350% in 7 trading days

Since the time when I mentioned about Y-Ventures last week, it had multiplied by 350%. It was about 7 trading days since it hit the bottom at 3.8 cents on 31 March and 1 April 2019. I had mentioned in the article that it probably worth a punt on the stock.

Given that it is a penny stock, the queue in the buy column at that time was very low at 10,000 to 20,000 shares. So, it meant that you could key to buy at a few bits lower than the trading price and, still,  somebody was willing to sell the stock to you. However, when one were to look at the the transaction volume, it was another story. It was comparatively huge, perhaps 1 to 2 million shares showing the market was full of spot sellers willing to short the stock for any ready buyer. For the past one year, the share price has been beaten down and was close to 5% of the peak value by end March/early April. This could be one of the best chance to buy the stock at fire-sale price. It can only happen when the market thinks that the company is on the brink of bankruptcy or is widely expecting a rights issue. The company was listed on the stock exchange fairly recently, of less than 2 years and the stock price has been affected by the fallen crypto-currency joint venture and the accounting fiasco that it experienced last year. 

With the quantity of shares issued at 200 million, it is possible to buy 0.1% of the company with only $8,000 at the share price of 4 cents. (The pre-IPO share quantity was 35 million from which about $7m was raised.) It means that at 4 cents, it is below the pre-IPO price valued at 5 cents. In effect, it is worth the risk to take the plunge. At most, if the company did go bust (touch wood), I would lost a few thousand dollars. The potential upside should be higher than the downside.

It would be good to execute the trade in small tranches, each time by buying 25 000 to 50,000 shares per trade. As we know, the best trades happen when nobody is looking at the stock. This is where custodian account becomes relevant. We need not pay a minimum brokerage of $25 to execute each trade. By doing so, it helps to cluster the buy price to around 4 cents. (I use the word ‘cluster’ because, very often, we do not know exactly know when is the lowest price. Sometimes when we feel that the purchase price is good, it still can drop further. So, to play it conservatively, we buy in smaller tranches once we believe that the share price has dropped to a level that one simply cannot refuse.)      

Fast forward a few days to today. The upside has been extremely sharp. The share price has advanced almost 400% from its bottom at 3.8 cents in a matter of 7 trading days! Perhaps, based on market psychology, it may still have legs going forward as it has started from a very low base. But the rate of increase should taper off as the share price increase. The purchase has been a pure luck as if one had struck a price in a 4-D. The timing was good. Certainly, it cannot be repeated or applied to other stocks easily. This can only happen, perhaps, once in a few years.

So, going forward, where will the stock price be? Well, your guess is just as good as mine. Right now, there is no fundamentals to provide us an idea of the share price, apart from making some wild guess, with some assumptions. That said, I have decided to sell one-third of my holdings. That provides me with some profit and the 2/3 of the quantity purchased at zero cost. With the change of management, hopefully, more good days lie ahead.  At today trading price at 14 to 15 cents, it is still below the IPO price of 22 cents in July 2017. If the new management proved to be good, the share price should advance in the long run.

 Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned security. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 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.

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Financial questions regarding Hyflux debts?

I chanced upon the article on “Hyflux story so far” in BT Weekend, 23-24 March 2019. Given that it had listed the debts raised in the past years, I decided to compile them into a timeline in hope to have a better picture of Hyflux’s current predicament. What really puzzled me was the perpetual raised in 2016. It was stated that the perpetual of $500m was raised to redeem the two tranches of perpetuals raised for institutional and accredited investors. The first was $300m perpetual @5.75% raised in January 2014 and the second was $175m perpetual @4.8% raised in July 2014.

Just purely from a financial management point of view, why was Hyflux willing to raise perpetual at 6% to redeem perpetuals at lower coupon rates. After all, the 4.8% and the 5.75% perpetuals were hardly 2-year and 3-year old respectively when they were redeemed. Why was Hyflux so anxious to redeem those perpetual bonds when the perpetuals were still so recent by any standard.

