Tuesday, July 22, 2014

REITs versus Brick and Mortar Properties

Yes, REITs do own property assets. 

They could be residential, commercial, or industrial properties; hotels, hospitals, and what have you - just as long it's a building or space where you can lease it out to tenants.

Does that mean when I own REITs, I am a property investor too?

You can call me Al!
First of all, if it makes you happy, why should you care what others think what you call yourself? 

I call myself a nano hedge fund manager. Laugh all you want. I choose it not because of hubris; it's to remind myself to focus on absolute returns and to be able to do it both ways (stop sniggering, it's not what you're thinking!)

REITs are equities

Having said that, to me, REITs are no different from any other equities. It's just a paper asset where we "own" a fractal share of a company - nothing more; nothing less.

As a minority shareholder, do I have the power or influence to hire and fire the CEO? Decide his/her compensation? Do I get to approve the strategic plans of the company like the Board of Directors do? Was I ever consulted whenever a company takes out a huge banking loan? Or when they do a Rights Offer? Or Share Placement to another idiot institution investor so as to dilute my existing holdings in the company?

No. Hence, when I own shares, I don't call myself a Business Owner. (I consider myself more of a freeloader)

Using the same logic, when I own a REIT previously (sold for capital gains), I don't consider myself a Property Investor either.

It's same same but different!

Property is about king of the castle (or dog house)
A brick and mortar property that I own is a physical asset. It's something I can feel and touch.

I can pretty much decide whatever I want to do with it. Rent it out, do an asset enhancement (renovation), knock down a wall or two, leave it empty gathering dust, etc. 

Of course there are certain restrictions, especially if it's a HDB or Strata unit...That's why properties with less onerous restrictions on the ownership cost a lot more...

What's the difference between paper and physical assets?

Let's take the example of gold. In theory there's no difference between owning physical gold and buying a Gold ETF. But in period of distress and you need to get away quickly, try bribing the pilot or boatman with a Gold ETF statement...

REITs won't go to zero?

Eh... In US, where the REITs market is a lot bigger and deeper than ours, there are some REITs that have sought bankruptcy protection... 

During the GFC, I was aware of 2 SGX REITs that almost failed... Lucky 2 white knights came to the rescue. Hell hath no fury like a yield investor scorned! Try going through a dividend suspension or a massive dividend hair-cut as a REIT investor during 2008... 

Similarly, remember when AIG almost failed during the GFC? Read about worried policyholders queuing outside the Robinson Road AIA building wanting to surrender their policies?

Isn't insurance "supposed" to be safe? Well, that's paper assets for you.

Therefore in investing, never say never!

Property can go to zero!

Yes! For leasehold properties, the value can go to zero. "Ah ber then"?  Sometimes I read funny statements in the internet that big daddy cheat us, we don't own our HDB homes, etc... 

You can't really have a conversation with such people if they don't understand the meaning of leasehold. 

So be clear on whether you are leasing or buying a freehold property. 

How to visualise 99 years? Just look at HK. The New Territories were leased to UK for 99 years, and I think the Britons made a lot of money out of these 99 years. So 99 years is long enough to make some serious money if we are lucky! Stop complaining already.

All asset classes went down in 2008

Don't listen to me. If you were around in 2008/09, all you have to do is to go down memory lane or do your own research if you were sleeping at the wheel then.

ALL asset classes went down.

Even gold!?

Even bonds!?

When you have margin calls and redemptions by shell-shocked investors, money managers have to liquidate whatever assets you can sell - even the good ones. 

But with QE money printing, gold and bonds rallied (after a brief temporary dip) while equities lagged behind. (Something to be said about having other asset classes in your portfolio eh?)

As for property in Singapore, did we have 50% correction like for STI? Not even 20% dip for Singapore properties right?

With QE and zero interest rate policy in the States, brave property investors that bought in 2009 were a happy lot especially after cashing out in 2013. Even happier when you factor in the 5 to 1 leverage! Without it, property investing is too boring for most "investors" - who are actually speculators.

So no single asset class can protect you during 1997, 2000, 2008 - unless you are great with market timing by going 100% into cash - which is an asset class all by itself.

Those with cash in 2009 is like a kid in a candy store.

