Investment is like our daily life

Dear readers,

It's been a month long since I last posted here. Merry Christmas and a Happy New Year to all of you. Hope that 2011 have brought you some good investments.

During the Christmas weekend, I read a post from a friend in her Facebook. 

"Damn crowded, whole world seem to be here — at 112 Katong."

We know that 112 Katong is a brand new shopping mall that was opened just before Christmas. It had attracted a lot of shoppers during the Christmas long weekend.

But how is this related to investment?

Thoughts just ran through my mind when I read the above post. Somehow I just linked the thoughts to investment. Here, I will explain their relationship.

It's in the humans. Nature create humans that like to follow the crowd or follow something new. 112 Katong was just opened and people just flocked there. They did not think of whether it will be crowded or not. They just like to be with the big crowd. Some people may even shop for things there, without comparing prices elsewhere. So, most of the time, shoppers bought things way above the value.

Imagine if you are an investor, waiting for a stock or a property to buy. You see that many people were buying ABC stock or DEF property, the price has been pushed up for almost 10%. You were afraid that price might go higher, so you decided to follow the  crowd and make your purchase, without doing any homework. This is the worst mistake that an investor can make.

112 Katong will still be there in the next 20 to 30 years. Why do so many people like to follow the crowd? Don't they feel uncomfortable with the crowd? Just like the shopping mall, the stocks will continue to exist as long as the company is still up and running. 

Personally, I prefer to shop in shopping malls on weekdays. Why? So that I can enjoy the shopping experience without squeezing with the others. So I applied the same concept into investing stocks. I look for stocks that do not trade on the top volume list. I look for stocks that people don't like. I look for stocks at my own sweet time and do research on them before I commit to buy. When I have committed to buy the stock, I will wait for it to fall to my strike price before I take action. That's what an amateur investor should do too. 

Also, we compare prices when we do our shopping. Recently, I bought two dozen golf balls that will cost $8 per piece in Singapore. A friend was coming back to Singapore for Christmas, hence I bought through the Internet. The golf balls cost less than $5 per piece. I actually bought at a discount of 37.5%. The same should go to property investment. I bought two, "not so popular", properties in 2010 and sold them for a good profit in 2011. Before buying the properties, I looked at the prices of nearby properties for comparison. Of course, I did not buy the cheapest one, but I bought one that is at a discount of my personal valuation of the property. Investment is just like buying normal shopping items, we tend to compare prices before purchasing them at a cheaper shop.

A good investor enjoys doing homework on the investments that he is interested in. Just like a student will like to do homework in the subjects that he is interested in. It's like purchasing a car. When a person likes a certain car model, he will look for all the reviews, or pictures of the car. This applies to investment as well. Be it stocks or properties, amateur investors should find out more before making the decision to buy.

There are many other examples that investment can link to our daily lives. Our daily habits will determine how successful we can be in our investments.

May the incoming 2012 bring us better investment opportunities.

Happy investing and cheers.

Should I pay down my mortgage or should I invest my savings?

I received an email from a reader of my book, Route to successful property investment in Singapore. Once again, I want to thank all those who have bought my book for your support. He asked if he should do a partial redemption whenever he has enough to do it, or invest the money? I pondered for quite some time, did a bit of calculation and replied him. I will not discuss about the email. I shall discuss my strategy in this post.

Take for example, a couple who has taken a $300,000 mortgage loan. It does not matter how much is the monthly repayment. The figure that is important here is the interest rate. Let's take the current rate of about 1% per annum. Many will say that I will invest the money since the loan rates is still so low. I can just put in any preference shares that give me 5% dividend and I can beat it by 4%. That is totally WRONG!


First, you must take note that 1% of $300,000 is $3,000. If you have only $20,000 of savings, 5% of your $20,000 invested in the preference share is only $1,000. You are actually paying $2,000 interest instead of $3,000. You are still paying interest on your part. In order to beat the loan interest, you have to make at least 15% profit from your $20,000. It is not impossible but a very difficult target to achieve. And remember, DO NOT try your luck on the gambling tables.  If you pay the $20,000 and reduce the loan to $280,000, the interest will be $2,800 and you are paying $800 more than what is mentioned above. If you are not confident of investing in the stock market, then you may choose to do the latter. You will still be saving 6.7% on the interest to be paid. Investment in stock market carries much higher risks than repaying your own home. In the event that a Lehman-like crisis happens again, buying the wrong stocks may cause you $20,000 and you will still have to pay $3,000 interest. Weigh the consequence carefully before you make your decision.
Of course, if you are confident that you can make more than 15% per annum for the next 5 years, then by all means, invest the money. But the current market condition is not suitable for one to dump their money into stocks. Anyway, invest in your own property is a better and more certain choice, compared to the stock market.