Without any consideration of the administrative costs involved, the $175m @4.8% and the $300m @5.75% would translate to $8.4 million and $17.25 million annually. Adding these two coupon cost together, it would cost Hyflux $25.65 million annually. Why would Hyflux wanted to raise $500 million @6% just to redeem the two earlier perpetuals. The $500m @6% would have cost Hyflux $30 million annually compare to paying the coupons of two earlier bonds that cost $25.65 million annually. Why did Hyflux willing pay additional fund of $4.35 million per year to new perpetual holders instead of just staying status quo to continue to serve the two institutional perpetual bonds. After all, the bonds are still very new especially when they are also of perpetual status. Are there some non-financial reasons that investors do not know? Wouldn’t the additional $4.35 million very crucial for Hyflux in view that they had been suffering negative cash flows for at least 5 years before Year 2016?

In fact, from financial management point-of-view Hyflux should redeem the $400 million preference shares @6% as by Call Date in April 2018, the coupon would be stepped up to 8%. Based on calculations, the $400 million perpetual coupons would have increased by $8m from $24m to $32m. So, wouldn’t it be more crucial to clear (or redeem) the higher coupon rate first?

All these make no sense to me.

Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 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.

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Be prepared to lose some money in our investments

I would have considered myself financial and investment savvy. But still, in our journey, there is still a possibility of losing some hard-earned money. The most recent case was in Hyflux. It was Hyflux’s first retail tranche, 2011 6% CPS.

Hyflux share price- August 2010 to August 2016

Looking back, the only bad situation surround Hyflux was probably the stock price had dropped 50% from one year ago. This can happen because Hyflux is a project-based company, and the company’s revenue and profit can be quite lumpy, just like many engineering project companies such as Keppel Corp, SempCorp Marine and a host of companies that fell one-by-one after the oil price tanked in the second half of 2014. (Lead me to a free beta-mode course on looking at engineering companies.) As of mid-2011, there was no history of negative cash flow nor negative profit for year 2010 and before. Even if there was, it would be difficult to fault a one-off situation that could happen to companies from time to time. Armed with some liquidity, I decided to put some $10,000 in the 6% CPS. After all, at that time banks were ‘paying peanuts’ for our deposits and there were no apparent signs of interest hikes. In fact, FED was still pumping $80b per month into the system through bond purchases. Certainly, at that time, an interest rate hike would have been an extremely remote possibility. In such a highly-liquid situation, it would have been rational to put a bit of money at risk in hope of better returns than just leaving it in a bank. That said, I still observe the basic conventional wisdom not to put in too much for this investment – perhaps $10,000 at most. After all, given the low interest environment at that time, I was very sure there would be many investment opportunities in the pipeline. This certainly would not be the last opportunity. By investing in small bits, we are able to stagger our investments along the way. This would help us time-diversify our investments. 

At that time, nobody would dare say that Hyflux would end up seeking court protection in 2018. I mentioned this because there are write-ups both in the mass media and social media about lessons learnt about this Hyflux saga as if they have not lost in any single investment before. Many mentioned about profitability and cash-flow. Talking is cheap. These are all discussions in hindsight. But in 2011, there was no negative cash flow nor negative profit to show at that time. It really takes the eyes of God to see through this. It was not possible to see so far ahead that this investment would have turned bad just from, at most, one year of negative cash flow until 2010 alone. After all, the Tuas desalination plant was not even up yet. It could be a right decision or it could be a wrong decision at that time. Only God knew. The only discomfort I had at that time was why Hyflux did not attempt to borrow from the bank given the low interest rate environment? Perhaps, they had. Or, could they have exhausted their means to borrow from banks and they have to resort to tapping on the retail investors by paying a higher coupon? Given this doubtful situation, I decided at most to park a small ‘bet’ into the investment. It is a situation of capital preservation before inflation started to erode my buying power if this low interest environment were to carry on for the next few years down the road. After all, it was a scenario of no pain no gain. The step-up feature from 6% to 8% was seen by investors, including myself, as a punitive feature for Hyflux to redeem the bond before it got more expensive. In hindsight, I can only say that it served well as a sweetener to attract many investors into believing that the preference shares will be redeemed ultimately.

It was a bit far back to recall why my CDP statement was registered at $5,000 instead of $10,000 as the original denomination mentioned in the prospectus was in lots of 100 shares at $100 per share. Perhaps, it was due to over-subscription, and the company decided to allot 50 shares instead of 100 shares. In hindsight, that was a thankful situation as we all know by now that the more money that we put in, the more losses we would have suffered by today.

