Any time is a good time to invest

We often heard colleagues or friends mentioning that they were right now on the sideline waiting to pounce aggressively into the stock market when the stock market crashed. It was as though they were seeking a revenge that the stock market owed to them for the past 18 years. There were also individuals trying to study the leading signs of past crashes as they were trying to draw parallels from the past crashes in hope to find a coming one for them to punt on. Then there was also another group trying to discourage the others from investing, quoting the reason that most of the major markets are trading at around their all-time high. Over the past few years, it was also quite common to come across people who mentioned in social media that they would get into the stock market only when the STI hit a low of 1,800 points. If all these people have been staying out of the market due to their respective reasons, they probably have missed out big time.

An article featured on the Sunday Time last week entitled “The time to invest is now.” As I read through article, I must say I agree with the writer 110%. The article revealed that a famous investor said the market was going to crash within a year in the midst of European crisis in 2011. Should we have followed that call and stay in cash, we would have lost plenty of opportunities hiccupped by stock markets from time to time in this relatively long rally from then till now.

One noteworthy point in the article is the following

a.       If $100k were to stay in cash since 2011 till now, the return would have earned $300.38.

b.      If the $100k were to invest in ST index, the return would have been $46,243.36.

c.       If the same $100k were to invest in MSCI All-Country World Index, it would have made a return of $111,869.96 or a return of more than 110%.

 

Speaking from my own experience, we often thought that the timing was not right to invest, but after a few months, we regretted for not investing because stocks that we were interested in simply got higher. I cannot agree more with the writer that stock investing is not a binary decision, that is, to be totally in the market or to be totally out of the market, and not somewhere in between.  But essentially, in stock investing, it should be somewhere in between. Periodically, we should put some percentage into stocks while another portion to remain as cash depending on our comfort level. It is this periodic allocation that probably wins the race even if one is just a medium performer in stock picks. The cash portion, by itself, is a good cushion against any crashes or significant meltdown that can occur from time to time.

 

People who are serious about in stock investing would agree with me that it is like managing a business. And like in a business, we simply do not get into it because the time is good and out of it when time is bad. Most of the time, we have to steer the business as it moves through the good and bad times. In the past twenty years, we witnessed at least two major stock crises that saw the STI tanked 60%. Apart from these major crises were numerous smaller ones that had depressed the STI of somewhat between 15% and 30%. If we look back in history, the time period between all these crises was not that long, at most 3-4 years in between. Each time when it occurred, we do not know the real bottom until it had passed us convincingly. Only then, we start to regret in hindsight. 

A very good example was the marine and offshore industry. Just 18 months ago, we saw everywhere is bad news and the two major oil rig producer SembCorp Marine and Keppel Corp were hitting their lows. But by today, the share price of the two stocks has already past their lows. For those companies whose stocks have been either suspended or still struggling to get out of the problem that plaque the industry, it is because they had over-stretched themselves during the good times.

 

To date, the Dow hit its all-time high in 30 of the 54 months since the global financial crisis. Within a year since Donald Trump was inaugurated as the president of US on 8 November 2016, the Dow advanced more than 5,000 points to 23,400.86 as of market close on 26 October 2017. Whether we are trading via HKSE, Nikkei 225, any European markets or the STI, we are either at the respective all-time high or near to it. Perhaps, I may have selected a wrong time to write about this because all these markets are at their all time high, and may be in for a huge fall in the near term. However my personal experience in my investing journey showed that cashing out can sometimes be worse than simply stay on course. My ill-timed sell-out and inability to carry out a re-purchase program during the Asian financial crisis was a costly mistake that I wish to forget. In the other 4-5 crises into the new millennium, it seemed that I had done better. True, when a crisis was in the midst of gyration there was a lot of fear, but it seemed that things got better than it originally started when things were over. So, actually anytime is a good time to start our stock investing journey.

