Tag Archives: Financial Education

Business model

When I first read about a business model to better understand why it was entangled in the bond feud with the note-holders, I felt quite loss. I read it again, but still I did not get a good picture of the working business relationship among the companies involved. Reading at the first level to understand the working business relationship among the various partners was quite a challenge actually. If comprehending just the working relationship among the business partners cannot be understood by a person who reads passionately about business news, I wonder how many people out there can fully understand it, let alone the legal and accounting aspects that the company had with its business partners. Certainly, not all the note-holders and shareholders are corporate lawyers and accountants to fully appreciate the legal and accounting aspects to fully understand the risks involved when investing in the company. In fact, when business partnerships get very complicated among business partners, it surfaces more links, and if any of these links weakens and give way, it is likely to cause a domino effect to bring down the company as well as a lot of companies associated with it.

By the same token, prior to Alibaba’s launch as an e-commerce website, Jack Ma, the chairman pointed out that he personally made fool-proof tests of the system. It means that he tried to mimic a fool trying to use the system. His argument was if a fool knows how to use the website, then it should be widely understood and useable by the commoners on the street. That brings me to the point – If one cannot understand the business model of the company, why bother to take the risk to invest in it. Why do we need to invest our money to buy headaches?

Brennen has been investing in the stock market for 26 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.

Buy-and-hold strategy does not mean buy and don’t sell

For those who may not know, buy and hold strategy is a proven strategy and is used by long-term investors in hope to benefit from the capital appreciation of the component stocks in a portfolio. It is often associated with Warren Buffet (WB)’s style of investing, especially when he mentioned that the holding period for the Berkshire Hathaway portfolio is FOREVER. It is probably a sweeping statement, but many people had taken it to the extreme that when we buy a stock, we should not sell it. Of course, if we look at the ST index from its all-time high and compare it with today closing of 2869.74 as of 30 September 2016, one would have thought that by adopting the buy and hold strategy, one would have lost more than 25%. But does it really mean that buy-and hold strategy does not work anymore? Not quite. Otherwise, why would fund houses and insurance companies still continue to adopt such a strategy? Remember, these are big fund managers and when they hold a stock, they do not just own 2,000 shares. They probably own 200,000 shares or even 2,000,000 shares even if it means $20 per share. For the fact that they continue to use this strategy means that it is still relevant even with the advent of high-frequency trading computers. In my opinion, if it works for big funds, it should also work for individuals as well. And because big fund managers hold large quantity of stocks, we simply cannot expect them to empty their portfolio of, say 200,000 of OCBC in one day, and then buying it all back on another day on a short-term basis. In fact, most of the time, their portfolios do not change at all. In the way, they are practicing buy-and hold strategies. These fund managers have to think long-term in order to pay the clients and retirees, who are long-term stake-holders. The key here is to think long-term. (Sometimes, I am quite bemused by people who mentioned “Aiyo, must think long-term ah!”. Thinking long term does not mean that we do not sell a stock at all!)

 

Given the relevance of buy and hold strategies for large funds, can small retails players like us mimic the actions of these fund managers to make money? Certainly yes. The fact that we do not hold too many lots per stock, it is sometime easier for us to manoeuvre better than the fund managers.

 

