Riding the Bull: September 2007

The picture above shows the famous bull that you can find in New York City which was taken in 2002.

Riding the bull in the equity market
The Singapore stock market has been relatively bullish this last week or so following the Dow's performance in breaking 14,000 points. The STI is also testing new highs at 3,800+ and news about the private property as well as HDB resale market has also grown significantly.

For my own personal investments, I suffered some realised losses because I had bought into a few stocks that were trading at relatively high levels prior to the August 2007 correction. So when the correction hit, I didn't immediately sell but waited about 2-3 weeks to get out of the under-performing stocks and bought into banks and oil and gas sectors selectively as these were available at reasonable prices relative to their dividends as well as their overall business.

My few picks are STI component stocks and have benefitted from this recovery into bullish momentum that sees them performing well above any fixed deposit, treasury bill or even the CPF 4% return on Special, Medisave, Retirement Accounts.

Riding the momentum of the market
Whilst it is challenging to consistently outperform the market, there are advantages to riding the momentum of the market if you have the experience and necessary temperment to invest in stocks and shares. The key is discipline, i.e. to invest only monies you can afford to lose and to have the patience to do a little bit of research into the companies of the stocks you are investing.

Investing money you can afford to lose puts you under less pressure. This is because when you invest using borrowed money e.g. on margin or using share financing, the interest costs eats into your gains and if you make paper losses, you may need to top up your margins as the value of your shares drops below the amount you borrowed. In addition, if you are a contra trader, that is, you buy and sell shares within T+3, you will also feel pressured to sell or buy back within this period to close off your position or risk suffering big losses should your decision be wrong.

A buy and hold strategy can pay off if you hold quality stocks that are undervalued. Of course, that sounds good in theory but how do we put it into practice? I do not have any magic formula on my own neither do I claim to be able to generate extraordinary profits. But so far my foray into investing in equities has yielded me realised annual profits of about 2 months salary on average in the last 5 years. :-)

I realise that reading helps you develop the type of mindset and approach to managing your own money. By continuing to invest in expanding incrementally your understanding of both stock market mechanics as well as investing psychology, you become more attuned to opportunities in investing.

Investment is about risk taking
Investing is inherently risky. There is no guarantee of making money and there are real risks of losing it all. However, if you are serious about growing your own retirement nest egg and to have a big say on WHEN and HOW you are able to retire, you should consider taking some calculated risks now when you still have a job, a stable income and your health.

By participating in the growth of markets, one can then grow our investments prudently while making considered investment decisions while balancing risk and return. There is no risk-free asset that yields a high return. To get a reasonable return (to me it is at least 2-3 x rate of inflation or rate of risk-free treasury bills) of at least 6 to 10%, I need to take on some risks and invest in the Singapore Exchange.

While I have been fortunate because my returns have been mostly due to blue-chips performing in line with the general economic conditions, I was also fortunate that I took that first step back in 2003, to learn to invest my own monies in equities (stocks and shares), treasury bills, foreign currency time deposits and plain vanilla fixed deposits. This is just a small fraction of the investment assets available but has allowed me to grow my savings at a rate faster than inflation.

Different paths but one similar destination
We all take different paths in our lives in terms of how much and how do we spend, save and invest our hard-earned monies. No matter how we want to live our lives, we have to recognise that ultimately, each of us has to take responsibility for our returns.

Decide what and how you want to achieve your own definition of financial freedom for the path is unique to each of us.

Be well and prosper.

Staying on course in equities

Why invest in stocks and shares (equities)
Investing in stocks and shares (equities) is not without risk. Prices of shares can go up and they can go down. However, one of the historical facts that most investment books will tell you is that over the long term of 20-30 years, investments in shares have generally beaten the rate of inflation.

Inflation eats into the purchasing power of our savings
In Singapore, recent data for August 2007 inflation rate or the Consumer Price Index shows an increase of 2.9%. This is the comparison against the rate of inflation in August 2006. It is not difficult to see from our own experiences of the increase in the prices of drinks in coffeeshops and foodcourts as well as increase in prices of groceries that inflation is happening in the booming Singapore economy.

One of the reasons I became interested in investing in equities was that it provided you with an investment asset that could yield dividends in excess of the bank savings rate of 0.25% or even treasury bills at around 2%+ or fixed deposits. The rate of inflation in Singapore is guaranteed to be higher than the 0.25% savings we are getting from our bank savings, hence, in order for us not to see our purchasing power decline, we have to look for higher yielding investments.

