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Sunday, January 27, 2013

South Korea helps young emigrate, Singapore wants them back

January 27, 2013


Times are hard for young job seekers in South Korea. So hard, in fact, that the government is now helping them find work overseas.

The real unemployment rate among South Korea's twentysomethings is 20 percent, so the government is searching abroad for 30,000 internships and 50,000 jobs for its beleaguered youth.

Launched in 2008, the Global Leadership Development Program uses public funds to help young people develop the skills and language ability required by a foreign employer.

In December, I visited the privately-run IVY Academy in Seoul, a technical college that trains youngsters on behalf of the government-affiliated Human Resources Development Service. Its walls inside were plastered with photos of successful alumni.

"Why do you want to work in Qatar? Please tell me in English—and speak with confidence," declared an instructor.

I had dropped in on a class for students seeking work in Doha, the Qatari capital, as ground staff for Qatar Airways.

The instructor was an ex-airline worker and had the students rattling off their sales pitches in English.
One student present was 29-year-old An Ji-Myung. After university, he found work at an agricultural nonprofit organization, but got worn down there by endless nagging from a boss to "do better than this" and he resigned.

He used the last of his savings to attend a one-year English conversation course in the Philippines—and then applied to the government program.

An pays 300,000 won (25,000 yen, or $280) of his 2 million won tuition fees, and the government shoulders the rest.

He is optimistic for the future and says once he gains experience in Qatar he plans to secure work in Europe.

Over 80 percent of all South Koreans go to university, but less than 60 percent of these graduates are currently finding work.

Things were particularly tough after the currency crisis in 1997, when the fight for jobs and to keep them intensified sharply.

For many, the dream is to work at a giant South Korean conglomerate such as Samsung or the Hyundai Group, but such opportunities are few and far between.

South Korea's graduates are also somewhat averse to working in the three D's—jobs that are dirty, dangerous or difficult.

"In today's world, where capital and technology can move freely across borders, our young are battling for a limited number of jobs. It is only natural for the government to offer what support it can," says Jung Hae-Joo, team leader at Overseas employment bureau, the Human Resources Development Service. "If people start thinking of home as where the work is, this will expand possible areas of employment."

But will it work? The director general of the bureau, Kwon Young-Jin, answers the question with another.

"Do you know PSY, the singer who found fame with the song 'Gangnam Style?' He used his experience of studying in the United States to make it big there," Kwon said. "If South Koreans working overseas can enhance our country's image, it will create more employment opportunities.
"I hope to create niches in the international labor market where our young workers can thrive. We need to help our citizens find jobs abroad," he said.

The agency goes to considerable lengths to achieve it. It not only offers training, it collates job postings on its website and offers advice on procuring visas and how to spot fraudsters. It also holds job fairs both in South Korea and overseas to show foreign companies what Korean workers can do.
In the five years to September 2012, around 24,500 people had taken the agency's training. Of these, 10,645 subsequently found work.

Alumni range from office workers to nurses and computer technicians--and the list of countries where they found work--is dazzling: 54 nations in total, with China, Australia, the United States and the UAE figuring prominently.

Over 70 percent of successful job seekers were in their 20s; and Japanese firms accounted for 1,457 jobs secured by specialists such as engineers.

Ki Jae-Jung, 31, completed a nine-month data engineering course at another training institution in Seoul. He says a Japanese company has already offered him a job as a systems engineer.
Until a year ago, Ki was studying for the bar exam. He began job hunting when he hit 30.
But he applied unsuccessfully to 30 employers. He then learned of the training and signed up for a computer programming course, starting again from scratch.

The course aimed to prepare its students for work in a Japanese corporate environment and included Japanese language lessons. With an industry shortage of IT engineers, the course's 22 students quickly found themselves in hot demand, and Japanese employers handed them 100 job offers.

"I've heard that software engineering is a very demanding job, but I have nothing to lose," says Ki. "I have no choice but to try making a living in Japan."


Singapore, traditionally a nation of immigrants, is increasingly becoming one of emigrants.
Of 3.29 million people with Singaporean nationality, around 6 percent, or 200,000, now live overseas. Almost a third of them left in the past 10 years alone.

The government is frantically trying to stem this outflow and to calm social tensions over ballooning immigration—noncitizens now account for 38 percent of Singapore's population.

Singapore's per capita GDP is higher than Japan's. It also tops global charts when it comes to education and social order. No wonder, then, that foreigners have flocked there.

Though this has boosted Singapore's international competitiveness, it has also led to grumblings against the government by locals unhappy with rising prices and the social tensions accompanying rapid population growth. The competition is now uncomfortable.

"It's just an endless fight. I wish we could relax more," says Ezfahme Ezzam, 35, a Singaporean of Malaysian extraction.
His sentiments are shared by his wife, Ei, 36, who hails from Japan's Hyogo Prefecture. The couple say they will shortly vote with their feet and move to Australia with their two children, aged 8 and 2.

Singapore is only a small country, comparable in size to Tokyo's 23 wards. It has no natural resources. It managed to flourish after independence in 1965 by creating a fiercely competitive society.

The ruling elite is groomed from an early age, with classes divided according to skill from elementary school upward.

The workplace, too, has a strong focus on results, and workers may change jobs every two or three years in search of better conditions.

Ezfahme teaches history at a junior high school. He says his brightest student is an immigrant who arrived from China two years ago. At first the boy couldn't speak English, but he overcame by literally memorizing the dictionary.