   

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 also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Two important life lessons when investing in stocks

It must have been 20 years since I attended a remisier course leading to an examination that would enable me to become a full-fledge remisier. After all, I had just completed an MBA course and, this would enable me to skip one of the two remisier modules, thus short-cutting my way to become a remisier should I chose to be one. Just like any other school-leavers after a few years of work on the same job, I was contemplating and exploring a career change. I was no rookie in stock trading (I say trading because I was really trading) at that time. By that time, I probably had already had 6-7 years of stock investing experience as a client. My personal objective to attend the course was very simple. Even if I decided not to take the examination (in the end, I did not), I might still be able to learn a one or two things about the stock-broking industry. I believe the course fees must have been about $200-$300 and the whole course was taught over a period of about 2 or 3 days (can’t exactly remember). As I have already been working for several years, it was a small sum to pay to learn something, perhaps to help me develop another career path, just in case.  After all, I had already paid or have been paying for several high-ticket items, such as my MBA course, marriage plans, housing renovations, car loans, insurances,  etc.,  and many of those things that crossed into our path after we left school. So, in comparison, it is not going to break an arm or leg to pay for the fee to attend the course.

 

That was a long time ago, and frankly, I had forgotten most of the things that the practice remesier taught. If you ask me today, I think the lessons were pretty boring. They were just brute facts that were to be dumped into our minds and for us to re-produce them during examinations. The hand-out notes were no better. They came in the form of a ring-bind and were about one-inch thick in black/white photocopies in fading print on half-yellowish papers and were not exactly organized. These two factors would have been an ideal condition to put one into a good sleep within the first 10 minutes after sitting down especially given the nice air-conditioning environment and after a long day’s work. But still, there were at least 30-40 eager attendees listening attentively to the lessons.  Perhaps, there were one or two key reasons for this. Firstly, at that time, all the trades have to go through a broker. Whenever we buy or sell stocks, whether they are many board lots or just one board lot, they still have to be handed by a broker or remisier, who have to physically key in our trades. So, a remisier or a broker had a very important role to play in the whole transaction process if we bought or sold securities at that time. Thus, becoming a remisier was an ideal dream that many people were trying to get their hands on. The other reason, a very important one, was that stock market at that time had been enjoying about 7-8 years of boom, except for a temporary disruption due to the 1st Gulf war in 1990. (I actually have an important lesson to share for this episode as well, but I will leave it to another session in order not to digress too much from the subject matter.) It was a lucrative career if one was able to get into it. Can you imagine each transaction of about 1% commission in just 2 minutes of telephone conversation for just one counter! After all, the memories of the great boom of the 90s around 1992 to 1994 had not faded in people’s mind yet.

 

The point that I wanted to make was not because of the teacher or the notes. It could even be that I had been day-dreaming in most parts of the course. But there were two points that the teacher pointed out that still had a bearing on me in all the investing years that followed. They were actually off-the-calf sharing and were not part of the lesson proper. He shared with us some stories of people (without quoting names or mention anybody specifically, of course) who became bankrupts after losing big in the stock markets.  It was demoralizing. Here, we are trying to learn something to become a remisier, and there the teacher was telling us about bankrupt stories. Perhaps, he just wanted us to be mentally prepared when we entered this industry. But still, he ended up with a positive note. Based on his personal experience, he shared with the class that there were generally two types of people that do not do too badly in stock investing. They are:

(a)    People who do not trade on contra.

(b)   Those that are “one-lotters”.  (Yes, he really said “one-lotters”.)     

