Isn’t this similar to the 90s?

The spate of events that happened in the last six months reminded me of what we had experienced in the 90s. More than 20 years have zoomed passed us and how many of us remember those events that had taken place. In fact, many of us would have, either forgotten what happened or too young to know what had happened then. Based the historical time-line, it is likely that those in the Generation Z or Generation Y may not have really experienced the times of high interest rate environment, let alone making comparison between now and then.

By today, that business environment of the 1990s seems to be re-surfacing itself each passing day. There are just too many similarities. Let me quickly bring out a few examples. First of all, in the past few years, we had enjoyed a phenomenal economic growth, and as such, the stock market index was pushed to its high (second only to the all-time high of 3,875 in made on 11 October 2007). Whether regionally, or Asia as a whole, we were all doing well. This was a complete copy of what happened in the early 90s. The regional growth was so phenomenal that many economies were given names, namely, five tigers and four dragons. At that time, the local stock market index or STI raced from about 1000 in 1990 to about 2500 in 1994. Back then, there was a Dr M, who was holding the post of the prime minister of Malaysia, and by today, he returned as a prime minister after having left the office for many years. In between his two terms of office were two prime ministers, Abdullah Bidawi and Najib Razak. Then, in the year around 1994, the FED hiked up the interest rate several times. Is it not that what we are seeing now – in the midst of an increasing interest rate environment? The US economy at that time under the Clinton administration was so strong that the US stock market powered from 4,000 at the beginning of the administration to about 10,000 when Bill Clinton handed over the US presidency. That was also the period when the FED chair, Mr Alan Greenspan, coined the term “irrational exuberance” to describe the crowd madness of the stock market. The economic environment was so brisk that even the Lewinsky scandal could not derail Bill Clinton’s presidency term. Towards the 2nd half of the 90s, many people were expecting the Dow Jones to crash as it continued breaking new highs. On the contrary, it was the Asian stock markets that crashed leading to the Asian Financial Crisis (AFC) while the Dow Jones was pretty unscathed. Isn’t it that similar to what is happening in US now. For many years, many people were expecting the Dow Jones to fall, but at the moment, we are seeing the Asian stocks markets spiraling downwards more than the Dow Jones. Look at COE prices. In 1994, the COE price hit all-time high of $100k and then started to decline to hit a low of $50 in January 1998 (though in different category). In a similar way, COE prices are likely to continue to decline as business prospects gloom. Then, there was also a sudden property curb on May 1996 to stem property prices. Isn’t it similar to what the government announced three days ago regarding property prices? Since the property curb in 1996, property prices never really recovered until the recent years.

Frankly, all these are not for the sake of digging up the old history. By drawing out the similarities, it helps us get a glimpse of what we could expect going forward. If history can be the guide, what we had seen in the past 6 months or so, could even be only the prelude to a series of events that lead to more difficult times some time later. As earlier mentioned the 1st half of the 90s were the good years of phenomenal growth, and everybody became complacent. Many governments were taking on mega-projects that worth millions of dollars (millions of dollars is like billions of dollars in today’s terms). Just like today, many Asian economies, apart from Japan, were comparatively small back then. (China, itself, was focusing on its internal development and was less exposed to the outside world at that time.) To keep economies stable, both for internal control and export, many Asian countries pegged their currencies to the USD.   In response to the increasing interest rates, funds were moving out of Asia causing Asian currencies to fall. Isn’t it what is happening to the Philippines peso and Indonesian rupiah reported recently? At that time, the Indonesian rupiah was about 2,900 against one USD before the AFC and then spiraled to 16,000 rupiah against one USD at the peak of the crisis, shrinking 5,500%. Imagine, an Indonesian company originally owed a debt of US$10m before the AFC, the debt would have ballooned to a USD debt of 55 million without any wrong-doing on the part of the company. Really, how many companies can withstand such onslaught? To stem fund outflow, Asian economies were correspondingly forced to increase their interest rates. This, ironically, further stifled the lifeline of many Asian economies, which is to export their way out of recession. Increasing interest rates makes it more expensive to export and cheaper to import. The trickiness in such a falling currency avalanche often leads to more falls because of concerted speculations, causing many governments to dip into the reserves in an effort to maintain their currency peg to the USD. Before long, many government found their coffers depleted and had to let their currencies into free-falls by unpegging against the USD. One-by-one, the economies succumbed to the AFC, and had to be rescued by the IMF. Apart from the currency turmoil, there is another knock-on effect as well – a political instability in the region. Within a period of 2 to 3 years, Thailand and Indonesian respectively changed their prime minister and president several times.

