

He subsequently got in touch to further conduct a virtual interview. "Lim kopi" as one might say. Here it is, republished.




[Republished, with permission]

Lizardo - Giraffe's Coffee

My guest for today is Lizardo from http://lizardorealm.blogspot.sg, he has been blogging for about 5 years on topic such as ETF, Unit Trust and stocks. I like the most is where he looks at them in a portfolio perspective rather than an individual investment.

Let’s see what he has for us.

GV:
Hey Lizardo maybe you can start by giving us a brief introduction about yourself? I.e your major, profession, age and other things you would like to add.

Lizardo:
I am a working professional with a few graduate and postgraduate degrees(Computer Science). I’ve been working for 24 years and nearing the big “50”. I started investing with some seriousness only 10 years ago, and started buying individual stocks in the midst of the Global Financial Crisis. Lucky timing!

I’ve been running some what-if analysis and certain models would suggest I could choose to semi-retire next year. But we’ll see. As a single income family, there are many risks to consider.

GV:
I see that you have a World Cup Team(stock portfolio) consist of SG dividend stocks and overseas stocks, and you have also invested in ETF, and unit trust. Could you tell us what is your portfolio consist of, and the breakdown of its asset allocation?

Lizardo:
My Singapore and US teams of stocks are indicative of what I’m invested into. Broadly, my asset allocation is a spread of:

[a] 45% Singapore stocks
[b] 11.5% in US stocks
[c] 11.5% each in European, Asia-Pacific (ex-Japan) and Global Emerging Markets using ETFs/UnitTrust
[d] 4% in Japan ETF/UnitTrust and [e] the balance in cash, preference shares and bonds.

I have a high risk appetite as I view my CPF as the bond component of my portfolio. The Unit Trusts are primarily invested using SRS and CPF-OA funds.

I maintain a few separate portfolios for my two kids’ education funds, and for my wife. Collectively, the total valuation for my family has exceeded $1 million. The gradual accumulation over the years has given me a lot of confidence that investing is definitely the way to go to build a retirement fund.

Keeping cash in the bank and fixed deposits is definitely not the way to go.

GV:
let say that there is a reader who is out there who only has 6hrs per week to spare for stock investing. He wants to build a portfolio that can generate dividend for him, holding period 3-5 years. What are the 10 stocks that you would introduce to him right now, and how would you build the portfolio i.e no. of stock, stocks criteria, DCA or lump sum purchase and etc?

Lizardo:
With a holding period of 3-5 years, I suspect it will require more attention and time. I’m a long term investor myself and I tend towards holding stocks ‘forever’. For this, 6 hrs a week sounds about right for me, possibly less. A lot more time would be spent reading up and gaining appreciation about investing initially.

I would recommend that the investor consider his/her risk appetite and purpose for such an investment. It is only with that understanding that he/she can make the right choices that he/she can sleep peacefully come rain or shine. Instead of jumping into individual stocks, I would recommend someone who is just starting out to try a diversified portfolio across market regions using either Unit Trust or ETF for a start. And then to go into buying individual stocks when the portfolio has reached some critical size – perhaps when more than $100K.

For a suggestion on the 10 stocks, he/she could consider my team of 11 players for some ideas. As a value investor, I recommend however to keep those on watch and buy only when the price is right – esp. a reasonable margin of safety. Buying when the P/E is above 20 is unlikely to be ever a good idea.

Perhaps the top few that would be most interesting to me now would be OCBC, Keppel, M1, Boustead, Kingsmen, VICOM, HourGlass and GKGoh. Many of these have some interesting challenges that would suggest room for caution and doubt today. But it is precisely in circumstances like this that the best opportunities are created. It is the future that we seek, the past is only a history. In any case, every one of them is a dividend paying stock and hence provide some ‘insurance’ while we wait for their growth.

GV:
I see that you also blog quite a fair bit on your experience in unit trust. As you know, in our personal finance and investing blogosphere many have encouraged the use of ETF over unit trust, because of its lower cost and etc… What are some of the things that many have missed out, or things that you see and others don’t.