When you have partially redeemed to $150,000, then maybe it is a better choice to invest your money. A 1% interest on $150,000 is $1,500 per year. I believe that if you have $20,000 in savings, a 10% return every year will give you $500 more than your loan repayment. It is not difficult to find a good company that can give us more than 10% returns. You can read my other posts in this blog to find out how.

I will just use another figure to illustrate another scenario. A couple bought a $1 million condominium and took 80% loan. Their interest each year will be about $8,000. How much do they need to invest, in order to overcome the $8,000 interest? Let's just talk about making a profit of $8,000 every year. The highest dividend that I have come across so far, is Cerebos Pacific. Their dividends per year should be at least $0.25 per share. So taking $8,000 divided by $0.25, the couple needs to buy 32,000 Cerebos Pacific shares. At today's closing price of $4.69, they need to have $150,000, just to break even with the interest. If they have $197,000 to buy 42,000 shares, then they can expect to receive $10,500 dividend each year. Not only have they beat the interest, they have an additional $2,500 to reinvest and grow their savings further.

In summary, if you are not confident of investing in the stock market with your savings, it is better to repay the mortgage loan and reduce the interest. Interest rate may differ, but our aim is to invest only when we can really beat the interest of housing loan. Hope each and every one of you find this post useful and recommend your friends and colleagues to take a follow this blog.

Cheers!

Disclaimer: Any investment mentioned here is meant to be illustration only. Every investment involves risks. Readers are advised to exercise their own discretion when investing their own money. Writer of this blog shall not be held responsible for any failed investment made.

A sample defensive portfolio

As I was chatting with my wife regarding investment and how can we, the small investors, protect ourselves from the current wild emotion of Mr Market. The recent eurozone news triggered the roller coaster effect of the stock market. How are we affeted by that and how can we protect our investment from the effects?

I have included here a sample portfolio for the elderly. This portfolio is a real-life example that I recommeded to an old couple. The shares were bought one year ago and you can take a look at the percentage dividend yield and the returns on invested capital.

A defensive portfolio for the elderly
				as at 29 Sept 2011
Stock (No. of shares)	Buy at	1-year dividend	Realised profit	Unrealised profit
Cerebos Pacific (2,000)	$            4.48	$                640.00	$              640.00	$                  560.00
Popular (50,000)	$            0.15	$                500.00	$              500.00	$                  400.00
OCC 5.1% NCPS (200)	$        105.00	$            1,000.00	$          1,000.00	$                  (20.00)
	$  37,460.00		$          2,140.00	$                  940.00
		% Yield	5.7%
		ROIC (%)	8.2%

This couple was very satisfied with this portfolio which can give them a passive income of $2,140 in the year 2010/2011, compared to only $352 if they put $40,000 into fixed deposit that pays only 0.88%.
The price to buy Cerebos Pacific and Popular shares were calculated using my own formula before recommending to the couple.

Please note that these shares were bought in mid-2010, when the STI index was at 2987.70. The index closed at 2708.13 yesterday. This portfolio gained 8.2% (including dividends) while STI index lost (9.4%). This portfolio beat the STI index by a margin of 17.6%. I would have considered this an achievement.

What are the lesson that we can learn from here?
1.  Value investing is timeless. You can buy undervalued stocks anytime.
2.  A defensive portfolio is able to let you have a good night's sleep. Even during these uncertain times in the eurozone, this portfolio is still able to give the couple a dividend of more than $2,000.
3.  Buying and holding stocks that are not actively traded can protect your portfolio from the effects of news.
4.  Buy businesses, not stocks. Cerebos Pacific is a company that produces Brand's Essence of Chicken, Popular is a company that is known to almost everyone in Singapore.
5.  Buy a high yield preference shares can almost guarantee every dividend payout at a fixed rate.
6.  Buy at the strike price and not any other price.

The couple will still be holding on to this portfolio for the next couple of years to enjoy the high dividend yield. Will update on this portfolio at the same time next year. So do keep a lookout.

Happy investing and cheers!