Allow me to go back into my history. After falling and recovering from the bad experience in the Asian Financial Crisis (AFC). (Click here for the detailed history), my aim was to hold this great stock called DBS. On my record, I purchased 1000 shares at $14.80 in February 2004. (In fact, it was less than 10% below yesterday’s closing at $15.39 considering that they are more than 12 years apart.) My long term plan was to have at least 10,000 shares in 10 years. Based on this objective, my shortfall was 14,000 shares. The period between 2004 and 2007 was a fantastic time for stocks because the ST Index advanced all the way from below 2000 to its all-time high of 3,875.55 in October 2007. The global economy was doing so well that one very significant local political personnel was said to be saying “All the pistons are working at full force”, pointing to the perfect functioning of US, Europe and China. (Of course, we know in hindsight that Global Financial Crisis (GFC) came one year later and everything got imploded.) Needless to say, in between 2004 and 2007, if one were on the buy side and sold 1-2 months down the road, or simply buy and hold all the way, he should be able to make money. This is especially true for DBS, which is a good proxy to the stock market. Even though I have a long-term plan to continue to accumulate DBS in the long run, the speed of price advancement was so rapid that each time when I bought it, it became attractive to sell it off some months down the road. In fact, it was prudent to take money off the table because rapid advancements are very often met by rapid pull-backs. In such a situation, I could even say that I was trading, though not exactly short-term trading because each time my holding period was a few months. The share price of DBS in the period between 2004 and 2007 advanced from $14.80 when I bought it to a peak of $25.00. By the end of 2007, however, my shareholding in DBS did not increase at all because I had sold just as much as I had bought it. It was probably with some luck that the Global Financial Crisis (GFC) came along that I was able to pick up a lot more shares and subscribe more rights at $5.42. While I did lost some money on paper on the 1000 shares that I kept, it had been more than offset by the capital gains in the ‘trading’ that I made off from the DBS shares that I had bought and sold along the way. Furthermore, the GFC was probably a once in a lifetime chance to accumulate DBS. It came glistening right in front of my eyes. Such opportunities should not be missed at all cost. This was even truer for someone who had been bashed badly during the Asian Financial Crisis (AFC), and only to see opportunities slipped through the fingers from a low of 805 on the ST Index to more than 2000 within a matter of 15 months or so. (Click here to view my background).

 

Of course, one may argue why I did not even sell off my 1000 shares that I had been holding. The reason is simply that I am not GOD. (There is a Cantonese saying – 早知就没黑衣) I can’t predict the future. If I could predict the future, I would have even sold my 1000 shares and bought it back at the peak of the crisis. My long term plan, however, was clear that I needed to accumulate DBS shares in the long run, and the GFC provided me an opportunity to do so.

 

Then another opportunity came knocking again. After the GFC, DBS advanced again past $20 by late December 2014. Having come up from a relatively low base during the GFC, I managed to sell some shares at $18.50 in October 2014. At this share price, it would have translated to more than the market capitalisation of DBS before the GFC when it was at $25.00. (The reason was that DBS raised rights of 1-for-2 shares during the GFC.) I would have thought that the share price would not go beyond that point, but the general optimism pushed the share price further up to past $20. I sold again at $20.20 in December 2014. It finally reached $20.60 in early 2015. Of course, the crash in the oil price and a series of ‘scares’ in the last 18 months or so, made the share price of DBS came tumbling down again to less than $16, which now becomes a super strong resistance level. When it reached a level of around $13/$14, it allowed me to buy back those quantities and even more than I had sold.    

 

In a similar way, I have been reducing my SPH shares for the past 1-2 years because I felt that the fundamentals of SPH are weakening. It is not because of bad management or SPH was making wrong investments. In fact, I believe that the management has been quite good, peppering shareholders with good dividends. That was why the share price has been quite well-cushioned enabling me to sell a bulk of my stocks off at above $4.00, except for the last 2,000 shares which I sold recently.  The fact is that media and publishing business is under a huge threat from the internet, which is highly accessible locally. The threat is beyond their control and that is why the profit from the print business is dwindling. The only thing that probably helped them along is the SPH REIT, which probably had already hit a plateau. Of course, SPH is not sleeping and is on a look out for fantastic investments that may pop out along the way, but until today, it is still not there yet. Of course, when the price becomes attractive again, Perhaps, I may be back in again.  

So in summary, buy-and-hold does not mean buy and don’t sell. Sometime, it is prudent to sell and take money off the table even if the stock has not reached its full potential. Very often, there is a need for stocks to digest a bit before they can climb further. In fact, as it is DBS is now hovering for the past six months or so below $16. If I had not sold anything and stood only on the buy side from 2004 till now, I probably would have made only from my dividends and not too much from the capital gains. It is the long-term strategy and, of course, some luck that counts. It does not mean buy and don’t sell.

Good Luck!

 

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. These are past performances. They do not reflect future performances. 

 

Brennen has been investing in the stock market for 26 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.

Look at each stakeholder’s perspective

Every month, when I receive my credit card bills, I would almost immediately go to the internet and post-date the payment to 1-2 days before date due, and make sure that the bill is paid in full. As far as I am concerned, I am a AAA-customer of the bank. My question is – does the bank like me? Well, not quite. Why? Simple. The bank cannot derive a profit out of me. The bank is there to make a profit, and if it cannot earn a profit out from me, I am quite sure I am not its best customer. In fact, the best customers for the bank are the ones that only pay interest without any default, and not even those that pay up part of the principal sum, let alone those that pay the full principal sum. From my perspective, the bank views me just as a credit-worthy customer and not a profitable customer. Of course, the bank will not deprive me for being a credit card customer because it still needs to maintain a healthy ratio of those who pay on time and those who only pay part of the principal sum. What is my point here? A bank’s perspective can be different from its customer’s perspective. 

