Thursday, December 18, 2008
YTD Returns : -10.44%
The market seems to have reach a bottom since Oct '08 as the portfolio value is not going down as fast as before.
However, hedge funds I owned have all suspended redemption till Jan/Feb '09. So, Jan/Feb '09 should set the trend for next year. If hedge fund redemption continue, I'm sure you will see more selling in the market.
This downturn have left me to re-examine my strategy. My intended allocation was to be 50% equities/alternatives and 50% in bonds. However, should I even be 50% in equities and alternatives as an asset class since I would be very comfortable receiving all the coupons from the bonds. The coupons payment would put the portfolio in the highest income bracket if it should be taxable as an individual. So, why am I in equities at all?? :-s
Power Point: Buffett on 0% interest rates
Warren Buffett emailed this note to the directors of his company, Berkshire Hathaway (BRK.B), Tuesday after he heard that the U.S. Treasury sold $32 billion in 4-week bills at a yield of 0%:
“This should be bullish for Berkshire. With great foresight, I long ago entered the mattress business in a big way through our furniture operation. Now mattresses have become fully competitive as a place to put your money, and sales will soon take off.”
Friday, December 12, 2008
Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to
eight of the market's sharpest thinkers and what they had to say about
the future is frightening.
We are in the middle of a very severe recession that's going to continue through all of 2009 - the worst U.S. recession in the past 50 years. It's the bursting of a huge leveraged-up credit bubble. There's no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it's all reversing right now in a very, very massive way. At this point it's not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we're having a global recession and it's becoming worse.
Click link for more.
Saturday, November 29, 2008
Thursday, November 20, 2008
Ignore the StockMarket Till February
By Andy Kessler
The Wall Street Journal Europe
20 Nov 2008
Down in the morning, up in the afternoon. Or is it the other way around? The schizophrenic stock market is tough to read. In the last year, the Dow Jones Industrial Average has briefly been over 13000 and below 8000, and the past month feels like the...read more...
Thursday, November 13, 2008
Is Now the Time to Buy Stocks?
By John H. Cochrane
The Wall Street Journal Asia
13 Nov 2008
The markets are chaotic. The S&P 500 is down 34% for the year, and 17% in October alone. Volatility, which measures how much stocks move unexpectedly in a year, is even more dramatic. It’s usually around 15%, but daily volatility in October was 75% on...read more...
Monday, October 20, 2008
This guy is Jeremy Grantham - The chief at GMO.
He is a well-respected investment manager and also a perma-bear.
But, his market commentary is always insightful and his asset allocation projection have been spot on for the past 10 years.
Anyway, below is the link to his recent market commentary.
GMO LLC Recent Market Commentary - Reaping the Whirlwind
Give it a read! You will not regret!
Wednesday, October 15, 2008
It's quite a good checklist to go thru' and I'm confident of my picks as I've gone thru' the company in a systematic way.
1) Does the company have any identifiable consumer monopoly or brand-name products, or does it produce or sell a commodity product?
2) Do you understand how it works? (REALLY..Understand)
3) Is the company conservatively financed?
4) Are the earnings of the company strong - with an upward trend?
5) Does the company allocate capital only to business within its realm of experise?
6) Has the company been buying back its shares?
7) Does mgmt's investment of retained earnings appear to have increased per share earnings and therfore shareholder value
8) Is the company's return on equity above average?
9) Does the company show a consistently high return on total capital invested
10) Is the company free to adjust prices to inflation (pricing power)
11) Are large capital expenditures required to constantly update the company's plant and equipment
1) Is the Company's stock price suffering from a market panic, a business recession, or an individual calamity that is CURABLE?
2) What is the inital rate of return on the investment and how does it compare to the return on U.S Treasury bonds (or whatever govt bond your shares are based in)?
3) What is the company's projected annual compounding return as an equity/bond
4) What is the projected annual compounding return using the historical annual per share earnings growth. (Remember to weed out outlier)
Friday, October 10, 2008
Major factors include:
1. Borrowing Cost
2. Lease Expiry Profile
3. Credit Quality
Those who have not locked in their borrowing costs will certainly experience problems. As forum members are probably aware, credit has tightened a great deal.
Case in point: First Ship Lease Trust was recently forced to downgrade their DPU forecast because their lenders raised the interest rate on FSLT's debt.
This depends on:
a. Lease expiry profile - the more spread out the leases, the smaller the effect of lease renewal; and
b. Existing rates being paid - if the existing rates are very low, renewing at today's rates may still result in a net increase.
This has been overlooked by many people investing in REITs, shipping trusts and high-yield funds.
For example, I posted on the old forum about Babcock and Brown Structured Finance Fund (nka Babcock and Brown Global Investments) almost 2 years ago:
I warned that many of the underlying investments were of "junk" grade. Fast forward to today, and many of the underlying loans have stopped payment. People who think BBGI can maintain its forecast interim dividend rate of 3 cents i.e. 6 cents a year are being optimistic to say the least.