Fast forward the next 5 years came the second tranche for retail investors in 2016. Ah, this time, it was a different scenario. The fundamentals were getting from bad to worse. On the record, there were already several years of negative cash flow. In such a situation, it was increasingly possible that the company might not be able to pay coupons and to redeem the capital. That was when the trading price of 2011 6% CPS went below par for the first time. Otherwise, it had been trading at a premium all the time. Note that this was also around the time when FED, either had already started or going to start a series of interest hikes. The risk-reward scenario was completely different from the earlier retail tranche in 2011. In fact, just before this retail tranche, many companies were rushing to beat the impending interest rate hikes. Just a year before, in 2015, four companies issued short-term bonds of coupon rates between 3.65% and 5.3%. (See Table 1.). Even before, there was the issue of Genting bonds and Genting Perpetual bonds in 2012. Investors were indeed spoilt for choice in those few years.

Unfortunately, for the investors, Hyflux’s 6% perpetual bonds was greeted with such a huge fanfare that the bond was up-sized from the original quantum of $300m to $500m. Actually, at that time, financial numbers were indicative of an imminent financial stress:

  • There were several years of negative cash flow since 2011.
  • The debt-equity was increasing substantially from about 0.7 in 2011 (which was already high) to possibly more than 1.5 by 2015.

Despite the still relatively attractive high interest of 6%, it was certainly be a no-no for me in this tranche. After all, if Hyflux were to fold, I would not want to be slapped twice. The only regret I had was I did not go one step further to sell the 6% CPS in the open market for a small capital loss. But again, it was also not out-of-mind to have held the preference shares as it was still paying coupons. Then, there was also a consideration of re-investment. After all, the amount was not big, and it was only two years away when the step-up feature to 8% would kick in. In fact, it continued to pay coupon even in the first half of 2018.  Well, we could only know by now that it had been a bad decision. In just one stroke, all the unsecured debts, irrespective of their seniority, were locked up.

So, as one can see, even if we were to put up safeguards when we execute our investments, such as investing small amounts in each investment and to diversify our investments, there is still some possibilities of a loss. What is more important is in aggregate term, we gain big and lose small. Even the best investor, Warren Buffet did also lose big at times. It may be a self-consolation by saying all these. Certainly, I still hope to get back my capital. But I am not going to lose my sleep because of this. After so many years of investing, we need to embrace the fact that we may hit some snags from time to time. I seriously pity those who plonk in big time. Perhaps, they thought that it was a fixed deposit paying 6% interest. There are huge differences between a perpetual bond and a fixed deposit as far as risks are concerned.       

Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 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.

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Who are the winners and losers from the Hyflux saga?

By now, we all know that unsecured bond holders, preference shareholders and ordinary shareholders have to once again take a deep, deep haircut following Hyflux’s re-structuring plan. The proposal (see table below) is still subject to final approval through townhall meetings in the coming weeks.

Hyflux’s proposal (yet to be approved)

Just a bit more than 2 years ago, many investors were jumping into the $300m perpetual bond issue band-wagon that was dangling at a whopping 6%. Compare this to the meagre bank deposit interest rate of 1% or less, it was like a god-send. The perpetual bonds were so over-subscribed that it has to be upsized to $500m. Still, I believe, it was oversubscribed such that the company had to carry out an allocation exercise for the subscribers. And, by May 2018, the $400m 6% CPS issued in 2011 would have stepped-up to 8% if no redemption was made. The redemption did not take place and the 8% coupon was not delivered either. In fact, no coupons were made in 2018 as Hyflux applied to seek court-protection to carry out debt-restructuring exercise following its ever-choking cash flow problem under the pile of debts.

For the last few years, Hyflux has been pinning on the hope to sell its loss-making Tuaspring desalination and power plant in order to pay down its pile of debts. But the hope became more and more remote in each passing day. It was mentioned previously that there was an interested local buyer but it appeared that Hyflux was not exactly keen. And by today, it has been established that Hyflux would be selling the company lock, stock and barrel to a consortium between Salim Group and Medco Group, SM International Pte Ltd.

