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.

1. BE PROACTIVE - NOTHING COMES FROM NOTHING

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.

2. MAKING MONEY IS NOT EASY - ACCEPT THAT AND START MAKING MONEY

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.

3. DON'T PROCRASTINATE

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.

4. MONEY IS TIME

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.

5. THE FEAR OF LOSS VERSUS THE CERTAINTY OF (INFLATION-ADJUSTED) LOSS

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.

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.

1 DIVERSIFICATION
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.

2 VALUE INVESTING
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.

3 DIVIDEND REINVESTING
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."

BEWARE OF THE DIVIDEND TRAP

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.

4 DOLLAR-COST AVERAGING
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.

Link:
https://www.straitstimes.com/business/invest/stress-free-investing-or-at-least-close-to-it

High-tech Investing

 Dr Larry Haverkamp
The Sunday Times
30 October 2016

At the new technologies in the market can make your head spin. But how about investing? Does it have new innovations to lower costs, raise returns and reduce risk?

The answers are 'eyes, yes and yes'. We have had four investing innovations: ETFs, hedge funds, private equity and sovereign wealth funds.

ETFs are nearly an passively managed, which means they are index funds that simply duplicate a market index. like the S&P 500 in the United States or the Straits Times Index in Singapore.

The other three funds are actively managed, which means they try to do better than a market index by superior stock picking and market timing.

CAN IT BE DONE?
Of course, the billion-dollar question is. "Can it be done? Can smart managers out-perform the marker?" The answer, so far, has been "no," but hope springs eternal.

This optimism explains why we have actively managed funds and
the most well-known are hedge funds with US$3 trillion (S$4.18 trillion) of assets under management.

It matches the US$3 trillion in sovereign wealth funds, US$3 trillion in ETFs and US$1 trillion in private equity funds. Alt have sprung up from almost nothing 30 years ago.

Perhaps the biggest question is whether active management really works. Research indicates that it doesn't, because actively managed funds, on average, have failed to beat their benchmarks.

It means that passively managed funds, like ETFs, perform as well as actively managed ones. And they do it at a much lower cost since ETFs don't need to hire high-priced experts to pick the best shares. They simply duplicate an index by buying all the shares in the index.

The lowest-cost ETF charges an expense ratio of 0.04 per cent per year, which is only 40 cents for every S1,000 invested. It is not much, especially since ETFs do not charge a performance fee.

It compares to hedge funds which charge "2+20" which means a 2 per cent annual expense ratio and a 20 per cent performance fee above a minimum return. This cost has come down slightly in an effort to win back business lost because of low returns.

DO THEY OUT-PERFORM?
The big question is whether it is worth the money? Have hedge funds really outperformed their benchmarks?

Incredibly, no one can say for sure, as nearly all hedge funds declare themselves unique and so they don't have a benchmark. They judge themselves successful if they simply make a profit and not a loss.

These are called 'absolute return' funds and besides having no benchmark, many also use high leverage. Then, an investment might earn only 3 per cent but with three times leverage, the return rises to 9 per cent. Of course, leverage can also magnify losses.

Three times leverage may look high, but it isn't much when you consider that others have used extreme leverage, like investment banks that carried 30 times leverage prior to the 2008 financial crisis.

The stories hedge funds tell may be even more important than the numbers, especially if there are no benchmarks. Take high-yield bonds, commonly called junk bonds. By analysing the bond contracts one by one, it should be possible to pick out the best to produce high returns.

Well, that is the sales pitch. The problem is there is no obvious benchmark to compare to those leveraged returns.

Another example is emerging markets. Supposedly, experienced analysts can pick the best stocks in developing economies - like Africa - while developed stock markets have a longer history and are more efficient, making it more difficult to find a bargain. Again, the story sounds reasonable, but there is no obvious benchmark to use for comparison.

One more: Guessing the target company in a future take-over would be a sure money-maker. But can it be done and do hedge funds that try succeed? Again, the story is compelling but we don't have enough data from hedge funds to know.

The stories may have succeeded more than data in boosting hedge fund capital to an incredible U5S3 trillion.

Recently, however, investors have grown restless and some have given their required three- to six-months advanced notice to withdraw money, causing hedge fund assets to decline slightly while ETFs have continued to grow.

PERFORMANCE PARADOX
Hedge funds have an impressive record of returning 10 per cent in the last 25 years compared to 9 per cent for the S&P 500. And they did it with less than half the volatility of the S&P 500. That means the returns were high and the risks low, which is the standard measure of a fund's success.

But, as you may suspect, there is a catch. It seems that hedge funds earned spectacular returns of 18 per cent per year in the first decade, from 1990 to 2000.

Then, in the most recent decade from 2005 to 2015, hedge funds returned only 3.5 per cent per year. It is a low return that is hard to justify.

The billion-dollar question is "What happened? Why have hedge fund returns dropped so drastically?' And 'Do they have a future?'

It isn't certain but maybe - just maybe - all markets have become more efficient, which makes it harder for hedge funds to out-perform any index bonds, emerging markets or takeover targets.

That is one explanation. Another is that it is only a temporary market blip and hedge funds will make a comeback.

Value investing: grit, timing, compounding - and a dash of volatility

Experts at seminar share pointers on how to build up a retirement nest egg

By Renald Yeo
yrenald@sph.com.sg

Singapore

IMAGINE this: You are middle-aged and planning for your retirement. Instead of letting your hard-earned cash sit around in the bank, you make the wise choice to invest your life savings - say, a million dollars - in a bid to produce even more dollars.

What if you invest your entire savings in an all-equities portfolio, and actively ignore 'safe' instruments such as bonds and fixed deposits? What if you could withdraw a part of that sum for your own expenditure - say, S$50,000 a year - and at the end of 30 years, your portfolio would consist of about S$7 million, all while you were spending the equivalent of your original capital of a million dollars?

Sound like a get-rich-quick scam? A Nigerian prince lurking somewhere in the background, perhaps?

But a portfolio as described above is entirely possible through value investing - along with grit, good timing, a dash of volatility in the markets and compounding, a panel of experts said on Saturday at a retirement seminar.