Lizardo:
I think the advice on ETF over Unit Trust is the right one. However, unlike Unit Trust where one can buy and sell anytime, it is less so in the case of ETF. For many ETF (the exceptions are the STI ETFs), I have found it difficult to buy, and would suspect the problem would be even worse when trying to sell, especially if there is a market situation developing. Also, given the charges, it makes sense to go ETF only if buying in larger quantity. Hence, for an early investor (as I was when I started almost 10 years ago), it was more convenient to go with Unit Trust.

The ETF markets in the US is a lot more liquid. But it comes with the penalty of the 30% withholding tax (especially on the dividends paid out), and there is potential issue over inheritance that I do not yet confess to fully comprehend due to US laws. Unnecessary complexities.

[Although there are theoretically market makers for the ETFs, I find that the bid-ask spread can be very wide. I don't get a sense that the liquidity is really there for me to buy/sell easily for the less popular ETFs.]

GV:
What are the most common mistakes you often see people make on investment?

Lizardo:

I think the mistakes are:
[a] not knowing what one is trying to invest for (what’s the time horizon?)
[b] attempting to make quick bucks by trading actively, jumping in and out
[d] attributing luck to skill,
[e] listening to others (noise) without doing an analysis
[f] looking for excitement from investing!

GV: Alright, now come to the last question. What are the tools or webs you use for investing and any financial web you frequently visit to source for information?

Lizardo:
– Key websites that I read are on my home page. Especially: NextInsight, ValueBuddies, Finance.sg, Business Times, Motley Fool Singapore.

– Key newspapers/magazines: The Edge, Business Times Weekend, Fortune.

– Key online resource/tool: POEMS, Fundsupermart, and my own Excel spreadsheets.

---

Something that I have never considered of when looking at Unit Trust,  on the response from Lizardo liquidity is one big issue.  Of course one can still go for US ETFs which are more liquid but the withholding tax makes it unattractive and not to mention about the legal complexity.

Of course for withholding tax issue say on S&P500 one can go for VUSD which does not have a withholding tax on dividend(as it will be taxed at 15% before the divided is paid out) as compared to the US version of S&P which has a hefty 30% withholding tax on dividend.

In Times of Fear, How Did You React?

In recent weeks, there was much hoolaboolah with the Greek debts as they danced around the European partners, and the collapsing China share markets as the unwinding unfolded. These were accompanied by a fear of contagion of the deadly MERS virus in the region following the spread in South Korea.

The Singapore stock exchange saw some downwards movement, but never quite breached the 10% mark. At the individual stock level, most were in trend with this. Cries of a correction and bear market could be heard. At our Singapore Zoo however, our bear was flat out and enjoyed his snooze.

So what did you do during this period? Did you sell? Did you buy? Did you do nothing?

If you sold, was it because of the fear of further losses with the collapse in 2008 fresh on your mind? Did you then suffer regrets when the same stock you sold started rising again? It seems like every time you sell, it was at the lowest point?

If you bought, did you experience worries when the stock continued diving? Or did you experience glee when that happened and continued to buy more?

If you did nothing, was it because you were gripped by fear and uncertainty. You felt a sense of "I did the right thing" when you saw the stock continued to slide, and then felt a sense of "Damn, missed an opportunity" when you saw the stock climb?

The behaviour during this interesting period sheds interesting insights about the kind of investor we are. It probably helps to understand whether one is a speculator whose mood peaks and troughs with the market barometer, or is one a value investor who looks for opportunity and continues to focus on the company and its business rather than how the market is reacting.

The wider market is just a voting machine. Does it matter if the stock price goes down whereas the business continues to generate profit, experience positive cash flow, gives out dividends below its earnings, and maintains a rising trend of dividends? Or a proven management team that has proven itself over time and doesn't over reward itself, a business that can face off competition and dominates its segment, a business that provides products and services that remains relevant now and moving forward, insiders who continue to hold and buy their own stock; those are many other factors that give us greater confidence on the viability of a business.