So, who are the real losers in this whole saga? Although it is said in the media that Chairman and CEO, Olivier Lum, will lose all her shares in the company, she is probably not the ultimate loser. After all, she has got back her dues as a CEO and receive many years of dividends. Hyflux had established that cash dividends received by the chairman in the period between 2007 and 2017 was $58m (TODAYonline, 24 Feb 2019). Apart from the dividends, she had also been rewarded with an annual remuneration of between $750k to $1m as an executive. So, over the years, she has gotten back her dues. Perhaps the ones that suffered losses are the minority stakeholders. Many of them are working-class employees and retirees, who can only dream of earning a fraction of that $58m in their lifetime. None of these stakeholders got back what they had invested. The 6% promised yield was simply too mouth-watering compared to deposit interest rate of 1% or less at that time. The general belief for investing in the company was that it was producing a critical resource and would not likely be a let-down. Unfortunately, it failed. Many probably had lost their life-savings. Let’s ask ourselves, if a company were to pay 6% coupon faithfully, in how many years’ time will an investor get back what he had invested? It is 16.6 years not taking into account the value of money. So, base on this fact, none of the investors got back what they had invested as even the 2011 6% CPS issued by the company was less than 10 years. With the current state of affairs, there is really not much these investors can do. There is only so much money on the table for distribution and it falls so far short of the owed amount. Paying more for one group of people would mean less for another group. Certainly, the promised yield should not be the only criterion to get into the investment. (See the free beta-mode course for evaluating engineering companies.) In fact, investors should be well-aware that the higher promise return signifies that the higher possibility of losing their capital. Unfortunately, the high promised yield appeals very much to retirees as a source of passive income.     

In effect, the situation for the 2011 6% CPS was so near-yet-so-far. I was one of them. I had invested $5,000 and, all this while, the trading price has been above par. It was well and good until the last point when the issuer was to decide to redeem the preference share or to let the debt stepped up to 8%. Frankly speaking, I felt ripped off. Unfortunately, the nature of being perpetual gives the right to the issuer not to redeem the bond. What is the purpose of the step-up clause to 8% when it cannot deliver? Then, there are those who rushed to subscribe the 2016 $300m perpetual bond which was later up-sized to $500m. They enjoyed only one coupon distribution in 2017 to date. To a certain extent, it was with luck that I give this tranche a miss because I noticed that fundamentals were deteriorating badly, and the share price was descending fast. But still, if the proposal were to be accepted, I would have lost about 50% of what I invested for the 2011 tranche, not taking into account the value of money. Furthermore, the share distribution will make all the perpetual bond holders end up with odd lots, making it very difficult to buy or sell. Actually, for the perpetual bondholders, there is no way out other than waiting the bond issuer to redeem the bonds. Alternatively, they can sell in the open market, but during such critical times, the market is definitely trading at a deep discount. So, all-in-all, it has been a painful lesson for this group of investors.    

For equity holders, the picture is no better. For many years since 2011, the share price has been falling to reflect the increasing risk. At that time when it was suspended in May 2018, it was probably about 10% the price level of 2011. Unless one, can short the stock with extremely good timing, it is unlikely that one can really gain significantly by trading in Hyflux shares.

The real winner is certainly the SM Investment, a consortium formed from two Indonesian groups, Salim and Medco. They managed to buy opportunistically on the cheap, well below the projects’ book value. Going forward, it would be very dependent on how efficient the consortium is to operate as a group together with the Indonesia operations. Hopefully, they are able to reap sufficient economies of scale to operate efficiently and effectively. This, however, will take time as there are needs to make operational changes once the acquisition is confirmed.

(Lead me to a free beta-mode course on looking at engineering companies.)

Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned stock when the suspension is lifted. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 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.

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All about brokerage charges

Let’s face it. Over the years, technology has taken toll on many middle functions. Stock broking is no exception. It is no longer the, once-upon-a-time lucrative high-profile business. Commission rates offered by brokerage houses are so competitive that there are hardly differences separating one from another. All the commission charges have two features in common:

(1) Contract value range ie. 0 and $50,000 (inclusive), above $50,000 to $100,000 (inclusive) and above $100,000.

(2) A minimum brokerage charge, of which almost all the brokerage houses charged at $25.

Generally, the only difference that separates one from another is the brokerage fee rate (in percentage term) for each of the mentioned contract value range. (See youtube video by clicking the link below.