The seminar was jointly organised by The Business Times and Aggregate Asset Management. Value investing basically entails picking up bargains in stock markets and holding on to them until prices rebound, fund manager and executive director at Aggregate Asset Management Eric Kong said during the panel discussions.

One way to find such bargains is to divide the share price of a particular firm against its book value per share; a 'bargain firm' would be priced lower than the book value of the assets - such as cash, property and inventory.

In contrast, an "expensive counter" trades several times above the net asset value, Mr Kong said.

He espoused the potential dangers of investing in those counters. "If you are paying 10 times the asset value of a company, when earnings take a dip or when there is bad news, nine times of that can disappear. "That's because the nine times consist of goodwill, and goodwill can disappear instantly."

To mitigate risk, Mr Kong advocated for investors to diversify their portfolios across many firms across different industries and indeed, across different countries.

Aggregate, for instance, has investments in more than 500 counters, Mr  Kong said, reducing its average exposure to individual stocks to about 0.2 per cent each.

Since its inception in 2012, its flagship fund Aggregate Value Fund (AVF)  has returned a compounded 8.5 percentage points a year, and has outperformed the MSCI Asia Pacific All Countries All Caps Index by 6.1 per cent on an annualised basis, Mr Kong said.

AVF has more than S$300 million in assets under management.

Yet, the investment process is one that investors can undertake on their own.

"To begin the process, you need to know how much you need to invest in for your retirement," said Mr Kong.

The general rule of thumb is for investors to multiply their annual expenditure during retirement by about 20 times. "So, if you need S$50,000 to spend during your retirement annually, you need to invest S$1 million," he added.

With the capital on hand, an investor would then look for stocks trading at a discount to the value of its assets; when hunting for these assets, volatility - often a hated term - plays an important role, Mr Kong said.

During periods of volatility, stocks may trade at discounts due to over-reaction from the market, and those periods are when value investors can swoop in to "buy low, hold until it recovers and then sell high".

Indeed, it is that grit to hold a longer-term view that can bring the best results; Aggregate's research shows that an investor who bought into discounted stocks in Singapore - starting from 1983, for instance - would see his initial capital grow by seven times over the next 30 years. This contrasts with negative returns from investing in the market as a whole.

When asked by a member of the audience on why the investment strategy ignores growth stocks like "the Alibabas of the world", Aggregate executive director and head of research Teh Hooi Ling said: "When a stock is growing very quickly ... and has a high valuation, you pay top dollar for it, but the future that it will be there 10, 20 years down the road - you can't see it.

"When you buy stocks based on assets they actually own today at discounts, the possibility of your investment capital still remaining after, say, 10, 20 years, is quite high."

Understanding price returns in share investing

The Straits Times
Geoff Howie
26/10/2013

INVESTORS generally invest for two reasons.

First, they attempt to cash in on the price returns, which are reflected in the rise in the market price of the specific share upon liquidation.

Second, they benefit from the potential earnings that are periodically paid out to shareholders, otherwise also known as dividend returns.

A good investment opportunity should entail both strong price and dividend returns. However, some investors tend to focus on potential price returns with little regard for dividend returns, or vice versa.

In this second issue of the Mind Your Money Series, we will look at the concept of price returns and the factors that drive the growth and decline of market prices of different stocks.

Next month, we will explore dividend and total returns.
 •What influences price returns

From most investors' point of view, parting with cash to purchase a company's stocks serves one purpose: wealth accumulation in the future because the investors believe that there are potential price gains to be reaped.

So it follows that the price of a stock not only indicates a company's current value, but also reflects the growth that investors expect in the future.

An investor can choose to invest in blue-chip stocks, which are those of well-established companies with stable cash flows and strong management teams, as outlined in the Securities Investors Association (Singapore) Investment Guide Book.

Typically, blue chips pay regular dividends and would have had considerable long-term price returns in the past.

Otherwise, the investor can also consider growth stocks, which are shares of rapidly growing firms. Such companies typically plough back their earnings into the business, and hence their shares tend to experience more price fluctuations.
 •What sort of price returns have Singapore stocks showed in the past?

Consider the Straits Times Index (STI).

Like every stock market in the world, Singapore's stock market has a key stock market index - the STI.

In the same way the consumer price index (CPI) measures how much prices of goods and services have moved during a certain period, the STI is a barometer of how much the Singapore stock market has moved over a certain time.

The CPI is made up of a basket of certain goods and services. Similarly, the STI is made up of a basket of stocks of 30 companies.

If one were to look at the current STI stocks that have been listed for at least five years, it is clear that many have performed creditably.

Of the 30 stocks comprising the STI, 27, or 90 per cent, were listed more than five years ago.

Over these five years, the 30 stocks have shown price movements ranging from a 5 per cent fall for Singapore Airlines to a 270 per cent rise for Genting.

If the price movements were arranged from the lowest to the highest, the median (or statistical middle) of the price moves of the 27 stocks would be a 68 per cent rise by Noble Group.

Do remember, though, that past price movements of stocks do not mean they will behave in the same way in future.

In other words, past performance is not a guarantee of future returns.

Suppose an investor wants to start investing in stocks. How can he start?

A good way is to undertake a regular and long-term investing strategy by using regular share savings plans, which was covered by this column last month.
 •Using the Price-to-Earnings Ratio (P/E Ratio)

Apart from considering the price moves of a stock over time, investors also may want to review its price-to-earnings ratio, or P/E ratio.

The P/E ratio of a company is calculated by taking the price of one share and dividing it by the earnings per share.

The P/E ratio of a company can be compared with the P/E ratio of another company to determine whether one is higher- or lower-priced compared with the other if their earnings were the same.

If the P/E ratio of company A is higher than that of company B, then one may surmise that company A is higher priced than company B for their respective earnings.

The P/E ratio of an entire industry can be calculated by averaging the P/E ratios of all companies within that sector.

P/E ratios may vary vastly when comparing one market with another, or one industry with another.

While it is a useful measure, it is not the be all and end all when it comes to investment decisions. As investors, we should always try to obtain as much information as possible before investing.

The writer is a market strategist at Singapore Exchange.