For me, it's been a buyer's galore these past weeks. All that I need is a lot of cash. Lots.

Rags to Riches, Riches to Rags

The path to rapid riches end in tatters. It's been one article like that after another in the papers. Oil pods, gold scams, distressed properties both overseas and locally.

A pity to the many who found themselves in such shoes. Was it greed or ignorance? Neither is a good excuse.

Was just talking to a friend earlier. He had invested in some "gold" scheme and has not seen his money come back. It was a $5,000 write-off for him. At least it wasn't some epic major amount and he could live with the loss. But as he said, "can't afford to keep losing like this!"

Anything exotic and unusual could be an opportunity or a scam waiting to fall victim to. Between the gain versus the loss, are you able to withstand both? When stepping into the unknown, best not to commit what one can't afford to lose. It's also called risk management.

Related:
The Allure of Gold - Treachery of the Glitter

A Fantastic Investment Deal at the Bank - Or Maybe Not

I received a call from a relative recently. She was at a bank. Apparently, she had a fixed deposit that had matured and she wanted to cash out. The Bank Officer had proposed that she invest the cash in a Unit Trust offering a return of 2% per month. She was pretty excited. I laughed.

Obviously it wasn't a Bank Officer. It was one of those Customer Relations Executive (CRE) pedaling investment products to the innocent individual.

At 2% a month, I told her to ask the CRE to put that down in writing and guarantee it. If it was so good, I also want. I laughed big time.

I then asked if the CRE had told her how much they charge for the sales charge. Apparently, the CRE had said that they were offering a *huge* discount, reducing from the usual 5% to *just* 3%. Come on, Fundsupermart and POEMS charge a lot less.

The relative of mine had an interesting reaction to all these. She said, "I knew it, it's a con job! Never mind, I'm keeping the money in my savings account."

Oh dear. Sigh.

My Singapore Team of Dividend Stocks 2015

My first 11 team of dividend shares have remained largely unchanged over the past year.

Goalkeeper

(1) OCBC remains my stalwart to guard the goalpost. An increasing interest rate environment can only benefit the banks.

Defenders

My defence is built around Real Estate Investment Trusts (REIT) in the form of (2) Capita Commercial Trust, (3) Capita Retail China Trust and (4) Mapletree Industrial Trust.  That gives me 3 REITs covering commercial, retail and industrial properties, with some exposure to China. 

My fourth defender is (5) Vicom.  a proxy play for car ownership in Singapore. It could be facing some windy resistance as there are supposedly less cars that require routine inspections over the next 3 years. But will there ever be less cars in Singapore? Not in my view. So long as there is a high level of demand for car ownership, there will be business in car inspections and Vicom is dominant in this regard.

Midfielders

Midfielders need to control the play. They have to create opportunities for offensives, and at times have to roll back to the defensive. For this, I am standing by (6) Boustead, (7) Hour Glass, (8) Kingsmen Creative and (9) SATS.

Boustead is about to break off its property business. For Hour Glass, its founders continue to buy its stock. I view that as positive. Kingsmen Creative has been doing well, expanding regionally and in Greater China. There are many MICE events and theme parks being built in the region. SATS on the end could face some issues with the airline business somewhat affected by negativity with the number of unfortunate air crashes and economic challenges.

Strikers

For the offensive play, I am looking for some excitement, in particular, growth players that may not be as yet high yielding but have the potential to go far. No change to my strikers with (10) Global Logistic Properties (GLP) and (11) Yangzijiang, giving me exposure to China, Japan and Brazil.

The poor outlook of the shipping industry could well affect Yangzijiang. Likewise, the slowdown in China could well see impacts to both. I'm normally averse to holding China plays. But I'm making an exception for Yangzijiang. It however requires some close watching.

Reserves

Nothing has therefore changed after a year to the team composition. But it looks like there could be some challenges in the performance of my first 11 in the year ahead. To mitigate, I've expanded my team by beefing up the bench strength and recruited (12) GK Goh, and (13) Keppel.

