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Saturday, October 10, 2015

"Oct 15" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
China Merchant Pacific
ST Engineering
Stamford Land
Accordia Golf Trust
Ho Bee Land
Fraser Centerpoint Trust
CapitaCommercial Trust
IReit Global
Nam Lee Metals
Silverlake Axis
Dairy Farm*
Total SGD

It's another month that goes past which means another round of updates to the portfolio. The main purpose of updating the portfolio is to see how things have played out over the course of investing and to serve a reminder to myself where the end goal is.
The market for the past few days have rebounded quite aggressively since we hit a 20% decline not too long ago while everyone was starting to prepare for the bear territory.

It appears that these concerns are unfounded, at least in the meantime because everything appears to look “rosy” now despite the global outlook warning that there will be a few countries that will enter recession within the next year or so. This is probably the reason why staying vested in the market has its advantages and you can see why. In fact, experts believe that the best returns for investors are made within the first 5 days of the bull run. If you missed those runs, your returns would be reduced substantially. I guess we’ll just need to wait for another round of opportunity in the market which could take weeks, months or even years, no one knows.

For my own personal portfolio, I’ve benefited quite a bit from this rebound in the market.

First, I made a quick trade in the month by buying DBS and OCBC and then divested them a couple of days later for a gain of about $5K. It is a decent amount of profits but is not something which would dramatically change the outlook of my overall portfolio. Banks are always going to be cyclical in their nature of business and their performance will be closely tied to the global outlook of the economy. I think there could be another chance for a re-entry should the market head southwards but if not then it’s fine. Banks are not part of my long term strategies to hold them in my portfolio.
I also accumulated ST Engineering during the recent correction as I think it represents some value over the long term, especially since they are trading at a 5 year low in terms of the PER. With USD strengthening over the course of time, there will be a positive contribution to the company as around one-third of its business are denominated in USD currency.
Lastly, I also trimmed my position in Vicom as I feel that they are trading at a fair valuation given the moderate outlook of the vehicle and non-vehicle business for the next few years. Earnings are still resilient though growth outlook may be somewhat muted from here. I’ll be interested to see where they are heading in the next couple of quarterly earnings report and what the management is going to do about it before making any further decision.
For all the transactions listed above, you may refer to the "Recent Transactions" for the details.

Oct has been a very good month and something I will be proud of.
While the equity networth was never the focus of my attention, the portfolio for the month of October has increased quite a bit to $345,540 (+5.1% month on month; +38.2% year on year) due to the recent rebound in the market. It is also a big moment on a personal term because just a couple of months ago back in Aug I mentioned I was a couple of yards away from the goal. It appears that it is always better late than never.
With still 2 months to go before we conclude the end of the year, I will look to make a strong run into the final with a traditionally strong Nov and Dec still to come. The warchest portion has now gone back into 33% so I will pounce again on any chance of pullback in the market.
What about you? Have your portfolio recovered in the recent rebound in the market?

Thursday, October 8, 2015

Reducing Activities That Aren't Important In Your Life

One of the biggest beneficiaries I've discovered since becoming a parent is that I have a much greater willingness to pay for time and how I treasure the feeling of togetherness as one. The feeling is mutual for now, though I'm sure as he grows older, he will have time for his own activities and friends and will probably be spending less time with us.
This reminds me a story of a person who has planned many activities on his agenda only to find out later that he is unable to complete most of them. The solution for this is simple. He simply needs to reduce on the activities that aren't important in his life. Even so, there needs to be some sort of priority that he can organize.
Focusing on a few activities would have done wonders in our life. This is the act of channelling our energy into achieving a desired objective. Focused behaviour doesn't just happen by chance. It requires a lot of preparation and work to be done before hand. We need to look at our own behaviour and adjust our way of doing things, which could become awkward at start because we are not used to. In fact, in our everyday life, we are trained to multi-task so much that we have become servant to it.
Take my situation for instance. Since I treasure time and togetherness with my family, I had to think of ways that could push my case towards going home on time after work, cancelling any frequent dining appointments with friends and sustain it over long period of time. What this leads to in the end is the idea that strikes me with the possibility of cloning myself so I could enjoy my time doing other activities that matter most to me. Things will change and my priorities would have shifted over time but that is another case for another time. What I am trying to say is if we focus on things that matter to us, we are able to achieve great things which we are not able to if we diversify on doing too many things because of limited resources.
This is probably the reason why great innovators and entrepreneurs like Steve Jobs and Mark Zuckerberg wore the same shirt every day because they would rather spend time thinking more important things in their lives. The same can probably be said with bald people. When you reduce some of these activities which are not important, you can have time to think about things that matter.
Losing focus can mean going into multiple directions towards multiple goals and as a financial independence wannabe, it is the last thing that I wanted to happen to myself after working hard for a good number of years on the goals. Maybe the next time you have too many things on your plate, think again about organizing your priorities and get things done in an ascending order that matters most to you.
What about you? Are you focusing on things that are important to you?