A year for dividend investing in Asia

Executive Money
Published December 28, 2011

A convergence of global and domestic influences means 2012 will be an opportune time to invest for dividends in the region, says LEE KING FUEI

AMID the upheaval in global financial markets, it is useful to take a step back and re-assess one's long-term investment strategy.


While fears of a cyclical slowdown in China may put many investors off the region, the reality is that the bigger-picture trend of stronger economic growth driven by urbanisation, industrialisation and positive demographics will continue to unfold across Asia over the next two decades. Here, we discuss why now is an opportune time for long-term investors to develop their portfolios in Asia through a dividend-investing strategy.

Despite the market's obsession with share price appreciation, historically, almost two-thirds of long-term equity returns in Asia have come from dividends.

Unlike share price appreciation - which is affected by a myriad of factors including non-fundamental influences such as sentiment and momentum - dividend return represents actual cash paid out by companies to their shareholders.

In addition, because dividends can only be paid out of earnings, which are in turn driven by the economy, dividend return tends to have a stronger correlation with existing economic conditions than share price appreciation.


Investors seeking exposure to the multi-decade Asian economic growth story would do well to pay close heed to the dividends that they are capturing from their equity investments.

Critics of income strategies wonder why they should bother with boring dividends when they are really lusting after the exciting growth story of Asia. After all, Gordon's Model tells us that only companies that have run out of growth projects to invest in, pay dividends.

Try telling that to the executives at Astra International, an Indonesian motorcycle distributor that has steadily raised its dividend payout from nil to 45 per cent over the last decade, while growing its earnings more than 10-fold.

The real world is a very different place from theory. Because managers of companies have better information about their future prospects and loathe cutting dividends, they will often only pay high dividends today if they are comfortable that their expected earnings in future are strong enough to sustain the high payout.

This is also why, in practice, companies that have high dividend payouts usually experience much faster subsequent earnings growth than their low dividend-paying counterparts.

Academics coined this phenomenon the 'dividend-signalling effect'. Our research shows that this dividend-signalling effect is particularly strong in Asia, and can last as long as four years in markets like Singapore.

In a region laden with corporate governance landmines, focusing on dividends when investing in Asia has the benefit of helping investors avoid potential blow-ups. By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money on value-destructive investments, while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds.

Because dividends can only be paid out of real earnings and real cash flow, focusing on dividends helps investors avoid companies with dubious earnings, as these companies are unlikely to have the actual cash required to make dividend payments. Owing to these factors, companies with strong dividend payouts tend to possess higher corporate governance standards in Asia.

With high dividend-paying companies having stronger future earnings growth and better corporate governance, it is little wonder that over the last 20 years, high dividend-yielding stocks have outperformed both the market and low-yielding stocks in Asia.

That said, the benefits of investing for dividends are not unique to Asia. Studies have shown that in the US and Europe, dividend-investing strategies also outperform. However these benefits seem to manifest themselves strongest in Asia, with the Asian strategy delivering returns several times that of their global, US, Japanese and European counterparts over the last decade.

A convergence of global and domestic influences has meant that now is an opportune time to invest for dividends in Asia. In addition to boasting the strongest economic fundamentals in the world, the region also has one of the highest dividend yields globally; second only to Europe where the unfolding debt crisis continues to raise questions about dividend sustainability.

The region also benefits from current low interest rates as a result of Asian central banks pegging, or managing, their exchange rate policies against the US dollar.

Until monetary policies in Asia are altered so that the low interest rates in the US are not imported into the region through its exchange rates targeting, the huge divergence between Asian dividend yields and domestic interest rates represents a unique opportunity for investors to enter the dividend-investing strategy at little opportunity cost.

Investors now get to receive regular dividend payments from Asian corporates that far outstrip the interest rate payments that they would otherwise have received on their bank deposits, while continuing to participate in potential future share price appreciation - a clear win-win situation (if there ever is one in the world of finance!).

Our research shows that the current environment represents one of the best times to adopt a dividend-investing strategy. Just as the strategy underperforms in the period leading into a bubble climax (i.e. when the market discards fundamentals and chases hope), the strategy outperforms very strongly for an extended period of time after the crisis as the market repents its past mistake of ignoring fundamentals.

This was true at the end of the Asian crisis and after the technology bubble, and continues to be the case following the 2008 credit crisis. In fact, we believe the Asian crisis fundamentally changed the regional corporate landscape, and was the catalyst for the current dividend trend.

Undoubtedly, the corporate restructurings that followed the crisis led to higher corporate profitability, burgeoning cash flows and low debt levels which have given rise to the higher dividend payouts we see today. - BT

The writer is fund manager for Asian equities at Schroders

Six rules from world-class investors

Making money through investment involves a strategy based on a set of rules.

Sun, Nov 06, 2011
AsiaOne

Billionaires didn't become billionaires overnight.

For those who became rich by investing, Forbes.com says most would agree that "making money in the market comes with a steadfast strategy that is built around a set of rules".

In a recent article in Forbes, they found six world class investors who shared their investing rules.

Dennis Gartman
Dennis Gartman, who publishes The Gartman Letter - a daily commentary of global capital markets delivered to hedge funds, brokerage firms, mutual funds, and grain and trading firms around the world every morning - says: "Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are 'right' only 30% of the time, as long as our losses are small and our profits are large."

So, don't sell at the first sign of profit, and make sure that you don't let a losing trade get away. Losing a little is ok, losing a lot of money is not.


Warren Buffett
Warren Buffett, undoubtedly one of the most successful investors of all time, says: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Therefore, he would want you to evaluate the quality of the company first, before considering its price. Don't expect a great company to sell for a low price; "bargain bin" companies will sell at a bargain bin price, and will give you equivalent results.


Bill Gross
Bill Gross, who owns one of the largest bond funds in the world, PIMCO funds, says: "Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count. Good [investment] ideas should not be diversified away into meaningless oblivion."

Here, he talks about diversifying your portfolio. Be cautioned, however, that this strategy also runs the risk of diminishing your profits when one of your picks makes a big move while other names don't.