"In order to compete with such highly-driven foreigners, adults are working longer, too," he said. "I work 50 percent longer days than I did 10 years ago. I now need to work from morning to night."

The country could make up for its talent drain by accepting more foreigners, but this would likely drive more Singaporeans away. Since 2006, the government has tried to draw expats home by setting up an agency offering information about schools, housing or employment. And in 2011, it began issuing fewer visas to foreigners.

Coming from a nation built by immigrants, most Singaporeans have no aversion to moving abroad.
"If you don't like it, you can always come back! That's the globalized world we live in," jokes Ezfahme.


As more Japanese move abroad, an industry has sprung up to help them with the transition. The Japan International Movers Association says the industry has grown relentlessly over the past 30 years and is now worth around 60 billion yen ($685 million).

It's not just about transporting unaccompanied luggage; some companies offer expats full support as they settle in overseas.

The association has around 50 Japanese and foreign removals companies on its books. One of the largest is Singapore-based Crown Line, which now has offices in nine countries, including Japan. The company has recorded growth of 20 percent every year since 2008.

"More people are now telling us, 'My entire company has moved here, so I plan to stay until I retire,'" says the firm's general manager, Migiwa Kato.

Tokyo-based Relocation International offers an unusual service. It helps manage the homes vacated in Japan by individuals who have moved overseas.

Since 2005, the company has helped 200 companies and more than 8,000 households move abroad.
It offers comprehensive support, from getting health checks and a visa, to house hunting and the traditional service of shipping belongings.

"Human resources departments are increasingly outsourcing this work," says the company's president, Yasuji Shimizu.

But relocating overseas is not the same as moving within Japan, and this, it seems, is something not understood by every Japanese person with itchy feet.

An overseas mover who additionally deals in foreign real estate said a Japanese man in his 50s once called at his office.

He had just flown over from Japan—at no notice—and now wanted a one-room apartment.
And the man was rattling away enthusiastically about the health food company he planned to set up. It was a sure-fire hit, he said, as an Asian health boom was surely just around the corner.

But questioning revealed that the man's sole current product was one designed to help people stay warm—the last thing anyone needs in a land of perpetual summer.

And when it came to the cost of renting an office, the man was shocked at the price. Within two weeks, he was on the plane back to Japan.

The mover says moves are often stressful, too, for expat wives. With husbands often away from home on business, some wives even fall ill, worn down by the stress of living in a foreign land, in a small, claustrophobic Japanese community.

(This article was written by Kyoko Horiuchi, Daisuke Furuta and Eri Goto)

Avoiding common investment mistakes

US regulator's study flags some common investment pitfalls that tend to cloud our judgments

Published on Jan 27, 2013
By Goh Eng Yeow Senior Correspondent

For many of us, the hardest part about making the right investment decisions is not to let ourselves get in the way.

While turning a profit on our investments can be an exhilarating experience, it is much tougher to cope with the excruciating pain when we lose our hard-earned money on a bad call.

Sad to say, a recent study on investor behaviour commissioned by the United States Securities and Exchange Commission shows that investors tend to repeat the same mistakes all the time.

The problems it highlights sound drearily familiar.

"Specifically, many investors damage their portfolios by under-diversifying, trading frequently, following the herd, as well as selling winning positions and holding on to losing positions," it said.

Don't we recognise in ourselves some of this?

The study also flags some common investment mistakes that tend to cloud our judgments. In doing so, it hopes that if we know the potential pitfalls, we may try to avoid them and turn ourselves into better investors. Some of the common pitfalls include:

 •Letting our egos get in the way
Chief among our shortcomings is the enemy that lies within us - our emotions.

The study said: "Over-confidence, an emotion common among investors, triggers a wide range of investment errors. In the worst-case outcome, an overconfident investor becomes a victim of some form of investment fraud such as a Ponzi scheme."

The study notes that active traders underperform the market, as the over-confidence they display causes them to over-trade.

It cited another research report which noted that investors, who use traditional brokers and remain in touch with them by telephone, achieve better results than online traders, who damage their performance by trading more actively and speculatively.

 •Following the crowd
What is also noticeable is the horde of investors who tend to "chase" after hot stocks as market conditions turn bubbly.

"Because a bubble inflates rapidly and is not durable, it is a common metaphor for financial mania. When the bubble bursts, the price of the asset plunges, setting off a panic," the study said.

It cited two well- known examples of financial mania in the past 12 years - the bursting of the bubble in 2000 and the US sub-prime housing crisis in 2008.

 •Momentum investing
This refers to a strategy practised by many day-traders which involves chasing after penny stocks when they suddenly burst back into life.

While most investors would focus on the newsflow before making an investment, "momentum traders" seek to take advantage of a price trend, especially in small-cap stocks with low analyst coverage, the study noted.

"But the short-run momentum can lead to long-run reversals as stock prices overshoot their intrinsic values," it added.

 •Noise trading
Another pitfall, and one related to momentum trading, is "noise trading" - a mistake frequently made by traders as they get confused between the false signals sent out by a stock's trading pattern and the overall market trend.

"These investors generally have poor timing, follow trends, over-react to good and bad news. They make decisions regarding buy and sell trades without the use of fundamental data," the study noted.

 •Growth investing
In "value-style" investing, an investor buys out-of- favour stocks with low price-to-earnings and price-to-book ratios, believing them to be trading below their intrinsic value.

But the study notes that investors tend to under- estimate the ability of value stocks to rebound and over-estimate the ability of glamour stocks to maintain above-average growth.