So, once we know the brokerage rate for each contract value range, we can calculate the absolute amount in dollar terms how much one would have to pay for all the transaction fees including brokerage fees when we buy or sell SGX stocks on-line. Certainly, under this circumstance, a video would be extremely useful to demonstrate how it can be done.   

Excel spreadsheet software to calculate brokerage charges

The difference may be not be significant due to their infinitesimally small percentage compare to the trading (or contract) value. As such, a change of one or two bits upwards or downwards could have offset this difference. However, it is still important as an end-customer to know the figures are derived. This would certainly go a long way to help us optimise the brokerage charge. This is particularly true for those who trade very often. Of particular significance are at the transition point from minimum brokerage threshold as well as at the cross-over points at $50,000 and $100,000. They are marked in circles shown in the diagram.

  • Transition Point A. The transition charge from the minimum brokerage of $25. Generally, brokerage houses have a minimum charge of $25. The only difference is the transition point from $25 to either 0.275% or 0.28% for most brokerage houses. Consequently, there is a difference in the contract value amount. The higher the transition value, the better it is for the client. The difference, however, is infinitesimally small of less than $0.50 maximum. So, this factor alone is unlikely able to move traders from one broking house to another.
  • Crossover point at B & C. The brokerage charge dips quite significantly at $50,000 and $100,000 contract value mark. What do those numbers mean for clients? To help reduce the brokerage (though insignificant compare to the absolute contract value), trades may be carried out at slightly higher value than $50,000 and $100,000 respectively. Let’s look at the DBS and Jardine C&C as examples. They are trading at about $25 and $36 per share currently. If I were to buy or sell 2000 DBS shares, the contract value would be about $50,000. For $50,000 or less, the brokerage charge is 0.28%. This is calculated to be $140. However, if I were to trade at $25.01 per share, the brokerage rate would have dropped to 0.22% or $110.04. This means that I would have saved $30 in brokerage, but of course, this saving is offset by the higher trading price, which translates to $20 higher for 2,000 shares in order to reach a contract value of $50,000. So, there is actually a small saving of slightly more than $10 including GST. While coming from a viewpoint that if one is able to afford $50,000 a pop to buy or sell 2,000 DBS shares, the $10 extra in brokerage may not mean much, but still it is a good knowledge to know about. The same story goes at the crossover point at $100,000. Assuming if I am waiting to buy 3000 shares of Jardine C&C, it does make sense to buy at $33.34 than at $33.33. For 3000 shares at $33.33 would mean my contract value is $99,999 and the brokerage works out to be $220. However, trading 3,000 shares at $33.34 would mean that the brokerage is $180.04. After accounting for the higher trading value and GST, the savings again works out to be slightly more than $10. This, again, is quite insignificant compare with $100,000 in contract value. (Based on my self-programmed excel software, the difference comes to a little more than $12 for both cases.) This ‘trick’, however, is useful only for high-priced stocks, such as DBS and Jardine C&C. For lower-trading price stocks, they are not useful because it takes a sizeable quantity to reach a contract value of $50,000 or $100,000. Just allowing 1-2 cents increase would magnify the trading value so significantly that a lower brokerage rate would not able to offset the difference in the trading value.

Overall, it is a good mathematical knowledge to know although I do not think the brokerage fee alone will move customers from one broking house to another. Furthermore, they can only happen for ‘special-case’ situations like trading in DBS or Jardine C&C shares. Most of the time, they do not apply. Generally, clients only move due to a confluence of factors.

All that said, it is important that our actions to buy or sell stocks should not be based on penny-pinching decisions of one cent. After all, brokers and remeisiers do work hard in their professional capacity to service clients. Certainly, they deserved to be paid in some ways. What we should be more concerned is whether the stock that we want to buy or sell can move in our favour. That should be the more important factor to look at.                 

Disclaimer – The above pointers are based on the writer’s personal experience. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned stocks. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 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.

Posted in DBS, Jardine C&C, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance | Tagged , , , , | Leave a comment

Don’t make the same mistake that I made 2 decades ago

For the calendar year 2018, the Straits Times Index (STI) retreated from 3400.91 at the close of Year 2017 to 3068.76 at the close of Year 2018. The absolute fall for the calendar year 2018 was more than 10%. It had defied the predictions of many analysts. Many of them were generally bullish at the beginning of Year 2018. By today, on the 1st day of trading for Year 2019, it retreated another nearly 30 points, -29.87 (to be exact). Surely, many players have been slowly but surely cashed out of the market as the market retreated. Even those with cash to spare were not willing to get into the market. Just as we know in economics, there were more sellers than buyers for year 2018. That, precisely, was the reason for the market to fall.