 

In a similar way, a bank’s interest in lending to corporate may be different from a retail bond-holder’s interest even though both are lenders to the same company. Banks minimise their risk by securing physical assets as collaterals. That’s why they are in the business of secured lending. Given that banks have already secured the assets, their primary interest would be to achieve profitability when they lend out the funds. However, that cannot be said for an unsecured lender in retail bonds. The primary objective of an unsecured lender should, in my opinion, to focus on the risk to ensure than principal sum is protected and be returned with interest when it is lent out. However, very often, the promise of high returns tends to blind us. If we do not analyse a bit deeper, we may miss the whole picture altogether.   In fact, following the default of Swiber, several companies (need not mention them) had met with bondholders or note-holders to re-structure their debts as well as to change the payment conditions that come along with it. To get the bondholders’ support, companies very often have to make higher promises. However, higher promises do not mean safer promises in future. In fact, it could put the company’s financial future at risk due to the higher promise. One pertinent question is – how can we be so sure that the business environment in the future will be better than it is now?

Unfortunately for the bondholders or even shareholders, we do not have much say in the company executive matters except to raise some concerns. By the time, when such a meeting is called upon to discuss the re-structuring of debt payment, the damage is often already done.

For investors, whether we enter an investment as a bondholder or as a shareholder, doing it right first time is of prime importance. The effort needed to back-track is often arduous and painful.

Good luck.    

Brennen has been investing in the stock market for 26 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.

Companies that are not worth investing

In the last post, I had promised to make a post on how to look for negative companies, that is, companies that are not worth to invest in. Generally, it takes some time to know the management and learn their management style. But one pragmatic way is to decide if the company executive remuneration policy is in line with the minority shareholders’ expectation. Obviously, the quickest way is to zoom in the executive chairman’s remuneration components. In most corporate governance reports, they generally assure shareholders that executives do not decide their own remuneration package. This means that this responsibility is in the hands of the remuneration committee, which comprises the independent directors. This obviously provides us an idea of how independent the independent directors are.  Are they erring on the side of the executive directors or are they on the side of the minority shareholders or are they totally independent?

The table shows two generally well-regarded companies. They are Yangzijiang (YZJ) and Venture Corporation. These companies are run by the executive chairman doubled up as a CEO. From the latest FY 2015 annual report, the chairmen-cum-CEOs draw a fixed salary of 18% and 27% respectively. The bonus component made a large proportion, being 82% and 73% respectively of the total remuneration package. Obviously, if the company is not doing well, a large part or even the whole variable bonus component got wiped out and this will heavily hit the total remuneration package of the executive chairman. Of course, when a company is not doing well, it is also likely that the share price and shareholder’s dividend are both at risk. By breaking down the remuneration package into a low fixed salary component and high bonus component, it is a signal to the minority shareholders that the management are with them. Certainly, this will be more in line with minority shareholders’ expectation.  The two mentioned companies have market capitalisation of above S$2 billion, and this generally means these executive chairmen are shouldering a heavy responsibility despite their low fixed salary base in terms of percentage.

Unfortunately for the minority shareholders, that cannot be said of many other companies. Several companies have remuneration packages comprising a fixed salary component of more than 80%, a very small percentage for bonus and a sizeable percentage in other benefits. The components obviously reflect as if it is their entitlement to have a high salary. In fact several of these companies actually reported to incur losses year after year. This obviously means that the minority shareholders are not entitled to dividends, while the top executives are paid a package of between $250k and $500k. Certainly, as an investor, I will strike off these companies without having the need to go into further details. In fact, a number of these companies have market capitalisation of less than $20 million, and certainly we do not expect the share price to be very high. Just by investing say $20,000 to $30,000, one could be easily be among the top 20 shareholders of the company. However, is it worth to invest in them unless we have the veto power to remove the whole board? Obviously, the remuneration package of the executives is not in line with shareholders’ expectations. One of the purposes of public-listing a company is to get minority shareholders to share out the risk, especially in corporate actions such as issuing of rights and selling of bonds and perpetuals. Under such a circumstance, the existing minority shareholders are likely to be the first to be called upon to share out the risks, but yet top executives are paid highly without the need to commensurate their remuneration with their performances. This is certainly not equitable and it does not spell well for minority shareholders. And, certainly it is also unlikely that an executive chairman of a less than $20 million company works harder than his counterpart in the more than $2 billion company, yet draws a higher remuneration than the executive chairman of a $2 billion company. Certainly, I cannot justify myself to invest in these companies.