I could also write about Mapletree Logistics Trust and their exposure to Fu Yu, but that would double the length of this post so I'll save it for another time. Suffice to say that Fu Yu is losing money big time. If they have to vacate their building, the lease agreement isn't worth anything, and MLT will have to find another tenant - at much lower rates. MLT's exposure to Fu Yu is about 2% of total rental so it's not huge, but the fact that they have this exposure at all smacks of insufficient due diligence when buying the building.
Wednesday, October 8, 2008
CEO --Chief Embezzlement Officer.
CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
BROKER -- What my broker has made me.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW -- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per share.
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.
INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.
PROFIT -- An archaic word no longer in use.
Tuesday, September 16, 2008
The Key takeaway :-
1) Diversify your investment. Don't put all into 1 or 2 stocks. Why risk it all on 1 or 2 stocks you can't even control. The management can do stupid things and its beyond your control. Whoever tells you to concentrate your investment and get rich? Warren Buffett? But he did mentioned that when he buys into a company, the first objective is to gain control and if not, he will get a significant stake enough to exercise pressure on the management. So, he had eliminated the factor that we small investors can't - direct/indirect influence on the management thru' his significant holdings.
2) Don't speculate, don't do short-term trading... but do monitor your investment at least monthly and rebalance quarterly or less frequently as necessary. In effect, this forces you to sell stocks that have run very high and buy into companies or assets that are underperforming but with potential to gain.
3) Please go and attend a course on understanding financial statements and buy some management books to read. Try to understand the management considerations of CEOs and you will know whether the company is operating good or not. Also, read up on management strategy ... at least try to understand what makes up competitive advantage, whether it is sustainable.
4) Debt level - this one is a killer for all companies (big or small). It is leverage and when times are good, it will be performing. But when times are bad, it will be disastrous.. So, monitor this one... In good times, when u see debt level too high... u will have to start thinking about what happens if the company cannot service or refinance its debt. Look at its interest cover, debt to equity ratio. Look at the annual cashflow and see whether the company is expending a significant of it on debt.
Monday, September 15, 2008
Yes, there will be investors who quote wisdom from warrent buffett or other stock gurus on the merits of concentrated investment and knowing your investment real well. That diversification is actually an excuse for ignorance.
But how many of these so called amateur investors think they are really in the class of the gurus? Unless they have proven themselves using a diversified portfolio that they have a knack for picking good companies (in which case, the overall stock portfolio would rise in value as well), they should not attempt to do concentrated investment.
Also, there have been numerous studies by private banks that a lot of entrepreneurs and CEOs have a bulk of their wealth tied to the fortunes of their companies (in the form of shares & options). As can be seen during the past few crisis, a concentrated holding (even for CEOs and chairman who knows their company and industry inside out) could not prevent the erosion of their wealth. In some cases, the company going bust (some internet companies, some banks) have allowed their employees to go from millionaires to zero-aire.
So, before you start having this fantasy that you are in the league of the investment gurus, please validate that statement first. Are you in that league yet?
For myself, I admit I'm not in the league of the gurus and to know I am not and to implement a safer risk-managed investment strategy will lead me to multiply my investment portfolio slowly but steadily.
Friday, September 12, 2008
Recently, Peace Mark of HK over-leveraged by pledging their shares in Sincere Watch to get a bridging loan to finance its takeover of Sincere Watch. No doubt the payoff would be great if it was done successfully. However, there were doubts over its ability to service the loans and since then, several banks have applied for a provisional liquidator to restructure the company with an objective to fufil Peace Mark's financial obligation to the creditors.
For individual investors, we hear cases of investors over-leveraging especially on property purchases as property loans are the easiest to obtain and most leveraged at 80% of property value. In good times, you would no doubt be rewarded as rising property prices will magnify your gains. However, when you are caught off-guard by the turn of economic events. You will be stuck with the financial obligations with the bank and might need to suffer huge losses if you do not have the cashflow to service the repayments.
What is an optimal level of leverage then?
The optimal leverage is to always assume a worst case scenario in your leveraged investments and determine whether you have the financial ability to service the repayments. In the case of property, the more prudent means might be your ability to service the repayments with your current income for a year if the rent income is not available for 1 full year.
So, as investors, we need to always keep in mind that while leverage is a good tool to accumulate more wealth, it can also destroy wealth fast. What we need to aim for then is to have an optimal level of leverage. No leverage is the safest but you will not be as effective in creating wealth as a investor who is leveraged prudently.
In my case, the investment portfolio generates dividends & bond payments and I used re-invest a percentage of it into my investment portfolio and another portion to service repayment of leveraged investments in properties.