Prince Alwaleed Bin Talal
Well-known in the Saudi investing world, he founded the Kingdom Holding Company. He once said, "We're getting hurt, but I'm a long-term investor."

And apply to him it did. Prior to the 2008 financial crisis, he held a sizable stake in Citigroup, and his real estate investments in India lost considerable value after the 2009 recession.

But instead of selling, he held on, which is what many of the really good investors have done to get rich. Take a long view of your position by holding the stock for a long period of time, taking large events out of consideration and collecting dividends in the meantime.

According to the Forbes article, it is ok to trade short- and medium-term, but the bulk of your portfolio should be in long-term holdings.


Carl Icahn
Carl Icahn, a private equity investor and modern day corporate raider, has made his fair share of enemies over the years.

He says, "You learn in this business … If you want a friend, get a dog."

What this is saying is, when investing, don't act based on a tip from a friend. Rather, do your own research based on facts obtained from trusted sources. While you can consider other people's advice, this should not be the only reason why you'll invest your money on a particular stock.


Carlos Slim
One of the richest men in the world says, "I am convinced that all this poverty in Mexico and in Latin America, like it's happening in China is the opportunity to grow. It's an opportunity for investment".

His quote reflects the mindset of the best investors. They are forward-thinking, "investing now for what will happen later", according to Forbes.

So instead of jumping on the bandwagon of the hottest stock now, be on the lookout for the next big thing while making sure your portfolio is anchored with great companies that have a good long track record.

Investing in extraordinary businesses

Published June 8, 2011

Any market-beating technique should contain this one essential ingredient: a focus on the return on equity

By ROGER MONTGOMERY

BEATING the market is rather simple, especially when the index you are trying to beat is composed of mediocre businesses whose only qualification is their size. To win, buy extraordinary businesses at prices below their intrinsic value and hold them until they either cease to be extraordinary or cease to be reasonably valued. The amazing thing about this approach is that it is simple and it works.

Roaring business: A screen projection of the OS X Lion at the Apple Worldwide Developers Conference in San Francisco on Monday. Apple has a sustainable competitive advantage - something unique that a high return on equity may indicate. Apple's products and the user experience are unique, and there's an almost religious fervour when it comes to the brand

In the short run, the stock market swings from wild enthusiasm to irrational bouts of depression and despondency. Over the long run, however, it has been my experience that prices follow intrinsic values. And if your intrinsic values are based on the performance of the business, then over the long run, price must follow that performance. Your job then is to establish what makes an extraordinary business.

And, of course, opportunities to buy these extraordinary businesses cheap are presented 'in bulk' when fear and pessimism is greatest. In preparation for these inevitable extremes, it is worth establishing what an extraordinary business looks like.

How many times have you heard a commentator on the radio or television referring to earnings per share or dividends per share? Investing magazines and tip sheets are replete with these statistics. But they don't hold the key.

While many professional investment advisers and 'tipsters' will tell you to watch earnings or growth or dividends, these measures also fail to take into account something business owners worry about constantly.


To win at this game, buy extraordinary businesses at prices below their intrinsic value and hold them until they either cease to be extraordinary or cease to be reasonably valued.


You see, earnings and dividend growth only report what is coming out of a business; they are not concerned with how many dollars are required to produce that profit and dividend.

Business owners think about how many dollars they are required to invest in the business, to get those dollars of profit out. Given that the stock market is a place to buy pieces of businesses, you should be concerned with how many dollars need to be injected, in order to generate that dollar of profit.

That is what a ratio called 'return on equity' measures. A high rate means that profits are high compared with the amount of money being invested in the business. A company with equity earning a high rate of return can be likened to a bank account earning a high rate of interest.

Imagine I offered you the opportunity to invest in two start-up businesses, that will each produce a profit of $1 million next year, and profits that will rise by $1 million each year thereafter. The difference is that the first business requires you invest a total of $5 million in brand development, machinery and staff. And that's it. The second business requires an initial investment, in the same things, of $50 million.

The business that requires the lower investment or commitment from you - the business that produces the higher return on your equity - is the one to own.

I have found the best performing stocks over the long run are backed by underlying businesses that sustain high rates of return on equity. Indeed, simple arithmetic can show you that if you buy (and later sell) a share of a company, on the same price earnings ratio, that retains all its profits, your return will equal the return on equity of the company. Therefore, it makes good sense to focus on businesses with high rates of return on equity rather than earnings growth.

Even a company with high earnings growth will produce substantial losses for its investors, if return on equity is declining. An Australian childcare company that had global growth aspirations, called ABC Learning Centres, was just such a business. Years before its collapse, the company had been simultaneously reporting rising earnings but returns on equity that were declining precipitously.

Between 2001 and 2007, ABC Learning reported earnings that grew from virtually nothing to almost US$150 million. Return on equity over the same period, however, had fallen from over 30 per cent per annum to less than 8 per cent.

The company's declining return on equity reveals that growth in earnings was achieved only because shareholders kept shovelling more money into it. You can do the same, if you tip more money into a regular bank account. There is nothing special about that.

By 2006, the returns the business reported, on the nearly US$2 billion that shareholders had stumped up to help the company grow, were just 5 per cent. This was even less than the returns available from a bank deposit at the time. And bank accounts have a lot less risk.

You wouldn't invest $2 billion into a business if all you could expect was 5 per cent. If you aren't prepared to own the whole business for a long time, you shouldn't be prepared to own even a few shares for a short time.

Ultimately, these low returns will be reflected in low returns to shareholders, and the collapse of ABC Learning provided the lowest possible return.

Return on equity tells us many things about a company. Firstly, high rates of return on equity can suggest sound management. While high sustained returns on equity are more likely to be the result of a great business than great management, they may indicate a combination of both - a great vessel and a great skipper.

Secondly, a high return on equity may indicate there is something unique that prevents others from competing directly or successfully with the business. This is known as a sustainable competitive advantage. Apple has it. Consider how quickly the iPad was sold out in Singapore and elsewhere - and it arrived late in Singapore with 'the mother of all backlogs'. Apple's products and the user experience are unique, but more importantly, there's an almost religious fervour when it comes to the brand. This is impossible for another company to buy - even with billions of dollars. Extraordinary! The result is high rates of return on equity and a rising Value.able intrinsic value.

