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Sunday, May 27, 2018

Five things I wish I knew when I was young

Lim Say Boon
MAY 27, 2018, 5:00 AM SGT

A hot tip can be stale news by the time it reaches you, says banking and financial media veteran while sharing the insights gained over the years

If I had known when I was young what I know now - after 36 years in banking and the financial media - I would have been very significantly wealthier. As they say, hindsight is "20-20 vision". Well, let me share five "20-20" insights.


There's a line in a recent Andy Lau/Donnie Yen movie that goes: "Riches or poverty, it's all destined." Fatalism is poison to wealth.

Building wealth is more akin to Renaissance-era philosopher Niccolo Machiavelli's ideas of "fortune" and "virtue". Good fortune without virtue/human endeavour is opportunity wasted. So, a lot of becoming wealthy is about human endeavour, effort, and a winning mindset. Here are some of the attributes of that mindset to start you off.


Be suspicious of anybody who tells you making money is easy. The paradox is, the sooner one accepts that making money is difficult and requires effort, the easier making money becomes.

Much money and even more time are lost by investors waiting, hoping for that "big one" that will bring them overnight riches. The truly long-term average annual returns on stocks is around 10 per cent. That's history, that's reality. Most "get-rich-quick schemes" are either naive, fraudulent or illegal.

I think back to the Sept 11, 2001 terrorist attacks in the United States. Markets shut. And when they reopened, there was panic selling, and very few buyers. Like many others, I bailed out at significant losses. If I had simply held on, every one of the stocks I sold at losses would be worth a lot more today.

What about "hot stock tips"? The market is so efficient in pricing legitimate news - and it often happens within hours, if not minutes - it is likely that a "hot tip" is already stale news by the time it gets to you. Or worse, it's the concoction of rumour mongers with stocks to unload on the gullible.


Time is money, as the saying goes. Even more so when the time lost relates to planning your finances. Many people put off the more uncomfortable but necessary tasks, focusing first on the easier or more pleasant jobs, often at considerable cost to themselves.

When I started working in 1981, I hardly thought of investing. My priorities were cars, girlfriends and parties - in that order. Well, it was difficult to get a girlfriend and get to parties if I didn't have a car. So, I was a gold medal-winning procrastinator when it came to managing my own money.

But if I had invested just US$1,000 in the S&P500 at the start of 1981 and left it alone, re-investing dividends, that US$1,000 would have grown to US$54,000 (S$72,300) by the start of this year. Now that's annual returns of around 11 per cent a year. That might not immediately make you go "wow" but cumulatively, that would have worked out to over 5,300 per cent returns today.

Now, if I had continued to invest - increasing my investments by 10 per cent every year - I would have ended up with an equities holding of more than US$1.3 million today. Not bad for investments totalling US$330,000.


When I eventually got around to investing, I was a speculator. And it didn't help that I worked for many years in the trading environment of stockbroking companies. I traded in and out of stocks, chasing the thrill of the "win".

But I would have done better had I followed the advice of an elderly and successful client from decades ago who told me his formula was simply: "Buy good, buy cheap, don't sell." Time is money. But an even more profound twist is "money is time".

You see, the long-term history of stocks is about mean reversion on rising trend lines. That is, stock markets go through cycles - up and down. But in sound economies, stock prices generally go up and down against a rising trend line.

For example, international investment firm Morningstar's estimate of one-year returns for US stocks in the period 1926 to 2017 puts the periods of gains at 74 per cent versus 26 per cent for periods of losses.

But as the period of returns lengthens, the odds of making money rises dramatically. For five-year annualised returns, the periods of losses reduce to only 14 per cent. By the time Morningstar got to 15-year annualised returns, the periods of gains were 100 per cent. No periods of losses.


At many periods in my life, I held far more cash than was necessary for emergency purposes. Often it was just haphazard planning. My excuse was always: "I'm too busy to deal with this now." And sometimes it was risk aversion.

But here are the historical facts about holding cash over long periods of time. Yes, over the very short term, cash is "safe" - in the sense that a dollar in a bank today will still be a dollar next week.

But be wary of the illusion of money. US$1 million from 1926, held literally in cash - the metaphorical "money under the mattress" - will today have lost 93 per cent of its spending power.