It said: "Whether investor psychology is the cause or not, excessive investment in these stocks may drive up their prices well beyond their intrinsic value. Over time, growth stocks fail to meet optimistic expectations, while value stocks exceed pessimistic expectations."

 •Selling the winners and keeping the losers
And finally, the one trait which dogs most of us who are loss-averse investors - the tendency to sell our high-performing shares in order to try to recoup our losses on the loss-making ones.

"But in the months following the sale of winning investments, these investments continue to outperform the losing ones still held in the investment portfolios, an outcome exactly the opposite of that intended," it added.

In other words, try to keep the winners and cut the losers. While it may be very painful taking the loss, in the long run, you will find yourself enjoying better returns on your investments.

Charting stock performance

Comparing stock price now to 10-year average earnings yields insights

Published on Jan 27, 2013
Teh Hooi Ling

Let's recap some of the things I have talked about in this column. I discussed how we can value stocks by comparing the stock price to the stock's earnings per share and its net asset value per share.

Then I showed that buying a basket of stocks with the highest dividends relative to their book value appears to allow investors to capture the biggest returns among the few strategies that were discussed.

This strategy has only two negative years in the last 30 years - in 1997 and in 2008.

In the 12 months to March 1998, it fell by 22 per cent and in the year to March 2008, it plunged 38 per cent.

Despite the two downturns, the strategy still yielded 21.6 per cent compounded over 30 years.

Assuming a transaction cost of 5 per cent for the rebalancing of the portfolio each year, the return is still a rewarding 15.5 per cent a year.

Last week, I looked at market timing - how to tell when the market is irrationally over-exuberant and that perhaps in such times you should consider getting out of the market completely.

I compared the market price relative to its past 10 years' average earnings to gauge over- or under-valuation. The 10-year average earnings is used so as to smooth out the effects of business cycles.

The chart presented last week showed that indeed there would be depressed periods as well as periods of exuberance.

Using that indicator, one might be able to have had the conviction to stay out of the market in 1997-1998 and in 2008.

That would significantly boost the returns on the already high dividends-to-low book value strategy.

On the flipside, one could also miss out on some of the returns in some years as an over-valued market can stay over-valued, or get even more over-valued.

This week, let's apply the concept of comparing the current stock price to the 10-year average earnings on individual stocks. I shall let the charts do most of the talking.

The first two charts are of the banks - OCBC Bank and DBS Group Holdings.

As you can see, the earnings per share of both banks - smoothened over the past 10 years - have been on a steady climb. DBS's earnings is a bit more choppy than OCBC's.

Their stock prices relative to that earnings, however, are at the lower end of the 18-year range. This suggests that the banks are not excessively valued by the market at the current moment.

Next, let's look at Keppel Corp and Frasers & Neave.

Keppel's earnings growth has been phenomenal, especially after its rig building business took off. After the spike in its price-to-10 year average earnings in 2007, its valuation has come down to saner levels.

Meanwhile, F&N has also seen a steady climb in its earnings. But as you can see from the chart, its valuation has also been climbing - thanks to the recent bidding war for its shares.

The next two charts - those of Singapore Airlines (SIA) and Venture Corp - are interesting.

Unlike the earlier charts, the ones here show that the earnings are coming down.

This is due to the structural change in the industries that both companies are operating in. Our national carrier now has to compete with the numerous budget airlines that are traversing the skies.

Venture, meanwhile, is up against the Taiwanese manufacturers which have gobbled up loads of market share.

For SIA, its valuation - based on the metric I look at - is higher than back in the 1990s.

As for Venture, the strastospheric valuation it enjoyed back in 2000 has come down to more earthly levels. If it can maintain this kind of earnings, current valuation does not appear to be too bad a level to get in.

Next week, I will look at the arguments for and against holding a concentrated portfolio versus a diversified portfolio.

Monday, January 21, 2013

There is a way to time the market

21 Jan 2013 10:28

Use PE ratio as a guide and remove the effects of business cycles

In response to my article last week, on the good it would do to one’s portfolio if one could avoid the 10 worst plunges in the last 40 years in the Straits Times Index, a reader wrote: “I thought it is difficult enough to ‘miss’ one worst day, and now you have to ‘miss’ 10 worst days.

“Who would have this kind of clairvoyance or prophetic ability and also guts to act? It is impossible to be able to have such high conviction to sell all of one’s stocks on the eve of the crash based on your gut feelings that the crash is coming.”

Valid questions. So the underlying question he is asking is: Is there a way to know when to buy and when to sell the market as a whole?

One would need, like the reader said, clairvoyance if the stock market operates in a world of its own, detached from the logic we know that operates in the physical world that we live in. But here is a central truth to the stock market: Underneath it all, there is an economic reality. Companies have to make money in excess of their cost of capital to be of value.

In terms of the assets that the listed companies own, there is always arbitrage around the replacement cost. For example, if you can buy a drinks factory in the stock market for half the price of building one, nobody will build one. Those with money will just buy their competitors’ plants via the stock market.

This will drive up the stock price of drinks factories. When the stock prices rise to such a high level that it is way cheaper to build a new plant instead, a new set of entrepreneurs will come in to build new plants. This will mark the end of the “up” cycle in the stock prices of drinks factories.

Conversely, if you can invest to build something – say fibre-optic cables – for $1 and sell it for $10 in the stock market, then you can guarantee many people would want to do that until we drown in fibre-optic cables. This is exactly what happened in 2001 and 2002.

