Category Archives: Z-STOCK INDICES

Stock indices

Ten years after the fall of Lehman Brother

Today marks the 10th anniversary when Lehman Brothers fell into bankruptcy on 15 September 2008. Despite the on-going tariff war between the US and China, there is a general sea of calmness in the major stock exchanges all over the world.  Back then, scene was very different. For several weeks before 15 September and several months after that, the front few pages of our daily newspapers were full of bad news.

Lehman Brother’s downfall also pulled along with it several big banks and financial institutions. AIG, Citigroup, JPMorgan Chase, Bank of America, Fannie Mae & Freddie Mac were all at risks, and were awaiting government bailout. With the crisis hitting the big financial institutions in the world’s largest economy at that time, it is almost certain that small and open economies, like Singapore, was going to feel the onslaught as well. The STI fell from the high at close of 3,875.77 made on 11 October 2007 to 2,486.55 on 15 September 2008, retreating 35.8%. It did not stop there. As bad news, continued to flush all over the news media, the STI fell further. DBS, a good proxy of the Singapore economy, and a heavy weight on the STI certainly cannot escape from this avalanche. Its share price fell from more than $20 to less than $10 by the end December 2008, retreating more than 50%. Everywhere is fear, and we did not know which blue-chip stock, in particular which financial stock, was going to go under. Fund managers were all selling as redemptions picked up speed.

Perhaps, the stubborn side of me helped. I decided to swim against this tide, buy a few shares, close my eyes, close my ears, go for a long haul, do not sell irrespective of whatever happened, and see how it would turn out after 10 years. In the worst-case situation, I would lose some savings. If I have been wanting to own DBS, this would have been a good opportunity. In a financial crisis of such a scale, huge wealth is transferred one person’s pocket to another’s pocket. Debtors will be punished, creditors will be rewarded. Spenders will become poor, and savers will feel rich. Cash is king. However, cash is still only cash if it remains in the bank. So, this should be the time to put our cash into good use. Splurge and buy up assets that had never been put on such discounts, was the key.

A few weeks after purchasing the stock, came the next bombshell. DBS decided to raise rights, 1 for 2 shares, with a whopping 45% discount at $5.42 based on the last day trading price at $9.85. It literally forced existing shareholders to take up the rights. So, no choice, I dipped further into my pocket to pick up the rights. (I remember, I tried to buy extra rights, but I believe I only managed to get a few shares to round off the lots due to over subscription of the rights.)

In the midst of such a crisis and with a much bigger market float after the rights issue, the share price continued to fall. In fact, the share price went even below $7. It certainly, took some grits and guts to continue to hold the shares. Even at $7, it was still a long way to fall if it was really going to be very bad. My intuition impressed upon me that if DBS were to fail at that time, we would all be in real serious trouble. Our property price would plunge, our car value would be decimated and our Singapore dollars would be very unstable in the forex market. So, whether we are on shares, on property or on cash, it was not going to matter. And, with the US dollars also plunging at that time, the only shelter is probably gold. After all, it was only 10 years ago then that DBS gobbled up POSB. In the minds of those people on the street, POSB was still the people’s bank. It is unlikely that it would be allowed to fail. The epicenter of this financial crisis was in the US. We are only feeling the effects of this financial tsunami. The question was how low could DBS touch, and not whether it would fail. It turned up well, and the fear was quite short-lived. The stock came up back again after March 2009, when STI temporarily went below 1,500.