Wednesday, September 10, 2008
It is easy read as it is not very technical but it gives you a good grasp of what to look out for in a business.
Along similar veins would be Peter Lynch's books.
So go ahead and pick up the letters or the book and start your journey into value investing. I am primarily a fundamental investor but rely on simple technical analysis to know the trend of the stock. Conflicting ain't it?
As mentioned previously in my blog, be critical of what is told to you when attending investment seminar.
Tuesday, September 9, 2008
Gold Coast lifestyle from Brett Clements on Vimeo.
Queensland, Australia - Seeing this clip reminds me of my fond memories there...
Really a wonderful place to stay for extended periods.
Oh yes, which brings me to my opinion of the Aussie Dollar. It has depreciated a lot against the USD ('coz of the USD dollar strength, the impending economic global slow down). Since SGD is pegged against a basket of currencies including USD. AUD have also depreciated quite a bit to SGD. The current price of around $1.17 is within the 5 year low of $1.15.
Assuming you have some cash for Fixed Deposit, you could place it in australian dollar to earn a higher interest rates than SGD deposit. If you have a timeframe of 2-3years, you can also enjoy the potential appreciation of the AUD against SGD when the global economy demands commodities for their growth again. It is a safe bet as economy cycle exists. Further, SGD is unlikely to appreciate so much against AUD or any other currencies as a bulk of our economy is export-related and MAS moderates our currency band to maintain the competitiveness of our export trades.
Warren Buffett's Investing Questions
Before Warren Buffett invests a dime, he asks:
- Is the company in an industry with good economics? That is, is it not in an industry competing on price?
- Does the company have a consumer monopoly or brand name that commands loyalty?
- Can anyone with an abundance of resources compete successfully with the company?
- Are the earnings on an upward trend with good and consistent profit margins?
- Is the debt-to-equity ratio low, or is the earnings-to-debt ratio high? Can the company repay debt even in years when earnings are lower than average?
- Does the company have high and consistent returns on invested capital?
- Does the company retain earnings for growth?
- Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that's not good.)
- Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
- Is the company free to adjust prices for inflation?
In short, he makes companies jump through a lot of hoops before he considers putting them in his portfolio.
Source : InvestmentU
Monday, September 8, 2008
Dividends: Between 1872 and 2002, stocks returned an average compound rate of 9%. Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested stock dividends contributed 4.8% - more than half of the total return. Favor a stock with dividends for this very reason. You'll get paid to hold a stock while the market takes time to recognize its value
Further, to accelerate your capital appreciation, you should re-invest the dividends. Buying into more shares of the investment using the dividends received will enable you to receive more dividends in future. This is how compounding works. This also utilizes Dollar-Cost Averaging(DCA) as you are buying into the investment at different prices.
This should be the strategy for anyone who is between 20-50 years old as you have time on your side for your investments to do its compounding magic.
The end goal would be to create a dividend revenue stream from the investments that you can live on by 60years old.
If you do not intend to pass all of your wealth to the next generation, then you could also opt to liquidate part of your investment as and when needed for high-ticket purchases or lifestyle aspirations. Though you will need to plan properly as this will reduce your cashflow from the dividends.
Tuesday, September 2, 2008
You bought into their story and buy thinking it's a steal. Only to have the very same analyst "downgrade/underperformed/underweight" the same stock a month later with a TP or SOTP of $2?
All I can say is "DO NOT TAKE THE REPORTS SERIOUSLY". The analysts with their CFAs and what have you are only as good as you and me. Their estimates are as good as yours or mine. Their ratings and price targets are moving targets.
So, what should you be trying to get from the reports? Well, they did their research and often have access to more in-depth information than us. So, they have nicely summarized their findings and present it with their point of view. What you need to do is ignored their point of view and take the FACTS and form your own judgement and price.
At the end of the day, you might be as "right" as them. But hey, at least you learn something and will progress your investment skills/experience rather than relying totally on analysts ratings/price targets.
So instead of listening to analysts, do your own research and ask the right questions, like these:
- Can the company rebound to its historic price-to-earnings ratio?
- Is the market undervaluing a company?
- Can it continue to generate healthy cash flow and earnings?
- Will it be able to pay dividends and interest payments on debt?
Monday, September 1, 2008
The more you save, the more you will have. Saving creates wealth; wealth attracts more wealth. Thus, it is said, "Money makes money!".Anyway, the Joseph Cycle is a good read for people who are interested in economic cycles and how it can help in stock investment. For those in a hurry, the gist of the book is in credentialing and validating the Biblical Joseph Cycle of 7 Fat years and 7 lean years. The Joseph Cycle equates to a 7 year bull and 7 year bear in the stock market. After which, Simon mentions that for most, we have only 2 opportunities within our lifetime to take advantage of these cycles. The beginning of the last bull started in 2001 and will end somewhere inside 2008. After which, there will be the 7 years bear from 2009-2015. Thus, the year 2015 will be the bottom as well as the next start of a bull and if we believe in the Joseph Cycle, we will do well to invest during the start of the bull and hold on till the end of the cycle, ignoring most crisis along the way. But he does mentioned that you can still invest even if it's a bear cycle as long as the stock is undervalued or a crisis present an opportunity.