Tuesday, October 6, 2015

Dividend Investing - Revisited

I would like to draw a reference post by GV which I thought he did really well in explaining the truth about dividend investing which many had overlooked.
Readers of this blog would know that I am a proponent of cashflow investing which is a subset of dividend investing if you like to see it that way. The main difference between dividend and cashflow investing is that the former can pay out dividends through the cash they burn while the latter pays out dividends through their operating cashflow which can sustain for as long as the company continue their service.
Let me explain the accounting terms behind this idea.
When a company pays out a dividend to shareholders, the cash portion is usually reduced by the same amount being paid. In fact, investors should know that dividend payment is part of a cashflow from financing activities under IAS 7 which will decrease the amount of cash retained in the books. Since retained earnings are reduced, the NAV of the company would decrease by the same amount. This explains why the moment the company goes ex-dividend, the share price would usually fall by the same amount of dividends paid in the short term. This is the bulk of what GV was explaining in his post but in a less technical terms so that beginners would understand.
So far, we've only been talking about the theory, which will unfortunately not always happen to be the case in practical and real life scenario. Sometimes, we may even see a company share price increase the moment they went ex-dividend. The reason for this is simple. People are bullish and are driving up the price by going long on the company. This is the psychological portion of investing that we may never truly understand unless you are an expert in understanding human behaviour.
Going back to what I have discussed earlier, this is precisely why I enjoy cashflow investing so much because for as long as the company is able to sustain its dividend payout through their operating cashflow earnings, you will always have buyers that will come in and drive the share price up eventually.
Contrast this with a company that backs itself up with a low dividend payout because it has to preserve cash to grow the company. The latter has to depend very much on the growth story of the business which most of the time has been priced into the share price. Companies such as Raffles Medical Group, Sarine, Osim and Super came to mind. The moment these growth stories slow down, the share price would plunge right down to what gravity would do to the company. This is somewhat different from investing in companies such as properties and banks because the latter would usually be valued at mark to market, which makes the valuation more relevant to their book value than earnings.
Dividend investing is not a bad strategy, but I think it is important for investors to understand the concept of cashflow investing because that's where the thin line will draw between a successful and average investors.

Friday, October 2, 2015

A Quick Summary Valuation Guide for Developer Companies‏

Many developer companies have long endured a depressed valuation for a number of years, due to poor market sentiments from the market and tightening of the government policies.
As investors, we know that these developers are currently trading at a significant discount to their book value, a metric which is key to valuing these companies. People used to get interested in these companies since they are trading at a discount to their book value but the market environment over the past few years has forced investors to consider a much higher margin of safety, such that many are looking at deep discounts to their book value.
I have appended a summary table below using key metrics such as P/E, P/BV and Dividend Yield for those who are interested to invest in some of the developers listed. There are some notable key areas which I wanted to highlight below especially to new investors which I think is key to making decisions whether or not to invest.
This metric measures the price to earnings multiple of the company.
It is a direct inverse correlation to the earnings yield and it measures how long the company needs to earn before investors would break even for the price they pay.
It is important to note that the number you see above includes the earnings from fair value gains of the property which the company typically does the revaluation exercise once a year. What this means to investors is the multiple could fluctuate and skew the result from one way to another due to these large revaluation gains/losses that arises from the properties. Since the trend is many developers have recorded fair value gains on their books, it is important to consider if they will take impairments for the same in the future, especially if global outlook is uncertain.
Savy investors would strip out these non-cashflow generating gains and focus on core earnings that trickle down right to the operating cash flow. This should help the investors see the picture clearer and make better decisions and comparisons since what we want from these are cash and not accounting earnings at the end of the day.
This metric is most commonly used to value a developer since they are related to the assets (and gearing) the company owns relative to its equity.
It is important to note that the book value is somewhat different from the revalued net asset value (rnav) because there are some developers who does not opt for the revaluation under IAS 40 when the options were rolled out. An example of such companies are City Developments and Stamford Land. Having said that, most of the developers listed above have opted to go for the IAS 40 so their assets are mostly marked closely to market value, which makes up the rnav that many analysts are talking about.
Dividend Yield (%)
The dividend yield listed above are inclusive of special dividends issued to shareholders, either because they have an exceptionally good year or if they have divested some businesses most likely to their Reits. An example of such companies are City Developments and OUE, both of which owns the Reits arm in CDL-HT and OUE-COMM/OUE-HT.
In this regard, it is important for investors to consider if the special dividends are recurring in nature or if they come from a one-off divestment.
Final Thoughts
Developers are not well known for their high dividend yield simply because their business model requires them to constantly keep cash to further grow the assets of the company.
If you are an investor who prefers income to be distributed back to you, you should be more comfortable with Reits because their business model allow them to distribute most of their earnings back to shareholders in the form of dividends.
This may confused some of the beginner investors because it appears that latter is more attractive but what essentially the developers do is to reinvest the excess earnings back into the business immediately, which can generally be much better if they are able to find a higher IRR business than you do with the dividends reinvested. Of course, the recent market weakness has made the share price of the companies rather volatile but the underlying fundamentals should not change.
For anyone who are interested to invest in developers, please do more research on your own as guided above and treat the appended table as a form of reference and not face value.
What about you? Do you prefer Developers or Reits? Are you a growth or income investor?