Was it plain sailing after that? Not quite. I should ask, were there anything along the way to de-rail holding the stock? Certainly yes. When I purchased the stocks, my objective was to go long, and very long and to disregard the share price. So, the only ‘financial benefit’ was the dividend from the stock. At that time, this ‘giam-siap’ (stingy) bank, gave only $0.60 per share as dividend.  When a reliable source, told me that the bond coupon rate of Swiber was at 7%, I felt stupid again. If we invest in the bond at the cost of $250k, the yearly coupon would have been $17,500. A back-of-envelope calculations of the equivalent amount, would have been about 15,000 DBS shares at the prevailing price of between $16.50 and $17.00.  For 15,000 DBS shares, the dividend would only be $9,000. And this stark difference would carry on yearly, for probably 4-5 years, until the bond matured. If one were to chase for the last dollar, it would make sense to sell DBS shares and buy Swiber. So, would it make sense to sell off the shares and buy bond instead? Nobody knows what was going to happen. But, I do believe when the bond yields were high at that time, many people actually switched out of equities and buy bonds as well as other high yield instruments. It was lucky. I chose to remain in equities. The reason was that there was literally no secondary market. If we really wanted to sell, nobody was going to buy from our hands, unless we depress our price significantly. Precisely, at that time, due to liquidity, the corporate bond of Genting was trading at a discount, while the perpetual bonds were trading at a premium. So, if we want to get into it, the only choice was to hold corporate bonds to maturity. It turned out that the decision was right. Swiber defaulted and remain suspended today.  And, DBS was no longer a ‘giap-siap’ bank as it used to be. It doubled its dividend.  And, right now the yield based on the average purchased price would have enjoyed an even higher yield compared to Swiber or the any REITs. In fact, this stock would have become an equity-bond situation mentioned in the book “Warren Buffet and the Interpretation of Financial Statements”, by Mary Buffet and David Clark, 2008. It left me scratching my head what was the term ‘equity-bond’ really mean at that time when I was reading that book. Now, I understand. In a few words, it means to buy an equity, let the share price move up to its intrinsic value. As the dividend starts to move up back-on-the-heels of the equity price, we would have, in effect, enjoyed the yields of bonds.

Then again, were there any more scares along the way? Certainly yes. When China suddenly devalued the RMB in 2016, it was envisaged that China was not doing well on the economic front. That again pushed down the STI. In particular, the bank stocks were hit. All the three banks stocks were trading about 10% below book value. DBS, once again, fell below $14 for the first time in the few years. It had been languishing around $16-$17 per share almost throughout the year 2016. Only in 2017 did DBS share price climb up slowly and steadily, following of several quarters of good financial results. With the announcement of its new dividend benchmark, it has arbitrarily created a floor for the share price. If the bank continues maintain its dividend payout of $1.20 per share, it should help maintain the share price north of $24 per share, giving a yield of about close to 5% per share.

It has come a long way, and will there be more volatility going forward. Certainly yes, the tariff issues between the US and China is still yet to be resolved. Also, for so many years, the interest rates all over the world have been held extremely low. Debts were now at their historical highs once again. If FED were to increase interest rates aggressively, I would not be surprise that another crisis could erupt, maybe, this time, the epicenter is nearer to us. Then again, DBS share price can get hit again.

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

Join us in the facebook – BP Wealth Learning Centre LLP.

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

Isn’t this similar to the 90s?

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

Stock investing – The need for mindset change (1)

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

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

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

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

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

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

Being rational in the crowd of madness

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

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

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

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

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

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.

Not all stock portfolios can be turned into cash easily

It was already quite some time back when a friend of mine showed me his Central Depository Statement (CDP) statement of his stock holdings. He hoped that I was able to provide some ideas how he could revamp his stock portfolio. Below was what I saw when I unfold the statement:

  1. The total sum of the stockholding was more than $200,000
  2. He has slightly more than 2 full pages of stocks. Yes, more than 2 pages.
  3. Many of the stocks are in odd lots. Some even less than 100 shares.
  4. The worth of some stocks was like $20+ to $30+ in total value.

 

On paper, it appeared that he had a net worth of more than $200k, which is quite a decent sum. However, on a closer look, I told him that he will have a hard time cleaning up this stock holding. Some of the stocks are either I do not know them or they are so illiquid that it is quite difficult to sell out totally given the odd lots that he had. In fact, it may even be better to ‘ring-fence’ the stock-holding and re-start a new one than try to micro-manage those stocks that are not even worth the while to have a second look. I felt painful for him that he was not able to convert his stocks quickly to cash without taking a significant ‘haircut’ on his more than $200k of stocks.

What I believe could the problems in this stock portfolio?