Advantages and benefits of investing in equities
The main advantage of investing in equities is that if the company is profitable and growing in its earnings, the share price will tend to rise to reflect its growth and prospects. In addition, if you invest in sound, well-run companies in businesses that are growing in tandem with the growing economy, such companies tend to reward investors with dividends and the discounted cash flows from its future earnings will be reflected in its share price.

Historically, if you had invested in the S&P500 for the last 20 years and benchmarked it against the rate of inflation, you would have easily beaten the rate of inflation from your investments.

When you invest in a company's shares, you are participating in the profits (and possible losses) of the company. The company works to make money for you day and night since management is there to oversee the operations and companies that pay dividend generate passive income even while you are working on your day-job.

Disadvantages and risks of investing in equities
In reality, share prices can go up and they can go down even if the fundamental business of the company is sound, it is profitable and it is paying dividends. For instance, the recent sub-prime issues arising from the US affected many blue-chip shares in Singapore Exchange even those that did not have much exposure to it as the US New York Stock Exchange and consumer sentiment about the liquidity crunch affected investors short-term expectations of share prices.

The STI dropped to 2900+ levels even when fundamentally the Singapore economy was on track and poised to hit the 4-6% growth estimates by the Government. Therein lies the risk of the stock market. As much as the prices of stocks theoretically are expected to reflect the future earnings of a company, it is also driven by investors sentiment and expectations of the fair value of these companies given all the various factors. Therefore, even if the Singapore economy is on track for a good performance and companies are on track with profit estimates, share prices in the short-term can fluctuate wildly and if you are strapped for cash and need to sell your shares to raise money to pay for your car or house loans, then you would have been hit very hard and made big capital losses on your share investments.

Investing in equities also requires some degree of understanding of the stock market and about stocks and shares and the company's business in general. However, if you are interested to become financially free, to grow your retirement nest and to be responsible for your own financial situation, then it is not a black box you should be afraid of!

I too knew little about the stock market until the Singtel initial public offer turned almost 1 in 3 Singaporeans into share owners. However, it was not until 2003 that I really got involved in managing my own money and actively investing in the stock market.

My track record has been reasonable as I managed to achieve 8-10% compounded annual grow rate in my returns over the last 5 years. It is not the Berkshire Hathaway standard but it beats the rate of inflation hands-down.

If you apply the rule of 72 to 8%, then my investments will double in value in 72/8=9 years' time. :-)

Decide for yourself
Before you decide for yourself whether you have what it takes to invest in the equity market. Do consider the following:

• Your risk tolerance
  
• Your investment horizon (time period)
• Your targetted rate of return
• Your own personality, knowledge and skill

No one can guarantee that you can make money in the stock market. There is a very real risk of losing ALL of your money investing in shares in any stock market, including the Singapore Exchange. You have to decide for yourself if equities are an appropriate asset class for your investment portfolio and then take action to participate in this market.

Remember, doing nothing or investing in fixed deposits and treasury bills alone is also risky. The risk comes in inflation eroding away the value of your savings. Investing in equities comes with a much higher risk that investing in fixed deposits and equities and you must know what you are doing. But there is no perfect investment that yields a high return and virtually no risk.

Whatever you choose, be well and prosper.

Speed: The power of market forces

Speed's energy is infectious
I enjoy watching Speed music videos because the four girls, Hiroko, Eriko, Takako and Hitoe were typically featured in very energetic dance moves orchestrated to their (mostly) high energy tunes. The two lead singers Hiroko and Eriko were and are very competent singers who could perform live to the energetic dance routines while carrying the tune. Most impressive!

Kinetic energy in stock markets
Their energy reminds me of the raw power of market forces that has been unleashed in global financial markets resulting in the STI being beaten again down even as the bears successfully win another day on the NYSE. My portfolio has also taken a severe beating and essentially I have turned into a long-term investor as liquidating my portfolio under such circumstances would not help me very much. It is fortunate that I have holding power and hence am able to ride this market crash well enough under the circumstances. But it has been a humbling experience to see the raw power of pessimism and reaction to negative news arising from new disclosures of the extent of subprime problems permeating onto the shores of all markets in asia.

The market moves downwards demonstrate how when the fear, doubt and uncertainty translates into real doubt, real fear and real certainty in real selling down the stocks resulting is such a depressed stock market even when locally our fundamentals remain strong with the Integrated Resort and Formula One races coupled with positive economic outlook being factors that the Singapore market has conveniently chosen to ignore: or at least the foreign fund managers punishing the market has chosen to ignore them.