GK Goh holds a portfolio of interesting investments (more) with significant insider buying in recent months. Keppel on the other hand is my contrarian play. There is much fear in the market given its lack of new contracts and poor segment outlook in oil and gas. But with a Price-Earning ratio so low, it's too good to ignore given my long term outlook towards my investments.

Play ball! Oh wait, wrong game.

[Disclaimer: I hold all the above stocks. But this is not a recommendation to buy any of these. Do make your own assessment before investing, always. I acquired them at different times over the past five years (post Global Financial Crisis) and have benefited from their growth and reinvestment of dividend payouts since.]

So What? Is it Worth Buying a Stock with a Lot of Cash?

ValueEdge had an interesting post on the The Art of So What?

I recall an encounter once where my boss was running through a proposal with his boss. His boss then said, "So?" After providing a response, he was again asked, "So?" And this went on for five more times. It wasn't asked in a malicious way. It was a matter of fact, trying to dig deeper into the subject. Finally, having dug in five levels deep, he then went on to analyse the issue strategically. Fascinating to say the least.

Sometime back, I came across an analyst report about a stock. It said that the cash and equivalent that a company had was greater than the market value of the company (i.e. number of shares x price of the shares). And so it came up with a target price for the company. I bought into the idea.

The company in question was however not doing well. Its business was bleeding. The cash that was talked about soon disappeared as its operating expenses sucked away all the cash. Within a few months, it had lost half its value, and the cash was gone.

I should have asked "So?" a few more times.

Lesson learnt: It's the business that matters.

A Review of My Investment in 2014

The culmination of 2014 marks my 8th year since the start of my investment journey, and the 6th year since investing directly in the stock markets. Ok, so I'm a late starter. But better late than never.

[I shall not count those early years of insurance linked policies since my National Service days. Those were just done in a blind and oblivious manner. Lost years!]

Despite the ups and downs (State of the Economy - 2014), the STI has achieved over 6% in 2014. With dividends included, the total return would be in the region of 8-9%. 

My stock investment has returned an IRR of 10.3% for 2014, inclusive dividends. This compares poorly compared to the previous years' returns of 21.6% (2013) and 39.0% (2012). 2014's performance has therefore dragged down my long term IRR from 20.6% (5 years) down to 17.3% (6 years). Still, it hasn't been too shabby, and it did outperform the benchmark STI, if only marginally.

Bought:
  Capitaland
  Hong Kong Land
  Japan Foods
  Kingsmen Creative
  Second Chance
  Tat Hong
  The Hour Glass
  Lyxor Europe 10 ETF

Rights Issues Subscribed:
  OCBC

Sold:
  Soup Restaurant

Dividend income was only $10,723 for 2014 from the stock portfolio. But it has been increasing at roughly $2,000 per year. It would have been higher, except that I took up a lot of script options instead of receiving cash dividends.

The initial $3,000 that started this journey from eons has morphed into a diversified six-figure portfolio that is well on the way to the eventual target to achieve financial independence. Time and discipline are key.

Hope you've also had as good a journey as we welcome 2015. May the year ahead continue to be a prosperous and healthy one for everyone!

A $29,000 Problem to Financial Freedom

Surrender or Wait for Death

Well, we did it. Or she did it rather. My wife decided to surrender her only whole life insurance policy. We concluded that there was really no value in her owning such a policy when there's really no need to have such a sum to protect either myself or the kids.

As a housewife, why is there still a need for her to own this insurance policy? No point waiting for "till death do us part for" the returns from this policy.

The insurance agent was nifty and processed it in due course. The cheque for $29,000+ came in within a week, and is now safely deposited.

A Matter of Choices

Next question, what to do with it? Memories of the squandered $million$ case that went down the tube came to mind. Of course, this is several magnitude less of a problem. A happy problem in fact.

- Leave it in the bank savings account - build up the emergency fund, low interest rate, but risk free?

- Contribute to her CPF Medisave account to bring it to the the limit, earn 4% returns at the same time, but locked in?

