Tag Archives: stock index

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.

It’s time to take stock of how our stocks performed this year

At the close of calendar year 2015, the STI ended at 2882.73. And today, the last day of trading for year 2016, the STI ended at 2880.76. In effect, the STI lost less than 2 points or less than 0.07% for the year 2016.

However, if we were to slice the STI movement month-by-month within the year, it tells a different story. In the first two months, namely January and February, the STI actually fell below 2,600, down more than 10% from the beginning of the year following the uncertainties in China due to the sudden devaluation of the RMB. The free-fall that triggered the circuit breakers in the Shanghai stock exchange seemed to instil more fear than stabilising the market, causing even more selling when the market resumed. In the meantime, the oil price that reached a high of more than US$100 per barrel in 2014, had been falling throughout the year 2015 and was heading to below the $30 per barrel by January 2016. There was even a widespread fear that it could even go below $20 per barrel. Needless to say, the two simultaneous events that happened at the beginning of the year caused the Straits Times Index (STI) to dip ferociously from 2882.73 to below 2,600 losing more than 10% in less a month during January.

 

By early March, the oil price had somewhat stabilised at around $30 per barrel and made a u-turn gradually towards the $40 per barrel level. The STI that has been tracking the oil price also climbed gradually passing the 2,800 mark. However, the oil price that had been gradually falling since second half of year 2014, had already brought irreversible damage to the offshore and marine (O&M) sector. The share price of many stocks in this sector was relegated to super penny stocks when it was between 70 cents to a dollar just one to two years ago. Defaults become a commonplace for many bonds that were raised during the good times 3-4 years ago. The default of Swiber bond in the middle of 2016 triggered many O&M bond-issuers to seek bond-holders approval to re-structure the coupon payments. To date, these issues have not been fully resolved and they are likely to snowball into 2017. In the meantime, the bond defaults also spread to other sectors such as properties as well as other asset class such as perpetual bonds. Several short-term bonds and perpetual bonds that like Oxley Holdings, Aspial Corporation and Hyflux that were issued in the first half of this year had the share price fell below their respective issue price. Much to the expectations of stock investors, the surprised Britain-Exit (Brexit) in June 2016 turned out to be a non-event, at most affected a few isolated stocks on the SGX. 

 

Then, of course, the spectre of interest rate hike began to be in the forefront of investors’ mind again by the last quarter of 2016. The widely expected first interest rate hike became a reality in December after the American presidential election in early November. Shocking the political scene was the selection of Donald Trump, who was considered a rookie compared with Hillary Clinton. The interest rate hike in December as well as the expectations of more hikes into 2017 shifted the whole investing landscape. Bank shares were widely favoured while REITs and property shares lost their shine.

 

With the US presidential election behind us, it is likely that the FED has more leeway in calling the shot. Consequently, the fear of more interest rate hikes will continue to haunt investors going into the year 2017. REITs and property developer counters are likely to continue under pressure, although there could be a possibility that the government eases the property curbs especially when the economy is not functioning as expected. Although interest rate hikes are a great boost for banks’ interest margin, it is only good at the beginning of the interest rate cycle. Economic performance and non-performance loans are likely to put a lid on the banks’ profit margin going forward. In effect, the upside on the share price of banks may be limited unless the economy, on the whole, turn for the better going into 2017. Yields, be they bond yield, perpetual bond yield or REIT yield will continue to edge higher in anticipation of more interest rate hikes. This means the bond/REIT price is likely to stagnate or even experience downward bias if FED starts to be more aggressive in hiking up the interest rate. Although many REITs managed to re-finance and to resolve their loan issues for year 2017, they may start to feel pressure again into the years for 2018 and beyond.