Turn adversity into a positive energy by learning from it
The only sliver of a silver lining that arises from this meltdown has been to acknowledge the power of market forces to move up and down very quickly in a short span of time when the market conditions are right. Investor sentiment can turn so very quickly in a blink of any eye when bad news from subprime fed with fear, doubt and uncertainty about the nature and extent can sweep through not just the US but global markets to result in the bears winning the days and weeks. It has also exposed my own lack of effective knowledge and strategies to counter such moves by using different types of instruments to hedge or to mitigate the hit on my portfolio.

Learning from Speed
I take comfort from being buffeted by the stock market perfect storm through learning more about myself, my limitations as well as my own emotions even as market forces pummel and send the STI moving one way or another. I take comfort in listening to Speed and letting their infectious energy jazz up my day and to dwell on the positive and not on the negatives. For tomorrow is another day and if you hold steady to the fundamental principles of investing, i.e. to invest only money you can afford to lose, have holding power and have a clear investment objective, those will help you ride out the storm.

Be well and prosper.

Steady: Riding the Market Upheaval

Jpop Group Speed
The picture on the left is that of the jpop group SPEED that was (and is) arguably one of the most popular Japanese female pop groups of all time in terms of record sales. According to Wikipedia, during their time from 5 August 1996 to 31 March 2000, each of their 11 singles sold at least 550,000 copies. That is a massive number by today's standards.

What does Speed has to do with the recent market upheaval?
The reason why I brought SPEED into this blog post is because I was inspired by their single, "Steady" which one of my favourite songs from their album "Moment". Since I cannot read or speak Japanese, it is the title of the single and the word "Steady" that is relevant to you (and I) during these times where the recent market turmoil from the sub-prime contagion on the global financial and equity markets.

The gut-wrenching market moves has reinforced how you should be steady in your investment approach and strategy and your objectives of your investment portfolio. If you are in the Warren Buffet long-term investor mood and go for value-investing in shares of companies that has strong fundamentals, then you would have been relatively steady in pursuing your investment strategy. However, not many of us can remain steady to our original investment objectives when faced with paper losses on our portfolio. I can remember how many times I was so very tempted to liquidate some of my stocks amid the turmoil generated from the fear, uncertainty and doubt and coursed through the investment forums, market chatter and CNBC market reports. It seemed like the end of the word was nigh !

Steady as she goes
After these moves for the last two to three weeks, this week sees the market starting to work out the subprime issues as now analysts have flipped from their positions where they were questioning the depth and breadth of its effect on Singapore equities and flopped to saying that the banks were oversold as the central bank (MAS) was ready to inject liquidity into the market and that all 3 local banks (DBS, UOB and OCBC)'s exposure to asset backed securities affected by the subprime issue was negligible.

We are the market and the market is us
Again we are reminded that the market is a mis-mash of market players consisting the big boys, the retail punters and every Tan, Muthu and Abdullah who wants to buy, sell and hold stocks and shares who are affected by emotions, facts and news that breaks all the time.

Remember to evaluate what is your investment strategy? Investor or trader and act according to how steady you hold your beliefs (or not)!

Be well and prosper.

Fear, uncertainty and doubt in the stock markets

FUD in online forums
The recent turmoil in the stock markets sees some market players who spread fear, uncertainty and doubt through rumour-mongering and posting of views and opinions that aim to dampen sentiment and create the feeling that the whole market is collapsing and that you should short the market or sell if you are holding on to the stocks that appear to be going down.

In any market, you need to have a willing buyer and a willing seller who agree on the price and the quantity of the goods or services that they wish to transaction. The problem of a fast moving market where prices and moving upwards or downwards quickly is that our capacity for information processing lags behind the news and rumours that affect market participants' views on the situation.

Shortists (kateks) attack
Take these few days activities. The internet chatter on investment forums teams with swarms of people who take a bearish view that the stock market is going to collapse and they want to buy good value shares on the cheap. What some of these people do is that they will take the available news about the sub-prime issue affecting Amercian and European banks and insinuate that the same will happen to the local banks and hint that DBS, UOB and OCBC are not laying out all their cards about how the sub-prime contagion is affecting them.

In my view that is absolute bullsh** because all banks in Singapore are closely regulated by the Monetary Authority of Singapore and if any of these banks have significant exposures that affects the them materiallly or may impact the banking sector adversely, the MAS will have to step in with statements of fact and to boost up the confidence of the banking sector which they have done by talking about them being ready to inject liquidity into the banking system if needed.