By today, the Asian economies are generally stronger and have stronger financial muscles to ward off a similar financial tsunami that had wiped out the Asian economies back in the late 90s. The unpegging of their respective currencies to the USD acts as a counterbalance to the trade mechanism, which is vital for many small Asian economies. Unfortunately, based on past historically, increasing interest rates has never been beneficial to small open economies including Singapore. Added to this gloom is the increasing stakes in the trade war between the world’s two largest economies. The trade war and the retaliation actions put up by the trading partners are likely to push small open economies into difficult times. Personally, I think the 2nd quarter results will not reflect the full impact yet, but it could surface by year-end. Unless there is some kind of breakthrough in the negotiations, the worst is yet to come. The end results could be recessions and job losses. It’s time to put on our seat belts!

A video clip on the expectations in the coming months has been posted in the private group discussion for the students of “Value Investing – The Ultimate Guide.”

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the mentioned securities or the indices or ETFs or unit trusts related to it.

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

 

Hyflux: Some financial lessons

The timeline on 25 April 2018 has already passed us for more than a month. By now, the holders of the preference share, entitled Hyflux 6% CPS, have resigned to the fact that the preference shares would not be redeemed. According to its prospectus, the coupon rate would be stepped up to 8% if the preference shares were not redeemed. This clause seemed to have relegated in importance as the primary concern of the preference shareholders was whether their capital was at risk. The market, in fact, has already reflected this in early 2018, when the preference share was trading at around 75 cents, giving a yield of about 8%.

And just about two years ago, when Hyflux issued another tranche of unsecured debts at 6% for retail and institutional investors. It was so heavily oversubscribed that the company decided to upsize its offer from $300m to $500m. That was also the time when many companies were making their utmost, and probably, the last-ditch effort at the lowest possible cost to get their hands into investors’ pocket amidst talks of impending rate hikes. Before Hyflux’s issue of its 2nd tranche of its perpetual bonds in the first half of 2016, four companies had already issued perpetual securities to investors at rate between 3.85 and 5.25 per cent. It was a situation of “strike while the iron is hot”. There was no lack of investors at that time.

By now, the truth has set in that investors are not likely get capital back without a deep haircut. While the top executives and the lawyers of the company and the banks are busy working on the re-structuring plans, the likely scenario for the unsecured creditors is that they are forced to become equity shareholders marked at a high conversion share price such that conversion is “out-of-money” against the share price before the suspension. The end result is the float in the system becomes overly large causing the already miserable share price to plunge even further.

What lessons do we draw from the Hyflux saga?

  • Water is essential but no all waters come from Hyflux

I remember asking a student why she bought Hyflux when at the time, the share price was about $1.00 to $1.20. The answer given to me was everyone needs water. True, everyone needs water but not all the waters that we consume come from Hyflux. In fact, most of our drinking waters do not come from Hyflux.

  • We are buying a business, not a star

In the same occasion, another lady told me that she had bought Hyflux at more than $2 (can’t remember the exact purchase price that she had tabled). Based on the price chart, she must have bought the shares around 2010. That was the time when the stock was trading at its historical high. In a situation when the share price was already trading at 50% of her purchase price, it was a situation of between the devil and the deep blue sea. She did not divulge why she bought the stocks, but I believe it was probably due to one of the two reasons. Either she thought that the product was essential, or because she idolized a lady chairman. After all, at that time, a lot of attention have been placed on female entrepreneurs, businesswomen and female politicians. The point here is that gender should not be seen as the determining factor to decide if a business is going to be successful. A postal man or woman could also still end up in hard times at one point or another.

  • Debt-laden companies usually end up miserably – There may be exceptions but they are rare and far in-between. Throughout my years in the stock market, I cannot find anything more true than this. The irony is heavy debts often breeds even heavier future debts causing the interest cover to get thinner in each passing year. A quick review showed that the interest cover for 2016 was around 0.08 and the net profit was negative for FY 2017. The operational cash flow has also been negative for the past few years. In fact, the continual negative cash flow is usually the leading indicator of the worst yet to come. Many fundamentally-deteriorating companies often face negative cash flow even though the P&L statement may still show positive net profit for a number of years. To enable the company to continue operation, it has to get into more debts and there would come to a breaking point that results in bond defaults and share price falling off the cliff. Actually, this observation is not new. There have been quite a number of precedents in the recent years.

There may be one or two more considerations. They are not necessary related to the above stock in particular. I believe investors could identify them as they become more experience in their investing journey. Happy investing!