Contrast Apple with SingTel, Singapore Airlines and the banks. These are trophy stocks of Singapore's Blue-Chip Club, but are they truly extraordinary businesses? With return on equity of 6-16 per cent over the last 10 years, these businesses may be good but perhaps not extraordinary. For example, despite Vodafone's best efforts, SingTel remains Singapore's preferred carrier and this is reflected in an average return on equity for SingTel of 16 per cent for the last decade. But the Australian luxury accessories brand Oroton - who has just opened its first Singapore store at Marina Bay Sands - has recently achieved a return on equity of greater than 80 per cent.

Extraordinary stockmarket returns, over the long run, require extraordinary returns on equity. When it comes to determining an appropriate rate of return on equity to look for, remember that, as the sexy actress Mae West once observed: 'Too much of a good thing . . . is wonderful.'

Thirdly, return on equity can also tell us whether the company should reinvest its profits or pay the earnings out as a dividend. Companies generating high rates of return on equity should keep the money, while those generating low rates of return on equity pay dividends. Because this decision is made by management and the company's board of directors, return on equity can help show us which teams understand how to allocate capital properly and therefore those that treat their shareholders like owners.

Fourthly, return on equity can tell us something about whether the auditors and the board of directors are realistic when it comes to what they think balance sheet assets are worth. If the return on equity is consistently very low, it may suggest that the assets on the balance sheet are being valued artificially high.

Investors lose millions when companies announce writedowns because promised 'synergies' from acquisitions fail to materialise. If a company makes a big acquisition and projected returns on equity are very low, it's usually wise to take advantage of any enthusiasm and sell your shares.

Finally, return on equity is also an essential ingredient in establishing the true worth of a company and its shares. Ultimately, investing is all about buying something for less than it is truly worth. And at the heart of working out what a company is worth, is the return on equity ratio.

Seek out and invest in companies that can sustain high rates of return on equity over a long period of time, and you cannot help but beat the markets.

In my next column I will explain why debt not only increases the risk of a company but causes it to be mispriced in the market.

The writer is founder of Montgomery Investment Management Pte Ltd, a Sydney-based investment manager. His book, 'Value.able - How to value the best stocks and buy them for less than they're worth', is available exclusively online at www.RogerMontgomery.com/bt

Before you start investing

You should know your investment objectives, net worth and risk profile.

Wed, Apr 06, 2011
The Business Times

By Teh Shi Ning

IT is a truth widely acknowledged that a single man in possession of a good fortune must be in want of a good investment to marry that fortune to.

These days that single man, or woman, is likely to be younger, and typically hoping his investments will make his fortune good.

One reflection of rising investor interest among the young has been the Singapore Exchange lowering the minimum age to open a trading account to 18 two years ago, but the number of savvy young investors and success stories of their ilk appear to be on the rise too.

Interestingly, people often embark on financial planning and investing later than they think is ideal.

While based on the rather dated National Financial Literacy Survey of 2005, 54 per cent of those surveyed thought they should start planning their finances once they start work, but only 32 per cent actually did. This does still seem to be the case.

Most would appreciate the importance of investing, over and above saving, especially in this current low-interest rate environment. But many are also daunted by the sheer array of investment products and opportunities out there.

To warm up for the plunge into these asset classes next week, here are a few points to think through before you start investing, or for those already dabbling in investments, to take stock of where you are headed.

What are your investment objectives? What is your investment horizon?

Investment objectives are set by balancing your current and future financial needs.

Youth is on the investor's side. Each person's investment objectives are shaped by the stage of the life-cycle he or she is at, says Ang Ser-Keng, senior lecturer of finance at the Singapore Management University's Lee Kong Chian School of Business.

'The investment objective is important because it affects the time horizon,' says Mr Ang. So, a young person who has by default a longer expected life span, can afford to view his investments over a longer time horizon and thus take on riskier investments in exchange for potentially higher returns.

But people in their 20s would range from those still in tertiary education, to fresh entrants to the workforce, to others who may need to factor in support for ageing parents. So, age is not the sole determinant - lifestyles and personal financial commitments shape investment goals too.

Other points to consider include whether big-ticket expenses such as a wedding, a car or a house are on the cards, and whether you intend to save for and finance your children's university education.

Will upkeep of a certain lifestyle retirement suffice, or do you aim to attain spectacular investment success Warren Buffett-style (and give most of it away)? Why you intend to amass wealth will help determine where you decide to put your money into and how.

What is your financial situation/ net worth?

It's also worth having a clear idea of how monthly income and expenses affect how much you can invest.

Mr Ang says a simple gauge of how much you are able to put to work in the markets is to figure out your (Keynesian) money demand in transactionary, precautionary and speculative terms.

In other words, cash for day-to-day needs, cash for the rainy day and cash available to invest and grow.

Invest only with money you can comfortably spare both now and in the foreseeable future, he says.

'It also does not hold you hostage to having to sell assets at very low prices under adverse market conditions, very frequent these days, so that you can sleep well at night.'

What is your risk profile?

Most people can instinctively say if they have a good appetite for risk, or a tendency to shy away from risks. But that is only a subjective type of risk profiling.

'It is a common myth that a risk profile is just about how much risk an investor is willing to take - risk taking versus risk aversion,' Mr Ang says.

If a risk profile is to be used in asset allocation, it needs to be supplemented with an objective risk profiling. In other words, not just how much risk you think you can take, but how much you can actually afford to take.

'The litmus test of an investor's capacity to take risk is whether he would suffer a significant loss in quality of life if a complete loss of the investment occurs,' Mr Ang says. If so, he should then view himself as owning a lower risk profile, even if behaviourally, he is a risk taker.

How much do you know about investing?

'An investment in knowledge always pays the best interest,' Benjamin Franklin once said, a phrase just as well applied to investing for financial gain.

While money management is a lot of common sense, investing entails products and strategies that are not always easy to understand.

On top of researching thoroughly any investment product or strategy, the basic rule which bears repeating, going by the fallout post-Lehman's collapse, is to ask till you understand, and if you still don't, avoid.