At that time, I did not think much about what he said as they were just passing mentions to inject some life into the lesson.  No offence to those who play contra or on margin, I never play contra. I pay for my trades faithfully and on time. So I cannot share very much on the experience of contra. Perhaps, he was coming from a point of view as a remisier, and that he had to take on the financial risk when clients did not pay on time. However, later checks with another one or two broker seemed to confirm this point. Frankly, the purpose of checking was not to talk down or expose those who like to play on contra. I have no authority to do that. I just wanted to know how I could develop my investing character not to be along those lines that exhibited high chance of losing money. The 2nd point was more impactful for me. Apparently, he had coined the term “one-lotter”. I could not find it in an English dictionary.  He meant to class those people who only buy or sell one lot of a counter whenever they make a transaction. Previously, one board lot refers to 1,000 shares and not 100 shares as it is now.  Basically, he was referring to the fact that some people buy or sell only 1,000 shares no matter how good or how bad the market was. It suited me right from the start. Think about it, when we first graduated from school, our salary was close to $2,000 per month for a fresh graduate. Even after some years of working, it was probably $3k to $4k per month. After deducting for our CPF, provide some pocket money to parents, monthly payments for some high-ticket items, I am not sure if I could even save $500 per month in the first year or $1,000 after some years after I graduated from school. How many board lots of a counter can we really pay per trade? At most one. Even for some high-priced stocks, we still needed to save for several months before we could even buy the first board lot. At that time, for example, Cycle and Carriage (C&C) (not yet known as Jardine C&C) was trading at slightly above $10, and OUB (a bank subsumed by UOB) was trading around $8.50. But as I look back in history, taking on one board lot at a time may not be a bad idea. Many of the stocks that I have accumulated today in many thousands of shares were the results of buying one board lot at a time. It may not be the fastest way to riches, but it certainly is a safe and conservative way. Do not underestimate its cumulative power. It enables us buy on dips and picking up opportunities that might have slipped through the fingers of many.

 

Stock investing is a journey. It is not an end by itself. The stock market will outlive any of us. The investing journey may be long and arduous, but each small step that we take, we are one step nearer to where we want to be.  I am thankful to the teacher for the off-the-calf sharing.  They turned out to be more useful than the lesson proper as I looked back in history. They helped shaped my investing style in the later years. To be continued…. 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Walking away from a corporate bond deal

I came across an article on the newspaper yesterday morning that Ezion Holdings will be having a meeting with bondholders this coming Monday to present a debt restructuring plan. It reminded me that corporate and perpetual bonds were selling like hot cakes 4-5 years ago offering coupons between 5-7%. I had a chance to meet a relationship manager of a bank who was offering Swiber bonds at 7% at that time. A quick and dirty at-the-back of envelope calculation showed that the annual coupons would be a whopping amount of $17,500. Compare it with a dividend-paying stock like DBS, the capital of $250,000 to pay for a bond would have bought about 16,000 DBS shares around that time when it was trading at $16 per share. This would translate to an annual dividend of only $9,600. It’s a stark difference of $7,900 and this would recur yearly till the bond matures. This big difference in the yield could have tilted the balance to attract many investors into buying bonds than to invest in equities. Even I was salivated after making the comparison, but my sanity got better of me. There were a few things that made me feel uncomfortable about corporate bonds.

1.       Corporate bonds were extremely illiquid. Certainly, when the bond coupon is high with a relatively short maturity period, potential bond-holders would want to keep them till maturity. My guess was that most of the potential bond-holders were former property owners who had sold off their properties and had parked the money in the bank. Perhaps illiquidity was not really an issue to them. After all, properties are also illiquid, and they may take months to sell off. Perhaps, many people have overlooked the fact that a property could hold value better than many other types of assets. Even when the price is no good at that time, there would always be a next opportunity to sell some time in future. However, when a company is in distress, the bond value can fall very fast once the bad news goes public. The maturity date may be a further inhibition because potential buyers could calculate the number of expected coupons to maturity. On the buyer side, my inference was that there were not likely many too. Corporate bonds are mainly opened to the high net worth individuals (HNWI) and are not marketed to the mass market. That gave me some inkling that during the times of need, the sellers may have to depress the price significantly in order to attract a buyer. It is unlike a unit trust, whereby there is always a ready counter-party such as an asset management company or the bank, to buy over the financial product at the net asset value. 

2.       The second thought I had was – if the coupon offered was so good, then why the banks were not taking the first bite on the cherries. In all likelihood, the banks have made loans to these companies to the hilt and that all the company’s assets have already been pledged. This meant that bondholders had no recourse when things go wrong. How much could a company cough out to pay bondholders when there were no unencumbered assets to sell? Even secured lenders like the banks could be affected when the pledged assets could only fetch a fraction of their book value during fire-sales.