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the mentioned securities or the indices or ETFs or unit trusts related to it. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Portfolio building: Should we start with dividend or growth stocks

Abstract – In a dialogue with a student, he asked me whether he should start off with growth stocks or dividend stocks if he plans to build a portfolio. This, obviously was not a do-or-die situation, because building a portfolio does not require an instantaneous action or have to be right first time. But still, it actually set me a bit of thinking because that starting point was a long time ago for me. I was trying to picture myself what I would probably do in that situation. Presumably he was young working adult, perhaps with some decent savings. Obviously, he did not divulge how much he had as he meant it to be a passing question.  

Dividend stocks are stocks that pay good dividends. Usually the companies behind these stocks have grown to a level that the growth potential is unlikely to be significant (at least in the near future). Given that the company still has good earning power, they are able to distribute out their earnings in the form of high dividends. Of course, we are talking about companies that are able to distribute sustainably good dividends and not those that distribute dividends from debts. Apart from REITs, some high dividend stocks can have their dividend pay-out as high as 90%. Constant dividends usually help create a floor price for stock unless the market detects a fall in future dividends.

Growth stocks, by their stage of development, distribute little or even no dividend. Investors are usually rewarded through significant growth in the share price (if we purchased the correct stocks). However, we can expect more volatility in their stock price because there is little or no fall-backs on dividends as we go forward in time. The obvious risk of buying growth stocks is when the company share price plunge for whatever reason and shareholders get close to nothing when they sell their shares.

By nature, companies usually start off as a growth stock paying little or no dividends before they finally become mature and start to pay good dividends. So, if we were to buy into such a right stock early enough, we are effectively riding on the path of growing dividend and finally enjoy the big, fat dividend as the company matures. Of course, during its development, investors stand a high risk that the company could not take off, got derailed or becomes debt-laden(*). In such a case, it is likely to end up in a big hit on the share price and, of course, the loss of dividend. In making such decision whether to buy into a growth stock, one really needs to assess the affordability as well as the WILLINGNESS TO LOSE. It is a question of risk tolerance based on our own experience and background. No one else knows better of our own financials and investing character other than ourselves. The only thing that is obvious to me is that this young man is in a life-stage when he has a higher risk tolerance compare to another person supporting a family with mouths to feed. To me, buying the right stock in growth companies actually helps grow our wealth. Imagine if we buy a stock at $5 per share and it grows to $10 per share, it would have grown our wealth by 2 times, apart from the growing dividends along the way.  This is obviously the objective of getting into any investments (not necessary buying into stocks). But, of course, getting into such investments comes with huge risks which we have to be always mindful of. Perhaps, the saving grace in maintaining a growth stock portfolio is that, at any one time, each stock is at a different growth stage and the good and bad ones tend to offset or cancel out each other.

Now on the dividend stocks. It is likely that when a company pays good dividend, it has already passed its growth stage and that is why it is able to pay us good dividends. They are generally proven companies. So, buying a dividend stock is like buying an annuity, as if we pay an insurance company a sum of money and we get back the payments in the form of dividends. There is some kind of protection from an investor’s point of view. On the share price, it is relatively difficult for dividend stocks to advance significantly because a huge percentage of the profit is paid out to the shareholders. In effect, shareholders do not really get to enjoy share price appreciation but just good dividends. Still, this type of investment is good in a falling interest rate environment because risk-averse investors would look for alternative investments to park their money. Obviously, under such a circumstance, there would be price appreciation not due to the company growth but due to liquidity in the system. The situation would certainly reverse itself when we get into upside slope of the interest rate curve. We are likely to see the share price drop because the same group of investors would start to shift their money back to the bank, base on their risk-reward philosophy. Nevertheless, this type of investment appeals to people who do not have an active income and they need to see their returns almost immediately, in particular, the retirees.

Back on the young gentleman’s dilemma. While it is always good to see rewards coming back to our pockets almost immediately after we invested, the uprising interest rate environment would certainly see the value of the portfolio shrinking going forward if we have too many of these high-yield stocks. Perhaps, he can take on a more aggressive path of growth than income at this stage. After all, he has an active income to fall back on. It is unlike another person who has no active income. If he really needs a protection, then perhaps he can separately purchase an annuity. On the other hand, the capital appreciation for growth stocks can be very rewarding. Imagine the above-mentioned growth stock has a dividend yield of just 2% at $5 and it continued with the same yield, would mean that the dividend is 20 cents when the share price is at $10. At the purchase price at $5 with a dividend of 20 cents would mean that the dividend yield is 4%. In time to come, this dividend yield can be even higher than the dividend yield from a dividend paying stock. In effect, it is a capital appreciation, a growing dividend and a low capital outlay. Certainly, it is even more rewarding if we invest the dividends because it is a growth stock. This is exactly how wealth is made. Wealth is not made by buying an annuity. An annuity is just a protection. But that said, we have to constantly aware of the risk that we are in, especially when we hold growth stocks. A lot of growth companies fall from grace, not because they are in the wrong product, but because of pure mismanagement. Never wear a hat that is too big for our head. Certainly for his case, I am not saying that he has to be 100% on growth stock. I am just saying that he can afford to be slightly more aggressive at this life-stage. Taking on some risks at this stage can be very rewarding for the future. But, whether he is willing to take that risk is another question.