Now the next question is how independent are the independent directors? They are generally the team members for the remuneration committee. Usually, companies engage the minimum required independent directors to satisfy the minimum statutory requirements. The first reason is by keeping the team of independent directors small, the total director fee can be shared by less directors and each enjoys a higher distribution. And the second reason is, of course, to have less independent say in the company matters, which could otherwise thwart the decision making process within the board. Consequently, the remuneration committee, the audit committee and the nominating committee are run by the same few independent directors. Of course, in situations when the remuneration of the fixed salary component is set extremely high, perhaps, we have to question and to scrutinise the background of these independent directors. They may have perhaps served too long as independent directors in the company such that they are no longer independent. Or, they could have thought that they owe it to the board of which 100% of their director fee is decided. Well, if they are not independent, it is obvious that the minority shareholders’ interest is not protected.

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. The numbers are past data taken from the annual reports. The past data cannot be used to reflect future data or future performances. 

Brennen has been investing in the stock market for 26 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.

The real cost of averaging down

“I do not like to lose”. Joseph Schooling who recently won an Olympic gold medal for Singapore mentioned this, possibly several times, during interviews. In fact, nobody likes to lose. Whether we are in school, at work, in games or investing in stocks, we never like the feeling of being a loser. If anyone tells us that he trades stocks to lose money, then I think there is really something wrong with him. He must well take the money and donate to charity and make a name for himself.  The fact that we trade or play (whatever we can call it) stocks, is that we want to win, and of course, the reward for being a winner in stocks is the dollars and cents that come along with it.

So, from a human psychology point of view, we get into stocks because we want to win. It is that simple. Consciously or unconsciously, trying to win in every stock becomes our guiding principle. To keep the subject in focus, I shall leave investing in stocks as a portfolio in another session (or my conducted courses or another forum) and concentrate on our reactions to the individual stock price movements. The fundamental fact about investing is that not everyone is a winner all the time. No matter how robust our selection system and how well-timed our entry points are, there bound to have occasions when we bought a stock and the share price tanked, maybe for several weeks or even months. For some unlucky ones, they could have bought a stock right at a peak price, and never able to see any higher price for the foreseeable future. Now what do we do if we happened to be one of those unlucky ones. A lot of people mentioned about stop loss, cut loss, sell into strength whatever we can call them. But in reality, how many people really are willing to do that? Being human beings, we do not like to lose, and that actually inhibit us from selling stocks at a loss (or even to buy stocks in the first place). It’s very extremely easy to sell at a loss for paper trading with no emotions involved, but to sell at a loss with real money really takes a lot more courage to do so.

Guided by this ‘not-to-lose’ principle, it is not uncommon that people average down in hope of a turn-around in the stock price somewhere in the future. But there is really a cost in averaging down.

Let’s take a hypothetical case. The on-going price is $2 and we make a purchase of 1000 shares. Not including brokerage and all the other charges, the cost to us is $2,000. Let say each time when the stock tanks by 50%, we make purchase to average down our purchase price (see table). By the time when the price became a penny stock of $0.125, we would have made several rounds of purchases, and even that our average price is $0.38, which is 3 times more than the on-going trading price. Of course, this case is one out of infinite possibilities of what can happen in reality, but the point here is that the whole exercise were carried out totally relying on numbers… no emotions, purely mechanical and well-disciplined.  In this example, I am assuming that we purchased more stocks each time the stock price dropped 50%, if one starts to average say at a drop of 20%, then it would be a lot harder to average down.  So in reality, there is a cost in using the ‘averaging down’ technique especially when a turn-around is not in sight.