We keep reading it, but it is true: Greed and fear of market participants drive stock market prices to the two ends of the spectrum.

This week, I will show that there is a way to tell when the market is over or undervalued. And it is not based on your gut feelings.

Remember, we talked about using price-earnings (PE) ratio – how many times a stock is trading relative to its earnings – to value stocks. We can use this metric to value the entire market as well.

But there is a problem with using the PE ratio without regard to business cycles. For a cyclical stock say, shipping company NOL, if it is at the peak of its cycle, yet you are still willing to pay 20 times earnings for the stock, then you are set to suffer a substantial capital loss on your investments. Because the earnings will come down, and the PE of the stock will rise sharply, say to 40 and 50 times, and the market will deem it too expensive. Its share price will then drop.

Conversely, at the bottom of the cycle, you could pay 50 or 100 times for NOL and you could conceivably consider it a cheap buy.

So in valuing the market using the PE, we need to remove the effects of business cycles. One way to do it is to take the average earnings of the market in the past 10 years, and compare it to the current price of the market.

That’s what I have done in the accompanying chart. The Straits Times Index (STI) data from Thomson Datastream started in early 1973. So the first point of the PE starts only in 1983 – 10 years later.

Sunday, January 20, 2013

For a real rally, earnings must recover

In our monthly series featuring fund managers and leading market experts, we ask Mr Kevin Chen, Pan Asia chief investment officer at AXA Rosenberg, about his investment philosophy and strategies

Published on Jan 20, 2013

 Mr Kevin Chen says he is cautiously bullish on Asian equities and sees some opportunities in real estate developers in Singapore, China and Hong Kong. -- ST PHOTO: AZIZ HUSSIN

By Aaron Low

The bad news is that the problems affecting the global economy last year are likely to remain the same this year.

But the good news is that the skies are a lot clearer and should mean that markets perform better this year overall, said Mr Kevin Chen, Pan Asia chief investment officer at AXA Rosenberg.

Mr Chen noted that, in reality, nothing much has changed between last year and this year.

The macro-economic environment remains cloudy and uncertain, given the deep-seated problems in the United States and Europe.

But liquidity remains in abundance, thanks to the accommodative monetary policies of central banks around the world.

This should still support markets, said Mr Chen, whose firm oversees about US$21 billion (S$25.7 billion).

The firm's client base is both institutional as well as retail and funds are distributed mainly through private banks and accredited investors in Singapore.

The company's Asia-Pacific ex-Japan Equity Composite recorded an impressive 20.88 per cent gain over the past one year as of November, beating its benchmark rate of 19.03 per cent.

Q: Last year was a volatile year but markets still managed to do very well. This year, analysts are already talking up equities, especially Asian equities. What's your take?

Those risks present last year - slow growth in the US and Europe - will remain in 2013, so we will still see volatility this year.

But from recent data coming out, almost everywhere you see improvement.

If you look at Asia last year, it was mainly outflows from the region, except maybe for pockets of growth such as South-east Asia.

The theme seems to be different this year.

China is stabilising and, hopefully, growth will start again - slower but more balanced and, hopefully, higher quality.

But in order to sustain a rally this year, we will need to see the real economy recover.

If you look at the profit margins of companies in Asia, except for places like Thailand and the Philippines, margins were squeezed.

In order for the rally to continue, we will need to see a sustainable recovery in profit margins.

That's why I am cautiously bullish on Asian equities but there has to be a real recovery in earnings.

Q: Analysts have said that retail investors are the last to jump in and the first to get out. Is now the time to get in or is the rally already over?

At this moment we are seeing encouraging signs, on both the valuations and the fundamentals side of the market.

But to find out if the rally is a real one, we will have to wait till the first-quarter earnings and see what the outlook is for the rest of the year.

The first people to get in are the smart-money people but they are also short-term money. And when they see signs that things are not improving, they will run for the exit.

So that's where the fundamentals are the key to support the rally.

The conditions are better compared with those last year, however.

The managers who did well last year were those who were defensive, holding high-quality names, or those with higher exposure to South-east Asia.

Most of the managers are still defensive, meaning that the real money hasn't come in yet. And they will come in at the sign of the first recovery of earnings.

Our view is to focus on valuations but pay attention to earnings.

Q: Which sectors could do well this year?

Last year was a case of people doing better if they held higher-quality names, those firms which can generate earnings in a stable fashion.

But as a result, there is a relative increase in the gap of valuations between more cyclical names and more defensive names.

So we see good value in cheaper valuations on those which are more cyclical, including industrial, real estate and, to some extent, commodities.

We see some opportunities in real estate developers not just in Singapore but more so in China, and Hong Kong. We've also started to pay attention to consumer discretionary stocks.

Q: What about Chinese stocks? They've been depressed for a while but had a short rally recently.

North Asia, including China, will be an interesting place to look at. The region's under-performed the rest of Asia.

Last year, if you take out the banking sector, the rest of the market saw negative earnings growth. So the profit margin was depressed.

This year, for Chinese stocks to improve, profit margins have to improve.

Likewise, if you look at the Korean markets, they have performed relatively the same as the rest of the Asian markets.

But if you take out Samsung, which is 30 per cent of the market, the rest of the market was down almost 10 per cent to 11 per cent, relative to the rest of Asia.

And if the US recovery is more visible and concrete, Korea, which benefits both from China and the US, could be another very interesting area.