Put simply, the US$1 million will be able to buy only around 7 per cent of what it would have been able to buy 92 years ago. So, similarly, the savings you have now will almost certainly be worth a lot less in real spending power in 20 years.

You know how your parents say: "A hundred dollars was a lot of money when we were young"? Now you know why.

•The writer, a former chief investment officer at DBS Bank, is an investment professional in banking and finance, and the financial media.

Sunday, May 20, 2018

Stress-free investing (or at least, close to it)

Lorna Tan Invest Editor/Senior Correspondent
PUBLISHED MAY 20, 2018, 5:00 AM SGT

The severe jolt that rocked global markets early this the year, after 12 months or more of bullish gains, spooked plenty of investors. It was a sharp reminder that shares can fall just as fast as they can rise. Invest editor Lorna Tan lists four approaches that will provide some peace of mind, regardless of where the market is heading.

Not putting all your eggs in one basket is a sensible rule for retail investors. You can diversify by spreading your investments over different securities in various asset classes.

The Investment Management Association of Singapore (Imas) says diversifying gives you a portfolio that can weather the ups and downs of economic cycles and market volatility.

Let's assume you have invested all your money in shares. Your capital drops by 20 per cent if the stock market falls by 20 per cent.

What if you had split your investments equally into shares and bonds?

As they are sometimes negatively correlated, a fall in shares may tend to be associated with a rise in bond prices, says Imas.

Assume that in this case, bond prices rise by 5 per cent. Your share-bond portfolio will then fall by just 7.5 per cent, the average of the return for shares and bonds. As such, there are more diversification benefits when we include more asset classes in the portfolio.

To diversify effectively, you need to invest in a variety of securities and asset classes. You will have to invest in many shares and bonds spread across sectors. You may also want to invest internationally.

However, not many investors have the resources and time to do all these. This is where unit trusts and other types of pooled products, such as exchange-traded funds, can offer you a practical route to diversifying.

With an investment of as little as $1,000, you can invest in a well-diversified basket of securities, adds Imas.

For a two-year period ending in February, The Sunday Times ran a Save & Invest Portfolio Series that featured the simulated portfolios of three individuals.

The series indicated that at different points, different asset classes in the portfolios outperformed their benchmarks. The key takeaway is that it is impossible to predict all the factors that affect financial markets and, therefore, it is best to invest with a long-term horizon in a diversified basket of assets.

This means buying a basket of stocks that are trading below their fair value and with low borrowings.

In addition, these should be firms that are generating cash from the business and paying out some of the cash to shareholders as dividends.

Ms Teh Hooi Ling, portfolio manager of Inclusif Value Fund, says that because of low borrowings, the stocks will not fall to zero.

"Because you buy a big basket of such stocks across various industries and various countries, it is unlikely that all will go down significantly at the same time," she adds.

"And as you are paying only 60 cents a share for a stock that's worth $1, your downside is protected. Besides, you get paid regularly because the firms are paying dividends."

At some point, the market will recognise the value of the stock. When it trades back to, say, 90 cents, you would have made a 50 per cent return.

In the intervening years, you would have collected yearly dividends of, say, 3 or 4 per cent, notes Ms Teh. She points out five ways the value of such stocks can be unlocked.

•A company with unrecognised value could be privatised by its majority shareholder.

•An undervalued company may be bought by a bigger firm or by another strategic partner.

•A company can unlock the value of its assets by divesting some of them or by distributing what it owns to all its shareholders.

For example, last August, Pan Hong Holdings said it would distribute all its 73 per cent stake in Hong Kong-listed property developer Sino Harbour to its shareholders. Its share price more than doubled two months after the announcement.

•Some news may trigger the recognition of a stock's value. Malaysian stock Kuchai Development doubled over a three-day period in January when it was reported that it was poised to be a major beneficiary from the impending listing of Great Eastern's insurance arm in Malaysia. Kuchai owns 3.03 million shares in Great Eastern, which in turn has a stake in Great Eastern Life Assurance (Malaysia).

•A small cap can get recognised when it delivers results.

Japanese company Nichidai Corporation develops and markets precision dies and moulding products for automobiles. It also produces sintered wire mesh filters used in the aerospace, petrochemical and pharmaceutical industries.

Four months ago, its shares were trading at close to a 50 per cent discount to its net tangible asset despite the company being consistently profitable and generating cash from its operations.

