Key Learning from Millennial Money

I find this an undervalue book and thank God it pops up in front of me in the bookstore.

Once you have set the investing strategy, stay with it. Don't switch to a new one just because the original one has not work for the last year or two.

Value over Growth: Low EV to FCF, low Price to Cash Flow, Low Price to Earnings, Low Price to Sales, low EV to EBITDA

Quality over Junk: High ROIC, high ROA, high ROE, high Interest coverage

Follow the Trend: High six month momentum, high nine month momentum, low volatility

Follow the Leaders: High stakeholder yield, high shareholder yield, high dividend yield, high buybacks

In the book, it teaches you the right mindset which is to have a long term investing strategy. Do not let emotions dictate you during the both market extremes of Greed and Fear. Stay invested in all circumstances. I have managed to invest during the Greece crisis and Chinese stock crisis but I failed to continue my average down of OCBC. I was buying OCBC in large amount during 2015 (if I recall correctly) from $9 to around $10.4+. When the trend turn, I did not exit but continue to buy more at $8+. However, I did not buy more when it dropped to $7+. I switched out when the price recovered to $9+ and in 2017 July is $10+. Sometimes, it is better not to do anything. During the oil crisis, I was too terrified by Swiber and Ezra, I failed to buy McDermott when it dropped to $4. All these are real fear, you do not know when is the lowest and you are afraid to throw good money at the bad ones.  

Apart from rules based investment strategy, you need to evaluate the business model and whether the business has Moats. I was discussing Foot Locker with my mentor and he felt that this company does not have economic moat and it is like a distributor business model. He will rather buy Hour Glass, at least the assets are ROLEX and other branded watches. Hence, I will recommend to use Moats, SWOT analysis and understand business positioning other than looking at the financial numbers.

Investing is fun and it requires a holistic approach to acquire strong businesses for your better future! 

Investment Commitments

I am reading my M5 textbook and I finally come across something which is useful. Ops.

The Know Your Client states that in order for a financial advisor to make a recommendation, he needs to understand the client's investment objectives, financial situation and particular needs. From there, the financial advisor needs to carefully curtail a plan for the client.

This brings me to Investment Commitment. Are you able to commit money to invest on a regular basis? If yes, then you can harness the advantage of dollar cost averaging. I had an unfair advantage because since 2009 onwards, I was the Constant Cashflow Investor. I have strong net income (in my context) which comes in on a monthly basis and I will use them to acquire financial assets. I have a high saving ratio as I live frugally. I am quite proud of how I allocate resources most of the time. Hence, it is possible for me to get out of a "bad" investment (temporary having paper loss), I can choose to continue to buy more and average down the cost. Using this approach, I have seldom lose money and able to either i) grow the portfolio by acquiring more or ii) take dividend while waiting for stock to rise back up and reinvest to compound it further.

I will soon become the second type of investor because there is no income from employment. This is the Lumpsum Investor. They do not have constant income and they rely on an one-time investment, park it there and forget about it. Then how should this type of investor plan the investment game? There are a lot of experts who will recommend going in based on stages. For instance, pump 20% first, if it drops another 10%, pump into another 20%, so on and so forth. However, will it be a concentrated move or diversified investment? This is a tough call. I will think that if you do not have a strong stock broker to work with or you do not good investment skills, just buy ETF. Stagger the lumpsum into the ETF and reinvest the dividend. You should be able to get above average returns. Does this mean I will go into ETF? Yes, if I cannot get above average returns. Alternatively, I will use ETF to invest in countries such as Russia and China. 

Now I am going back to my studies, continue reading page 63 of 519. What a way to spend my Friday evening.

Low Interest Rates Dilemma

Low interest rates will create a dilemma. Will you accept a low return in order to protect your principal? Will you take on higher risk to achieve higher return?

Pay attention to costs

In a low interest environment, investing expenses will have a larger impact in eroding your gain. For example, a mutual fund with an expense ratio of 1% of net asset value each year which uses the expense for marketing and paying the employees. This 1% will have a big bite into your return if your return is only 3% than if the return is at 10%. At 10% of return, it is only 1% of your gain. At 3%, a third of your return goes to expenses. Prior to investing in a mutual fund, consider all fees and expenses as well as its risks which will be highlighted in the fund prospectus. Digest the fund prospectus because it is your money.