My conclusion? Well, it means that life carries on and we still will have to stick to our usual investment philosophy of asset allocation. For stocks, buying quality companies at fair prices giving fair dividends. For mutual funds, just let it grow thru' the dividends reinvested (since the fund manager is supposed to be doing the stock picking for you).
Thursday, August 28, 2008
Issuer: United Overseas Bank Limited ("UOB")
Format: Class E Non-Cumulative / Non-Convertible Preference Shares
Offer: 10,000,000 Preference Shares (S$1bln) of S$100 each, expected to be split as follows:-
Offering of 8,000,000 Preference Shares (S$800mln) to institutional and other investors ("Placement") &
Offering of 2,000,000 Preference Shares (S$200mln) to the public in Singapore through ATMs (the "ATM Offer")
Option to upsize: 5,000,000 Preference Shares (S$500mln) (the Issuer retains the right to set the final sizing of the Placement and ATM offers)
Minimum Application: (i) Placement : minimum 500 Pref Shares / S$50,000
(ii) ATM Offer : minimum 100 Pref Shares / S$10,000
Fixed Dividend Rate: 5.05% p.a., semi-annual
Closing Date of Offer: 12 September 2008 (The Issuer reserves the right to close the book early)
Issue Date: 15 September 2008
Redemption: Perpetual with no fixed redemption date
Optional Redemption: Redeemable at the option of UOB
(i) 5 yrs after Issue Date ;
(ii) 10 yrs after Issue Date &
(iii) each dividend payment date after 10 yrs
Issue Price: S$100 per Preference Share
Rating of Issue: Aa3 (Moody's)/ A- (S&P) / A+ (Fitch)
Listing: Singapore Exchange Securities Trading Limited ("SGX-ST")
Depository: The Central Depository (Pte) Ltd ("CDP")
Governing Law: Singapore
Joint Books: UOB / HSBC
Wednesday, August 27, 2008
For me, I will stick to verifiable sources of expertise like books written by gurus whose primary activities are what they are writing about.. Example, Donald Trump writes about real estate, his business is real estate and everyone knows a substantial part of his income and networth is in business, not training. Or when Peter Lynch writes about "one up on wall street", this guy manages a very successful mutual fund previously, he retired Freaking rich.. He does not depend on the training session for income or his networth. There are so many verifiable gurus out there in your library or bookstore and it costs much less.
Anyway, below is a comprehensive feedback by bloggers of the various investment seminars out there. Go check it out before you plonked your money into the courses.
I am like many singaporeans trying to learn to trade by attending seminars since 2003 that sprung up like mushrooms. I would say I am cheated/mislead) by the seminar I attended. Basically the trainer go through theory but not really how to make money trading. After 4 years since 2003 I am still not making money, I find Trading is not a walk in the park and you can lose all your money as I have found out. I want to forewarn those naive singaporeans about those dangerous half-truth seminars where the trainer seems more a motivational speaker than a trader.
My criteria now for trading seminars is
1) the trainer himself managing a fund and has a verfiable track record
2) the trainer is not making most of his money selling seminars but from fund management
3) teaches trading systems not a generic bunch of options theory
4) Excellent post-seminar support and training, contactable
can offer a trading program that last months not just a weekend
(Trading needs not months but years to achieve proficiency)
5) Seminar attendents are making consistent profits from trading systems(Not trading theory) taught
This is good as consumers would have better alternatives to most mutual funds that underperformed the market with outrageous expense ratio. When it comes to investing, the lower your expenses, the better your return in the long run.
However, ETF selection is critical as ETFs that lack liquidity will affect your bid/ask spread (for short-term trading). With the lack of liquidity, the ETF provider might shut down that particular ETF and return your money based on the last NAV for the cut-off date.
Interestingly, Providend was in the news today for creating 3 portfolios comprising of index ETFs which lowers the expense ratio to around 0.5% per annum. Providend will then charge clients 1% of AUM (Asset Under Management). So, the clients expense ratio is around 1.5% per annum. This is equivalent to a mutual fund annual expense, just that Providend have assumed the role of the fund manager. This should be as low an expense as you can get for ETF investing unless you are doing it yourself thru' your own trading platform. If you are a DIY person and you know your investments, you can buy ETFs thru Philips and save on the annual expenses.
Providend is a company I admired for their story of bringing value to their customers. I subscribed to their belief of lowering expenses for their customers and not take anything more than what you are supposed to recieve as fair compensation.