Tuesday, September 29, 2015

The Psychological Problem of Waiting

Earlier in the month, I wrote an article (here) about how I was going to utilize my funds in a bear downturn market scenarios. Since then, the market has somewhat presented me with an opportunity to add on some of the great counters at a rather attractive price which I excitedly add on into the portfolio. I'll share some of these buys when I finish consolidating and start to write my October portfolio in a few weeks time.
For me, the strategy was simple.
I had a strategy in place to how I am going to approach the bear market and focus on it. I had earlier shared some of these strategies which are exclusively mine and could be different from any individuals (disclaimer) but the message was clear. Have a plan, sit back and enjoy the show.
In summary, I have appended my strategies as follows:
1.) Research on the companies in your watchlist way before hand.
2.) Focus on companies which exhibit strong earnings and balance sheet and are trading at attractive valuations.
3.) Ensure to phase out the purchase such that liquidity will not remain an issue.
4.) Continue to monitor on personal incoming cashflow (monthly salary/bonus/dividends) for additional liquidity buffer.
The Psychological Problem of Waiting
For some reason, there are always a group of people who are going to wait for a better entry price and play the waiting game. I have no issue if that person has a plan in mind or perhaps are waiting for an even better valuations but for most of the cases these are usually not the case.
The problem of sitting in cash and just waiting for a "better" entry is really about the psychological mind games that isn't going to work out well for the investors. We are not assuming a full binary decision of all-in versus all-out in this instance but the problem with mindless waiting is that you as investors are never going to be comfortable in the market for as long as the market rises or falls.
Every investors are looking for an opportunity of a market correction so that they can purchase the stock at a cheaper price for the same valuation. But when the market does go down, it usually tempt the investor to change his strategy by shifting the goal post further and further away from the reality. The longer this plays out, the harder it is for the investors to make a decision to enter the market. This happens a lot that when stocks fall, people think that they might as well wait because stocks are going to get cheaper the next day.
When we were at the peak of the market not too far away from today the past couple of months, it is easy to look back on the depth of the market crisis and think how we are going to deploy the strategies when opportunities arise. However, when we come to real time, everyone realises it isn't an easy decision and history would prove again that people will chase after stocks only when it moves up and trading at higher valuation.

What about you? Are you one of those who finds it difficult psychologically in the market?

Sunday, September 27, 2015

Do You Know Your Reits Well Enough?

I discussed a lot on the Reits sector towards the end of previous year (Click Here) and then updated them again early this year (Click Here), especially on the sensitivity risk towards rising interest rate environment, and thought it is a good time to review the sectors again after some serious correction during the past couple of months.
Many people who looked at Reits often do very minimal research on the companies because most of the times they are looking at trailing facts. This includes looking at trailing earnings and dividends yield, current gearing ratio and present price to book value and then they start making decision based on that. The forward looking portion is often ignored, which is what successful investors should be projecting and analysing on, especially with information that are not so apparent to retail investors.
For instance, I wrote an article here in the past regarding how gearing is a function of both the numerator and denominator. Many investors had considered gearing as a single function of liabilities and thought that as long as the company did not take on more debts, the gearing would not be affected. This is obviously not the case as we know that any devaluation of the property assets due to increasing interest rate environment would directly result in a correlation increase in the gearing ratio.
Income Support
Another information that are often ignored and not so apparent in the financial statement is the utilization of income support. Take Viva Industrial Reit for instance. I had readers who expressed their interests in the Reit because they are offering a double digit yield at 10.5% and decent discount to NAV. What the investor doesn't realize is there are often an expiry with these income support and when it does, the yield would drop massively to the surprise of the investor. A savy investor would usually monitor the NPI yield of the properties and ask question if the dividend yield distributed is higher than what the properties can yield out.
When I recently added Accordia Golf Trust and Ireit into the portfolio, one of the consideration was whether the freehold properties they have on their books are generating competitive Internal Rate of Return (IRR) as compared to shorter leasehold properties (such as Industrial Reits) which are generating higher IRR. This is tricky because both have their pros and cons to consider about.
Now, we know that based on the theory we learned in school, we need to choose a project that can generate a higher IRR for as long as present value is bigger than 0. Think about it this way. As a Reit manager, you make an acquisition for a 30 year leasehold property that can yield an IRR of 10% per annum. This acquisition is likely to be yield accretive immediately and can boost distribution to shareholders. Another Reit manager make an acquisition for a property that are freehold but only yield an IRR of 5%, which are not immediately yield accretive but can work out to be good long term investment simply because the assets are held to infinity of time.
It is hard to argue which is the better acquisitions because the former yield a higher IRR in the beginning and you assume that the manager can make a similar astute call on making another acquisitions that yield the same IRR when the existing leasehold expires. As for the latter, the assumption is since it is a freehold assets, it doesn't matter that it is yielding a lower IRR because time will eventually increase your returns with higher predictability.
Final Thoughts
I think Reits still present a good opportunity at present environment if you know how to decipher the code that is not so apparent to many other retail investors.
The key is to look out for hidden values and consider the risk reward ratio over the long run since we've seen some of the share price has corrected significantly from the peak. And when market mispriced them once again due to fear factor of weakening global economy, that's when we should be ready to pounce on them.