 

Whilst the oil price has passed the $50 mark per barrel recently, it is unlikely to go very far beyond the $60 per barrel mark as shale oil is likely to supply aggressively into the oil market, thus putting a ceiling on the oil price. This means that oil rigs and peripheral industries such as OSV suppliers will still not benefit in the short term. Apart from the need for oil price to reach at least $70 per barrel level, it needs to remain sustainable at that kind of price level for at least 9 months before the oil giants can convincingly decide on investing in offshore exploration. This means that the profit visibility is still dicey for the oil and gas counters in general listed on the local stock exchange for the year 2017. For the other commodities, it appears that the worst is over after retreating in the last few years. However, it appears that the stock prices have already run up recently. Thus, I do not expect much upside unless there are some game-changing developments, which could tilt the balance in either way.

With that, let’s look forward to another interesting investing year!

 

Disclaimer – The above write-up is purely the opinion of the author, and it does not constitute an advice to buy or sell the mentioned stocks or the sector. Readers, who buy or sell stocks based on this article, are fully responsible for their own action.  

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.

What can we expect from the American election?

Now that the American election is over, and Donald Trump has been announced to be the president-elect. The inauguration is scheduled to be on 20 January 2017. As a biggest economy in the world, we can expect big event changes to have a bearing on the many smaller economies. Certainly, the promises made by Donald Trump during his campaigns would be closely followed, as they may become the new government policies during the term of the new president. Of course, one may argue that these may be promises, and they may not be fulfilled or at most partially fulfilled after looking at the cost-benefits of all these promises. After all, until the fate was sealed on last Thursday, Donald Trump had been an underdog in this neck-to-neck race with Hillary Clinton. To change the odds of winning this election, he might have to resort to populist promises to win votes.

 

However, as investors, we tend to make anticipations of the future to guide us in our buy or sell decisions. So the closest or best clues would be to go along the lines of his background as well as to rely on his promises during the campaigns. As it is, he has been a real estate magnate businessman with zero political back-ground, many would have expected that he would be especially focused on infrastructure developments. These constructions would likely to bring about inflation resulting in FED hiking up interest rates more aggressively. So in all likelihood, our bank interest rates would also perk up in time to come. As it is in the last few days, the local bank stocks such as DBS, OCBC and UOB were holding up relatively well while many local stocks were on a down-trend. In particular, DBS advanced $1.20 or about 8% in the last two days on Thursday and Friday. Conversely, the interest rates sensitive stocks such as bonds, REITs, property counters as well as many debt-laden companies were hit quite badly. Many emerging market currencies are also affected as funds are expected to repatriate back to US in search of higher interest rates. Thus many Asian currencies have also been on the downward trend. In fact, companies, especially the debt-laden ones that borrowed or purchased goods in US dollar are likely to be hardest hit. Consequently, many Indonesian company stock prices fell very hard. They purchased goods in US dollars and sold locally in rupiahs. Stocks like Jardine C&C, which held 50% of Astra shares, had already retreated about 10%. This situation is likely to continue as long as the spectre of interest rate hikes remains in the mind of investors.

 

The other significant factor mentioned in his presidential campaign was pro-American, pro-white policies that point toward protectionism. This means that many economies depending on US for trade will be also affected. These countries include Indonesia, China, Taiwan, Malaysia, South Korea, Philippines, Vietnam and even Singapore. Furthermore, with their respective currencies retreating against the US dollars, it is likely to make things very expensive for these countries. Certainly the respective stock markets are not going to be spared as well. The fear factor should likely continue to weigh on the Asian stock markets in the short term.

 

While the situation looks grim, it is only based on anticipation. The reality may not turn out to be this way after more detailed review of those promises. It could even be that the President may decide to soften his stance on free trades after his inauguration.

 

So, end of the day, it is still important to continue to stick to our long term-plan in building our stock portfolio. The fear factor may even present interesting opportunities for us to buy stocks that are beyond our reach during euphoria.      

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.

