Sunday, 22 February 2015

All I Want Is To Invest Wisely

I work in the engineering industry. Many of my colleagues and friends know that I blog. However, not many actually read my blog. It was only recently that some of them feedback to me that my blog is a little too difficult to comprehend. If I could distil what they probably want to read, it would be this: "All I want is to invest profitably". However, since nobody can guarantee that investing would be profitable, the next best thing would be "All I want is to invest wisely". To understand how you could invest wisely, first of all, let me share an analogy with you.

Being an emperor is both easy and difficult. The difficult part is to select a loyal and competent prime minister to run the affairs of the state. But once you have done this, the rest is actually easy. All you have to do is to let the chosen prime minister do his job without any interference.

Investing is likewise both easy and difficult. The difficult part is to select a loyal and competent "prime minister", which could be a fund manager if you invest in unit trusts, or an investment strategy if you invest in equities directly, or both. Fortunately for most people, even this difficult part has already been done. Numerous literature has shown that index funds (i.e. funds that invest in component stocks of an index) outperform most of the active fund managers. To further leverage your advantage, you could employ the investment strategy of either Dollar Cost Averaging (DCA), which means investing a fixed sum of money regularly, or portfolio rebalancing, which involves re-allocating money invested in different asset classes on a regular basis or when the allocation has hit certain thresholds. That is all you really need to do.

There is however, something to guard against. As mentioned previously, you need to let the chosen "prime minister" do his job without any interference. Even with the best fund manager and/or investment strategy, there will be times when your portfolio loses money. As human, it is tempting to fix it when it is broken and replace the "prime minister" with another one who might look more promising. As the Chinese saying goes, "用人不疑, 疑人不用", which translates to "trust the man you use, if you do not trust him, then do not use him". Index investing + DCA or portfolio rebalancing is probably the best "prime minister" you could find in this world with minimal costs. This "prime minister" has survived numerous market crises before. If you do not trust him to pull you out of a market crisis, who else could you trust?

Although I invest in equities directly, I have also entrusted some of my funds to this "prime minister". My Supplementary Retirement Scheme (SRS) account is invested using index funds + DCA, while around 10% of my cash account is invested using index funds + portfolio rebalancing. The SRS account (index fund portion) has returned 7.0% on an annualised basis, measured from the last market peak to the latest market peak, even after going through heavy losses during the Global Financial Crisis in 2008. You can read more about it at Review of My SRS Investments. As for my cash account (index fund portion), it is about a year old, so the results are not representative of the returns you can get through one full market cycle. You can read more about this account at The Passive Portfolio.

Finally, you might think that you need to be good in investing to be rich. Actually, that is not really true. You can read more about it at You Don't Need To Be Good In Investing To Be Rich.

Wishing all readers a Happy and Prosperous Chinese New Year! 祝大家新年快乐, 万事如意! 

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Sunday, 15 February 2015

The Bull-Bear Tug of War

I really liked the series of posts on asset allocation started by Derek and followed on by a few other bloggers. Unfortunately, I was busy with the privatisation theme then and could not participate. So, here is my post on the issue. To make up for the late posting, I added a few notes for readers' info.

I have been tracking my asset allocation since 2001 and the figure below shows the asset allocation at semi-annual intervals since then.

Semi-Annual Asset Allocation
Each column shows the asset allocation at the stated point in time. The assets are arranged such that the more equity-like an asset is, the lower it is placed, while the more cash-like an asset is, the higher it is placed. Thus, you find that equities are placed at the bottom, followed by REITs while at the other end, cash is placed at the top, followed by preference shares. In the middle are the hybrid assets, such as unit trusts which have a 70% equity / 30% bond split. The "Others" asset refers to a commodity fund which is neither equity nor cash. Thus, you can see that each column resembles a tug of war between members of the Bull Team (i.e. equities & REITs) and members of the Bear Team (i.e. cash & preference shares). The hybrid & other assets resemble the ribbon commonly found on the rope in a tug of war. So, as at end Dec 2014, the Bull Team and the Bear Team are quite evenly matched. Using a commonly used term, the size of my war chest is around 43% currently.

One advantage of the historical asset allocation chart is that it allows me to review how the asset allocations have changed over time. Currently, the Bull Team (specifically equities) is gaining ground on the Bear Team, which is a reflection of the Changes to My Investment Strategies in 2014. For a preview of how the tug of war will turn out in the next 12 months, you can refer to My Investment Trends for 2015. Overall, the historical changes in asset allocation follow a contrarian approach as described in Have a Plan.