The first obvious mistake was that he probably held too many stocks. Imagine CDP statement list out the stock counters in single-lines, ie. without any line-spacing in between. Just within the first page, it could have accommodated a listing of 30 stock counters. I do not know how many stocks are on page 2, but let us put an estimate of 50 counters to occupy full page, and several stocks listed on page 3. In all, they should add up to about 85-100 stock counters. That means he owns about 10% to 13% of all the stock counters listed on the Singapore stock exchange. Just by the sheer number of stocks, I personally think it is too much for him to manage. In fact, in my opinion, the number of counters that can go beyond page one of the CDP statement is probably far too many. Think about it. Many indices around the world are made of about 30 components stocks, and this is already very representative of the respective markets. Surely, we do not need to own more shares than what is needed to form the index. With the advance in technology, it is of course possible to include more stocks in indices, but that cannot be said if we want to formulate a stock portfolio manually. In fact, according to past literatures, by the time when we hold about 12 to 18 stocks, we have already reaped 90% of the benefits of a diversified portfolio.

Another problem of his stocks holding is that many of them come in odd-lots. This means that he is not able to buy or sell efficiently. And because some of the odd lots are less than 100 shares, he may even have to buy in some shares and the sell out all the shares to combine the total shares to reduce the brokerage charges.  As expected, it does not go down well on him because the fact that he reduced his holdings by selling out the full lots and leaving the odd lots, we cannot simply expect that he will make a reversed move to buy more shares of those counters in the near future. Furthermore, I do not know if he had made any money when he sold the full lots as he might have reacted out of fear to sell out the full lots during times of impending crises. In summary, he could have write-off all these odd lots, which would otherwise impede his move to clean up his portfolio.

As a stock investor, it is important to understand that the stock market is a quasi perfect competition and many of us have no control over the on-going transaction price. In other words, we are price takers. The only thing that we can possible control is the quantity to buy or sell.  Even that may still be a limitation because, as individuals, we have limited resources. We simply cannot buy or sell any quantities of shares that we like. So it is important that whenever we buy or sell, we are mindful of the next move and how to react when something unexpected happens. It is like playing chess. We are not able to anticipate all the moves of our opponent. What we can do is to limit our damages when we encounter an attack by our opponent and leap on a strong attack when we see an opportunity. Trying to build a stock portfolio without some kind of strategy in place is doomed to fail.

Wish you luck in your 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.

If we missed the best stock upsides

Today marks a little more than one month after Donald Trump won the US election. When he first won the election, the market at first reacted negatively, followed by a strong rally and then tapered off in the last two days. The banking stocks, in particular, were the biggest beneficiaries of this rally. DBS has advanced from about $15.20 to a high of $18.32 and then settled at $17.83, an increase of $2.63 or about 17.3%. Similarly Overseas Chinese Banking Corporation (OCBC) had also advanced $0.73 or 8.6% from $8.53 to $9.26. United Overseas Bank (UOB) also showed a significant increase of $2.31 or about 12.4% from $18.59 to $20.90. Of course, if one holds the bank stocks, the return for this month alone is extremely significant.

Despite the rally, many people still asked the same question just a few days ago– DBS bank, can still buy now? Does it mean that these people missed boarding a stationary wagon and is now chasing a moving one? Actually, if we look at the bank stocks, in particular DBS, it has been parking below $16 for many months, right from the beginning of the year or even before. Why do we need to wait for it to move up to chase it? Why can’t we buy it at our own pace and wait for the rising tide to raise our boat?  It appeared logical right now in hindsight, but seemed to be an irrational decision when the share price was oscillating between $15 and $16 per share for a long time. Very often, when a stock or the market rallies, the onset is often the sharpest and this is when the smaller players start to take note. By the time when one start to confirm, double confirm, triple confirm, a significant part of the upside has already been priced in the stock. So by the time retail investors start to buy into the market, perhaps there is only the last 20-30% upside. We always come across a statement to the effect that if we missed the best 10 trading days, our stock performance would just appear ordinary. Worse still, it could even be negative performance despite that the STI moved up significantly. To me, stock market has a place for both big and small players. Big players cannot play like a small player and a small player cannot afford to play like a big player. Big players buy into the market to cause the market rally, but the advantage of small players is to be able to buy into stocks without causing big ripples in the stock market. That’s where we should play to our advantage. Remember that our wealth is not just measured by the amount of money we have in the bank. Our wealth is measure by the sum of our cash, stocks, properties and whatever assets that we possess.  So, there is no need to be in cash all the time. It is important to engage the stock market all the time than to wake up only when the rally has already been well underway.