Saturday, January 19, 2013

When to sell

In a bull phase, investors must decide how long to hold so as not to leave too much on the table, and yet not be exposed to a sudden reversal in the market

19 Jan 2013 09:30

I WAS with different groups of friends this week. Coincidentally, the same topic cropped up: When to sell the shares you have bought.

Friend No 1 says: "I have a near perfect record when it comes to buying. I have the guts to go against the market and buy undervalued stocks. And when the market goes against me, I have the conviction to hold and even buy more.

"It is when the market moves in my direction, when my position starts to make money that I make mistakes."

He tends to sell too early. For example, he bought into Thailand real estate developer Quality House not too long ago. In the last one month alone, the stock surged nearly 40 per cent. He sold his stake at about 2.60 baht recently, only to see the stock go up to 3.08 baht in the following two days.

For me, I'd say that valuation is key. When the stock price runs up to a level that it no longer justifies the risk of owning it, then it's time to sell.

He is toying with the idea of moving the positions he has built up to his wife's accounts so that he doesn't have to look at them anymore.

At a lunch a day later, Friend No 2 says: "Hooi Ling, you know what your next article should be? When to sell!"

I ask: "So when do you sell the stocks that you've bought?"

He says: "Never."

Consequently, some of his positions have gone from a 40-bagger to just maybe a three or four-bagger.

Friend No 3 quips: "I'll give you a quote. 'Buying is a science, selling is an art.'"

Friend No 4 chips in, saying: "We put in a trade, but we don't realise that the trade will end up changing us."

"What do you mean?" I ask.

He shares his experience. He says that he sold Raffles Education after it had gone up by six times. But after that, that stock went up by another 30 times from where he sold it. But now, it is back to the level he sold the stock.

He explains. "If I had held Raffles Education from five cents all the way up to $4.40, that may have changed me. I may end up spending all my time trying to find the next Raffles Education.
"I may not be the macro person that I am today."

Indeed, he may not have been as successful an investor as he is today. Stocks like Raffles Education are very few and far between. And who is to say that he would have the fortitude and the foresight to sell the stock at its peak. There is a chance that he would ride it all the way down as well.

Well, generally the problem with value investors is that they sell too early. In fact they may go in to buy too early as well.

GMO's Jeremy Grantham, in one of his quarterly letters, notes that you can apparently survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like "margin of safety" and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage.

"In my personal opinion (and with the benefit of hindsight), although we in asset allocation felt exceptionally and painfully patient at the time, we did not in the past always hold our fire long enough or be patient enough," he says. "It is the classic failing of value managers (and poker players for that matter) to get impatient and bet too hard too soon."

In any case, it is safer to err on the side of buying too early and selling too early than buying too late, and selling too late.

Mr Grantham's colleague Ben Inker puts it this way. The risk of an asset, he reminded investors, rises with its valuation. Stocks at fair value are less risky than stocks trading 30 per cent above fair value because the expensive stocks give you the risk of loss associated with falling back to fair value.

That "valuation" risk leads to losses that should not be expected to reverse themselves anytime soon.
Meanwhile, a cheap stock can certainly go down in price, but when it does, one can expect either high compound returns from there, which makes one's money back steadily, or a reasonable sharp recovery when the conditions that drove prices down dissipate, which will make your money back quickly.

"The loss is therefore temporary, although it may seem unpleasant while it is occurring. When an expensive asset falls back to fair value, subsequent return should only be assumed to be normal, which means that the loss of wealth versus expectations is permanent."

Some advice given by Investopedia on when to sell is:
The stock hits your target price;
Its fundamentals deteriorate;
A better opportunity comes along.

Opportunity cost is a benefit that could have been obtained by going with an alternative. Before owning a stock, always compare it with the potential gains that could be obtained by owning another stock. If that alternative is better, then it makes sense to sell the current position and buy the other, according to Investopedia. Accurately identifying opportunity cost is extremely difficult, but could include investing in a competitor if it has equally compelling growth prospects but trades at a lower valuation, such as a lower price to earnings multiple, it says.

For me, I'd say that valuation is key. When the stock price runs up to a level that it no longer justifies the risk of owning it, then it's time to sell.

This topic is coming up because I guess we are kind of entering the bull phase of the market. Price increases have been sustained in the past few months, taking by surprise investors who have gotten used to the constant fear factor in the market.

As we have seen time and time again, during a bull market there is a tendency for prices to go way beyond fair value. How do you identify if we are in a bull market and how long do you hold so as not to leave too much on the table, and yet not expose yourself to the sudden reversal in the market?

I lamented to another friend not too long ago about how I always tended to sell too early. He says he has a system. He says: "Shares enter my sell list when the price-earnings ratios go up too high, or when fundamentals deteriorate."

But he uses technical analysis to guide him on the actual sell. "Actual sell is triggered when the RSI (Relative Strength Index) drops below 60."

RSI measures the momentum of the share price. The RSI computes momentum as the ratio of higher closes to lower closes: Stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

Perhaps this is an added measure one can put in.

Share investing should be made into a process. Follow the process, and constantly refine it. That should keep one's emotions in check, and over time, should allow one to come out on top.

The writer is a CFA charterholder

Monday, January 14, 2013

Buy-and-hold works – up to a point

14 Jan 2013 09:00

 Of the 16 stocks listed in the Singapore market since 1973, Asia Pacific Breweries is the best performer currently. Its share price has appreciated by 9.7 per cent a year over the past 40 years. But it was not always the leader of the pack. - SPH
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It’s very hard for us to think outside the environment we are in, a learned friend told me. In other words, many times, we are products of our environment.