The second and more important advantage of the historical asset allocation chart is that it allows me to understand clearly how I react during bull and bear markets. Referring back to the chart, the allocation to equities and REITs ranges from a low of 22% in Jun 2007 to a high of 77% in Dec 2002. This means that I will never be fully out of the stock market during bull markets nor totally in during bear markets. The range is probably between 20% and 80%. Conversely, the size of my war chest ranges from a low of 23% in Dec 2002 to a high of 78% in Jun 2007. There are 2 important points to note from this. Firstly, I will never fully deploy my war chest, even in the depth of a severe bear market such as the Global Financial Crisis (GFC). For me, the psychological benefit of having some cash left in the bank far outweighs the monetary benefit of buying stocks at bargain basement prices. Secondly, since not all of the war chest will be fully deployed, the current size of the war chest must be viewed against the historical range. On surface, the current size of war chest at 43% might look quite large, but in reality, it is closer to the low of 23% than the high of 78% achieved historically.

There is however a major disadvantage in tracking the historical asset allocation. Since I adopt a contrarian approach, invariably, I would also see how well I had timed the market during bull and bear markets whenever I look at the chart. The most obvious error would be during the GFC in Dec 2008, when I only had 62% in equities and REITs. I always have to remind myself that a decision was made then to stage a final stand if the Straits Times Index were to fall to 1,200. Sometimes, during times of relative peace, it is easy to forget the severity of the market collapse and all the issues that cropped up during that difficult period. A glimpse of the events then could be found in Behind Every Successful Bear Market Recovery is A Cash-Like Instrument. Anyway, a post-event analysis suggests that entering the market before events become clearer might not be the wisest decision. See Be Cautious While Being Greedy for more info.

So, how does your Tug-of-War between the Bull Team and Bear Team shape up?

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Sunday, 8 February 2015

Daughters Are Generally Prettier Than Mothers

There are a couple of mother companies and child subsidiaries listed on the Singapore Exchange (SGX). For the sake of this blog post, let's call the mother companies "Mothers" and the child subsidiaries "Daughters". Generally, are Mothers or Daughters prettier?

For the measure of beauty, let's not use price as the yardstick, as beauty is often in the eyes of the beholder. To value investors, beauty means a low price while to growth investors, beauty means a rising price. Instead, we turn to more objective measures of beauty that both value and growth investors can agree on, namely, Return on Equity (ROE), Debt/Equity (D/E) ratio and dividend yield. The statistics of the Mothers and Daughters for the latest Financial Year up to Sep 2014 are listed in the table below. Notice that the banking families are missing from this table, as their operating characteristics are quite different from non-banking companies.

Stock Family Status ROE D/E Yield
ComfortDelgro CD Mother 12.2% 28.9% 2.4%
SBS Transit CD Daughter 3.2% 102.8% 0.9%
Vicom CD Daughter 22.0% 0.0% 3.5%
Chuan Hup CH Mother 5.8% 0.0% 3.6%
CH Offshore CH Daughter 10.5% 0.0% 8.8%
PCI CH Daughter 6.8% 0.0% 23.5%
GP Ind GP Mother -3.0% 49.7% 5.0%
GP Bat GP Daughter -28.5% 49.1% 1.1%
Guocoland Guoco Mother 11.2% 170.4% 2.8%
GuocoLeisure Guoco Daughter 3.2% 28.8% 2.1%
Jardine Matheson Jardine Mother 8.5% 26.4% 2.2%
Jardine Strategic Jardine Daughter 5.5% 24.9% 0.7%
Jardine C&C Jardine Daughter 21.5% 54.4% 2.6%
Dairy Farm Jardine Daughter 39.1% 6.6% 2.6%
Hongkong Land Jardine Daughter 4.4% 16.5% 2.3%
Mandarin Oriental Jardine Daughter 9.7% 79.9% 4.2%
Keppel Corp Keppel Mother 19.0% 51.9% 4.5%
Keppel Land Keppel Daughter 12.7% 55.5% 2.9%
Keppel T&T Keppel Daughter 13.4% 91.7% 1.8%
K1 Venture Keppel Daughter 4.9% 0.0% 26.6%
Pacific Andes PA Mother 8.5% 96.8% 0.0%
China Fish PA Daughter 5.1% 100.3% 0.0%
SembCorp Ind SC Mother 15.5% 29.1% 4.0%
SembCorp Mar SC Daughter 20.7% 27.3% 4.2%
SIA SIA Mother 2.7% 5.6% 3.8%
SIA Engr SIA Daughter 19.4% 1.6% 6.0%
SATS SIA Daughter 12.6% 7.5% 4.2%
Tiger Air SIA Daughter -80.8% 129.2% 0.0%
UE UE Mother 8.5% 114.3% 2.2%
UE E&C UE Daughter 24.8% 11.1% 5.6%
Average (Mother)

8.9% 57.3% 3.0%
Average (Daughter)

6.5% 39.4% 5.2%
Median (Mother)

8.5% 39.4% 3.2%
Median (Daughter)

10.1% 26.1% 2.7%
Difference (Average)

-2.4% 18.0% 2.1%
Difference (Median)

1.6% 13.3% -0.5%
On average, Daughters' ROE are 2.4% lower than that of Mothers'. This is due primarily to Tiger Air's ROE of -80.8% dragging down the Daughters' ROE. The average D/E ratio of Daughters is better than that of Mothers by 18.0% while the average dividend yield of Daughters is better than that of Mothers by 2.1%. The higher dividend yield of Daughters is due to both PCI and K1 Venture declaring larger-than-usual dividends. 