(*) At the time of post, at least three SGX stocks were in such a situation, namely, Noble, Midas and Hyflux.

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the securities, the indices or any ETFs or unit trusts if they are mentioned.

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Reading too much into news & Wall Street movement can derail our financial plan

Very often we try to check the Wall Street movement and the futures to have an idea of what is likely to happen in the local stock market at the start of the trading day. After all, the Wall Street houses a few largest exchanges in the world. Most of us see this totally out-of-phase time difference as an important leading indicator to position our trades. Big falls are often discussed extensively with a lot of anxiety and anticipation of how low the STI can retreat in response to those falls. Some of us may even be tempted to ‘sell into strength’ at the start of the trading session.

Actually, there were times the STI did not fall in tandem with the Dow Jones or NASDAQ. Just over the last weekend, many were anticipating that the STI would be in for a big fall when the Dow Jones sank 572.46 points from the close of 24,505.22 on their Thursday to 23,932.76 at close on their Friday. But, the STI actually moved up by 7.48 points from the close of 3,442.5 on Friday, 6 April 2018 to 3,449.8.98 at close on Monday, 9 April 2018.

Then on Tuesday, 10 April when President Donald Trump brought out the possibility of aerial strike in Syria, the Dow Jones sank 218.55 points, but the following day, STI advanced 13.38 points. Despite those devastating news, the STI actually advanced close to 100 points (or close to 3%) for the week. For the same period, the Dow Jones also advanced 427.38 points from 23,932.76 to 24,360.14 and the NASDAQ advanced 191.54 points from 6,915.1099 to 7,106.6499. Perhaps, there may be some kind of co-relationship between Wall Street and STI over time, but it does not mean that the STI move in exact lock-step with the Wall Street movement.

Perhaps, those who try to time the sell are not really selling off their stocks for good. It is likely that they wanted to take advantage of the steep fall in the Wall Street to sell and hope to buy them all back when the share prices tank significantly. This could be a wise thing to do if the Wall Street and the STI have perfect correlation on day-to-day basis, but we often find ourselves caught in the situation if our timing is incorrect.

Let us look at transaction cost to assess if the risk is worth taking. Take OCBC for example. Assuming if we were to sell off 1000 shares at the opening bell at $12.77 on Monday, 9 April, and let’s say we were lucky enough to buy back the same stock at the lowest share price of the day at $12.93 on Friday, 13 April, it would still be a loss of about $248 dollars. Even using a priority banking nominee account on Standard Chartered trading platform which is supposedly the lowest brokerage, it still set us back by $220.50. Apart from the trading loss, there is also an end-of-FY dividend distribution of $190 that sellers are likely to miss out given that the ex-dividend date is around the corner. Without considering the loss of dividend, we have to wait till the stock price drop to $12.65 and $12.71 respectively (or a drop of 12 cents and 9 cents respectively) to buy back in order to just break even. With the dividend loss thrown in, the purchase price would have to go lower by a further 19 cents before we can break even. Given that that ex-dividend is drawing near, it is unlikely that the share price retreats significantly for us to cover the transaction cost, trading losses and the loss of dividend. So, the dividend is likely be lost just because of the little folly unless something significantly bad happens from now till the ex-dividend date. Perhaps if investors lost their patience, they may even go ahead to buy back the shares at a higher price. So instead of benefiting in stock investments by simply holding them, we may lose out in terms of the brokerage and all the additional costs in selling and buying them back. Of course, one may argue that the stock price is likely to drop when it goes ex-dividend, but it is still possible that the drop is less than the dividend amount or even creeps up after the ex-dividend. So why leave our fate to chance?

With so many news from many major economies happening every day, it would certainly ruin our financial plans in the long run if we keep reacting to the stock market movements. Sometimes just simply doing nothing is the best strategy of all.

Afternote – Just hours ago, US together with its allies, France and UK, attacked Syria over the alleged use of chemical weapons. Care to make a guess of the STI movement for this coming Monday?