Perhaps, you may argue that the assumption that the stock price drops from $2 to $0.125 is not realistic. But if one were to be diligent enough to check on the stocks that have dropped 90% from its peak value for the past 5 to 10 years, perhaps we can already find quite a number of them. Furthermore, given the flagging economy, and with a series of bad news affecting some sectors of the economy, it is can be quite common to see some stocks giving up  90% of its peak share price. (Click here for the video clip)

While there are some costs involved for averaging down, there are also some categories of stocks that are worth applying the average down strategy. They may not be sure-win strategies, but they certainly worth at least a consideration.

In summary:

  1. Stocks that are not worth to average down – These stock prices tend to trend downwards. They are companies that are incurring losses, bad cash-flow, high-debts, poor management, consistently difficult business environment or any combinations of them. Averaging down on these stocks is usually quite suicidal unless we are very sure that the fundamentals have changed for the better. Otherwise, there is really no point in averaging down.
  2. Stocks whose share price do not change very much – Frankly speaking, there isn’t much benefit to average down on stocks whose share price does not change over time. The apparent incentive to buy more of these stocks is we are attracted by its dividend payout. Basically we are in accumulative mode and not applying the average down strategy. The REITs and some high yield stocks exhibit this nature.
  3. Stocks that worth to average down – The average down strategy is best applied for stocks that show some degrees of volatility, but appreciate in value over time. The volatility enables us to buy subsequent stocks at lower prices, and hence averaging down the share price. However, over a longer period, it gains in value. Certainly, the average down strategy is best applied to stocks that are classified as blue chips. Of course, this is a sweeping statement as the share price of some blue-chip companies still trade within a tight price range. Frankly, we should be thankful that the SGX had changed the trading board lots from 1000 shares to 100 shares. This will allow more trading liquidity among in retail trades and make the averaging down technique more efficient. Yes, there will be more brokerage cost involved, but it will be more or less cancelled out as we accumulate more stocks at a lower prices.

Happy investing!

Brennen has been investing in the stock market for 26 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.

Sell in May and go away strategy: Why not a contrarian view?

The old saying sell in May and go away strategy seemed to have taken its toll this year when STI was sharply sold down from 2960.78 on 21st April to 2730.8 on 6th May 2016, a drop of 230 points, representing about 5.8% decrease on the ST index. After that, there appeared to be an increase in volatility as the bull and the bear tussled to tip over each other. By the end of today, after approximately 3 weeks of trading or so, the ST index ended at 2791.06, a mere increase of 60 points from 6th May.

According to The Straits Times (ST, 30 May 2016), it happened four out of five times in the last five years. If that view still holds true, then would it not be interesting for us to take a contrarian view and buy into the market when we bade farewell to the last ship that left us. And, of course, if they do return going forward, we can slowly sell back to the market.

Slide28

Frankly, taking advantage of this apparently universal ‘market theory’, I was actually a net buyer in the month of May. After all, isn’t it important that to gain from stocks, we should either be ahead of the market or, if we are courageous enough, even to act against the market movement. Otherwise, we are just a market follower moving up and down with the market. When market tanks, we lose; and when the market roars, we win. That said, I bought back some of the stocks that I had sold in April such as Jardine C&C and IPC to pocket the difference and yet maintain my original exposure in these stocks. In other words, I ‘squared off’ my position.

Hopefully, I am well-positioned when there is a big buy to propel the market. There could, however, be a stumbling block this year as the spectre of higher interest rate can derail this strategy. Big investors and fund managers may not return any time soon as they go in search of better yield elsewhere especially when local economic outlook still looks uncertain. Should such an event happens, it would affect the market liquidity. Accordingly, we should expect the spread between lending and saving to widen, thereby benefiting the bank stocks. With the cash return from OSIM, following the privatization plan by its chairman and CEO, Mr Ron Sim, I had also increased my stake in the bank stocks. However, one has to be careful about over-exposures in bank stocks in an increasing interest rate environment as non-performance loans (NPL) will also increase as well. If the interest rate continues to perk up, it will come to a time when the deteriorating asset quality will overwhelm the benefits of higher interest margin.

Happy investing!

Disclaimer:

This article is not a recommendation or an advice to buy/sell the mentioned stocks. It is a sharing of his opinions with the readers.

Brennen has been investing in the stock market for 26 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.

How do we see perpetual bonds?