A few years back, when I was selecting institutions to hold my investments, I had actually tried to arrange for a discussion with Providend. However, I was put off by the condescending tone of the "gatekeeper" and the way she tried to screen prospect on the phone. So, I did not arrange for a discussion. When I told my sister about my experience, my sister also commented that she and her husband was not too pleased with their experience with Providend as well. Maybe this is something that Providend should improve on.
UBS, Credit Suisse, DBS, Citi, Standard Chartered, UOB were all more welcoming. They do not screen their prospects on the phone. They welcome you for a discussion and from there, try to understand your financial situation and how they can help you. I guess what the gatekeeper must understsand is this... If someone dares to call your company for service, you can expect that they will probably be able to afford your service.
Tuesday, August 26, 2008
They panicked when they see losses of $3~4k in their individual stock and maybe a loss of $30k in their portfolio.
However, you should only sell if you feel the investment has served its purpose or the price is right or the business behind the investment does not have a compelling future.
One way to mitigate the desire to sell is to look at the percentage loss instead... so the $30k loss could only be a blip in your portfolio as it is only a 3% loss. If you believe the market returns an average of 6-10% per annum, then a 3% loss is not really a cause for alarm.
My investment portfolio is currently down 2.6% and that translates to a loss in the region of $200k, but I'm holding tight.. Are you?
What the.... I'm only worth this much....
Anyway, the link is here...
Thursday, August 21, 2008
Singapore's 40 Richest
Suzanne Nam 08.20.08, 11:00 PM ET
Singapore's export-dependent economy has been hit by the global economic malaise. With gross domestic product decelerating and inflation rising, the Straits Times Index is down 5% over the past year, and Singapore's wealthiest are feeling the pinch. Fortunes based on real estate have dropped significantly. Four property developers, including Chua Thian Poh and Zhong Sheng Jian, saw their net worths fall by 40% or more.
As usual, quite a handful built their fortunes with stake in property or finance-related industry. China's Rich List also is full of property and finance-related companies. To be a Singapore 40 this year, you need a minimum of USD$120 million, but to be in China's top 40, you need to have min. of USD$1 billion.
So, the size of the economy will directly reflect on the wealth of the company as a company is able to generate a very sizeable earnings just by concentrating on a single country. Thus, I feel investing in China banks and property firms will give me greater returns than being invested mainly in singapore-listed property and finance companies.
Further, USA currently holds around 30-40% of world's capitalization and China is tipped to overtake USA in 20 years time or less, that would mean more liquidity will flow into China related companies (with direct operations in CHINA). So the potential effect of that liquidity would be similar to what happened to USA when it became the de-facto market in the world by virtue of the size of its economy, most US finance & property companies have their capitalization multiplied liberally by the liquidity of the world's investors.
So, if you have a dollar today to invest, would you invest in a company with greater upside or limited upside? Of course, we are assuming you have a investment horizon of at least 5 years.
Tuesday, August 19, 2008
Tuesday, August 12, 2008
However, it might not be advisable to hold it to perpetuity since the redemption occurs in year 10 and after which you will be getting the SOR + 2.5%. I'm sure there will be good opportunities that pays better when the equities market turned around.
I got this details from my banker below:-
OCBC will be issuing a new Preference Share with details as follows:
Issuer OCBC Capital Corporation (2008)
Guarantor OCBC Bank
Total Issue size SGD 1 billion
Upsize Option If applications are received for more than 10,000,000 Preference Shares, the offering may be increased at any time on or prior to the Closing Date from 10,000,000 Preference Shares to up to 15,000,000 Preference Shares
Issue Price SGD 100 each share
Issue & Allotment 27 August 2008 (or such other date as OCBC Capital
Corp 2008 and OCBC Bank may decide)
Dividend (a) Fixed rate of 5.1% per annum for the period
from the issue date up to 20 September 2018,
payable semi-annually on 20 March and 20 September
of each year
(b) Floating rate per annum equal to the three-
month SGD Swap Offer Rate plus 2.5% for the
period after 20 September 2018, payable quarterly
on 20 March, 20 June, 20 September and 20 December
of each year
Optional Redemption On 20 September 2018 and each dividend date
thereafter, at the option of OCBC Capital
Ranking Rank equally with any preference shares or other
similar obligations of OCBC Bank or OCBC Capital
Corporation (2008) that constitute Tier 1 capital
of OCBC Bank on an unconsolidated basis
Voting Rights Holders of the Preference Shares will not be
entitled to attend and vote at general meetings of
OCBC Capital Corporation (2008), except in certain
Listing Listed and traded on the Main Board of the SGX-ST,
expected from 28 August 2008 onwards
Rating Aa3 by Moody’s, A+ by Fitch and A- by Standard &
Governing Law Cayman Islands law (Singapore law for the subordinated
guarantee and the subordinated note)
Minimum subscription amount is SGD 250,000/-
Monday, August 11, 2008
Have you ever walked into a bank with the personal banker selling you products (8% coupon payout- no risk! capital protected) that are on promotion with gifts? Did they even bother to find out what investments you have, your risk profile, time horizon? Have you asked them whether they are personally invested in these type of products or are they just following the sales script and promoting all the goodness of the products? Have you ever asked them do they need to meet a sales quota?