Disclaimer – The above arguments are the personal opinions of the writer. It is not a recommendation to buy or sell the mentioned securities, the indices or any ETFs or unit trusts related to the mentioned indices. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

The need for mindset change in investing (2)

In any stock seminar, we often hear of the same question over and over again. What are the stocks to buy and what to sell? In fact, it is probably the only question in the mind of investors when they attend stock seminars and investment talks. We all like to hear out what is the next popular stocks in town, and hopefully to make some financial gains out of it.

Of course, we all know that good stocks generally move upwards over time in line with their earnings. But within a very short period time in terms of days, weeks or even months, share prices move in random walk fashion. So, there could be some ‘bad luck’ times when no matter how well we did our due diligence, there could be one or two stocks that fall underwater. Buying stocks is a calculated risk. And often, we cannot wait for all the uncertainties pertaining a particular stock to go away to buy it. By the time, when we are certain that the most of the uncertainties have been removed or considerably reduced, the share price would have already moved up significantly. How fast a stock price moves to reflect the fresh information depends on how efficient the stock market is. Then, there are also times, in the spur of the moment, we bought the wrong stocks or even the right stocks at a wrong price. There are also situations whereby government or the relevant authorities suddenly made changes in their policies or there could be some shocking news that hit a company and we were caught in such situations. Worst of all, we buy on hearsays, market rumours and friends’ recommendations even though they might not necessary come with bad intentions. So, there is a high chance that at any one time when we open up our stocks portfolio, there may be 1 or 2 or even more stocks that are eye-sores in an otherwise, a ‘perfect’ portfolio. Hopefully, these bad stocks form a very small percentage in the portfolio and they are overwhelmed by the bigger gains in other stocks in the portfolio.

At least for the start of our investing journey, the problem often is not because of the one or two bad stocks in the portfolio because, over time, we will get to know which stocks are good and which are bad. The whole problem is that we try to save the bad stocks in hope to make them good. This type of investing philosophy is likely to have been inherited from our young days. Right from the very early stages of our formation years, we have been conditioned by the school system to focus on subjects that we are weak in. For example, when we get 90% for Mathematics and 60% for our English, we are very often asked to focus more on our English, sometimes even at the expense of our Mathematics, in hope to bring up the grade for our English. Very often, we bring such philosophies into our investments. While some stocks advanced, there are also others that fall. As in investing psychology, we tend to be more concerned about those that fell than those that have gained. Consequently, we keep on put new monies, and worse still, sell off the good stocks and buy into those stocks that are declining in hope to make it a ‘perfect’ portfolio with all stocks in the positive territory.  But very often, things get more complicated. The declining stocks got worse and the rising stocks got better. This is where the disaster starts. Imagine we try to sell off some good stocks to average down the stock price of Noble even until today. The stock just simply sinks and sinks. As we have more and more stocks into the portfolio, it also becomes much harder to average down each time. Even blue-chip counters like SPH and Comfort-Delgro are not likely to see turns-arounds anytime soon. So, for those trying to average them may eventually give up after a few years of trying. In short, the whole portfolio ends up with a lot of stocks in negative territory and only a small quantity of good stocks on the positive side. As such, the whole stock portfolio underperformed badly.

In essence, sometimes, we have to accept some imperfection in our stock portfolio. Many investors who have been in the market for some time would probably agree with me that if we simply focus on those stocks that have gained and let go of those stocks that have incurred losses, they could have been very much better off than trying to average down the under-performing stocks. There is imperfection, but this is really the play-to-win strategy when dealing with stocks. It is just like playing a game of chess. We never hear of anyone, even world class players, winning a game of chess without losing a single chess piece. In fact, very often, they are willing to trade off high-value pieces to win the game. Even a king with just a pawn may win in the whole chess game. Very often, many investors out there try to save all the counters to bring them into the positive territory by simply averaging down but, eventually, find themselves struggling to outperform. This is because there are too many drags on the portfolio. Then, there are others who do not invest because they cannot accept even some loss counters. On the whole, it is a bigger loss because good stocks do gain in the long run. In summary, it is generally acceptable to have a few minor losses just like not every business endeavour turn into a success story. It is alright to be imperfect. We play-to-win and not to play not-to-lose in stock investing. That should be the mindset.

Note – A video clip on this investing psychology is available free in bpwlc.usefedora.com.  The video clips are part of the more than 60 video clips on the online course in InvestingNote.com, namely: Value Investing – The Essential Guide and Value Investing – The Ultimate Guide.

Disclaimer – The above arguments are the personal opinions of the writer. It is not a recommendation to buy or sell the mentioned securities, the indices or any ETFs or unit trusts related to the mentioned indices. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Stock investing – The need for mindset change (1)

In the discussion during a webinar that spanned over 2 hours yesterday evening, it was a natural progression that participants touched on the subject related to Straits Times Index (STI) movement. Almost all the participants lamented that the STI has been at its high now and that some stocks are also trading at their historical high. Many were concerned they might be holding the last baton if they buy stocks at this time.