An essential product does not mean its company share price will continue grow

I met two persons, who told me that they had Hyflux shares. I met one of them some 4-5 years ago and the other 2-3 years ago. Both of them have held the stocks for some time. So I presume they have bought the shares 5-6 years and 3-4 years ago respectively. If I remember correctly, first one told me she bought the stock at $2.10 and the other bought at $1.02 per share. When I asked them why they bought the stocks, the common reply was “Everyone needs water.”

When I checked the price today, it is about $0.46 per share. Should they have kept the shares till today, the loss would be about 78% and 55% respectively. This goes to show that it is not necessary that the share price of companies producing essential products will continue to grow. Essentially, the stock price still depends very much on fundamental results like profitability, capital structure, management etc. When I look into the historical chart, the share price went up as high as $3.50 in year 2010. So, I believe when they bought the stocks, they must be thinking that stock was cheap compared to the price reached in 2010. After all, “everyone needs water” as they claimed. Perhaps they have been in it for a wrong reason. I agree that everyone needs water, but may I add that not all drinking water has to come from Hyflux.

Since then, I took note of Hyflux share price from time to time. It has already been falling gradually. In all these years, it has been quite deep in debts. They also had raised two perpetual bonds. The amount raised in the latest perpetual bond was $500m up-sized from the original planned amount of $300m. The total amount raised was higher than its market capitalization of about $362m based on today’s price at 46 cents. The heavy debt has taken a toll on the share price. Perhaps, the decent financial results released this week helped to break the continual fall in the share price, but still, it needs to resolve its debt issue before the stock price can climb convincingly again. So, the conclusion I have is that the two people who had bought the stock might have overlooked the capital structure and had focused too much on the stock price.

Extending the same arguments, there are actually many non-essential but sexy and well-loved products on the market. The share price of these companies has been very strong and their cash holding can be tremendous. Apple Inc is one of them. Think about it. We do not really need an iphone to live. Years ago, there were no iphones, but yet we still continue to survive as a civilisation. Even till today, they are many who simply live by surviving on food, water and shelter, but go without an iphone. Yet, the share price of Apple Inc. continues to be strong and unrelenting.

In summary, it does not mean that a company producing a product viewed as essential (not exactly though, as the process is not essential) will always see its share price growing. It is still very much dependent on a few fundamental attributes like management, profitability, cash flow etc.

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.

5 reasons why stock investing is so difficult to start

 

Ethan Ho is a guest writer for our blog. He is part of the investing & financial literacy team that helps build the investingnote community. We thank you for his invaluable contribution. 

Slide1

You have probably heard stories of people who’ve made investments. These people range from veteran institutional investors like Warren Buffet, Carl Icahn to associates, friends and little known hearsays. The similarity is, all of them have made some sort of money. But what stops everyone from doing so?

You’re probably reasoning that the big boys can make money because they already have the capital, skills and maybe some insider info.

Isn’t it obvious enough? True only to a certain extent.

Let’s break down the 5 actual reasons why investing seems difficult for most:

Steep learning curve

If you’ve never taken a finance course back in school or know absolutely nothing about finance, the thought of investing might scare you. Assessing the valuation of a stock through the company’s profile, financial reports and even research firms’ projections is terribly time consuming. There’s fundamental analysis and then there’s technical analysis. Each is a separate school of thought in investing. Learning both to hone your trading skills on your own is just way too time consuming.

Barriers to entry (a) Knowledge

Let’s face it: to be able to learn finance in school is a privilege. A privilege that is often invisible to those who study it as part of their majors. For the same amount of time taken to take a bachelor’s degree, business finance majors spend all their time honing their skills that aids them in making informed investment decisions as compared to their non-finance peers. Many of us who’re not specialized in finance can definitely relate to this. Of course you can learn it by yourself, but what we’re really saying is that the high barriers of entry due to the inherent complex nature of finance makes it harder to do so. Furthermore, finance courses by stock educators and professionals can cost thousands of dollars just for a few lessons. All these are barriers to entry. Sometimes to the extent to which people give up on learning and being interested midway.