Some oft-mentioned strategies include:

Diversification and asset allocation

Spreading the wealth you wish to invest across a variety of investments helps reduce the risk that the failure of any single investment wipes out the value of your entire portfolio.

Different products react differently to the shocks which rock world markets more frequently these days, and diversification can be undertaken by asset classes but also by sectors and geographies.

Think about the composition of your portfolio methodically. The mix of assets in your portfolio ought to help reduce your overall risk, while the exact allocation depends on your investment horizon and risk tolerance.

Dollar-cost averaging

Some advocate invest set amounts on a regular basis over a certain time horizon, whichever way the market heads, as a useful way to invest amid volatility. The idea behind this is that since investors are unlikely to be able to 'buy low and sell high' or 'time the market' all the time, it is preferable to buy a smaller amount each time but do so regularly.

While no shield against market fluctuations, dollar-cost averaging is supposed to lower the average cost of investments over time compared to that of a one-off investment. This is because, in theory, regular investing will mean buying more shares when prices are low and fewer shares when prices are high.

Investing in a volatile market

Financial experts offer advice on some of the safer options to choose from. -ST

Fri, Jun 04, 2010
The Straits Times

By Gabriel Chen

It is getting bumpy out there in investor land, and you may be wondering where to put your money now.

Asian stocks are at 10-month lows amid fears that tensions will keep escalating on the Korean peninsula.

There were reports last week that North Korea may be priming itself for combat, after South Korea officially blamed the regime for the March 26 sinking of one of its warships, which killed 46 sailors.

A Korean war is not the only downside risk to markets.

Before that, fears were festering that Europe's debt crisis could spread, and that China's real estate bubble could pop horribly and cause problems around the globe. Both these worries persist.

Another scare came when the Dow Jones Industrial Average plunged almost 1,000 points in less than 30 minutes earlier this month, for reasons yet to be fully explained.

The ups, as well as the downs, are also getting sharper - with the Dow often rising or falling 200 points or more in a single day.

It is natural to feel disheartened if all that volatility is wreaking havoc on your investment portfolio.

But it is important to take a long-term view and not panic and sell your stocks in a knee-jerk response to the market ripples.

'For long-term investors, they should not be reacting to the short-term volatility and be derailed from their long-term plans,' said Citibank Singapore's head of wealth management, Mr Shrikant Bhat.

'In times like these - while there can be an appropriate shift of risky assets to less risky assets - totally exiting from risky assets may not be the most advisable strategy.'

Fidelity International's managing director for Singapore and South-east Asia, Ms Madeline Ho, advised people to stay invested during these volatile times.

'If one is uncomfortable putting in a lump sum of money, regular investing is a disciplined approach and more palatable if you are uncertain about the market,' she said.

Still, the question for you, the investor, is whether this level of volatility is keeping you up at night.

If your main concern is limiting your losses and saving what cash you have, then you may want to put a lower percentage of your money into stocks and stock funds.

To be sure, you can put all your money in bank deposits just because they are very secure, but that is not wise as your purchasing power will be reduced by inflation - which exceeds bank deposit rates by a fair margin.

Experts say that a sensible combination of products with varying risk levels can provide good returns.

What are some safer investments you can choose from? The Straits Times investigates.

Bonds

Just as people often need to borrow money, so do companies and governments.

One way for them to raise money is by issuing bonds to the public via the market.

You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

Assume you buy a bond that has a face value of $10,000, a coupon - the annual interest payment - of 6 per cent, and a maturity term of five years.

You would earn a total of $600 (6 per cent of $10,000) in interest a year for the next five years. When the bond reaches maturity after five years, you would get your $10,000 back.

You can trade your bond before maturity, but you may receive more or less than you paid for it, depending on market conditions.

Bonds can be bought through most banks and brokerages.

Consider buying Asian bonds, said UBS Wealth Management's chief investment strategist in Singapore, Mr Kelvin Tay.

'On a risk-adjusted basis, due to the relative strength and strong fundamentals of the Asian economies and hence corporates, Asian bonds are a very attractive asset class to invest in,' he said.

It is worth mentioning that while bonds are generally safe bets, they are not risk-free either.

The bond issuer could default on its debt payments.

Investing directly in bonds does not come cheap. The average bond is usually sold in blocks of $50,000 to $1 million at a time, depending on the issue. For retail investors, opting for a unit trust or fund that invests in bonds may make more sense. It is easy, provides diversification, and if chosen properly can be cost efficient.

'For bond funds, the concentration risk is minimised because for the same amount of money invested, it is spread across many issuers,' Mr Bhat said. 'Hence, the impact of the issuer's default on the fund is more muted compared to direct investment in the issuer's bond.'

Mr Albert Lam, IPP Financial Advisers' investment director, suggested three bond funds that investors could consider given their decent performance over the last three years. They are Franklin Templeton Global Bond (8.8 per cent annualised return), Schroder ISF Emerging Market Debt (6.49 per cent annualised return), and DWS Lion Bond (2.8 per cent annualised return).

However, in terms of risk-adjusted returns - or returns adjusted for the amount of risk involved in producing that return - DWS posted the highest number, followed by Franklin Templeton and then Schroder ISF.

Money market funds

Money market funds invest in high-quality short-term instruments and debt securities. The latter are loans sold by firms and governments to borrow money.

These funds are a good alternative for investors who are looking for a stable, low-risk instrument with potentially higher returns - ranging between 1 per cent and 2 per cent - than banks' savings deposits.

'The (Prudential) Cash Fund, for example, invests primarily into Singapore dollar deposits which most investors are familiar with,' said online fund distributor Fundsupermart's analyst, Mr Cheong Chee Kin. 'Its three-year annualised return was 1.06 per cent, while banks' savings deposits return was 0.22 per cent.'

Not all money market funds are the same. Do your homework and read the fund's prospectus and annual reports. Check to see what kinds of debt instruments the fund invests in.

Multi-asset funds

The rationale for investing in such funds is straightforward.

No single asset class can be guaranteed to top the performance charts each year, so it makes sense to have exposure to a broad mix of investments, such as stocks, bonds and property. Multi-asset funds are riskier than fixed deposits, but they are usually less risky than a stock-only portfolio.