With each market fall, it flushes out some players. The unfortunate thing is market retreats and advances are never linear with time. They are never exactly predictable, especially over a longer of period of 6 months and longer. Market volatilities are due to the changing political, economic and social conditions that are thrown out into the market from time to time. Frankly who is able to predict what an influential political figure will say or act next week or next month or next year. Most of the rise and falls were due to some smart Alex out there trying to anticipate the moves of these people before things really happen. Unfortunately, time and again, it almost always sucks in new players and throw out some others as the market rise and falls in a falling trend. Many players, who were unable to take the market gyrations would have cashed out of the market, and stayed in cash in hope to fight for another day.

Let me say this. Market gyrations are not an easy thing to stomach, especially for those who are very watchful of the market movements. In fact, many are willing to take losses and leave the market instead of riding through the market ups and downs as sentiments get hazy. Along with the falling market, I am quite sure a number of us have this floating thought “I would rather take a small return of even 1-2% to protect my capital than to see my capital dwindling with time.” That precisely became the guiding principle that drives their action. So, instead of staying liquid after cashing out, they choose to put the money into more certain investments. They gladly put their money in longer term plans, such as fixed deposits and Singapore government bonds and even insurance plans that can only yield rewards (if there really are any), at least, 1, 2 years or even a few years down the road. I mention this because I happened to see some posts in social media lately. Some people seemed to have decided to take this course of action. Frankly, this was exactly the mistake that I made 20 years ago.  

STI was retreating for several years. It hit 805 in Sep 1998. It sprang back to 1500 by end 1998 and then to 1500 by end 1999.
STI from January 1997 to December 1999

For at least 2-3 years leading to the peak of the Asian Financial Crisis, the market had already been retreating. As a rookie who had never seen a long-drawn market retreat, I was holding out very hard in hope that the market would turn around. It never did. It was down and down. Then, suddenly, the stock market fall started to gain momentum, as the Asian Financial Crises started to bite. That was the time I caved in and sold out. Instead of holding the much smaller sum in cash, I put them in fixed deposits. That appeared to be the wisest thing to do at that time. Between a steep falling stock market and a high fixed deposit (FD) rate of 5%, it was almost a no-brainer to put the money in FDs. The reason for the relatively high rate was that liquidity was drying up as the neighboring countries were battling to stamp the falling value of their currencies due to massive currency outflow. Along with the falling currencies, stock markets were retreating at an accelerated pace. My naive thinking was this – one year is not a long time, and hopefully by then, the market would be calm again for us to re-invest. Meanwhile, we should let the money work hard for us by channeling it to an avenue that yield the highest possible return.  

It was a wrong move. While the cash was still in the FDs, the market was making a huge turn around. For the next three months (or around end 1998) after the bottom, it gained 50% (In fact, 50% was an understatement) – see diagram. What the hack! I had effectively traded off a 50% gain within 3 months for a mere 5% gain in a year down the road. From the low of 805 in September 1998, it zoomed all the way to around 1500 by the end of 1998.  Then, it gained another 50% from 1500 in the year that followed. So, by end of 1999, it was at 2,500, recovering all the losses that it incurred in the previous few years.

What were the lessons here? Cash is king during a crisis. So long as it is not invested, cash remains as cash. Cash is no longer the king when the crisis is over. Count ourselves lucky if we had sold out before a huge market fall. But we need to re-invest at the right time to make significant gains. In other words, we need to be right twice, to time the selling correctly and to time the buyback correctly. When it is too late, just ride through. It’s a matter of the survival of the fittest. In fact, consider to invest more if you have the means. You may have the last laugh.

Disclaimer – The above pointers are based on the writer’s personal experience. They do not serve as an advice or recommendation for readers to buy into or sell out of the market. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 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.

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Are we over yet?

Just two days ago, the FED raised the interest rate by 25 basis points to 2.5%. Going into year 2019, it is expected that there will be another two more hikes. In a scenario when global stock markets have already been battered for some time in the last few months, this certainly drove the final nail into the coffin. Stock markets all over the world tanked further. Even the apparently strong Dow Jones (DJ) also succumbed to selling pressure. For the week, from 17 December and 21 December, the DJ fell more than 1600 points or close to 7%.