Real Return

If inflation is low, even when you are earning based on low interest rate, your real return will not suffer. Real return is what your money earns after taking inflation into account. Based on 2015 Singapore's inflation rate which is exceptionally low, the real return should produce the same return during high inflation years.

Own dividend paying stocks

You should not just buy highest yielding stocks for dividends alone because high yield stocks will have a certain level of risk. However, as part of portfolio management, you need to have some defenders which we will recommend the blue chip stocks with a yield of 4% and above.

Buy high-yield debt

High yield debt is also known as "junk" bonds. There is a reason why they are called junk because you are buying debts of companies which are on the brink of insolvency or with credit issues. You need a high return to justify for the high risk and bet that the companies can survive long enough to pay back your principal. Alternatively, you can consider owning a slice of this junk bond market through an ETF can serve good way to increase your dividend yield as part of your overall investment portfolio.

Invest in foreign stocks and bonds

Foreign companies and governments present the same credit issues and challenges. You need to analyse before parting your money. Speak to us if you require assistance to construct a suitable portfolio based on your risk appetite. All investing strategy will require you to measure your ability to suffer loss in a downturn. You need to question what are the factors which can blindside your judgement, taking into consideration low interest rates and rising inflation.

What should I do when the stock price drops?

What should I do when the stock price drops by 30%?

Knowledge is a very powerful tool. Investing requires knowledge and familiarity of the companies that you choose to plough your hard earned money into. This may be a good reason not to own too many stocks but invest within your circle of competence. You need to have a diversified portfolio but not beyond what you can handle.  For instance, I am visiting Breadtalk during breakfast, lunch and dinner to observe the crowd, the service level and menu. I will try to understand the price level and when they will increase price and give promotions to drive sales. You need to understand the companies you want to invest in thoroughly and its external factors such as competition and macro factors.

Know nothing about the company

I was having this chat with my mum this morning and questioned her why she bought InnoPac. I glanced through the Annual Report which was mailed to the house and immediately threw it aside. My mum explained back then there was a bull run and every single stocks had increased two to three folds and only this stock was like a few cents. Then they put their money into it and never see it grow past their initial investment. When I asked her what does the company do? What was the business behind the company? She just shrugged. Cheap does not mean the stock is good. My friend's girlfriend asked me whether she should buy penny stocks. I said," Unless you know the companies well, please don't throw away your money and buy ETF instead." As she is not into trading but want to invest thinking penny stocks are less pricey and can buy more of it with her monthly saving. I was burnt in the past with penny stocks and one of them was de-listed. It is in my portfolio to serve as a gentle reminder.

When the stock price is going up is not good enough reason to own the stock and keep it in the portfolio. Likewise, when the stock price is going down is not a reason to sell as well. In the short run, the market is a voting machine and in the long run, the market is a weighing machine. Firstly, you need to understand the business of the stock that you own.

Determine whether it is a good company

The company's success is related to the stock's price. It is imperative to focus on the long term and look at future earnings instead of historical earnings. You need to understand that profitable companies in today context may be future losers because new competitors will come into the market and erode their margin. Do you still remember Nokia handphone? It used to be very profitable until the smart phones came along. Apple replaced Nokia and dominate the market for a few good years. Apart from the business, you need to question what is the competitive advantage the company has over the competitors and whether the economic moat is deep and wide enough to fend off other competitors. With all these in mind, you just need to be patient and wait for the price to drop until it reaches a level with sufficient margin of safety. Then you just need to buy more of the company's shares. Margin of safety is important to protect you from unforeseen factors which blindsided your judgement.

Volatility in the market

Volatility is good for the market. After the meeting in Doha failed, the share price dropped and the very next day, the share price recovered. Stock market price movements are nothing to be concerned about. You should be happy when there is volatility in the market, especially when the stock price drops. Mr Market is presenting a discount to the price and it is a great opportunity to snap up this bargain.

Warren Buffett said: “Price fluctuations are there to provide opportunities to buy wisely when prices fall sharply. At other times you would do better to forget the market and pay attention to the operating results of companies."

You should not focus on the price but focus on the fundamental of the business. You should only sell the stock not when the price drops by 30% but when the company's business has deteriorated and it is an irreversible situation. You need to remember that you are a long term investor and not a short term trader. Seat back and collect dividend!