Take someone who, early in his or her investment career, went through the boom years of the 1920s only to see everything wiped out during the Great Depression.

Most likely, such a person would have a rather pessimistic view of the stock market.

In contrast, a person who knows only of bull markets would have been conditioned to think that the market can only go up.

Hence, it is always instructive to study history, to talk to people with lengthy experience in their chosen fields.

I have this friend who I reckon is in his 60s. He used to run his own construction business and is now retired. He said he was an ignorant young man in the 1980s and lost money investing in a fund. He then resolved to educate himself about investment. Like most value investors, he idolises famed investor Warren Buffett.

Having experienced and seen the results of making wise investments, this friend is fervent about convincing others of the importance of learning that skill.

At his age, he still buys and reads books such as Trump Strategies For Real Estate: Billionaire Lessons For The Small Investor and Accounts Demystified by Anthony Rice.

Three years back, he asked me to help edit a two-page message that he wanted to circulate to the younger people around him. In it, he gave the example of his cousin.

Back in 1958, the cousin earned less than RM200 a month as a primary school teacher. But she put some savings away every month. By the early 1960s, she had accumulated a sum of money that she could invest in stocks.

“She did the ‘right’ thing in investment,” wrote my friend. “She chose the ‘good’ stocks – companies with good businesses. She held on to the stocks for the long term.”

Over the years, she bought more of the stocks with additional savings as well as the dividends received from the stocks she held. Her stockholding also grew as the companies distributed bonuses and issued rights.

“Thirty years later, she had become a millionaire. She managed to send her kids to England to study. Despite her wealth, she is still very careful with her money. As a retired civil servant, she receives a pension of RM1,000 a month. But dividends from her stocks come to RM3,000 a month.”

The example is heartening. But again, I think it’s important to put a context to it. The period during which the cousin grew her wealth ran from the 1960s to the 1990s. Perhaps during that period, a buy-and-hold strategy worked. Would it still work today?

I tracked down stocks that have been listed in the Singapore market since 1973. There are 16 – some counters might have been delisted, for good or bad reasons.

So there is a survivorship bias, that is, only the good or viable ones remain.

In any case, even among the 16 stocks, the performance varies. As of today, the best performer over the past 40 years has been Asia Pacific Breweries (APB). Its price, excluding dividends, has appreciated by 9.7 per cent a year.

It has grown by some 40 times over the past 40 years. For those who reinvested the dividends back in the stock, the return would have been a lot higher.

Jardine Cycle & Carriage was the second-best performer, with price appreciation of 9.1 per cent a year. It was followed by Fraser & Neave (F&N) with 7.8 per cent. For the banks, prices grew by about 5 per cent a year.

Auric Pacific Group fared the worst. Back in 1973, it was trading at about $1.50. At the start of this year, its shares changed hands at $1.13. WBL, Haw Par and United Engineers all managed to chalk up price appreciation of less than 2 per cent a year.

The thing is, APB wasn’t the leader of the pack every step of the way. In the early 1980s, Straits Trading had its days in the sun.

By the early 1990s, Natsteel (now NSL) was ready to take its turn. The new millennium saw the spotlight fall on DBS Group Holdings. And now it is APB that has caught the market’s fancy.

The market is such that it will be fascinated by different themes or the latest fads at different times. During any of these episodes, it might not be entirely rational in pricing stocks.

At such times, when one of your stocks catches the fancy of the market, and you think the market price has gone far beyond the fair value of the stock (remember the valuation metrics we discussed in the past few weeks?), it is not a bad idea to lock in your profits.

Remember, a stock that falls 50 per cent will need to recover by 100 per cent before it gets back to its old levels.

To illustrate how important it is to protect your downside, I charted the performance of the Straits Times Index as calculated by Thomson Datastream from 1973 up to last week.

The price appreciation was 3.9 per cent a year. If you had invested $10,000 in the index from the start, that sum would have grown to $47,000 today. Assuming you missed the 10 worst trading days of the past four decades – the most recent was in October 2008 when the market fell 8 per cent – your performance would have been boosted to 7.3 per cent a year. Your $10,000 would have grown to $165,200.

In contrast, if you had missed the 10 best days, that $10,000 would have grown to just $17,100 – a gain of 1.4 per cent a year.

However, if you buy when market valuations are low, there is a high probability that you will avoid the worst days in the markets and yet not miss out on the best days.

The key message that investors should never ever forget is to protect their downside. Let the upside take care of itself.

The strategies that we have talked about in the past few weeks – and that appear to work well – have been about buying low-valuation stocks, taking profits and redeploying the capital to the next batch of low-valuation stocks.

There appears to be persistence in the performance in these kinds of strategies.

When to lock in profits

The market is such that it will be fascinated by different themes or the latest fads at different times. During any of these episodes, it might not be entirely rational in pricing stocks. At such times, when one of your stocks catches the fancy of the market, and you think the market price has gone far beyond the fair value of the stock, it is not a bad idea to lock in your profits

Sunday, January 13, 2013

A Visit Into Dr. Alexander Elder’s Trading Room

by Xavier Lim, 13/01/12

In this volatile market, Dr Alexander Elder is one of the world’s most talked-about professional traders. His contribution to the trading community through his best-selling books and classes has helped many people to become successful traders.

He is the author of ‘Come into My Trading Room’, Barron's 2002 Book of the Year, and ‘Trading for a Living’, which is considered as modern classic among traders. He is also the originator of Traders' Camps - week-long classes for traders, as well as the Spike group for traders.