What about you? Do you know your Reits well enough?

Tuesday, September 22, 2015

Is The Story of Emergency Funds Overrated?

I recently read an article online about a person who has invested all his funds into the stock market. From his past articles, it appears that he doesn't keep any funds for emergency purpose and I get the impression that neither does he think he requires them at this moment. He is young, single and probably doesn't have any strong commitment to anything other than himself. There were a couple of people who have attacked him with his choice and action being naïve, but I think the overly strong reaction appears pretty strange to me given that these people does not know anything about his background.
We have all by now heard the mantra advice that it is advisable to keep 12 months of expenses in your emergency funds in case unexpected things cropped up. There are further discussion about whether it is preferred to keep 3, 6 or 12 months of either expenses or income and the discussion can go on and on. The truth is, these choices are down to each individual preference, objective and circumstances and decisions should be made independent without subject to any comparison made to another individual.
Let me give an example that illustrate my own case.
Many people would have considered the fear of retrenchment from their job as a subset of factor for consideration when thinking about emergency situation. This will vary differently from one individual to another, depending on the industry or role one is working at. Maybe you are currently working in a cyclical industry, where the likelihood of your company being affected by the economic cycle is pretty high. On the other hand, you can be working for a government sector where the likelihood of a retrenchment is pretty low.
For my own case, I consider the probability of this particular factor when deciding on my emergency funds pretty low due to my role that I am engaged in. I won't entirely rule out the possibility but the chances are slim. For instance, my role in the company entails preparing for the budget for the company. When the company exercises its discretion for retrenchment, they are usually projected at least a year in advance and I would be leading the project for this from the finance representative. What this means is that I would have known in advance and be better prepared than the others should I am one of those included in the lists and I can start preparing for it sooner than many other people that were informed at a later stage.
My purpose of illustrating this is simply to highlight the difference in individual's circumstances in life and there could be many factors to consider at before one start to think that the 12 months of expenses are the holy grail of emergency funds before you can start doing anything else.
We can extend the discussion into how well you are covered for a H&S insurance, how easy you are able to access any liquid funds, how many credit cards you might have, or how many rich godparents you have adopted. Recently in the blogosphere, there has been a rather hotly debated topic about young employee transferring their money over from CPF OA to SA in order to obtain higher returns in the long run. Monkey see monkey do. The point being that every individual is different and I don't think there is a hard and holy grail rule that needs to be followed simply because everyone else is doing the same.
Final Thoughts
My very own definition of emergency funds are funds that should come unexpected and is something that I am not able to control. In this case, I have excluded the possibility of retrenchment because this is something my role allows me to have a higher degree of visibility in advance than many others. I can't say the same for things related to permanent disablement which I deemed as unpredictable. The same goes to unexpected illness coming from my family. In any case, my projected emergency funds for myself are estimated at around 8 months of expenses based on my own discretion of what I think emergency should entails.
If you are confused about how much to keep for your emergency funds, there are plenty of advise out there you can seek. The general rule of thumb is within 3 to 12 months of expenses and you can take reference from that, assuming everything else equal.
But more importantly, I think it is even more crucial to consider and look at your own options and truly understand what you might need or do not need (or have) in life in order to advance better. That does not entails you keeping 12 months of expenses in your emergency funds and things will turn out to be fine. It just means that it allows you to react better when unexpected things hit you while your mind is in a blank.

What do you think? Are there any hard rule of thumb to keep as emergency funds? Do people monkey see monkey do for emergency funds as well?