Slide2

 

 

 

 

 

 

 

 

 

 

Barriers to entry (b) Capital

Another barrier to entry is capital. Let’s just talk about the local stock market. Before shares trading were reduced from 1,000 shares to 100 shares per lot, it implied that only people with a decent amount of money could invest. Let’s take for example, Singtel’s stock. It trades within range of $3 to $4. So the minimum capital required to buy just one lot of shares would be $3000 to $4000. To some, it might seem reasonable. But remember that a stock bought is an opportunity cost to diversification.

Lack of role models

We all know that when it comes to learning about investing, it can get really lonely. Like with every skill, role models are an important contribution to the learning process. A role model can either be a professional or someone with experience. In the world of investing, nobody can be held responsible for your gains or losses. However, it would help if there was a role model or mentor to guide your learning process with a certain direction and investing styles. It makes the entire learning and investing process much pleasurable and easier to follow. Most the ‘mentors’ and ‘role models’ out there usually charge a fee for students to take up their classes and workshops. Hence, role models seem to be an optional and expensive choice, rather than serving as modest mentors.

Slide3

Fear & Risk

You’ve probably heard stories of how people got ‘burnt’ by trading stocks. It can range from big losses to bankruptcy. Such stories aren’t exactly encouraging with the steep learning curve in the complex world of stocks. Studies have shown that people are also more contented with not losing, rather than not winning. As a result, fear ensues and stops many people in their tracks to invest.

Another key deterrent is risk and uncertainty. As you already know, every reward begets a certain amount of risk. If it doesn’t, it probably harbors a scam. In the stock market, risks are aplenty. Other than just stock-specific risk that stems from the company of a particular stock, there is systematic risk. Systematic risk unlike stock-specific risk, cannot be diversified. For example, the recent oil glut has impacted many companies in the oil and services sector. Most of these are fundamentally strong companies, but were still heavily affected by adverse market conditions.

Market volatility and uncertainty caused by geo-political risks are also part of the equation. Terrorism, global warming, law and the increasing interconnectedness of the global economy- makes it very much harder to divert risk, especially when you’re new to the game.

These are the 5 reasons that I’ve personally struggled with before I started and some of these reasons are still relevant.

Slide4

What are some of the reasons that didn’t get you started?

Written by Ethan Ho – from Investingnote [www.investingnote.com]

Investingnote is a free-membership social network platform designed specifically for stock investing. It is the only platform that empowers the stock investing community, through free access of stock data, research reports and technical charts, combined with sharing of  investment ideas and up-to-date news. Members can even pitch their stock investing skills by setting stock price targets against real time stock prices. Each member is accorded with reputation points based on the number of followers, likes and posts.

 

 

 

 

 

 

 

 

 

Making sense out of this market

The interest in the stock market returned with a vengeance over the last 6 trading days. By Friday yesterday, it had ended at 2837, an increase of 234 points from the closing at 2603.40 on 25 February. This represented an increase of 9% on the ST index. Imagine if one were to continue to wait in hope that index tanked further, then he would have missed this rally. It may be the best rally for this year.  Thanks to this changing global sentiment, I managed to pick up some battered blue-chip stocks after the Chinese new year to add to my portfolio. This is in anticipation of additional liquidity that will come April and May when companies distribute out their year-end dividend.

The fact that stock markets all over the world were retreating in the last two months was that people were generally fearful about the world economy – the retreat of commodity prices, the collapse of crude oil prices and that the Chinese economy growth rate slowed to 6.9% was the worst in the last 25 years. Similarly, the European as well as the Japanese economies were only trudging along even with huge stimulation packages. Naturally there is a lot of pessimism over the local economy that led to a huge retreat in the ST index over the last two months in January and February.