Rebalancing

Rebalancing is a powerful strategy

Rebalancing is the process of buying and selling to bring your portfolio back to your target allocation. Your portfolio's components will change overtime due to market forces, some will do better than others, those that done well will take up a higher percentage of the portfolio. You need to readjust to bring the portfolio back to the original balance. Rebalancing is about risk management to ensure that your portfolio is not dependent on a single asset class to succeed or fail. If your risk profile has change, then you need to revise your asset allocation according to risk appetite.

Rebalancing helps you to reap the full rewards from diversification, by scaling down on your winner, you will free up your resources and reposition them to your laggard. Rebalancing helps to remove the psychological factor of investor in the market cycle.

How to Do That?

Step 1 Set your target portfolio mix

Firstly, you need to determine all you asset classes and fix on the investment styles which will lead you to your investment goal. For instance, Jason has $100,000 to invest. He decides to invest 50% ($50,000) to stocks, 20% ($20,000) to bond, 10% ($10,000) to gold and remaining 20% ($20,000) to cash. This is the opening balance and he will like to remain in this portfolio mix.                          

Step 2 What is the difference?

Compare your target component to your present component. Then determine where your investments are not performing. Do you have a larger stake in a riskier company stock? Then consider your sector exposure, this is to ensure you will not have over exposure in particular industry. Then look at your investment to understand which one has performed the best. Continuing from previous example of Jason, at the end of the year, his stocks has grown to $75,000 , his bond has drop to $15,000 , gold has drop to $5,000 and cash remains the same. Total portfolio value is (75,000 + 15,000 + 5,000 + 20,000 = 115,000). The percent of stocks to his total portfolio values will be approximately 65%, bond to portfolio value will be 13%, gold will be 4% and cash will be 17%.

Step 3 Readjust

Then it is time to bring components of portfolio which has grown and direct the money to the investment which have not.

In this situation, Jason needs to sell his stocks and bring it back to 50%, so he need to sell to a level of approximate $57,500. This will bring some of his cash position to 20% which is $23,000 and the rest will be used to purchase additional bond and gold.

When do you need to rebalance?

You should conduct a thorough check on your portfolio once a year but only rebalance when it is not within your target. For example, you might rebalance when your allocation of stocks has exceeded 60% before you need to make changes. Hands off investors can set a higher limit by another 10% relative to their targets.

Costs of Rebalancing

During rebalancing, you need to cater for transaction costs to execute and process the trades, there will be commission, stock exchange fees, and taxes. For mutual funds, costs will include purchase or redemption fees. This will incur time on your side and if you engage a professional investment manager, you will incur administrative and management fees. If there is an increase in transactions, over the long run, it will affect your returns.

Strategies of Rebalancing

The portfolio can be rebalanced on a time-only strategy, it can be rebalanced daily, monthly or yearly basis. The second strategy will be on the limit of portfolio, you can predetermine rebalancing threshold such as 1%, 5% or 10%. The third strategy is to combine time and threshold. Rebalancing with dividends, interest payments, realized capital gains or new contributions can help investors exercise risk control and reduce the cost of rebalancing.

Conclusion

Rebalancing helps you to maintain your desired original asset allocation, allow you to fine tune according to your risk profile and remove emotions during investing.

Multiple Sources of Income

The problem in Singapore's school system is they do not teach financial literacy and entrepreneurship. In the past, it was about rote-learning, trained in a specific manner to gain employment in accordance to the demand and supply of the nation.

Why do we need Multiple Sources of Income?

Never place all your eggs in one basket and employment has shifted from iron rice bowl to present day contract work. Even though your contract with your employer is a permanent job basis, your work is good as your last. The harsh reality is for PMET (Professional Manager Executives and Technicians) to face a more challenging landscape to gain employment when their age hit 40 and beyond. Due to globalisation, you will be competing for jobs with the world. Jobs here today may become obsolete in a few years time.

Currently, most of the employers in my industry is shifting to Kuala Lumpur in Malaysia. This spells for disaster in a few years time. By then, I will be in my early 40 and maybe considered obsolete by others.

Instead of whining, I need to use my present income and resources to create other sources of income.

1st Source of Income - Investment

In my previous post, I have already mentioned from my portfolio, it will create two types of investment income. The first type is dividend income. The second type is capital gain income. This is on the basis that your stock price goes up and you can sell your shares for a higher value. I am still learning about investment, reading up on books and attending courses.