Happy investing!

For more, join me at investing note by clicking here!     

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.

I was there 6 years ago

Today marks a little more than six years since this article was featured on The Sunday Times on 21 November 2010. The STI was 3197.3 then, and by today, it ended at 2859.33, about 10.6% down. It is time to take stock again after the span of 6 years.  The real time is the best endorsement of how our stocks perform over time.

 

ST, 21 Nov 2010
ST, 21 Nov 2010

By and large, the components in my portfolio were relatively intact. I might have added one or two stocks to replace two of my beloved stocks that were taken off my portfolio due to privatisation. The first was Cerebos Pacific which was delisted in 2012/2013. The offer was attractive at a whopping $6.60 per share. The second was OSIM which was delisted in the first half of this year. The offer was at $1.39. Both of these stocks had been multi-baggers apart from receiving the good dividends that had been distributed in all these years.  I have also parted with SPH due to its weakening fundamentals and reduced my stake in Comfort-Delgro when the share price went past $3.00 per share. I had left some stocks in my portfolio waiting for the good news for a one-off dividend announcement when it entered the asset-light regime but it never came. Perhaps, I would consider to buy back the stocks again when the time is right.

 

Meanwhile, there were people who mentioned that bank stocks, in particular, DBS did not really gained in terms of capital appreciation in all these years. I agree with that totally based on the price chart because in the last few years, DBS share price was hovering below $16, then gained momentum and went above $20, then fall below $16 for a significant amount of time. By today, it is back above $16 and ended up at $17.05 today, which is still well below $20 reached some years ago. So, if we look at the two end points, we may not see a significant capital appreciation. This means that if we apply a ‘buy-and-hold’ strategy, we may not have gained anything or could even have suffered some paper losses if we had bought it high. As mentioned in my previous post, a long-term strategy does not mean buy and don’t sell. What I meant was we should buy when it is time to buy and sell when it is time to sell, but our focus still remains on it. In fact, over the last week, the increase of $1.20 in two days gaining 8%, and then around 56 cents made within this week had made it a strong showing, following the widely belief that the FED is likely to make a hike in the interest rate by December. If not for this sharp increase, DBS share price would still be lingering below $16. That said, isn’t it important that stocks must have some degree of volatility to be able to buy low and sell high. Certainly we cannot expect a stock to be increasing all the time because at some point in time, the share price will go past its fundamentals and a crash would certainly be imminent. This indeed happened to the penny stocks in October 2013. In fact, just yesterday, the ISR Capital also crashed 55% from 28 cents to 12.7 cents. Many investors/traders had been sucked into these stocks thinking that they were the next blue chips in the making or probably to make quick profits. In a similar way, we cannot expect a stock price to remain constant all the time because it means that the only thing that we can depend on is, hopefully, a fat dividend. So, in a market place of different groups of people, we should be mentally prepared that there is bound to be volatility and we should be prepared to embrace it. Otherwise, it is difficult to take bold decisions in our stock investments. In fact, in all these years, slowly but surely I have increased my bank stock component. Perhaps, it may crash tomorrow, next month or next year especially when they have been quite exposed to the offshore and marine sector. But I would still stick my belief that bank stocks should be part of our portfolio so long as Singapore exists as a financial centre regionally.