It is not uncommon to see companies dishing out bonds that are sliced into very small denominations to attract retail investors. During the past three months or so, we see at least 2-3 per month. These bonds are certainly not short of subscribers. With a bond rate of 5%-6%, it is certainly very attractive given that the fixed deposit (FD) rate of about 2.0% at the very most. The expectation of impending interest rate hikes certainly push companies, especially those that are in need of funds, to dangle out bonds as quickly as possible to beef up their war chests. In particular, perpetual bonds are special type of bonds that do not have maturity date, and that is where the term perpetual is derived.

While a lot of focus has often been placed on the expected returns, investors often forgot about the terms, especially, the risks that come along with it. First and foremost, when there is no maturity date, theoretically it means that it is up to the company to decide when to redeem back the bond, or not at all. It is unlike a conventional bond that a company has to take pain to ensure that the exact capital is paid back to bondholders at maturity. In other words, a bond holder is in no position to get back his capital unless he sells the bond in the open market, which is very often very illiquid and may have to sell at a discount if one needs the money urgently. Of course, if a bondholder is prepared mentally that that could be the situation in future, then at least the first part of the hurdle is solved.

Given that bondholders do not have much control over the maturity, we should assume that we would not get back our capital at all to be very conservative. That means that we have to rely on coupons distributed by the company quarterly, semi-annually or annually, whatever declared, to generate the returns that we need. This also put the issue of irrevocability a point of contention here. If the bond is irrevocable, it also means that the company is not obligated to make good the coupons that were missed out. While this may affect the company’s credit-worthiness, it also means that retail investors have no recourse on the missed out coupons should such as situations occur. This literally means that the pay-back against the initial investment is stretched even further. Of course, I do not mean that companies would purposely want to do that as they definitely would want to continue to be in the good books of the banks and the investing public, but that term gives them a huge protection should such a crunch occurs. Personally, I would believe that companies would time and again review their account books to assess if they could redeem back those bonds given that interest premium over the prevailing bank interest rate is not a trivial amount in terms of the quantum that they need to pay the bondholders.

That brings me to the last point on why, in the first place, the companies want to raise bonds at a higher interest rate instead of borrowing from the banks. In all likelihood, before the companies carry out such an exercise, they have already had discussions with their banks. Generally, banks lend to companies via secured lending, which means that companies have to present some collaterals as a form of guarantee against the borrowing. That enables the banks to lend at a lower interest rate. However, it may be a situation that most of the company assets have already been pledged to banks, and the banks find the risks too high to swallow, and the company has to turn to the investing public for funds. This means that retail investors are taking on a higher risk as such lending are generally unsecured, and, of course, in the event of liquidation, it is almost certain that bondholders would lose at least part of their capital. Needless to say, this would also affect the common stockholders as well. And that is why share price usually falls whenever a bond, be it a conventional or perpetual bond, is issued.

Perhaps, when we enter a perpetual bond, our mind is never to have it redeemed. In other words, our intention is to continue to have a passive income, hopefully forever. Before you do that, maybe you may wish to review the table in the link to really know your breakeven point of your investment. For investing public like us, the best way to measure it is to assess in terms of number of years required for us to re-cope our initial investments.. This table applies to perpetual bonds, REITs or any investment that you wish to keep till perpetuity. Think about it, if the bond is irrevocable, then the payback gets even longer. Further, with the impending interest rate hikes, it is almost certain that bond prices (or even REIT prices) will fall. That will further discourage us from selling the bonds and shift us into holding the bonds longer. The point is does it worth to keep our investment till perpetuity?

Breakeven table at various coupon and discount rates

So, look at the risks as well, not simply just the expected returns.

Brennen has been investing in the stock market for 26 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.

If this stock market turmoil ends up in a liquidity crunch, do you know what the banks will do?

During the times when there is liquidity crunch, such as now when there is an impending interest rate hike in US or when there is a  stock market rout in the region, what is the most important thing for the banks? Yes, CASH at hand! When there is an extreme liquidity crunch, the banks will tend to play it safe. Whether or not they are going to use it, raising cash is the most important thing to do during such times.

Historically, there were many precedences. During 1998, when there was the Asian Financial Crisis, DBS bought POSB. It was the people’s bank with a huge amount of deposits. The main lending activities of POSB at that time was mainly in secured lending such as housing loans and the deposits at that time was huge.