As pointed in my book “Building Wealth Together Through Stocks”, markets tend to undershoot the pessimistic outlook (and of course it also tends to overshoot during massive optimism at the other extreme). Consequently, windows of opportunity will present themselves time and again. Take DBS for example. Six months ago, it was trading at around $20 per share, but it fell to $13 per share just recently, a drop of about 35%. In between, there were only two quarterly of reporting. Were the results that bad for the share to tank so much? I am not saying that DBS share cannot drop to $13 if it really did badly. What I am saying is that the market tends to anticipate too much before it really happens. And when things were not as bad or when there were some signs of good news, it would start to leap forward. That was exactly what I mentioned in my earlier post (Market rout: A test of our mental fortitude.) that the market is likely to roar with ferocity because the market had already dropped too much.

 

Let us examine the stock market index. About 20 years ago, if the ST Index were to reach 2500, we can safely say that it had reached its high. But today, if ST index 2600 level, it would be have been considered it as a historical low. There were only two occasions since global finance crisis in 2008/2009 that had hit below 2600, namely the euro-zone crisis in 2011 as well as after the collapse of oil prices recently. Again, it is of course possible that the ST index can go lower than 2600 and even 2500 and below, but it is important to note that stock indices represent the value of a sample of selected companies. As stock indices retreat, values of companies will emerge because market is “under-pricing” the value of companies more and more. Stock prices are driven by sentiments, and very often, the market may become so pessimistic that it starts to price themselves grossly below companies’ intrinsic value thus causing big price differences between stock values and stock prices. Consequently, when the sentiment changes, the bounce back becomes forceful. Now that this force had already pushed up the stock index significantly, perhaps the strength to push up the index further may start to weaken or even collapse going forward.

Invest carefully now.

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.

OCBC – script dividend in the money

Recently, OCBC announced the distribution of scrip dividend in lieu of cash dividend. Its dividend was $0.18 per share and the bank had established a conversion rate of $9.50 per share, a discount to on-going share price. Given the discount to the prevailing share price, the scrip dividend has been ‘in-the-money’. Those shareholders who opted for script dividend would have gained much more than the original dividend if he had held the stocks till today.  With the current share price of about $10.36, the share holders would have gained $0.86 per share for the dividend that they held in scripts. In fact, script dividend can be a powerful compounding tool if the share price increase gradually over the years.

Slide32

 (Brennen Pak has been a stock investor for more than 25 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.

STI – Is it better to be on selling mode now?

The STI reached a high of 3549.85 on 16 April, only second to the all time high of 3899.29 made on 10 Oct 2007. This means that the recent high was about 350 points or 10% below its all-time high. Unfortunately, the STI seemed to be going downhill from 16 April reaching at 3295.13 the end of today’s trading day, a difference of about 255 points from its recent high. This means that between 16 April till today, the STI had dropped quite significantly by about 7.0-7.5%.

STI_6mths

Given the drastic drop, many people seemed to be looking into buying or bottom-fishing as some may call. In investing psychology, we call this anchoring because we tend to anchor or fixate the recent high of 3549.85 as an anchor point as if the STI will hit it anytime soon. However, in reality, is STI going to go up anytime soon? Personally, I am of the opinion that it may not. In fact, it may continue to languish for a while given the uncertainty in the US interest rate hike. Economy-wise, I do not think Singapore did well to enable the local stock market to roar. Currently, we are also facing structural and labour issues that will take time to resolve. Regionally, China is also not doing well economically, and the regional currencies are also getting weaker. Hence, it is unthinkable how the STI can tun-around anytime soon. In fact, may be weakening gradually or hovering around this level at best.

Taking history as a guide, in the worst-case, the STI was at about 2370.3 on 12 May 1996 when the government slammed the brakes by increasing property downpayment from 10% to 20%. It was just shy of the all time high then of 2493.7 made on 7 Feb 1996. After 12 May 1996, the STI started to tank accelerated by the Asian financial crisis. In the following two and the half years or so, the STI tanked all the way to 805.14 on 7 September 1998. In total, the STI sunk 66% within that period.

(Brennen Pak has been a stock investor for more than 25 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.