To exclude the impact of such outliers on the average figures, let's review the median figures instead. The Daughters' ROE is better than the Mothers' ROE by 1.6% while the Daughters' D/E ratio is better than the Mothers' D/E ratio by 13.3%. Only in the dividend yield did the Daughters lose out to Mothers by 0.5%. Thus, generally speaking, Daughters are prettier than Mothers on the SGX.

However, the general trend does not hold across all families. If we look at the individual families, we can see that Mothers are prettier than Daughters in some families while the reverse happens in other families. In yet other families, the results are quite mixed. Families in which the Mother is generally prettier than the Daughters include the GP, Keppel and Pacific Andes families, while families in which the Daughters are generally prettier than the Mother include the Chuan Hup and UE families. Families in which the results are mixed include the ComfortDelgro, Guocoland, Jardine, SembCorp and SIA families. For the SIA family, if Tiger Air was excluded, the Daughters would generally be prettier than the Mother.

Generally speaking, if the Mother is well-run, the Daughter(s) are also usually well-run. Good genes and strict family discipline do get passed down to the Daughters. This is why when a well-run Mother spins off a Daughter, the Daughter is usually a good deal. We must thank all the Mothers for raising good Daughters. Thus, my wish is for all well-run Mothers to let their Daughters have a public life (i.e. SGX listing) of their own, rather than keeping them forever hidden in the family. Lest we forget, some of the Mothers on the above list are themselves Daughters of the GrandMother (i.e. Temasek Holdings). Let's hope that that the wise old GrandMother would be willing to listen to the pleads of sincere young men eager to date her many GrandDaughters hidden in the family ;)

P.S. This is the usual section for declaring my vested interests in the above-mentioned stocks. In line with the theme of this blog post, here is the declaration of my interests: I am currently dating 2 Mothers (Keppel Corp and Sembcorp Ind) and 2 Daughters (CH Offshore and UE E&C). Coincidently, both Daughters (and Capitaland's daughter, CapitaMalls Asia last year) have been the subject of a marriage proposal by richer suitors. In all 3 cases, I have rejected the separation and held out for a higher separation fee. Unfortunately, I was not successful in 2 of the cases and have/ will be formally separated by way of a separation notice. The remaining case is still subject to negotiation. If you are wondering why I am usually the party that gets dumped, that is because my girlfriends are pretty ;) That is usually the case when the girlfriend is pretty and the boyfriend (i.e. me) is not rich. Sigh...

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Sunday, 1 February 2015

Striking the Privatisation Lottery 4 Times

I am not sure if you have read the letter that I sent to Today, which was published on Tue (27 Jan). Here is the link if you have missed it: "Review Wave of Delistings on SGX".

Coming back to the topic, how many times do you hope to strike lottery in a year? For me, I struck the privatisation lottery 4 times last year (based on date of announcement of the offer)! Below is the list of lotteries that I struck:
  1. CapitaMalls Asia (privatisation at $2.35)
  2. STATS ChipPAC (takeover at $0.466; sold)
  3. UE E&C (privatisation at $1.25)
  4. CH Offshore (cash offer at $0.495)
Before you congratulate me on my "good luck", allow me to share an analogy on football with you.

For those who are fans of Premier League football, you would be familiar with the news that Gareth Bale moved from Tottenham to Real Madrid in 2013 for a transfer fee of between £77 million and £85 million. The latter transfer fee would be a world record. This was followed by the transfer of Luis Suarez from Liverpool to Barcelona a year later for a transfer fee of between £65 million and £75 million. Although the 2 Premier League clubs had hoped to retain their star players, the huge transfer fees nonetheless represent a huge windfall. After receiving the transfer fees, they went about reinvesting the fees into other good players, hoping to replace the star players that they have lost. However, the players that they bought have not yet been able to replicate the huge impact of their former star players in the club. If you were to ask the fans whether they would have preferred to keep Bale/ Suarez or take the huge windfall, I guess some would have preferred the former. As at today, Tottenham and Liverpool are in the fifth and seventh positions in the Premier League table. There is still much work to do to win the fourth position, which is the last position for Champions League qualification. So, one thing we can learn from this is: if we keep on "selling" our best "players", we will not reach the "Champions League" of world-class stock exchanges!

Notwithstanding the above, this is not to say that we should never accept any privatisation offers. Privatisation offers are a double-edge sword; we might gain in the short-term but lose in the long-term. It is important to assess each offer on its own merits and determine whether we might lose in the long-term before accepting the offer.