In the recent global financial crisis in 2008, DBS raised S$4.2 billion through rights issue. Seven hundred and sixty (760) million rights were offered at $5.42c, a hefty discount of 45% from the last day trading price of $9.85. Each right was offered at 1:2 basis, meaning 1 right for every 2 shares owned.

In parallel OCBC went into offering preference shares at $100 per share in August 2008. To sweeten the deal, the dividend was offered at 5.1%, a rate way above bank’s interest rate even until today. OCBC raised $1 billion from that exercise. Following that move, UOB also followed suit with the same offering but at a slightly lower rate of 5.05%. UOB also raised about $1billion from the exercise.

In such times, when people are fearful and cashing out of the stock market, this appeared to be the best time for the banks to raise cash. After all, with bank interest rate at historical low couple with the stock market turmoil, many investors are looking to park their encashed money in safe instruments that offer sufficiently good returns. With the bank’s brand name and offering good dividend payout, it is possible for the banks to raise funds with relative ease.

What do the banks do with those money? Well, during market turmoils is one of the best opportunities for the banks. It is a question of survival of the fittest. Many so-called ‘fantastic companies’ will not be trading at historically fire-sale prices unless during such times. Remember that Astra, was one of the crown-jewel of the Indonesia companies before the 1998 Asian Financial Crisis. It was forced to sell its shares to Cycle and Carriage (C&C) before C&C was taken over by the Jardine group. If the shares of Astra had not been sold to C&C, Astra would not have been in existence or could have been disintegrated into smaller companies. Who knows Danamon Bank in Indonesia may be up for sale once again with better selling conditions. The last time, when the deal fell through was in 2013, when the Indonesian regulators allowed only to a maximum cap of 40%. DBS, on the other hand, was looking into acquiring 67.37% (for a price tag of $542.4m) which will ultimately trigger it to make a take-over offer of the bank.

Shareholders, in particular those who hold blue-chips, should maintain your liquidity now. You may be put in a situation to acquire rights or preference shares at a steep discount. Perhaps if you look at it in a long-term basis, it may not a bad deal. When the good times come back again, maybe you are rewarded with 500 DBS shares or 1000 OCBC shares as dividend in its yearly dividend distribution exercise.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

Big funds are moving away from stock markets

Yes, it is confirmed. Funds are moving out of emerging market and the results have not been pretty.

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After two weeks of punitive sell-out, most of the indices have either gone below the year opening level or expected to move towards that. With the exception of Nikkei 225 and DAX, most of the indices have already gone underwater. With this massive sell-out it is only a matter of time that the DAX and the Nikkei 225 go below the year opening as well. Right now, they are less than 10% shy of the their respective year-open level.

Certainly, with the trading volume and ferocity, it could not have been the act of individuals or retail investors. This is the act of institutional fund managers that are holding large quantities of index-linked blue-chips. These fund houses do not hold just 2 lots of DBS or OCBC, but in much larger quantities like 200,000 shares. The irony is that such selling often breeds more selling as investors want it out. And as redemptions accelerate, fund managers have no choice but to encash their shareholdings in anticipation of more redemptions even though they know that the price of blue-chips have gone to unpredented levels.

Certainly, with the ferocity of the drop in the bid-offer prices, the victims are the investors who have dedicatedly squirreled away their hard-earned savings in these funds for the past years. It is a situation in which the fund house takes the first dollar of profit but investors bear the first risk on the money.  Frankly, I had tasted these bitter fruits years ago during Asian financial crisis when I noted that the fund units were trading at one-third the price which I originally bought even though the indices dropped only by 50%. In addition, our yearly management fees of 1-2% paid to them and the undistributed dividends that went into the pockets of the fund managers do not seem to offer much help for the helpless investors who  put their money at risks. Learning from the lessons during the Asian financial crisis. I had encashed most of my unit trust funds about 2 months ago in anticipation that the stock market scenes will not be going to be pretty.  After all, what is the 5% sales charge compare to an anticipated drop of 30%-50% in stock indices.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

My first course on Udemy

I am pleased to announce that my first online course is now on www.udemy.com.  You can register yourself using your email and password and look out for the course. Search for “Read financial statement as a stock investor”.

As a start, we are having a very fabulous offer and participants should get away with a very huge discount!! The discount was so significant that I myself would not have given it out even for offline students who wanted to come back for my courses. Other courses will be put online for the next level as we need to work out the curriculum. See you at the course!!

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(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.