Many wished they had more cash rotting in the bank during 2009!!!

Man-whoring ways

If you are not a one woman man as in loyalty to one asset class only, welcome to the world of prostitution: I am a equities man-whore.

Big daddy says we must constantly re-skill and upgrade.

Well, I am levelling up from equities man-whore to asset-class man-whore!

Life time learning?

Sunday, July 20, 2014

What Passive Income?

There's some emotive words out there that work very well in attracting consumer attention:



Buy 2 get 1 free!

Bonus pack!

And for the journey towards Financial Freedom, there is this popular "Passive Income" quote that never fails to attract interest and attention.

When we were young, we get an allowance from our parents. To us, this allowance is "passive income". We didn't do anything to earn it did we? But to our working parents, is it passive?

To the mistress of a wealthy businessman, the "housekeeping allowance" may appear passive, but we know there are certainly some activities she has to perform....

Even marry into wealth it's not passive as we need to first be "active" in hooking our partners up. Unless you are one of those mail-order bride or groom...

Quick quiz!

Do you know anyone who gets money from a source without having to do anything "active" to earn this income in the first place? (Besides getting money from parents lah!)

I do!

I know descendents of another branch of my family tree do get annual dividends from Ngee Ann Kongsi - just for having the right surname. Typical Teochew - boys get more; girls get less.

I guess that goes also for those who get regular money from a Family Office or Trust that's left behind by a wise, compassionate and super rich ancestor.

And those who inherited rental properties from mommy and daddy.
Now that's Passive Income! Without lifting a single finger, money comes. 

As for all other forms of so called "Passive Income", especially rentals from investment properties, and dividends from equities, is it "passive" really?

Unless inherited or gifted to you by someone, we need first to secure or earn this supposedly "passive" flow of income right?

And that's where we see the difference between shepherds and sheep.

Shepherds are constantly, actively searching for loop holes, opportunities to exploit.

Sheep just passively wait for shepherds to guide them.

Lucky, good shepherds will steer sheep to green pastures. Sheep just surrender their wool for this "service"; shepherds don't work for free.

Unlucky, some sheep may discover belatedly that some shepherds don't just want wool, they want lamp chops too!

Wednesday, July 16, 2014

Specialist versus Generalist

The panda has a specialised diet consisting almost exclusively of bamboo.

So is the just as cute koala bear that survives mainly on a diet of eucalypt leaves.

Now compare them to humans or bears who are omnivores.

We humans eat almost everything! In some countries, humans have diets that include spiders, insects, scorpions, etc. 

Talk about survivability!

In the Corporate world, we commonly start out as "generalist" executives. Over time, we discover what we like or excel in, and we will gravitate towards a specialisation.

We end up as "specialist" managers in Marketing, Human Resource, Finance, Operations, etc.

Guess what? For the elite few, we end up back as "generalist" CEOs or Managing Directors.

When it comes to investing or trading, some agonise over whether to specialise or be a generalist.

Don't ever let others tell you what you should do.

Unless you have a habit of lying to yourself, you know who you are.

If you are a carnivore, you are a trader, a salesman, an entrepreneur, and so on.

If you are a herbivore, you got to be on high alert that you don't end up as the menu when others invite you to join them for dinner. 

(OK, need to make this metaphor clearer as we are dealing with herbivores - be aware that some seminars and talks are actually slaughter houses for the unsuspecting "guests"; and some even pay to join the event!!! And be very aware of that "friend" or "classmate" who is ever so helpful to "share" with you their good fortune and opportunity of a lifetime...)

If you are omnivore, you have headaches! Which is good because you have options!

Sometimes options confuse us. We can choose to be a vegetarian or vegan. We can choose to go for a low carb diet like Atkins diet. 

And we can be very fussy with what we put into our mouth. I have a ex-ang moh colleague who spent 5 years in Singapore without once trying our hawker centre food!!!??? It's only fast food and Western restaurants for him. Know any fellow Singaporeans like him on our travels?

Some omnivores look enviously at herbivores and carnivores, wishing to be more like them - specialists. Well you can! But the decision making part sucks though... What if we make a wrong choice?

Well, if you choose to be a panda or a koala bear, just make sure you don't ever run our of bamboo or eucalypt leaves!


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