3.       Then there was another mind-boggling question. Why was the company prepared to pay bondholders at 7% when the banks were paying depositors less than one percent for their deposits? Bond issuers are not charity organizations to dangle a 6% difference in interest just to attract investors to buy their bonds. They probably could have made do with 3-4%.     

4.       Next is a personal finance question. Most of the target customers were probably HNWI who had sold their properties and parked their deposits in the banks awaiting the next investing opportunity. Or perhaps, they are business owners who had earned enough and parked their money in the bank. For a person, who was not born with a silver spoon or made from property sales and have to work hard to earn every single dollar, it would be difficult to part with a quarter of a million just for a single investment. Frankly, we do not have many quarters-of-a-million to spare to make sufficient diversifications for our portfolio. This would end up with a lob-sided risk concentration. It is really not a way to create a defensive portfolio.

5.       When I inquired about the effect on the company if the oil price tumbled, I did not seem to get the comfort that the RM was able to answer me adequately. Of course, at that time, I did not expect the oil price to tank so fast and so drastically from more than $100 per barrel to less than $30 in about a year. It was a naïve question as a time-filler during the conversation, but in hindsight, should have been a pertinent question to ask.

All these thoughts made me think twice about investing in bonds. Given that I still need bonds to beef up my portfolio, I decided that perpetual bond was probably the way to go. While there is no maturity date for perpetual bonds, without the $250k requirement would help me able to apportion out the amount to buy several perpetual bonds or a mixture of perpetual bonds and stocks. After all, there were several perpetual bonds on offer around that time. Genting perpetual bond was one of them. The bonds were offered in two different tranches first to institutional investors and then to retail investors one month later.  The coupon rate of 5.125% may not be as attractive, but casino operation is a cash business and it should be less risky compared to an engineering project or service company which is purely dependent on the oil price and the up-stream oil payers.

 

It has been well and good now that things have fall in place. DBS shares price have appreciated by 25% since then. Also now that Genting has decided to redeem both the institutional perpetual bonds and retail perpetual bonds by September and October 2017 respectively.

On the other hand, many issues related to corporate bonds, especially those related to the offshore and marine sectors, have still not been resolved. To date, most of the bondholders were forced to take deep haircuts. When there is no money on the table, it is likely that all the bondholders and even shareholders may be forced to swallow some bitter pills. As I know, so far two companies namely, Nam Cheong and Ausgroup have proposed to convert the bonds to equities. Perhaps, Ezion would also do likewise in the coming meeting.       

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

SPH & Comfort Delgro

Since the heavy selling in the beginning of the last week following by a strong rebound towards the end of the week, SPH seemed to have stabilized and moved up a little in the last 5 trading days. It appeared to have attained a respite after dropping relentlessly in the past few months. In fact, it had gained about 5% from its low at the close yesterday. Perhaps, the worst had passed. Hopefully, this can last until at least the release of the quarter results in October. As the price of the stock fell, its value began to emerge. So it had enabled me to take a very small position after having sold down all my holdings more than1½ years ago. I did not purchase at the lowest point, but at this price, it should have discounted a lot of bad news. Fundamentally, nothing has changed. It is still a sunset industry and therefore my position should not be big. Have to trust the new management to stabilize the share price. I may consider buying more in future, but I am in no hurry to do so for now.

 

In fact, it appeared that the market attention has been shifted from SPH to Comfort-Delgro (CDG). In the last few days, CDG share price fell below $2 for the first time in 3 years. The fall was relentless especially in the first few days of the week, following the news that there could be an exodus of as many as 2,000 drivers from Comfort-Delgro to its aggressive competitor, Grab. Even the recent release of the tender results for operating the Thomson-East Coast Line (TEL) went to SMRT. It was one bad news after another. How long will the onslaught last? Nobody knows for sure. Hopefully it is near as well. 

Meanwhile CDG’s partner, Uber, is still grappling with several concurrent problems that happened in different parts of the world. It is unlikely that CDG and Uber are able to find solutions to arrest this price fall as yet. To date, the funding for Grab seemed endless, and this could remain a long-term threat for CDG. So, for round 1, it appeared that Grab is a clear winner for now.