2nd Source of Income - Residential Rental Income

Rental Income can come from the extra room in your house which you can rent out for $600 per month or you can leverage on a second house and rent it out. There are a lot of factors to consider, extra stamp duties, rental income taxation, whether your rental income covers bank interest. Currently, the SIBOR is increasing and rental income is decreasing. I will look into this aspect 

3rd Source of Income - Internet Business

The biggest advantage of starting a business online is it's incredibly cheap. It gains access to wide audience and create scalability in your business. This is a source of income which I am trying to understand and venture into.

4th Source of Income - Coaching/Consultation
Do you have an area of expertise? You can probably use your area of interest and expertise to provide coaching to an individual, to groom the person and help him to maximize his potential. You can provide consultation to a business and provide consultation services to help the business grow through marketing, lean in processes and set up systems to be efficient.

Conclusion
The above sources of income are brief introductions and there are many paths to Rome. The bottom line is time and tide waits for no man, many of my friends took the leap of faith and pursue their passion. I am still hanging on to my comfort zone which will soon cease.

My Investment Journey 2015

It is another year which I have remained invested with aggressive approach, putting all my money into the stock market. Through trading, I understand the greed and fear in me. There was a trade on ThaiBev which I took an leverage position which was beyond my comfort zone and the market went in the opposite direction. Furthermore, I was outstation in Vietnam during the transaction. I knew that I do not have the capability to buy the shares, it was just a trade and time was against me. I was terrified, selling my SGX shares to acquire the shares of ThaiBev.

I experienced a valuable lesson during the China market crash. I was monitoring CSOP A50 ETF 2822.HK when the euphoria sets in. All the aunties and uncles were buying the shares and suddenly the law of gravity kicks in. The shares were falling and I went to acquire a falling dagger, hoping that it will bounce back up. I acquired with every drop in 10% until I ran out of ammunition. Then I tried to sell whenever it recovered more than each drop. Thankfully, I made slight profit from this. The lesson learnt is you can never buy in exactly at the bottom. I believe in discipline in investing as well and you need to have the vision to believe in what you are doing is right.

I was naive as well, listening to my stockbroker that the stocks will forever go up. His advise was to add more to the holdings. Nevertheless, the PE and valuation of the shares in Singapore is low. Now I believe that when I do my own homework and I am convinced of the business, I will not regret or blame others. I will blame myself only. I studied the financial statements of Prada 1913.HK and convinced to acquire the shares at $33 and subsequently at $30. Currently, the share price of Prada is $23.95. 

My current dividend income from my portfolio is a total of S$17,425 as seen below. 

Currently, I only have this path of passive income. I need to create multiple sources of income.

The path to financial freedom is amidst lots of challenges and I forecast that a passive income of S$100,000 per year is required for the family to achieve financial freedom. Probably, I need to scrutinize and reduce the expense drastically to achieve financial freedom earlier in life. Probably to live simply.

A difficult yet easy decision to make

Today I am trying to evaluate my portfolio with a good friend and he pointed out my portfolio is risky as Singapore is experiencing slowdown.Almost 90% of my stocks are in Singapore. Furthermore, my portfolio is already 10% below original value. I was thinking of a strategy to either sell all my OCBC and ThaiBev shares and reallocate them to IBM. IBM has been upgraded and target to increase from present share price of 138 by another 8-10%. I was thinking of taking a bet and maybe will bring my portfolio back to original value. Common stocks are subject to recurrent and fluctuations in prices, the possibilities to profit are way of timing and pricing. I should remember that an investor should not believe the day to day prices to make him rich. When you buy the company share, you own part of the business. From the fundamental analysis viewpoint, I need to understand the intrinsic value of the stock and constantly follow the quarterly results. In addition, I need to forecast the future earnings of the stocks. The most important fact about investment is investor is never forced to sell his shares. I should not be anguished by the fact that shares are dropping but rejoice that I can accumulate more at a lower price. I should concentrate only on my portfolio but not how much my friend has made. I should consider both the dividends and long term value of my portfolio. I should think for myself and not let others or market fluctuations tell me. I am in control of my emotional life and decide the based on the market price whether it is to my advantage to act on them. 

Conclusion I will continue to hold on to my present portfolio and trim down on GLP and Singtel, I will start to pump in future money on a monthly basis into IBM. In addition, I will set aside $1,000 each with my wife to purchase MTR for our baby's future education fund.