It is a fact. At this level above 3500, the STI is within 10% of its all-time high of 3,822.62 made on 30 September 2007. Yesterday, it closed at 3,512.14 even though it had retreated for the past three days in succession. The general view was that the STI was high, and it was better to wait for it to retreat to a comfortable level before one should invest again. This is the general sentiment of the small sample of participants and I believe many investors out there think like-wise too. This is particularly true in a relatively well-protected Singapore, whereby entrepreneur spirit ranks low and the willingness to take risk is almost non-existent. Many investors get into the stock market with a mindset of maximum return together with low risk, or better still, zero risk. Perhaps, they would only lay their hands to buy stocks when it retreats to below 3,000 level. So, the whole situation becomes a waiting game. In fact, some time ago, there was someone in a social media mentioning that he would only buy when the STI falls to 1,800, when at that time, the STI was probably at around 2,700 level. I am not sure if he is still waiting till today. If he does, then he has missed out one of the best run-ups in STI in the recent years. From a level of 2,700, many good stocks like DBS, Venture and OCBC have advanced at least 35% by now. (In fact, 35% could be an under-statement if we include the dividends that were paid out in all these years.) My point here is that this. Sometimes, our mind gets too microscopic zooming too much on the highs of the index that we have forgotten the fact that behind the rise in the index are component stocks whose earnings have been breaking new highs for several years. The growth in their earnings are not just 1-2%, but at phenomenal growth in double-digits. Even some non-index components stocks also did well over the past few years.

To illustrate my point further, let us look at the Dow Jones Industrial Index (DJII). During Mr Bill Clinton’s presidency term between 1993 and 2001, US enjoyed one the best stock market run. The DJII advanced from less than 3,500 to more than 10,000 by 2001. In percentage terms, the index advanced 200%, so worrying a trend that the FED chair at that time, Mr Alan Greenspan, coined the term “irrational exuberance “, to reflect the extreme market optimism at that time. He was extremely concerned that the market optimism could have run well ahead of the real economy. But then, how is it today? The Dow Jones at this level has been another 15,000 (150%) higher than the 10,000 made in 2001, despite several disruptions like US, DOT-COM burst in 2000, recession in 2001, terrorists attack on the New York World Trade Centre and the global financial crisis in 2008/2009. By the same argument the high of STI at 2,500 some 20 years ago would have been considered extremely low based on today’s STI level. So, in essence, stock market high today does not mean that it cannot set a new high somewhere in future. In fact, if the stock market does not break new high from time to time, then we have a bigger cause to worry. It may mean that the economy has stalled and all our assets, apart from the stocks that we hold, are at risk. Even if we were to divest all our assets and hold them in cash would not help either. The Singapore dollar by then would have depreciated significantly in the foreign exchange market.

So, in essence, we should not let the high of STI intimidate us to think that it should fall in the near future. It is possible, but it is not necessary. Certainly, when the index approaches its all-time high, there will be some resistance as some investors would definitely held back their purchases. But over time, so long as the economy is chugging along and companies are reporting profits, it is possible that new highs be attained. After all, since the global financial crisis, wall street has made new highs at least 40 times, shared between Obama and Trump presidency terms.

Disclaimer – The above arguments are the personal opinions of the writer. It is not a recommendation to buy or sell the mentioned securities, the indices or any ETFs or unit trusts related to the mentioned indices. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

DBS – The pleasant surprise

Abstract – Two years ago, the sudden devaluation of the Chinese yuan RMB caused DBS share price to fall below its book value. Since then, DBS Holdings share price has been on the rise. In a similar fashion, the share price of OCBC and UOB also fell to below their respective book value. For the past two years, the share prices of all the three banks were rising at unprecedented pace. As of 23 Feb 2018, the share prices of DBS, OCBC and UOB were respectively at $29.59, $13.37 and $28.05 respectively.

It came as a big surprise to many that DBS announced a very generous dividend distribution policy following their internal assessment that they have been more than fulfilled the Basel reform requirements. Historically DBS has never been this generous and their dividend distribution to share price ratio has almost always been lagging behind OCBC. Even during times when they offer scrip dividends, their discount has always been lower than that of OCBC. As their share price advanced, the number of scrip dividends that can be converted from the dividends gets smaller, and it became extremely daunting for people who has been targeting to get, for instance, 500 shares for every year of dividend declared. In simple arithmetic, by the time the share price hit about $20, we need to have at least 15,152 DBS shares before one can get 500 shares of scrip dividends assuming that no discount was given for taking scrip dividends. As the share price goes upwards, it is almost an impossible task as the horses are running well ahead of the chariot.