SPH and CDG are both recession-proof stocks. Unfortunately, they are not technology-proof.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

SPH – At its lowest for now?

When a spring is hammered very hard, the spring back tends to be very sharp. This is probably the best description for SPH this week.

In the last few days, most of the news or discussions related to this stock appeared to be bad, or at best, neutral. Being a by-stander watching from the sideline, it appeared to me that nobody seemed to have anything good to say about this stock. Indeed, it was hammered very hard for the first 3 days of the week hitting a low of $2.54 per share on Tuesday and Wednesday. In the last two days, however, it seemed to have rebounded quite strongly to close at $2.68 by Friday, though it is still lower than the last week’s close at $2.74. Perhaps, these were some opportunistic purchases made by contrarians. After all, it SPH has never experienced this low except during the global financial crisis in 2008/2009.

 

For the last 5 quarters or so, most of the news related to the stock were generally not positive. Pessimism over this stock grew in every release of quarterly results. Perhaps, the sell down this week was in anticipation of the poor results for the coming quarter as well. So if the quarterly result is not as bad as expected, then maybe we can expect a small price re-bound. (I say small because SPH’s economic moat is not strong at this moment for a significant turnaround) Of course, the other way also holds true. If the result is worse than expected, then perhaps we should expect a further sell down.

    

(This was the abstract taken from a Facebook post in April 2016 for past students. At the time of writing the Facebook post, things were still not as bad. So the expectation was that it probably should stabilize at around $3.70. News turned out to be very bad for the next 5 quarters. Yesterday, the share price closed at $2.68.)

Here is the dilemma. It has been a happy situation to have unloaded all my SPH stocks in anticipation that SPH would face hard times ahead. It has been too heavily dependent on the print business. Since then, I was on a stand-by mode, waiting to buy them back at a lower price. It should not just centres itself around the print business. It has to lay out a sustaining business proposal on the table before the share price can turn up convincingly. Now, with the bad news already significantly discounted in the share price, it may be the time to re-consider buying some back as ‘insurance’ in case it really made a turnaround or at least stabilized after more than a year of battering. Hopefully, it is at least a breather for now. It had lost one-third its value from an average price of about $4. For all we know, the share price always lead the actual company performance. So buying back may be a good idea if we believe that something magical can happen in the future. Let us see what happens in the next few weeks.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

 

 

Value investing – is it wise to stay in cash or remain invested?

I read in a recent article that a value investor has now holding mostly cash. Over the past few years, he probably had made some money. He mentioned that he has already divested out of stocks and stay mainly in cash for the past two years.  In all likelihood, he is timing that there will be a market crash or at least a major correction not too far ahead perhaps in a matter of 1-2 years.  In fact, he did mention that he will pick up some good stocks when the market crashes. Now the question is – should one cash-in or should one to continue to remain invested sitting on unrealized profit even after a good run. The chart below showed that many stock markets had a good run in the last 5 years.

 

A few possible scenarios could happen in the next 1-2 years.

(a)     If the market did really crash or undergoes a huge correction

In this case, he will be very glad that he had timed the market correctly and was able to pick up some good stocks and earned a difference between his higher sale position and his lower purchase position.

(b)   If the market continue to advance

In this case, he is likely to regret his action for selling ‘too early’. He is unlikely to buy at higher price any time soon and will be stuck with cash for a total period of 3-4 years since he had already cashed out. Given that he is a ‘value investor’ probably meant that he no longer saw value in stocks and decided to get out of them. Certainly, he would not buy the stocks when the prices of those stocks went up even higher unless he has ascertained that the fundamentals of the stocks that he had sold have changed for the better.   

 

(c)    If the market moved sideways or even in a gradual decline

Initially, he is likely to continue to wait in hope to get a ‘better price’ for his stocks. There probably would come to a time when he lose his patience and start to dabble in stocks again. As one of the readers rightly pointed out, it is actually quite ‘expensive’ to stay in cash in hope time the market. The opportunity cost lost in collecting dividends for the last few years could have more than off-set the gain even though he may manage to sell at a higher price and buy them back at a lower price. In timing a market, we need to be two time right – both in the buy and sell, in order to gain from it. 