Ok, I may be generalizing here, but you get the idea.
When I first started looking for wealth management solutions, I turn to the private banks as they have always been the first choice for people to entrust their money with. From there, I begun to see the difference in the way they do wealth management. It is a process that is both systematic and holistic. I'm not saying that private wealth management is the holy grail but at least there is a system in place that will make it easier for you to build your wealth upon.
Wealth management is a long-life commitment and it is crucial that you find the right wealth management firm or partner for your wealth journey.
The figure was taken from a ML/CapGem Wealth Report and I found it quite reflective of the spectrum of wealth management service available.
As you can see at the rightmost spectrum, there is no wealth management solution presented and the advisory service is typically product-driven solution and transactional. I would classify most of the personal bankers and insurance agents in this group as they typically sells products and try to convince you that the product meets your needs. If you show interest in the products, they will give you a risk-profile form and ask you to fill in or vice versa. They will then give you the product. They are typically remunerated based on commission from the products or they have sales quota to meet, thus, they have to sell something to someone every day.
At the left end of the spectrum, you see the wealth management service is more advice-oriented and client-driven. It is commonly fee-based approach where you will pay a certain percentage (usually not more than 1%) for assets under management (AUM). But the bank will still earn any product sales charges and trailer fees it is entitled to and usually, it is a maximum of 2% and no more. Because they are already incentivize by the fee-based approach, they will be more interested in retaining your AUM and giving you good advice for your money, unlike the product-driven approach where commission is how the sale staff earns. The solution will be more holistic with the proper asset allocation and it will be based on your objective, timeframe and risk profile.
To get on the left most spectrum, you have two options:-
1) the private bank as they can spend more time with a client since the amount invested or managed is substantial enough to warrant more attention.
2) an independent wealth management firm (like the one I'm working for right now) who can offer similar wealth management solution to people who demand more from their wealth manager.
Saturday, August 9, 2008
Some financial advisors/bankers will tell you to buy products and they might not even know what a portfolio should consist of. However, if you have more than 50% of your fund invested into asian equities, buying another asian growth fund means you will take more risk and reduce returns should asian equities tanked. They are more interested in generating more sales from you. Stay away from these advisors/bankers.
Other advisors/bankers might advise you to invest with a portfolio approach, though they would just give you a few products and ask you to put more money in regularly to this portfolio. This might not be optimal since you will be mixing two conflicting objectives into your portfolio. Most of us want both wealth preservation and appreciation. Wealth preservation will mean your investments in the portfolio will generally tend towards more conservative investing but also with potential for appreciation. Wealth Appreciation will mean your investments need to be more aggressive and you will be considering more of the returns. When you mixed this two objectives in one portfolio, it's unlikely you will find an investment that fulfills both at the same time.
A better approach might be the core-satellite approach used by private banking clients. The Core Portfolio will have your Wealth Preservation Objectives and consist of investments that fulfil this criteria. It might be your typical 60% bond, 40% equities asset allocation (which historically have served investors well). The Satellite Portfolio will try to fulfil your Wealth Appreciation objective and have investments that are more aggressive or with your views that it might outperform the market. These investments are usually investment themes or major trends you wish to take advantage of like water/energy/infrastructure. Though it could also be a company shares that you believe will appreciate in the near term.
A core-satellite approach allows you to maintain a significant amount(eg 80%) of your fund in a wealth preservation portfolio while the balance (20%) invested in a wealth appreciation portfolio. This takes into account human tendency to want to outperform the market and constantly meddling with the investments. With this approach, you can fiddle with your satellite portfolio and try to minimize the fiddling on your core portfolio (apart from the rebalancing). And if your aggressive portfolio does not do well, you will not be financially devastated as well.
In a core portfolio, most people will probably be using Passive investment like index funds/etfs to mirror the market returns. Passive investing means you believe in the Efficient Market Hypothesis and you just want to replicate the market returns instead of outperforming it. Active investing entails funds managed actively by fund managers that are trying to outperform the market. In active investing, you believe that you have some advantage over the other participants in the market place and is likely to outperform the market.
In my portfolio, I have both active and passive investments in my core portfolio as I do not believe that all markets are efficient. In developed markets (USA, UK etc), it might be considered a Strong form of Efficient Market Theory as information would be disseminated efficiently to all market participants and thus, by the time news reached any market participant, the price of the asset will have efficiently factored in the value of the news. In developing markets, that might not be the case and there could be a semi-strong or weak form of EMT in play. This means there might be significant knowledge that will not be reflected in the price of the asset efficiently and there are some who can arbitrage in this market (hedge fund managers or proven gurus like Mark Mobius of Templeton Fund).