The year 2011 was difficult and complex for global economies and many economists are expecting that the year 2012 will be no different. What does Dr. Elder see ahead, and what advice does he have for traders?

Dr. Elder shared his views with Shares Investment (Singapore) in an exclusive interview. We discussed his views on the current stock market situation as well as his thoughts on trading and how traders can improve themselves. His comments follow:

Shares Investment: Do you think the volatility witnessed in 2011 is an "unfinished business" that will continue affecting the markets in 2012?

Dr. Elder: Investors and traders must understand that all markets are cyclical, it can peak as well as slide to the bottom and rise to the peak again. When one cycle is finished, the next begins.
Based on my studies, we are in the bull market since March 2009. However, stock markets experienced a correction last year in May, and I foresee that this correction, which has been going on for 7 months, is ending.

Investors and traders must be aware that volatility is also cyclical. During a bull market correction, stock market can be very volatile, but when the correction ends, volatility will decrease.

SI: In your book, "The New Sell & Sell Short", you have included an intensive study guide with over 100 questions and answers. Can you tell us how it can benefit readers in their trade?

Dr. Elder: Normally when you read a book, you don't absorb everything unless you practise what you have learned. For example, a student will not be able to score high points in his exams if he did not attempt to do past years’ questions. By simply listening to what the teacher teaches will not prepare him well for his exams.

Similarly, in trading, the best form of study is to solve tactical problems from real market situations, essentially placing you into a professional trader’s mind and trying to figure out the stock market’s next move. These 100 over exercises will prompt readers to think on their own to determine what type of trading plans they should adopt - when to take profits and set stops at what price?

SI: Since selling short carries a certain amount of risks, what advice would you give to someone who is new to short selling?

Dr. Elder: I must emphasize that short selling is not a strategy for beginners and inexperienced traders, only traders who know what they are doing should attempt this. Theoretically, you can lose more than when you just buy a stock.

I would advise those experienced traders who want to learn short selling to start off with small positions. When traders take on a larger position beyond their comfort zone, they may succumb to emotional stresses and end up making irrational decisions. It is important to trade high liquidity stocks so as to allow yourself to get in and out easily, to enter and exit a stock at a good price.

SI: Do you screen all your stocks using the Triple Screen System or do you add certain variables to it, depending on the industry the stock is in?

Dr. Elder: I use the Triple Screen System to screen all stocks and any stock indexes. I will only improvise and fine-tune the system from time to time to suit current market changes. The Triple Screen System begins by using a longer-term trend following technique and a shorter-term overbought/oversold indicator to time the trades.

However, most traders only pay attention to the daily charts, but if you begin by analyzing the weekly chart first your perspective will be much broader. By analyzing the long-term chart first allows you to take up your strategic positioning.

Next, take up your tactical positioning by using a daily chart to find buy or sell setups in confirmation with the daily and weekly chart readings. When the weekly chart shows an uptrend, any declines on the daily charts will be your buying opportunities.

SI: What do you think are the common pitfalls that most traders experience in their journey? What advice do you have for those who want to trade for a living?

Dr Elder: Traders go through different stages as they work through their trading journey. Some improve themselves and move on to a higher stage, and others don’t. I would say that a trader should have his foundations right from the start. Many are too eager to get to the finish line and forget to have a good start.

At the early stage, beginners have no knowledge in trading and don’t understand that stock market is complex. They have to acquire this knowledge by reading books and attending courses. Once they have learned this knowledge, they will begin to realize that even with all of the trading methods they have acquired, sometimes they win, sometimes they lose.

Beginners who went through stage one will become much more aware of the importance of psychology. This is where they start planning their trades and stick to the plan. This is stage two.
I urge traders to have two goals in mind for every trade - first is to make money but not every trade will be successful. Second, he needs to learn from his experience.

I notice that many traders simply search for another opportunity to trade after they have made a loss due to wrong move. This is wrong! You can never be a better trader by not learning from your mistakes.

I advise traders to keep track of all their trades. Keep a diary and record every single trade. Write down your plans for each trade, this will make you slow down, preventing you from acting impulsively and trading in an impulsive manner. Keeping a diary helps a trader to understand his mistakes and correct them. This will make you to be a better trader!

Before you think of trading for a living, start with little money; trade small size, learn your moves. Don't try to make a lot of money at first because you will only be stressing yourself and losing that money. Remember, it's going to take time to become professional trader.

SI: One last question before we conclude this interview, if everything held constant, other than the eurozone crisis continuity, do you think it's possible to see at least some kind of rebound in the first half of 2012?

Dr Elder: Yes, we are in the bull market since March 2009. A cyclical bull market normally lasts an average of four to five years and then we get a bear market. I believe that we are in the middle of a cyclical bull market, which should move up higher this year.

Sunday, January 6, 2013

Gems amid poor market sentiment

Buying stocks with unappreciated value in such a climate can pay off in the long run

06 Jan 2013 15:52 TEH HOOI LING

Back in October 2011, sentiment for the stock market was really bad. Concerns over the slowing growth in China, the sovereign debt crisis in Europe and the struggling US economy all weighed heavily on investors’ willingness to take risk.

At that time, I spoke to a friend of mine who, in his more than 40 years of stock investing, has ridden through a few bubbles and survived their bursts.

He shared some insights with me. He said there remained opportunities despite the very poor market sentiment.

“You can buy now if you can hold,” he said then. “There are always stocks out there with unappreciated value. Sooner or later, the market will realise their value.”