- Buy more dividend yielding stocks on SGX, accept the risks of volatility?

- Buy Unit Trust to diversify globally, accept the leakage from annual charges?

- Buy ETFs to diversift globally, accept the risk of poor liquidity?

What would you do? For now, my wife says, she wants to see the sum appear on her savings account first. Feels *shiok* first mah.

Either way, that's also a few hundred dollars (avoidance from not having to pay the monthly insurance) freed up to do other things with. Invest that sum too?

Related:
Whole Life Insurance - A Good Deal or a Dead Deal?

Investopedia, the Secret Millionaires Club and MyMoney

Many blogs on the subject of Personal Finance and Investment provide wonderful introductory explanations of these topics.  Investopedia is probably the most comprehensive, the ultimate Wiki for the investment peons.

I just came across another website which does a decent job of extending the educational materials further.  You may want to give it a go: Orcam Group Educational Resources.

For a kids friendly version, you may want to try the Secret Millionaires Club for a cartoon web series hosted by Warren Buffet.  Warren shares a piece of wisdom in each episode.  Guess he gave up on the adults and decided to start working on the kids instead!

For Singaporeans, the best available source is probably the serious of talks organised by SIAS MyMoney series to educate Singaporean investors:

Happy reading.




Related:
Investopedia
Orcam Group Educational Resources [Orcam Group]
Secret Millionaires Club
MyMoney [SIAS]

Journey through the ages - is 20% good?

It has been a fascinating, and at times exciting, journey. Initially, I had only invested in insurance-based schemes. Be it whole-life endowment plans or investment-linked policies (ILP). Work, work, work was otherwise all I focused on. Making ends meet from the salary I earned and saving money into the bank were pretty much the game plan otherwise. Marriage, housing, post-graduate studies and kids pretty much took up everything else I had.

Had it not been for the early years buying into the various ILPs, I wouldn't have much of an investment to speak of. Interestingly, I had the fortune of having taken up ILPs in the era post Asian Financial Crisis and it had generated quite a tidy sum. It came in handy when I needed the money to complement my CPF to buy my first home.

Then I discovered Fundsupermart. A small sum in its cash fund gave me confidence to take the next step - i.e. to invest into various unit trusts funds. As I read more and gained a better understanding of the concept of diversification, stocks and bonds, the unit trust funds I invested into became more systematically managed.
Then I discovered the tax benefits of the Supplementary Retirement Scheme (SRS). Voila! Max'ed out my SRS, minimise the tax I have to pay, and invest the SRS into unit trust funds at Fundsupermart. It's all too easy!

At the depth of the Global Financial meltdown, I saw my unit trust funds sink miserably. And I mean miserably. But I stayed faithful to the diversification plan with the confidence that the market will generally recover in the long run.  It has not disappointed.

In 2009, I assessed that there were many opportunities to pick up stocks. I must say I had a confirmation bias when I saw a video interview with Warren Buffet where he suggested that he was on the look out for things to buy. So started my stock picking journey.

After 5 years investing into the stock market, I did an analysis recently to see how I've faired. Turned out, not bad. Not bad at all. Using Excel's XIRR function, the internal rate of return showed 20.6% over the 5 year period investing in stocks. The stock portfolio, both from valuation uptick and from cash additions to the investment fund, has grown in leaps and bounds, from zero to hundreds of thousands in that 5 years.

Significantly, as I analysed the individual stock's performance, it is also clear that the dividends have been significant. Soon, the dividends alone would generate $1,000 per month of income. Of late, as companies try to preserve their capital, several have started offering Scrip Dividends (also known as Dividend Reinvestment) options which I have opted to subscribe to, and thereby increasing the number of shares that I owned of those companies.  I'm doing so with the assessment that these stocks are not going the way of the dodo bird over the next 5-10 years.

In many cases, the dividend yields have gone way beyond 4% compared to the original cost of the shares as many of these companies have consistently raised their dividends year on year. It sure feels *shiok* to see a stock that cost $1,000 generating an annual dividend of $100 per year and growing. Must say though, that there aren't as many SGX companies that behave like that compared to US stocks on the NYSE. The later have many more companies with a long history and consistent track records. Unfortunately, that also comes along with the 30% withholding tax.