So, it is good to know your preference and thoughts on investing and then design your portfolios. A good advisor/banker will also be able to profile you and advise you on your portfolio accordingly.
Friday, August 8, 2008
Assumed the role of the CEO of your company, define your vision, plan your strategy and execute the plan. Hopefully, you will steer your company from a mom-and-pop shop to a SME and finally to a listed company.
As a CEO, you need to find your funding by selling your vision and plan to your prospective shareholders. So, who are your shareholders? Your family is a good start. Now, what should be in the plan?
1) Shareholders and Exit Strategy
Draft out an agreement to indicate the share of the fund allocated to each member and the redemption strategy. The easiest and most direct is by the amount of money contributed into the company and withdrawal will need to be a majority consensus. This reduces conflict as the shareholders are taking a risk putting money into your company and should be rewarded for it on a pro-rated basis.
2) Fund's Vision and objective
Share with your shareholders the wealth management plan. Your vision might be to have every shareholder become a millionaire with a final fund size of $XX million. Your strategy might be to adopt Modern Portfolio Theory approach with an investment time horizon of X years with a targetted return on investment of X% and a withdrawal strategy of 4% annually. Tell them the likely investment portfolio composition as well to draw out any concerns. Address the risk tolerance of each shareholder and moderate to an acceptable risk level so you can refine your portfolio.
3) Communication Strategy
Define how you will want to communicate the company's performance to your shareholders. Would it be monthly, quarterly or yearly? What should be included in the report. For a start, a half-yearly report is good as you will not be rushed into making financial investment just to show some results.
Your company needs key personnel to run and most probably, you will need the CFO (Chief Financial Officer), CIO (Chief Investment Officer). Usually, it will be you acting in all the 3 roles or you could have outsource the CIO to someone else (Eg, financial advisor, banker). The CIO usually gives you advice and update on new investment opportunities. The CEO will need to work with the shareholders to decide whether to accept the investment opportunity. The CFO will need to effect the funds for the investment. Initially, decision making might include you making presentation to your shareholders to tell them the rationale for recommending an investment. This will force you to be accountable to your shareholders and indirectly, you will put more due diligence into checking out advice from your CIO.
The advantages of running your investment portfolio this way are:-
- More investment options will be available as you have more fund at your disposal. You might have read that Hedge Fund reduce the total violatility of your portfolio and it requires at least $30,000 for entry. If you have only $50,000, just investing in a hedge fund will skew your portfolio towards the hedge fund and leave little for your other investments. This will affect your total investment returns as your hedge fund occupies a large percentage of your fund. Or you could buy bonds to earn a stable income which is better than the deposit rates you get from local banks. Even an investment property is not out of the question, though it's advisable to setup a company if you are investing on behalf of your family. This is what I am doing for property investment.
- A consolidated portfolio with a significant fund size will mean your trusted CIO (financial advisor/banker) will develop a more significant relationship with you. In business, a company will do its best to service its best customers as it is afraid of losing significant revenue. Likewise, if you have a significant fund size, your CIO will be more interested in developing a relationship with you instead of a one-off transaction. They will more likely be trying their best to retain your assets under their management. Thus, they will not be so stupid to give you lemons that will make you move your assets out of their care.
- You will enjoy bargaining power in fees. Mutual funds have investment amount brackets and you can negotiate for it. Your time deposits in banks have amount ranges with tier interest, you can enjoy higher rates.
- Constant communication of the progress will enable all shareholders to meet frequently to own the investment decisions. It might also foster better family relationships since there's frequent get-togethers with your family.
- Maybe your siblings/parents are not as knowledgeable as you and they might have bought investments that are not suitable for them? Helping your parents plan for their retirement? Helping yourself build a better future?
Sunday, August 3, 2008
From there, you need to further refine your investment outcome for your individual investments within the asset classes of bonds and equities.
This is akin to what you would do every year with your supervisor. He/She will sit down with you and ask you to set your goals which must be :-
- Specific - Identify why you need this investment and what you intend to get out of this investment. Is it a theme you believe in? Or is this meant to be a core investment in your portfolio? Is it for capital preservation or is it for capital appreciation?
- Measurable - You need to have a benchmark to measure the performance of your investment. If not, you will never know whether your investment is performing as claimed. For example, if you are invested in an unit trust/mutual fund that is targeted at US Market and the fund is proclaiming a 20% annualised return. You need to get an appropriate index like the S&P500 index and compared against it. If S&P500 returns 10% Year to date(YTD) and your investment is returning only 7% after fees, you might want to re-evaluate your investment decision.