Earlier this year, it announced that net profit had more than doubled.

The stock rose more than sixfold after that. The price has since corrected but it is still trading at close to 100 per cent above its level four months ago.

Financial experts such as Schroders say reinvesting dividends is one of the most powerful tools available for boosting returns over time.

The fund manager points out that investors in the MSCI World index would certainly have noticed the difference over the past 25 years.

If you had invested US$1,000 in MSCI World on Jan 1, 1993, the capital growth would have produced a notional return of US$3,231 (S$4,340) by March 7 this year. Annually, that represents a growth rate of 5.9 per cent.

However, this changes once dividends - the regular payments made by companies to their shareholders - and the miracle effects of "compounding" are included, says Schroders.

"By reinvesting all dividends, the same US$1,000 investment in MSCI World would have produced a notional return of US$6,416, representing annualised growth of 8.3 per cent.

"In percentage terms, it's the difference between your money growing by 323 per cent, without dividends reinvested, or 640 per cent with dividends reinvested, nearly twice as much," it says.

The reason for this stark difference in returns is the compounding effect, where you earn returns on your returns.

Why could dividend reinvestment be effective?

When buying a share, investors can typically elect how they will receive any dividends.

They can choose to receive cash, referred to as income, or use that money to repurchase more company shares. When you opt to repurchase more shares, it triggers the start of the compounding process.

Compound interest is interest on interest and it helps an investment grow at a faster rate. So by reinvesting dividends, you give your stockholding the potential to earn even more dividends in the future.

Over time, shareholder value rises, especially when share prices increase.

Mr Nick Kirrage, Schroders' fund manager for equity value, says dividend reinvestment is one of the most powerful investment tools available. Its research shows the potential difference to the rate of return that dividend reinvestment makes could be substantial.

He adds that in an era when interest rates are so low, investors need to be aware of relatively simple investment techniques like dividend reinvesting that can help build returns.

"Over time, those seemingly small amounts reinvested can grow into much bigger sums if you use them to buy even more shares that pay dividends in turn," he adds.

"Investors need to do their research and make sure the company they are investing in can afford to pay dividends on a sustainable basis. Your original capital is also at risk, so it pays to be picky."


Nevertheless, it is important to remember that firms do not have to pay dividends and that they can be reduced or cancelled at any time.

Some firms even borrow money to pay dividends to keep investors happy, which may be unsustainable.

Borrowing to pay a dividend could be a symptom of a firm with a weak balance sheet.

As with all investments, do your due diligence before making any investment, says Schroders.

Even with a crystal ball, you will struggle to predict the market. Of course, if shares are on a clear upturn, investing a lump sum at the lowest point is likely to yield good returns. But what happens when you are unsure?

Many financial experts recommend dollar-cost averaging as a suitable strategy to mitigate the risk of being wrong about the market. Simply put, it involves regularly buying a fixed dollar amount of a particular investment, regardless of the share price. By doing so, you buy more shares when prices are low and fewer when prices are high.

So over time, you will have a lower average share price.

For those who think the stock market is overvalued, dollar-cost averaging lets you invest small amounts over time and not miss out on any big rally.

Studies show that investors who choose to stay on the sidelines waiting for a rally typically miss the best days.

Mr Sean Cheng, portfolio manager at Providend, says the dollar-cost averaging method typically outperforms the lump-sum investment approach when the market is declining and when it is U-shaped.

"The key is to keep investing when the market is down and you would have benefited when it recovers because your average price is lower," he says.

Mr Cheng adds that it could also help most investors in their emotional stability.

"Ample data has shown us that most investors are unable to withstand the fluctuations of the markets and tend to bail out during tough times, thereby making what would have been temporary losses permanent instead," he says.

Dollar-cost averaging would help most people to not only stay invested - because they would only have invested a portion of their savings - but to also keep investing through the tough times since it means they can keep getting a lower average price, Mr Cheng explains.

Financial experts advise that dollar-cost averaging is usually more suited for investors with a lower risk tolerance and a long-term investment horizon.

Note that the approach is no guarantee of good returns on your investment.

For instance, it is not prudent to apply dollar-cost averaging to an investment that keeps falling.

You should still do your own due diligence and select investments that have a good track record and that you understand.