The good, the bad and the ugly players in the market
Opposite views in the forums are welcomed but what irks me is when some of these rumour mongers have a vested interest (who is undeclared) and who use fear, uncertainty and doubt to scare the weak sellers into parting of their shares at firesale prices when such actions run against the fundamentals of the company and its business prospects. Such FUD is usually not supported by specific facts or figures but by allusions to possibility that something unknown is looming in the dark waiting to pounce on the unsuspecting investor.

The stock market brings out all types of behaviour in people: the good, the bad and the ugly. And where it comes to profits, the ugly behaviour can be so grotesque and mercenary that it really sickens me to the stomach.

Invest based on your own convictions and principles and remember that make decisions based on information and facts and not on fear, uncertainty and doubt!

Be well and prosper.

Investing vs. Gambling on the Singapore Stock Exchange

In my quest to achieve financial freedom, I frequently find it a challenge to separate between the thin line between gambling and investing. If you too invest in equities listed on the Singapore Exchange, you will find that there are the two primal forces at work within us whenever we make a decision to buy, hold, sell or do nothing in the market-- The forces of FEAR AND GREED.

Fear and Greed in the Stock Market
How do these two emotions work within us to complicate the already challenging decisions we make on the stock market? If you are an investor who is already investing in stocks and shares (equities) on the Singapore Exchange or if you are a newbie to the world of stocks and shares you will encounter these two emotions. They are part of our human DNA and to deny their existence is to deny our very own humanity.

The stock market as represented by the Stock Index, for instance, the Straits Times Index (STI), goes up and down according to demand and supply for the shares in a company. While the STI may go up or down or remain flat, the prices of the individual shares in companies also go up and down. In investments, what you want to do is to put buy shares in a company whom you think will rise in the future. The price of a share in a company is affected by many factors such as the company's profitability, its dividend policy, its future growth prospects, its fundamental business. The share price is a function of buyer's and seller's expectation of future cash flows either through capital appreciation (price of share going up) or through dividends.

Fear
Fear comes in because of uncertainty. No-one can completely predict how the price of a company's share will rise or fall in the future. Hence, when the price of a company's share goes up, you fear that you have missed out on capital gains when you did not buy its shares earlier. Conversely, when the price of a company's share goes down, you fear that you may be buying at a price that will fall in the future. This fear is very real and good investors are those who recognise this and invest based on their objectives, risk profile and their knowledge and understanding.

Greed
Greed comes in when you hold on to a company's share when it is going up and up and you want to sell at the highest price you can possibly get. Greed also sinks its jaws into us when we see the price falling but we cannot get ourselves to cut loss and sell the shares because we think it will eventually rise.

The combination of these two emotions make investing in shares an activity that is very close to gambling because we are trying to time our entry and exit of the price of a company's shares. We are basically taking a bet on how prices will move based on fundamental analysis, technical analysis and sometimes based on pure luck.

I too am victim of this gambling mentality to gain short term gains on the stock market. If you read personal investing books, most of them advocate an index fund approach. This is because experience has shown that only a handful of professional fund managers or investors can consistently beat the market or the index return. Hence, unless you are the calibre of Warren Buffet or Peter Lynch, you are better off doing regular investment into a low cost index fund.

However, you will find that the thrill of participating in SGX by punting specific stocks plus the added emotions of fear and greed can make a very potent combination.

How do I overcome these two emotions
To invest safely and not succumb to the gambling mentality of short-term gains, it is important to consider the following principles:

1) Determine your investment objective
- what is your investment objective for buying and holding shares of companies listed on SGX?
- what is your targetted returns and over what time horizon

2) Determine your risk profile
- what type of companies you pick will be affected by your approach to risk
- do you prefer blue-chip stable companies with established dividend payout or high growth small cap companies

3) Determine that amount of money you can afford to invest (and potentially lose!)
- investing in the SGX is not the same as a fixed deposit or treasury bill
- you can potentially lose ALL of your investment monies as the price of a share could possibly drop to zero should a catastrophic event happen e.g. major fraud, collapse due to business calamity, natural disasters etc.

4) Know yourself
- know that you also have fear and greed inside your DNA
- beware of what these two emotions can cloud your investment decisions

Fear and greed will always be with you. Learn to deal with these two emotions by having an investment objective and plan to achieve your targetted returns.

May you be well and prosper.