 

But not everything is a fairy tale story in my portfolio development. There was a stock which I held for easily more than 20 years when I started off as a rookie. By today, it had lost 99% of the price which I had bought. I have decided to leave it there to decay to serve as a reminder not to believe in promises and glamorous stories painted by the management. After all, the residue value is only a few hundred dollars. Even today, it has been struggling to keep its price above 20 cents MTP after consolidation. The second was a company whose products seemed to be promising, but apparently, the management seemed to be taking a different direction thus sabotaging the share price. This again showed the misalignment of what the management claimed and what their actions are. The third was a recommendation by a ‘self-declared guru’ who aggressively coaxed investors out there to buy bombed out counters that crashed during the penny stock crash. Frankly, I did not carry out my homework for this stock. In a fit of the moment, I simply threw in some money to buy the stock. The share price has been going down and down and never return back to even near the after-crash price.  It was one of those acts of impulse that can happen from time to time but I learnt a lot of lessons from this episode. Firstly I did not do my homework, which was not my usual self. I was probably too carried away with other things back then. Secondly, I was too trusting to believe a speculator who ‘disguised’ himself as a guru. Thirdly, buying into a bombed out counter does not always mean a good buy because at end of the day, the fundamentals of the company still counts. In fact, I think many people got this basic notion wrong that when a stock crashes, it means a good buy. From past history, many counters that had tanked badly had never been able to come back up again because the stocks simply lack the fundamentals to trigger a turn-around in their stock prices.           

 

Now comes the blessing part. I had managed to avoid the crash that had plaque the offshore and marine (O&M) stocks. I find most of these stock prices are too intertwine and the crash of any one stock would bring down the other stock prices as well. The survival of the companies behind these stocks hinges largely on the oil price, which we do not have control over it. This means that our fate lies in the hands of the oil producers and users. Even as a country, we are only but a price taker.

I would also consider it fortunate that I had also avoided the corporate bonds. At one time, I was considering to buy Genting bond as it was trading below par while the perpetual bonds was trading above par. However, I seemed to have an impression that the relationship manager was trying to impress upon me to buy O&M bonds offering higher coupon rates. Personally, I find that there is too much concentration of risks to support the bond-issuer even though the coupon rates were attractively priced at between 5% and 7% compare to the bank interest rate of less than 1% offered to retail clients. Furthermore, I would not have much bargaining power as an individual in case of a dispute. Thirdly, there was lack of liquidity in these investments. The bid and offer spreads were often wide and far in-between. Certainly, if we are not able to execute an exit plan at our wish, it is never a good investment. This decision paid off well and I felt extremely blessed following the default of Swiber in July this year. Now with the defaults catching fire across the industry, I felt that I learnt some good lessons without paying a price. Many who had bought bonds, particularly in the O&M sector would now been licking their wounds and would likely to be entangling with long-drawn legal tussles with the bankers, lawyers and the bond-issuers. These are unfortunate events that bankers, investors and bond-issuers would not like to be in.

Thanks god, despite the drop of about 10.6% over the 6 years, I feel lucky that portfolio had actually grown and I have avoided several major stocks setbacks that had derailed many investors and traders out there. Essentially, the best test for our stock performance is the real time.

  

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.

Some notes about Investingnote

About two years ago when my stock-broker friend introduced InvestingNote to me, I was not exactly keen initially. The reason was that I have a business to develop and a family to take care. All these will draw away all my awake hours. Where can I find the time to socialize and get into it? Nevertheless, I still register my name, perhaps, to keep myself current with new developments as well as to know some investors and traders out there. It was a good decision. Today, I have met several distinguished investors and traders via this platform and had even met them personally.

In the meantime, InvestingNote has grown by leaps and bounds, and now with members in tens of thousands. All these came about because more and more features have been incorporated in the platform to have everything that we need to know about local stocks within the platform. Not only can we find the price chart featuring real time price, we can also discuss about the potential of each stock on the SGX with fellow investors and traders. Apart from that, one can also horn his trading skills making estimate about the share price of each stock for a particular time-frame. This can help one sharpen his investing/trading skills before taking the plunge using real money to buy or sell stocks. Frankly, I have not come across another platform that offers this feature.    

With all these said, there is no cost. You need not pay anything to be a member of InvestingNote. Registration only requires an email and a password, and is extremely easy. Just register by clicking this link.

Register me at www.investingnote.com now!

It’s an additional tool for your stock 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.