 

Of course, if one is possible to see what is ahead of us, in every boom and bust of the stock market, then market timing is the best strategy. But when things are generally uncertain, the time in the market appeared to be a better strategy than timing the market. The simple logical reason to that is that stock markets generally go up higher in the long run. Just simply by being a passive arm-chair investor could have helped us make a huge profit as the market tends to go up in the long run. That was actually endorsed by Warren Buffet who mentioned that one should buy an S&P low cost index fund consistently to gain from it in the long run.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

CPF – Crossing 55

I bumped into a friend a few weeks ago. He had just passed an important life milestone – the double digit 55. For most of us, especially those who have been working most of the time, hitting this milestone is akin to getting the coveted key to a treasure chest – the CPF. After all, most of us have been working hard all these years and, certainly, would look forward to unlock this ‘can-see-cannot-touch’ national forced saving scheme.

Apart from setting aside a full Retirement sum of $166k, he still has more than $83k to enable him to go for the Enhanced Retirement Scheme (ERS) for which he would enjoy a monthly payout of about $1,920 for the rest of his life after he crosses the age of 65. He decided to go for that. But here is in interesting irony. Instead of drawing down from Ordinary Account (OA) and Special Account (SA), he decided to join the ERS by topping his retirement account with cold hard cash, drawn down from a commercial bank. Meanwhile, the balance amount after deducting the full retirement sum was still left in the CPF under the ordinary and special account attracting 2.5% and 4% respectively.

The above episode invites two camps of thoughts. The first, being spender camp, would believe this is one of the stupid course of action to take. The general belief is that they have worked hard and have accumulated a huge forced saving all these years. Reaching 55 is a god-send and, surely, they cannot wait to unlock the piggy bank that has been stowed away for many, many years. The common excuse is that they are almost at the tail-end of the life-stage and if they do not use it, then when? The general motto is ‘enjoy it while you can’. The second camp is the saver camp. This is the group that believes in delayed gratification. They believe in holding their savings as long as possible so that they can enjoy the tastier fruit in the later part of their life once they crossed 65.

 

After evaluating two options, perhaps the topping up with cash may not be a bad idea if we can afford it. It may not look like a wise decision at the first thought, but coming from a difficult life when even $1 was a treasure during my childhood days, I thought it was not a bad idea too. While a big chunk is being stowed away in the ERS to secure our livelihood until death, the remainder in the CPF would attract a higher interest of 2.5% in the OA and 4% in the SA. It is an excellent place for putting our money for emergency, and yet able to secure a high interest yield while our funds lay idle. It is certainly better than putting the emergency cash in a commercial bank attracting less than 1% interest. This is after all, emergency money and is not supposed to be touched unless really necessary. By so doing, it would help free up the savings in commercial banks for other investments. Furthermore, even if the fund is earmarked for investments some time down the road, it is still a good place to park our funds in view that most of the stock markets have already touched their all-time highs. Not a bad idea at all!

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Is a $20 stock expensive and a $2 stock cheap?

We still see and hear people talk about a stock being expensive because the share price is high. It may be true but only to a certain extent. It depends on the situation. For example, when DBS share price hit $20, there were people mentioning that the share price of DBS was too expensive. Instead, they chose to buy other company stocks instead. This can be a naïve action to take because it may mean that highly-priced stocks (or generally the blue-chips) never get into their portfolio. A lot of opportunities could have been missed! That may also implicitly means that these people are holding a lot of low price penny stocks or, at best, held some high yield stocks like REITs, which are not so ‘highly-priced’. But if we look back into the price history for the past several years, one would have found that, generally, it is the blue-chip stocks that had made significant price gains. They gained from strength to strength. On the other hand, those stocks that were left behind were the low-price penny stocks and low-performing ones. In fact, some of them have been under long-term suspension and cannot be traded at all. To summarize it all, despite the bull market in the recent years, one may not able to enjoy a significant upside if he holds on the belief that high-price stocks are expensive stocks. Moreover, the share-consolidation exercise 2-3 years ago to meet the minimum trading price (MTP) criterion could have even made the situation worse. The share price of many penny stocks gets even lower after the consolidation, ending up in extremely low price and illiquid situation. This really is value-destruction. On the other hand, we now know that DBS share price has reached more than $22 or 10% even if we had bought it at $20 per share. Of course, I do not mean to say that buying high-price blue-chip is a sure bet to being a winner in the stock market. What I meant is that by viewing high-price share as expensive purchases would unconsciously prevent us from buying into them and probably lost out some investing opportunities.