But that all changed overnight as DBS suddenly moved up the dividend generously from the expected final dividend of 33 cents for FY 2017 dividend to 60 cents and topped it up with a special dividend of 50 cents. In addition, it further announced that the dividend going forward to be marked up to $1.20. This means that we should generally expect the dividend pay out to be $1.20 per share for 2018 and, perhaps, even for the next few years. The whole dividend equation changed overnight. What that has been a more and more distant dream of getting 500 shares for each yearly dividend distribution became an instant possibility overnight. For example, in the above case, we do not need 15152 shares for have 500 shares of declared dividend. Instead, we need to have only 8333 DBS shares to get an equivalent of 500 DBS shares in declared dividend. Fortunately, or perhaps unfortunately, depending on whether one owns the shares or still wanting to buy the shares, the share price never look back. It has been gradually rising two weeks ago from $25.36 on 7 February, the closing price on the day before the results announcement, to $29.59 as of yesterday. This represents a rise of more than $4 or about 16.7% rise within a matter of two weeks, literally unperturbed by the Chinese new year holidays in between. With the newly declared dividend for at least in the near future, it actually helps provide a ‘floor’ share price for the stock.  (For those who wish to have a better idea of the valuation may wish to refer to my on-line course on the investingnote.com platform – Value Investing – The Essential Guide) For example, the share price of $24 would now have been considered a steal when it was said to be ‘extremely expensive’ even at $20/- just twelve months ago.

Apart from the positive effect on its share price, the newly declared dividend distribution by DBS has other pulling effects too. It turned on the pressure for the other two banks to up their dividends going forward as well. In fact, in the latest results announcement for FY2017, both OCBC and UOB have already declared a higher dividend whether in the form of the final or special dividends. As we all know, bank performances tend to move in tandem with each other. So, with the more generous declaration for DBS, it is also likely that the heat for OCBC and UOB be turned on to bring up their dividends as well. Even if that do not happen in the near future, the current perception of a higher dividend declaration would help push up their share prices. Adding to this tail-wind is the expectation of higher net interest margin in the coming months. That means the shareholders of the all the banks would ‘huat’ (prosperous) in the light of this pleasant announcement.

Disclaimer – The above arguments are the personal opinion of the writer. It is not a recommendation to buy or sell the mentioned securities.  

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

The shock that finally comes

Investors had a rude shock on Tuesday morning when they found out that Dow Jones fell a whopping 1075.21 points the night before.  That followed by an after-shock tremor of another 1032.89 on Thursday, 8 Feb 2018. In total, the Dow Jones fell 1330.06 points for the week. This was the second week of fall since the peak at close of 26616.71 made on the 26 January 2018. To date, Dow Jones fell about 10% from its peak. As the saying goes when the Dow Jones sneezes, we catch a chill. For the week that passed, the STI fell about 6.5% to end at 3377.24. Although the STI volatility is much smaller, it is good enough to drive people crazy rushing in and out of the exit door. By now, we know that the recent peak of 3,600 has already passed us and we may not reach it back again so soon. As shown in reality, we do not know when the peak really is until it passed us in real time.

Out of my normal self, I was forced to react making buy and sell decisions in double quick-time to avoid being swept down by the avalanche and failing to pick up good stocks at discounts. This was happening as I was in the midst of scaling down some property stocks holdings after all the euphoria about en-bloc sales in the past few months. This will help get rid of some lousy stocks and enhance my liquidity in preparation for the next interest rate cycle. During times of distress, all stocks, whether good or bad, are all in a mixed bag, moving up and down with the market swings. Actually, such times are the real tests that separate excellent fund managers from the good ones, and the good ones from the lousy ones. As we all know, in an upmarket, everyone is an expert, but we only know who is really swimming naked when the tide recedes.

Extreme volatilities are also trying times when no classroom analyses are able to capture. It is just the human nature of greed and fear that swing stock prices up and down in real time. Even though I am a great believer of stocks’ underlying fundamentals, there are really more to just doing analyses to find out stock PE, BV or intrinsic value. To me, knowing some classroom fundamental analyses probably help us in the first 50% of winning the battle, we really need to understand how the market works as well as some understanding human & market behaviour. (That was why I decided to launch two courses instead of only one in the investing.com platform – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. The former being more a classroom analyses and the latter one being practical aspects of investing.   To me, these two parts have to come hand-in-hand to be more complete as a successful investor.) But again that does not mean that fundamentals or any analyses are of no value and can be thrown out of the window. On the contrary, I think understanding FA is extremely important. It helps capture the first 50% of the battle. It is usually during these trying times that we get to experience their importance. Stocks with good fundamentals usually fall together with the rest of the stocks during a market collapse but will get to be picked up first when we sense that the market is returning to calmness. And once the market is in the state of steadiness, these stocks leap further up ahead of the others. To me, value investing is still the most important subject to take away the stress off the crazy market place.