Happy investing!

Related:
Where Lies the Portal to Wealth?
Pattern of Behaviour - A review of 2013

Crowd Funding and Peer to Peer Loans

Crowd Funding

Crowd sourcing has developed into crowd funding in recent times. These have provided avenues for new business opportunities and innovations to thrive.

crowdbnk.com
crowdcube.com
kickstarter.com
syndicateroom.com

Peer to Peer Loans

Another interesting trend has been the appearance of Peer-to-Peer Loan services, allowing the retail investors to became a banker, providing micro-financing. There are several such services in the US and UK. Such loans are not without risk for the lender, and some bad loans are only to be expected.

fundingcircle.com
ratesetter.com
rebuildingsociety.com
zopa.com
assetzcapital.co.uk
lendingworks.co.uk

When will we see such innovations become possible in Singapore?

Positive cash flow without putting any cash at risk! Too good to be true?

Saw an online video clip on YouTube recently by this lady who was selling her concept of developing wealth. She was schooled in the art of "Rich Dad, Poor Dad".  I've no grouse with the general idea of "positive cash flow" though I guess some of the concepts may run contrary to accounting practices in the way assets and liabilities are normally tagged.

She gave an example of a Singapore property and asked the audience if they would invest in it.  Essentially it had a negative cash flow due to the high loan payments compared to the rental income.  The obvious answer was no.  But she postulated, what if she had a way to turn this into positive cash flow?  I was intrigued to say the least.

The concept?

Idea #1.  Secure an interest-only loan payment.  The argument being that since this is for the purpose of generating income from rental and not for capital appreciation, taking this approach helps to reduce the loan payment and hence shifts the cash flow equation to the positive.  Not bad.

Idea #2.  Obtain a capital refinancing.  She made it clear to differentiate between refinancing a loan (which I understood) versus capital refinancing (which I had no clue about).  It sort of work like this.  Suppose you could obtain a loan of 80% against a $1,000,000 property - i.e. $800,000.  So you had to put down $200,000 as the upfront down-payment. 5 years later, the value of the property has appreciated to $1,200,000.  Recall Idea #1?  So, the loan principal has remained at $1,000,000.  But since the value of the property has now appreciated to $1,200,000, the capital refinancing would offer a revised loan at 80% giving $1,000,000.  You would therefore have extracted the $200,000 you had put down earlier!  Of course, the loan repayment would have increased.  But she argued that the rental income would likely have similarly increased as well.  Amazing isn't it?  Over 5 years, you have effectively put no cash into the investment and would still generate a positive cash flow from the rental income!  I also want!

What's the catch?

Catch #1.  Notice how the assumption in Idea #2 contradicted Idea #1.  She said we should not invest for capital appreciation but to achieve positive cash flow.  But what was the assumption in Idea #2?  Capital appreciation!

Catch #2.  What happens if the value of the property drop?  The bank is going to come calling for a cash top up!  Do you have the cash reserves to respond when that happens?  Are you still cash flow positive? Companies can die when they don't manage their cash flow properly from month to month.  For the individual, it could mean bankruptcy and a miserable rest-of-the-life.

Catch #3.  Does the economy remain healthy always and you can be assured of the rental income?  More often than not, when things are getting bad, it just gets worse. The very scenario in Catch #2 is also likely to be accompanied by a poor economy. What happens?  Your rental would also go up in smoke.  Now the ability to service the loan has just been compounded by an amount equal to the lost rental income!  Double whammy!

Speaking of which, got a call from a friend (person A) recently, asking for the number of another guy I know (person B).  A was trying to get in touch with B over his investment.  Seems A had invested in some gold-related scheme with B.  I happened to know B had been scammed by his business partner (absconded!) and was desperately trying to get his life back.  B was now driving a taxi to make ends meet.  I guess friend A has to kiss his investment goodbye.  Sad.