Actually a high-price stock is not necessary an expensive stock. By the same argument, a very low-price stock is not necessary cheap either. This has been explained in my book “Building wealth together through stocks” from page 110 to page 114. In fact a high price stock of say $20 per share can be a lot cheaper than another very affordable stock trading at $2 per share. Instead of looking at the share price alone, we should look at a company’s market capitalization (or MktCap in short). It is the product of the shares outstanding and the share price. In a very practical sense, it is the dollar value of the company of how the market, as a whole, evaluates it. In other words, it is the ‘market price-tag’ of the company. DBS, for example, has 2,562,052,009 shares outstanding on July 2017. Given the share trading price closing today, 7 Aug, at $21.15, the MktCap is S$54.19 billion. This is the market value of the bank. This means if you have $54.19billion, you can theoretically buy up all the outstanding shares. However, this only exists in theory because once you start to buy the shares in the open market, the float gets smaller and the price will shoot up due to its market liquidity. Of course, this is also barring the need to carry out a general takeover exercise once we held beyond a certain threshold.

Let’s say for some reasons DBS wanted to make the share price affordable to around $2 instead of the current price of around $21.15. (Note: making the share price affordable does not mean making it cheap) The management simply cannot depress the share price by a stroke of the magic wand without doing something else. To bring it down to a share price of $2 from about $20, the bank has to introduce a lot of shares into the market. This, essentially, involves a share split of breaking down one share into 10 shares in order to bring the share price to that level. This means that shares outstanding would be magnified by 10 times to 25,620,520,090. The market-value of the DBS simply cannot evaporate overnight. The market, as a whole, still recognizes that DBS has a market value of a $54.19 billion unless the bank performed so badly that shareholders started to sell out the shares over time. Apart from the arduous administrative work involving existing shareholders, there is absolutely not much incentive for the directors to do share splits just to make shares affordable. If affordability is really an issue, then investors should instead buy smaller lot size instead of 1000 shares. By doing so, that should reduce the outlay from paying $21,190 to buy 1000 shares to $2,119 to buy 100 shares or the multiples of it. That essentially, was the purpose of smaller trading board lots of 100 shares instead of 1000 shares introduced by SGX about 2 years ago. In fact, in more sophisticated stock exchange like the NYSE, we can even trade just one share instead of a board lot of 100 shares.

Essentially, the above also helps explain why OCBC is trading at around $11 per share and is almost 50% of that of DBS on per share basis. Otherwise, in no time OCBC share price would play catch up and go higher to reach to $21 or it could be DBS share price sinks to $11.21 to match with OCBC trading price. Certainly, that is unthinkable. For that, we shall leave to the next post.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Execution strategy: Sell & buy back

In the talk organized by InvestingNote a few weeks ago, we shared several guiding principles when we buy or sell our stocks. Ideally, when we buy into a stock we hope that the moment when we buy into it, the share price immediately rises and stays for a long time, better still, forever. This means that our stock has appreciated and provides us a good margin of safety. The other part of the return is the recurring income that comes in the form of dividends year after year. So basically, we enjoy both the capital appreciation and dividends. This is an ideal situation. It is akin to buying a bungalow that cost $50,000 in the 60s or 70s and the valuation is now at $25million. The recurring income comes in the form of rentals. This is known as the buy-and-hold-strategy, and was famously used by long-term investors like Warren Buffet and John Templeton.