A way to identify stocks with unappreciated value is to look at their share prices relative to the value of their assets in their financial statements – a measure we discussed last week.

The bigger the discount of the market price relative to the book value, the more “undervalued” the stock is.

But as mentioned, sometimes there are valid reasons for the discount. So to minimise risk, my experienced friend says, first, ascertain that the companies are carrying the assets on their books at a fair and realistic value.

Second, it is better if these deep value stocks are also paying decent dividends.
It is anybody’s guess how long the market would take to recognise the companies’ value. So it will be good that you get paid while you wait.

Third, make sure that these companies have little borrowings.
Companies trading at low price multiples to their earnings are also underappreciated.
But the market’s underappreciation of them is not as great as that of those trading below their book value.

We showed in the last few weeks that consistently buying the 10 per cent of the market with the lowest price relative to their earnings (PE) would turn $10,000 into just under $200,000 over a 22-year period from March 1990 to March last year. That’s a compounded annual return of 14.6 per cent a year.

Meanwhile, buying the 10 per cent of the market with the lowest price-to-book (PTB) ratios would turn $10,000 into $355,000 for a return of 17.6 per cent a year.

What if we buy stocks which pay dividends and are trading at a low PTB ratio?

To rank the stocks, I take the dividend yield divided by the PTB ratios. So, say, a stock has a dividend yield of 5 per cent but trades at 0.8 times its book value. Its score would be 6.25. Again, I repeated my test of consistently buying the 10 per cent of the market with the highest dividend/PTB score.

What do I get?

Well, the strategy grew the initial $10,000 back in 1990 into $715,665 by March last year. That’s a compounded return of 21.4 per cent a year!

Few fund managers can boast of that kind of track record.

The accompanying chart shows the performance of the three strategies I’ve discussed so far in this column – the low PE strategy, the low PTB strategy and this week, the high dividend but low PTB strategy.

The third, I believe, allows one to screen for stocks that pay investors to wait.

I highlighted the strategy of combining these two ratios in late 2011 and again last year in my column in The Business Times. I churned out a list of stocks which fit the criteria. Then, a lot of real estate investment trusts showed up on the list.

A reader kept the list and tracked the stocks’ performance since then.

He wrote to me two months ago saying: “You concluded that investing in stocks with the highest dividend yield but lowest price-to-book ratios appears to ‘capture the cream of the crop’. How true it is!

“Just these two ratios alone would have filtered out most stocks and just leave the investors with a small number of stocks to choose from.”

In response to numerous readers’ requests last week for lists of stocks which fit the various metrics I have talked about in this column, this week I have tabulated lists of stocks which have high dividend yields relative to their price-to-book ratios.

I have three lists – one for companies with market capitalisations of above $1 billion; one for companies between $200 million and $1 billion; and finally one for those between $50 million and $200 million.

Just a word of caution. As you know, stock markets around the world have rebounded strongly since the US fiscal cliff has been averted – for now.

Thus, there is less value in the market at the moment than say, four or five months ago.

Also, there may be some errors in Bloomberg’s data. So readers who intend to take the lists one step further should do their own due diligence and please do tread with care.

Tuesday, January 1, 2013

STI records best annual gain since 2009

Jonathan Kwok 1/1/2013 

THE "fiscal cliff" jitters meant local shares ended 2012 on a sour note but the dip failed to take the gloss off what has been a fairly remarkable year for the market.

Despite yesterday's 24.72- point decline, the benchmark Straits Times Index (STI) still added 520.73 points for the year to close at 3,167.08 - up 19.7 per cent.

That is the STI's best annual gain since 2009, when it rebounded almost 65 per cent after a sharp recovery from the global financial crisis.

Go a bit further back and it looks an even more impressive performance: In the past 10 years, shares have bettered that 19.7 per cent gain only in 2003, 2006 and 2009.

Tokyo and Hong Kong did even better with both bourses up 22.9 per cent in 2012.

It was all the more remarkable as analysts and brokers were tipping a tough 2012 this time last year amid the long-drawn crisis over European debt and the weak United States economy.

"The August 2011 sell-down was quite a large one," said Singapore remisier Desmond Leong.

"Everyone thought: Could this be the next bear market? (Hence) December that year was a lot more choppy."

There has been some progress towards fixing global problems over the past 12 months, particularly in the US where economic data improved markedly towards the end of the year.

But market watchers say that the flood of liquidity unleashed by major central banks has played a larger role in the market's climb.

The European Central Bank, US Federal Reserve and Bank of Japan all expanded their various money-printing programmes last year.

China's government helped in its own way, by announcing one trillion yuan (S$196 billion) of new infrastructure spending.

Trading volumes here also indicate that the rally lacks broad market participation.

The year's average daily turnover was only $1.28 billion, down from 2011's $1.46 billion, although the average number of units traded daily was larger - 2.09 billion, as opposed to 1.41 billion the previous year.

This showed that remisiers were increasingly focusing on low-cost punts as they trade on their own accounts in the hope of earning some money.

They can trade in millions of shares each time but the combined value will be low if they are dealing in penny stocks.

"Ever since the casinos were set up, we've seen a steady decline of business (from retail clients)," said Mr Leong. "2012's business was not as good as 2011's, and 2011's was not as good as the year before."

Nomura Equity Research is tipping "single-digit returns" for the local market this year.

It said the ongoing economic restructuring could hit company earnings.

It even flagged the possibility of a market fall if the local economy turns out worse than expected.