Mr Al Clark, regional head of multi-asset at Schroders, cited the recently re-launched Schroder Multi-Asset Revolution as such a fund, adding that it is designed to help investors maximise opportunities in any market environment.

'It has the ability and flexibility to invest in not just traditional asset classes like equities, bonds and cash, but also alternative asset classes like commodities and property,' he said. 'The fund also tactically moves into asset classes that are most appropriate for the prevailing market cycle.'

Gold

Many people invest in gold as a hedge against stock market declines, burgeoning national debt, currency failure, war and social unrest. In fact, there are a number of studies which show that gold prices generally move in the opposite direction from stock prices: Gold soars when stocks tank.

'Gold protects wealth as a safe haven in troubled and uncertain times. This appeal remains compelling for modern investors,' said Mr James Sim, president of the Financial Planning Association of Singapore. United Overseas Bank sells physical gold that can be bought from, and sold back to, the bank at its daily buy-sell market rate.

Perhaps the easiest way to buy physical gold is to walk into a goldsmith and buy 22-karat or 24-karat jewellery. You can also buy gold mining stocks, though they tend to be more volatile than the gold price, Mr Sim added.

Mr Rajiv Baruah, Royal Bank of Scotland's head of sales for private wealth management, expects the price of gold to rise 6 per cent by the first quarter of next year.

This is not an 'unreasonable return' for a six to nine-month investment, Mr Baruah said.

Fixed deposits

If your top priority is to have cash at hand, then fixed deposits are the usual place to park your money.

They let you save a fixed amount of money for a fixed period at a fixed interest rate.

DBS is offering 0.7 per cent a year for a 24-month term deposit. You will need to lodge a minimum of $1,000.

However, Mr Tay from UBS argues that even for conservative investors, staying in fixed deposits is not an option 'due to the increasingly negative real rate of return as a result of higher inflation in the near term'.

This means that people with fixed deposits in the bank are getting a rate of return that is too low to compensate them for the loss of their purchasing power.

gabrielc@sph.com.sg

Investing and Trading of Stocks

Welcome to the world of stock investing. Before you start investing or trading please spend sometimes reading the following articles, it will help you to become a better investor or trader.


"Don't invest in or buy products you don't fully understand. Don't try to out-smart the market. Investment is about adopting a disciplined aproach based on your strategy and risk appetite. It is not about listening to rumours or timing the market." -- Anonymous


Investing
http://www.investmentu.com/research/timelessrules.html

http://starones.blogspot.com/2008/03/contrarian-investing.html

http://starones.blogspot.com/2008/03/templetons-10-investment-principles.html

http://starones.blogspot.com/2009/07/rules-of-trading-and-investing.html

http://starones.blogspot.com/2009/07/importance-of-risk-management.html

http://starones.blogspot.com/2008/10/eight-pearls-of-investment-wisdom-for.html

http://starones.blogspot.com/2008/03/when-you-to-sell-your-stocks.html

http://starones.blogspot.com/2008/06/warren-buffetts-stock-portfolio.html


Trading
http://starones.blogspot.com/2008/03/secrets-for-profiting-in-bull-or-bear.html

http://starones.blogspot.com/2008/07/high-probability-trading-take-steps-to.html

http://starones.blogspot.com/2008/03/ganns-24-never-failing-rules.html

http://starones.blogspot.com/2008/03/how-and-when-to-sell-stocks-short.html

http://starones.blogspot.com/2008/03/how-to-make-money-in-stocks-william-j.html

http://starones.blogspot.com/2008/03/9-deadly-trading-mistakes.html

http://starones.blogspot.com/2008/03/study-guide-for-come-into-my-trading.html

http://starones.blogspot.com/2008/03/stock-market-rules.html

http://starones.blogspot.com/2008/03/richard-rhodess-trading-rules.html

http://starones.blogspot.com/2008/03/trend-following-trading-turtle-trading.html

http://starones.blogspot.com/2008/03/technical-analysis-power-tools-for.html

http://onlypill.tripod.com/toolsofthetrade/id7.html

http://www.rb-trading.com/begin.html

http://www.swing-trade-stocks.com/

http://www.dtjr.com (Chinese)

Valuegrowth Investing II

by Glen Arnold

WHAT JOHN NEFF AVOIDS

John Neff was in charge of the Windsor Fund for 31 years. It beat the market for 25 of those 31 years. He took control in 1964, and retired in 1995. Windsor was the largest equity mutual fund in the United States when it closed its doors to new investors in 1985. Each dollar invested in 1964 had returned $56 by 1995, compared with $22 for the S&P 500. The total return for Windsor, at 5,547% outpaced the S&P 500 by more than two-to-one. In this article, instead of focusing on what stocks Neff purchased, let us focus on what he avoided, most of which relate to bull-markets.

1. High Transaction Costs

Few mutual funds can claim to have such low expenses as the Windsor had-- a mere 0.35% per year. The portfolio's turnover was kept to unusually low levels. This saving on dealing costs is complemented by the low level of operating expenses for activities such as information gathering and analysis. One of Neff's guiding rules is to keep things simple. The most important element determining stock value can be understood without the need for expensive sophisticated equipment or people. By holding for the medium term and not going for short-term profits he reduced both transaction costs and taxes.

2. Excessive Diversification

While all would agree that 'some' degree of diversification is necessary, if this is taken too far investment performance is hobbled. Neff said: 'Why own, for instance, forest products companies if the market has embraced them and you can reap exceptional returns by selling them?' He generally ignored market weightings and bought in areas of the market where under valuation was evident. Some sectors would be unrepresented in the portfolio, whereas others would be 'over-represented' (according to conventional logic). Normally the vast majority of the S&P 500 were not held, at any one time, by Windsor. Generally a mere four or five of these well known stocks fulfilled his requirements for inclusion. When the fund was valued at US$11 billion it still only had 60 stocks. Furthermore, the largest ten accounted for almost 40% of the fund. Windsor would often have 8 or 9% of the outstanding shares of companies. 'By playing it safe, you can make a portfolio so pablum-like that you don't get any sizzle. You can diversify yourself into mediocrity', he said.