As of today, it appears that there are more uncertainties compared to, say, 6 months ago. Most of the major economic blocks are, in one way or another, entangled in some kind of political and economic tussles. Amidst the impending interest rate hikes, there are at 5 issues that are still in a limbo and they appeared to have higher propensity of tilting the balance negatively than it would positively.

The growth of the US economy

Although the US economy is still showing signs of growth and low employment figures that are enough to trigger FED to increase the interest rate, and even signalling another two further hikes in 2019 to achieve its long-term sustainable target, there are concerns that the accelerated pace may tip the US economy into a recession. This can happen very quickly. The Dow Jones stock market reacted just that, declining more than 1,600 points for the week. Perhaps, the low experienced this week may not be the lowest for now. The sentiment can remain weak for some time.

The trade war between the US and China

Many of us probably have under-estimated the impact of this trade war when it first started. When two largest economies are at logger-heads, the other smaller economies suffer. The initial tit-for-tat tariff war imposed by the US and China seemed to have gone a step further, involving the detention of important key personnel and the race to attain 5G network capability. As the trade war starts to widen in its extensiveness and depth, an easy resolution is not going to be come by so easily. On paper, or at least in the short term, US appears to be at the upper-hand due to the significant trade imbalance between the two countries. But this may not be so in the longer term. For one, the next administration may not hold the same view as the current one, but the Xi-administration in China may be a long eternal one. In the meantime, perhaps China is adopting a ‘buy-time strategy’, awaiting an internal implosion to happen. In fact, it appears to be so, given the number of departures in the Trump administration. In the meantime, China is extending its reach to fill up the voids left out by the US in the Trans-Pacific Partnership (TPP) and the ‘one-belt-one-road’ initiative. These have longer impact for putting China to become the centre of influence in years to come. But, of course, in the short term, it is still a question of who will enter the ‘threshold of pain’ first. Still, whether the balance is going to tilt towards China or US, it would not be favourable for the trade-dependent economies and the global stock markets. In all likelihood, most of the smaller economies have direct exposures to the two economies. 

The Brit-exit

Comparatively, our exposure with UK is relatively small, but still it is one of the major economies in the world. The more worrisome situation would be the contagion effect that can trigger any one of the 27 countries to move out of the EU. In fact, there was a precedent in 2011. Greece was literally bankrupt and, in a way, appeared to almost bring other economies, such as Portugal, Italy, Ireland and Spain along with it. The STI at that time retreated around 15%.  

Denuclearisation in North Korea

While some efforts are being carried out, the full nuclearization at the Korean peninsula appears to be still a far-off reality. In fact, just recently North Korea threatened to re-start the nuclear programme unless US lifts off the sanctions (ST 4 November 2018). While US wanted a full nuclearization before lifting the sanctions, North Korean insisted the lifting be in lock-steps with the denuclearisation effort.  It could be a deadlock situation that takes a long time to resolve. Although we have practically no exposure to the North Korea economy, we cannot fully eliminate the fact that other surrounding countries such as Japan, China and South Korea may get involved in this long-drawn tussle as well.

The recent spat between Singapore and Malaysia

While most of the people on both sides of the causeway wanted issues to be resolved amicably, there will always be some discomfort among investors whenever border issues were brought up. So long as there are these teething problems remaining unresolved, it would not be good for the stock market, whether it is SGX or Bursa Malaysia.

In fact, there are more, such as the on-going tension in the middle east and the over-lapping claims among many countries around the South-China Sea.  In the midst of climbing interest rates, liquidity can evaporate very quickly, and that is when we start to experience huge falls in the stock indices as seen in the Asian financial crisis and the global financial crisis.

While I may have unconsciously painted a dark picture for the stock markets, I personally believe we should not completely extricate ourselves from the stocks. I am not saying that sentiment would turn for the better soon. In fact, I believe it will possibly continue to get worse going into the next year (please take this as a personal opinion) or, at best, remains the same. Right now, there are no apparent catalysts to trigger huge purchases. The tough investing market, in the last few months, have elbowed out many marginal players out from the world stock markets, leading to an approximate fall of 20% fall from their respective peak positions.    