- Attainable & Realistic - If you expect a very high return on your investment but your risk profile and investment horizon indicates otherwise, you might want to reconsider whether it is really realistic to demand that type of return. Set realistic & attainable goals for your investment and you will not be forced to make speculative bets to achieve your desired returns. You will be more motivated when you achieve your target and you then set new stretch targets.
- Timely - Or rather the time horizon (timeframe). Your timeframe will influence your investment strategy. A short 1 year timeframe might meant your value liquidity for a forseeable future needs one year from now. Or the investment might be meant as a theme you believe will do well for this one year.
Now that you've found what investment to buy, how do you determine whether you should buy it and when you should buy it?
For all investments, this is a must do for me. I consider the macro outlook, risk reward ratio and then consider 4 scenarios for every investment. The four scenarios are 1) Up a lot, 2) Up a little, 3) Down a little and 4) Down a lot. Usually, I will consider it worthwhile to buy if it's not scenario 4 and the risk reward ratio is adequate for the risk I am taking. Kenneth Fisher's The Only Three Questions That Count is a good read.
For equities, I will further used fundamental analysis to determine whether an investment is of good value. I will go through the checklist in this book called "The New Buffettology" which tries to explain how Warren Buffet rationalise his investment decision.
When to buy? I will usually use simple technical analysis for this. I believe in Trend and you can't fight the trend. If it's a down trend, don't catch a falling knive. How do you determine that? Well, when the price is above the 200 day Exponential Moving Average (EMA), it usually signals an uptrend. There will be others who employed more indicators like RSI and what have you, but I have found 200 day EMA enough for my use.
Ok, I am done with explaining the 3 rules I employed when I do investment. With these 3 rules, I have been enjoying my travel on the highway with minimal bumps throughout the journey.
Friday, August 1, 2008
However, in the short-run, you better have some idea of money management and when to take profit and cut loss. In other words, a bit of active management is required on your part.
For the whole portfolio, an approach called rebalancing is necessary. Rebalancing means selling your outperforming asset class and buying your underperforming asset class. The rebalancing frequency often suggested is semi-annully or yearly as anything more frequent might not give you any added returns. This requires you to examine your portfolio asset allocation and "rebalance" your asset classes percentage back to the desired allocation percentage. This will shift your portfolio back to your desired risk-return characteristic.
Rebalancing, if done correctly, will force you to 'Sell High(sell outperforming asset), Buy Low(buy underperforming asset)'. It's a discipline enforced on you to take profit.
For individual invesments within the asset classes, you need to adopt a disciple of taking profit and cutting losses. This is because no one can get a 100% accuracy on his/her investment views. You might have done serious mental work on which investment might be the next performer but what if you are wrong? Are you going to stick to your investment and usually, you become emotionally attached to your invesmtent. Or when your high flying investment takes a 20% drop, do you think it's time to re-evaluate your decision on the investment?
A way to achieve an emotionless investing approach to taking your profit and cutting your loss is to adopt a trailing stop loss strategy. This requires a fair bit of active monitoring on your part. Whenever you buy into an investment (especially stocks), do a mental trailing stop loss strategy of 20%. This requires you to ensure that your investment never drops more than 20% off its highest traded price. I use 20% as it is within my comfort level and I do not get stop out so frequently. You will have to find a percentage you feel comfortable with, though anything below 10% is most likely detrimental to your strategy as you can see the annualized volatility for stocks is around 15%.
Yes, the investment might rally after the 20% drop, but what if you are wrong? The investment might languish in that trading range for a long time. There are so much investment opportunities out there, don't let a bad investment decision tied you up.
If you bought into an investment and your investment soared 50%, you still need to do a mental trailling stop loss. Should the investment drops 20%, you take your profit! This ensures you have a 30% profit in hand for other investment opportunities and not wait for the investment to drop further and reduce your profit.
Lastly, for whatever investment you made, you need to adopt a proper money management technique. Run your investment portfolio like you are a fund manager! Adopt proper position sizing by allocating no more than 5%(maximum) of your total investment value into any investment. This way, you can ensure that a 20% loss on any of your investment will translate only to an insignificant 1% loss in your total investment value.
You might argue that this also means that a 20% gain in any of your investment will translate to only 1% gain in your total investment value. Look at the BIG PICTURE! If you were a good investor and allocate 5% to every investment, you will have 20 investments in your portfolio. If you achieve a 20% gain in all of your investments within a 1 year period, your total gain for your portfolio will be 20%! Congratulations! You are on the same level as Warren Buffet who averages 23% on compounded annual growth. Just kidding, you have to achieve that at least 10 years in a row for any one to believe you are in the same league as Warren Buffett.
So remember, do not over-allocate and let one bad investment decision deciminate all your gains accumulated by other investment. In the long-run, you will be better off!
Yes, you won't get rich fast, but you won't be a pauper either.