3. Technology Stocks

These were generally avoided for three reasons: (1) they are too risky; (2) they do not pass the total return to PE ratio test employed by Neff; (3) Neff admitted that he had no 'discernable edge' versus other people in the market place (Buffett's circle of competence lesson). Neff believed it is essential to have some informational and analytical advantage.

4. Forgetting the Lessons of the Past

The memory of stock market participants is notoriously short. Markets are continually foolish, being condemned to invite catastrophe by forgetting the past. A knowledge of history is essential to give the required perspective. Neff, writing in 1999, believed that speculators in 1998 and 1999 were merely the latest in a long line of amnesiacs. In the late 1990s anything ending in a .com generated great excitement. In the 1950s firms merely had to put 'tronics' on the end of their name to attract attention and to drive their share prices higher. In the 1960s it was the go-go stocks. In the late 1960s and early 1970s to be labelled one of the Nifty Fifty was to see your stock prices soar. In the 1980s oil companies were in vogue. Before these bubbles you had the new era stocks of the 1920s, and so on.

Each generation believes that a few magical companies have an almost infinite capacity to grow, that the rules of economics have been rewritten and that you have to jump aboard before it is too late. The 1990s fervour was more dangerous than most because many, if not the majority, of the companies which lured the speculative dollar had no profits. They could not be called growth stocks in the traditional sense of the term. Speculators were premature in conferring growth status on companies that had good prospects only if you made massive assumptions regarding the likelihood of the entry of competitors, or the prospect for another change in technology, and, the willingness of consumers to join the revolution rather than continue to do things without the new technology. 'Windsor's critical edge was nothing more mysterious than remembering the lessons of the past and how they tend to repeat themselves,' said Neff.

5. Getting carried away with Bull Market Hype

Markets go through cycles over time. There are occasions when investors are very risk averse. There is a phase when the emphasis is on quality. Later as confidence grows, investors look for stocks with a more speculative taint. After a period of growth the speculators fall over each other in their buying panic as the market runs well ahead of its fundamentals. 'The capacity of investors to believe in something too good to be true seems almost infinitive at times,' quips Neff. As the fad gathers pace, people who have little familiarity with stocks get swept along with the drumbeat of the prevailing wisdom. People find the urge to 'hop on the line that moves fastest' as they try to take short cuts to riches. The siren song of positive beliefs in the future drowns out the argument for a rational investment strategy based on a fundamental evaluation of stocks. Traders buy and sell on the basis of tips and superficial knowledge. The visions of overnight fortunes blind them to the logicality of investing without sound information and calm reflective thought.

People come to believe that there is gold enough for all in the same streams that earlier adventurers panned. Most of these followers go home empty handed as the wild expectations of the individual members of the mob one by one receive a slap in the face with a dose of reality. Eventually, it dawns on the masses that some players have already taken their money, as they figured things had already gone too far. Group panic begins, as everyone tries to exit at once. Predicting when these inflection points will occur is impossible so the best advice is to stay clear of stocks and markets that have lost touch with fundamentals. Don't try to play the greater-fool game -- you might just end up being the biggest fool.

6. The Technical or Momentum Game

Neff considered it ill-advised to try and predict market movements. His approach: 'amounts to hitting behind the ball instead of anticipating market climaxes six to eighteen months ahead of the investment crowd. Poor performance often occurred as a consequence of a technical orientation that tried to predict peaks and troughs in stock charts. It assumed that where a stock has been implies where its going.'

7. Growth Stocks with High PE Ratios

The problem with stocks showing fast earnings growth is that their potential is likely to be well recognized. Indeed, on too many occasions, stocks that have attracted a market buzz have their price driven up to unrealistic heights as investors get carried away. This was clearly evident in the mania for business-to-consumer internet stocks in the late 1990s. A combination of over excitement, small free-float and the obligation of index tracker funds to purchase high capitalization stocks drove prices to ridiculous levels, especially for those with an untested business model, no profits and without enough time having passed to be able to analyze the possibility of market entry, competition and the introduction of substitute products.

Even well established growth companies such as General Electric, Gillette, Coca-Cola and Procter and Gamble can be poor investments. Yes, they are good companies with excellent financial performances based on strong competitive positions and good management. Yes, their businesses are broadly-based, sound and global. Yes, they are safe and, almost inevitably, will be around in 20 years' time. But, no, they will not produce good returns to the stock buyer if they are purchased at a time when everyone knows these are great companies and the price is bid up to reflect this common belief. The slightest hiccup in growth or expectation of growth for these companies will see the stock sent reeling as the crowd becomes disillusioned. The lesson is that even great companies have a price ceiling. Neff says, 'You can't up the ante forever. Eventually, even great stocks run out of gas.' Believing that Coca-Cola is a buy at a PE of 55, because it might go to 70 times earnings is battling against the odds. Value investors always keep the odds in their favor.

8. Being a Simple Contrarian

Neff is an individual who makes up his own mind about a situation or a stock. His willingness to argue with a signpost has paid off handsomely when it comes to going against the whims and fancies of the stock market. And yet, he was never obstinate, ego-driven or simple minded in his opposition. He did not assume that the market was always wrong. He was prepared to listen to the views of others. Most importantly he did not unthinkingly and automatically take a contrarian line.

Neff says, 'Do not bask in the warmth of just being different. There is a thin line between being contrarian, and being just plain stubborn. I revel in opportunities to buy stocks, but I will also concede that at times the crowd is right. Eventually you have to be right on fundamentals to be rewarded... Stubborn, knee-jerk contrarians follow a recipe for catastrophe. Savvy contrarians keep their minds open, leavened by a sense of history and a sense of humor. Almost anything in the investment field can go too far, including a contrarian theme.'

Credits: This article is modified from a summary of Neff's investing style provided by Glen Arnold in Valuegrowth Investing, 2002.

Timing the Market

"Don't invest in or buy products you don't fully understand. Don't try to out-smart the market. Investment is about adopting a disciplined aproach based on your strategy and risk appetite. It is not about listening to rumours or timing the market." -- Anonymous