As of today, stock prices have come down to a more comfortable level to nimble. Unless there is a huge dividend cut across the board going forward, especially among the blue-chip counters, dividend yield has reached a fairly attractive level. From my personal experience, stocks are one of the best inflation hedge instruments if we take a long-term view. That said, it is also not the time to go in a big-way as if there is no tomorrow. Amidst the increasing interest rates, liquidity could evaporate very quickly and stock prices can fall off the cliff in a free-fall fashion. So, the key is to take a long-term view and nimble slowly if you believe that stocks have reached a reasonable level for purchase.     

Brennen has been investing in the stock market for 30 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.

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The importance of financial goals

Until a few days ago, stock investment has been extremely daunting. For several months, the stock market has been relatively unidirectional – downwards! Even with the run-up in the last few days, the stock market still lost more than 10% since the beginning of the year, and more than 13% from the high made around April/May 2018. So, if we have been a net buyer of stocks in the last 6 months, it would be a big miracle if these stocks are unscathed by the end of last week.

But then, the question is should we stop the whole buying program and leave the stock market until the bull returns. If we did so, we would have probably missed sharp u-turn of about 5% this week.  Actually, in this complexity of the daily ups and downs belies only two uncertainties – we do not know how exactly how low is the low and how high is the high. If we have known that 2 critical points, then things would be very clear, and our decision-making process is just as easy as snapping our fingers. We are, after all human beings, and we do not know what lies ahead.

Given this backdrop of the uncertain future, we need go back to the basics of why we are buying stocks for? It is not known of the financial objectives of the readers out there, but for me it is extremely simple – I want to build a formidable portfolio in this life journey (Sorry, I am not able to provide specifics). So, whether the market is going up or down, I will have to ride through somehow. I am certainly not clever enough to sell everything when the market is at the highest point and buy everything back when the market is at its lowest. Even if I can do it for one or two cycles, I am definitely not able to so repeatedly for many cycles in my whole life journey. But that said, there is still a need for some buying or selling criteria so that we are not caught buying at the highest point and selling at the lowest point.

If we look at the whole investing journey, we are in effect, a net buyer. Everyone of us starts off from zero, and our objective is to have some stocks at certain point in our life-time no matter how dicey our objectives can be. With such a down period like in the last 6 months, are we going to give up our journey towards our objective? Think of this investing journey like a car ride. From the starting point to the destination, the journey is infested with many disruptions such as traffic lights, pedestrian crossings, floods, road accidents and even animals dashing across roads. With these disruptions, do we give up the car journey? Certainly not, right? In fact, during such trying time, when everyone is not ready to buy stocks, it may be a good time for us to accumulate stocks at discounts. Just 6 months ago, many were complaining that stock prices had become extremely high. Over the past 6 months, the market and stock price have become a lot cheaper. There were  a number of stocks offering discounts for those who had missed the cheap sales years ago. In fact, very often, we regretted in hind-sight that we did not buy ‘such-and such’ stock when it was at ‘such-and-such’ price some time ago, right?

With proper financial objectives, then the picture ahead would become much clearer even if that destination is still far, far away. No matter how difficult the market is going to be, we still continue to invest and head towards the final objective. Every step that we make is one step nearer to the objective. Just like in a car journey, we need to have clear objectives to define our route of advance in our investing journey. (I cannot imagine what it would be if we do not know even the final destination in our car journey.) From so many observations in my decades of investing, the best way is to detach ourselves from the ever-changing economic environment. In fact, the stock market tends to move ahead of the real economy. So, if we try to use the economic outlook as a guide to make our buy or sell decisions and to wait for uncertainties to become certain, we often end up missing the best purchase of those stocks. If we are convicted to reach our financial goals, and stocks values have emerged themselves, then we should go ahead to buy them. Procrastination and trying to time the purchase at the best price often lead to missing the boat because the u-turns, as seen in the last few days, can be extremely sharp.  After all, stock prices tend to move upwards in the long run. Even we did not buy at the best price, we are often rewarded if we keep the stocks for sufficiently long time. That said, make sure we are holding fundamentally good stocks.

Join me in the youtube video for more.

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.

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Brennen has been investing in the stock market for 30 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.

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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.

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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.

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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.

 

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