There are, however, situations that are not viable to hold a stock any longer because the underlying fundamentals have eroded with no immediate solution in sight. A good example is the SPH. In the 90s and the start of the new millennium, SPH had been a good stock. It was a near-monopoly in the print business. Hence, it made sense to buy the stock at a reasonably good price and held it long term to take advantage of the dividends that were distributed year after year. But the inauguration of the internet changed the rules of the whole game. Customers now have a choice – either to continue to read the hard printed copy that comes one to two days late or to browse through the internet in search of immediate news. It is so powerful that many newspaper and magazine printers were pushed to the brink of bankruptcies. While we continue to like the stock, we probably have no choice but to change our tact to a sell-and-buy-back-later execution strategy.

By selling into strength and buying back later, it helps us lower of the average cost for the shares. Even if we decide not to buy back the stock any more, we are effectively enjoying a saving that would have otherwise eroded with time. Let me use an actual scenario of a person whom I know very, very, very well. He had 6,000 SPH shares mid-2016.

The share price was dropping very quickly by mid-2016. He was left with 6,000 shares at that time. Feeling that it no longer made sense to hold the shares any longer, he decided to let go of his holding over a period of three months. The proceeds after taking into account of the brokerage and other fees come to about $23,589.61. Hypothetically, if he were to buy back the same quantity of stock yesterday, the amount that he had to pay would be $17,949.73. Deducting further of the loss of dividends of $1,080 which he did not collect as he had sold the shares, he still can make a gain of $4,559.88. This is equivalent to a gain of at least 4 years of dividends without losing out the shareholding instead of losing out one year of dividends originally. In summary, we need to adapt the right buy/sell strategies for our stocks. Buy-and-hold strategy may not always work.

 

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Comfort Delgro

Of late, Comfort-Delgro (CDG), together with some stocks like SPH and Noble, were in the limelight. Obviously, a sea of pessimism has been haunting the stock in the last few weeks. Today, its share price is $2.28. It had broken through the ‘very strong’ support level that many traders described as between $2.37 and $2.40. The strong support had lived to its name for several months, but still it was finally broken. Frankly, there has been a swing in the sentiment.

For the past two years in 2015 and 2016, the market appeared to be extremely optimistic over this stock. It started off with the falling fuel price in end 2014. Then came a revision of transport fares and, finally, the news on LTA taking over of operating assets from the transport operators in mid-2016. Good news had obviously fueled the market to become overly excited and the share price of CDG was pushed above $3.00 in 2015. At the price of $3.00 the PE ranged between 20 and 23 from 2014 to 2016 and was trading between 2 and 2.5 above book value. It is not exactly expensive (of course without the luxury of comparing against similar companies). Perhaps, its growth potential has prompted many analysts to be more optimistic with buy calls above $3. Even in the year 2016, when the market price was gradually sinking, many analysts were still recommending buy calls on the stock with target prices above $3.00.

Obviously, there was too much good news feeding into the stock price. Frankly, I felt alone when everyone was optimistic, but that gave me pockets of opportunities to scale down my CDG holdings in the Q3 and Q4 2015. It had a good run since mid-2012 from around $1.50 per share. In fact, I had pointed out to past students be aware of the threat from Uber and Grab almost 2 years ago amidst the widespread optimism over this stock. It was difficult to know the extent of the damage it can cause on the taxi services. My initial assessment was also that there could be some kind of government intervention, but it appeared to be almost none as we know now.

In fact, even in 2016 when the share price was slowly sinking, most analysts were still recommending buys with target prices above $3.00. The discomfort prompted me again to write the blog in May last year :

 http://blog.bpwlc.com.sg/feeling-uncomfortable-about-comfort-delgro.

In hindsight, I am happy that I was able to reduce my shareholdings at a good price. With most of the shares bought before 2012, and I had sold about one-third of my shareholding above $3.00, I have a relatively comfortable margin of safety even at this on-going price (today close at $2.28). However, I still regretted that I did not follow through my conviction to sell 50% of my holdings. My expectation of the government intervention and a special dividend for the sale of assets to LTA did not materialize. Also, perhaps, I have emotional attachment to this stock. Its predecessor, SBS Bus, was my first stock that I ever purchased and sold at more than 100% profit in matter of 2 years more than 20 years ago. This experience had actually set me off in this adventurous stock investing journey.      

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.