Happy investing!

 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Being rational in the crowd of madness

Today, the STI ended up at 3567.14 or about 240 points (or about 6-7%) short of the all-time high made by the STI in 2007. By now, it appeared more and more people are thinking that a crash is around the corner. Isn’t this the same old story that started as early as 2011 in the midst of the Euro crisis when it was widely expected that Greece would likely be the 1st country in the Eurozone to default? That was already about 5-6 years ago. Every year pockets of people would shout of an imminent crash. More recently, when the STI passed 3600, it appeared that many more are clamouring that a crash is around the corner. But then, what happened to the real stock market in all these years? Dow Jones Industrial Index (DJII) broke its all-time at least 40 times since the global financial crisis. The NASDAQ punched through the 7,000 mark. Hang Sheng pierced through its all-time high several times, Nikkei 225 perhaps at 20-year high. And our STI, though miserable, still managed to climb pass 3600, second only to the peak made in year 2007. Naturally, when the market is on an uptrend, it must peak sometime in the future, but it may not necessarily end up in a deadly crash immediately thereafter. It can a be long-drawn side-way movement or, perhaps, a gradual decline. The question is when would be the peak and how it is going to happen beyond that? It may happen in 6 months’ time or 2 years down the road and the side-way movement can last for another 2-3 years. After that it can continue to climb or maybe decline. There are just infinitesimal ways that it can happen. So, why anticipate a crash when it may or may not happen somewhere in the near future? In fact, by haunting ourselves that a crash is near, we may risk ourselves into holding too much cash making us look stupid when the market is in a bull run. It may be alright to hold cash for one, two or even three years, but beyond that would be a big drag on our overall portfolio performance. Investing is like doing a business. We do not get into a business when the time is good and then get out of it when it is bad. If there is really a crash, we just have to face it, and steer through it and learn from it. We always read on the news that billionaires whose wealth got decimated 30%-40% during a market crash. But that was only a point in the time-line. With their steady hands, their business actually improved to a next level when the crisis was over. Only businesses that did not sit on strong fundamentals and poorly managed would end up collapsing like a pack of cards during a crisis.

Suppose we have $100k and we engage a fund manager to help us invest. After a few months, when we found out that the fund manager had put 50% in stocks and another 50% in cash. When asked, the fund manager replied that he stayed 50% cash was because he anticipated a crash somewhere in the near future. What is likely our next course of action? We probably pull out the fund, isn’t it? Why would we want to engage the service of a fund manager when he is only 50% engaged?   Isn’t it the same question that we need to ask ourselves if we are managing our own funds when we are only 50% engaged. Think about it. Even if our stocks were to advance 30% for that year, the other 50% that stayed as cash would yield at most 1% return from bank interest.  That puts us a weighted average of 15.5%, which was below the STI ‘s advance of 18% last year, which was considered as a very good year.

So much has said about holding too much cash. As a matter of fact, I also do not advocate holding only 6 months average monthly expenses as an emergency fund either. Without some cash at our disposal, it would be difficult for us to make opportunistic purchases that may pop up from time to time. So, end of the day, it boils down to a few basic questions of personal finance. What is our risk tolerance level and our comfortable percentage in holding stocks?

Historically, with dividends thrown in, stocks are a good hedge against inflation.  Personally, I would estimate the historical inflation rate to compound around 2% annually, apart from some seismic shocks that happened once in a while. That should be matched by about 2% in dividend growth rate in blue chip stocks, even though it may not necessarily advance in lock-steps with the inflation rate. So, it means that if we purchase a stock and never ever sell it off, we should, in essence, not be worse off.  Of course, this is not the motivation for buying stocks. With a bit of stock price volatility but, generally, with an upward trend in the long run, it is highly probable that we can make some money along the way. In a nutshell, stocks should be considered as an avenue to provide a reasonable rate of return in the long run. Based on this very basic fact, we really do not need to be an A-grader in school to make money from stocks. What is more important are traits like discipline, able to acquire some skills on valuation techniques, perhaps pick up a few basic money management skills and get some understanding of the market mechanism. That’s all it needs to gain from stocks in the long run.

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.