Tuesday 28 February 2012

Do you practice low cost passive index investing?

I don't.

That's normal as I am used to arguing with the stop sign.

It's quite common to come across "investors" who will pooh-pooh the use of actively managed mutual funds. They will usually mention these 2 strong and convincing arguments: 

1) Low cost or no-load funds outperform funds with high management fees 

Especially when compounded over the long term - like in 30 years. I can't argue with that!

But doesn't it look a lot like the Discounted Cash Flow (DCF) valuation method? There are "assumptions" and my favourite line - "all things being equal".  If you have been investing for several years, when was the last time you encountered "all things being equal"?

By the way, if you are currently vested in passive index funds or ETFs, may I ask how long is your average holding period? How many "trades" have you done in a year? Especially if you are using the ETF vehicle.

Ahem, you may want to add the transaction costs into your calculations and maybe re-read the writings of John Bogle (father of index funds) from the Vanguard Group.

Quoting John Bogle and doing the opposite of what he advised is not exactly passive index investing... 

2) 75% of active fund managers underperform the index 

Can't argue with statistics (especially those not manipulated by yourself)!

To those strong advocates of passive index investing, again I ask you this question - do you stock-pick individual stocks on your own as in DIY?

I will pause here so you can listen to yourself better.

PAUSE  (shhhh)

Can I assume you do so because your individual stock-picking track record has outperformed the index?

Or you fancy yourself to be amongst the 25% of fund managers that can and do outperform the index? 

The reasons why I prefer actively managed funds 

I stress this is for me and me alone. This post is merely to call out the Emperor's clothes. Not an attack on passive index investing; which definitely works for individuals with the right matching mindset and discipline.

I am not hyper-active, but for me to sit around, do nothing, and patiently wait 30 years is not exactly my definition of "fun". I'm in it for the money; but some fun along the way couldn't hurt right! Or? 

a) Cognitive dissonance 

In the words of the Godfather III - our ships must sail in the same directions. I do like the intellectual process (I made this up) of DIY investing. Of course this applies to the thrill of finding a fund manager (notice I never say fund) that can outperform his/her peers!

It will mess with my mind if my right hand says passive index investing good, while my left hand says DIY is the way to go! I'll go bananas!

Since I do a bit of swing trading on the side, the odds of finding these 25% top fund managers are a lot better than what they say of me making money by trading - only 10% of traders make money consistently.

Does that mean if I set aside some funds for outsourcing to fund managers, my odds of making money versus me trading on my own will improve by 2.5 to 1? How's that for statistical manipulation? LOL! 

b) I don't mind paying for performance 

Honestly, what's the difference between 0.3% versus 2% annual management fees if the fund manager can outperform the index by 5% and more?

Wait. Let me check my calculator... Yup! I still come out ahead!

The longest period I've held to a mutual fund is 5 years, and the average holding period is probably around 3 years.

I don't mind paying for performance, but I practice switching horses as and when needed. Once you don't perform, you're out! No wonder I am still single... I am such a cad!

I am more fearful good fund managers will not want my money - I am either too small in their eyes, or they have more than enough clients on their hands and close their funds on me :( 

Mixed-up to conviction 

In the end, what we say, what we do, and what we believe should ideally be aligned. At the very least, when we stumble and fall, we will know the reasons why. And can take the corrective actions.

For fellow veterans, I think we've all been through our early low conviction days. This month say long term investing is the way to go, only to switch to contra trading the next month, then join IPO staging, then switch to dividend investing, punting small caps to S-chips, and now singing Blue-chips are the best! Why? Business Times say so what!

I am always laughing at myself ;)

Now I listen to myself more.


Saturday 25 February 2012

You can’t out run the bear!

2 Greek friends were having beer one evening in the local taverna.

“How about coming with me to the rekcus forest this weekend? I know a spot where there are lots of wild Saffron flowers!” Dimitris asked Yiannis excitedly.

Now Saffron is one of the most expensive spice in the world… Why would Dimitris share this good fortune with me? Yiannis thinks to himself… And then he smiled.

Yiannis looked at Dimitris in the eye and asked accusingly, “I thought we were friends? You do this to me? I know about the man-eating brown bear that lives in rekcus forest.”

Dimitris’ eyes open wide in mock protest, but he couldn’t press down his thunderous laughter that followed, “So you admit I am a better runner than you! Ha ha ha!”

Now Yiannis is very much interested in the Saffron mind you. But he knew going with Dimitris would put him in harm’s way should they stumble on the brown bear.

Just then, the local school teacher walked into the taverna.

Yiannis took his bottle of ouzo and glass and walked towards the school teacher. In between drinks of ouzo and nodding of the heads , Yiannis returned to Dimitris with a wide grin.

“I’ve invited our learned friend along for our little walk in the woods,” said Yiannis.

“But he has little knowledge of nature and what’s it like in the forest. All he knows are his books and theories. Wouldn’t he slow us down?” queried Dimitris.

“Precisely!” said Yiannis beaming with confidence.

“Oh you are so nasty!” exclaimed Dimitris, patting his heavy hand on Yiannis’ shoulder.

The 2 friends were full of song and laughter that evening.

1) Do you know anyone or groups of people who remind you of:

a) Dimitris

b) Yiannis

c) The school teacher?

2) What's the moral of the story from your perspective?

Thursday 23 February 2012

100 stocks in SGX = Diversified?

Of course it's an extreme figure!

Some investors will not let one stock exceed 5% allocation in their portfolio. This is to prevent 1 stock blow-up from damaging their entire portfolio.

This I can understand. But I curious.

Whether its 1 big water-melon, or a few apples, or a bunch of grapes - aren't they all in the same single basket?

So if it's Sept 11, SARS 2003, or other external shocks, when the basket's bottom fell out, won't all the fruits be smashed?

What if we spread our equities holdings over several markets? But aren't all stock markets more or less correlated? Did any stock exchanges in the world held-up during the 2008/9 financial crisis?  There must be some. If they are; we probably don't have access due to currency controls, liquidity, or restriction issues ...

I do own some silver, RMB, bond fund (indirectly through pension fund), EURO and of course SGD. (A glaring gap is investment property)

Do you practice asset allocation to diversify against risks? Or do you stick with "quantity diversification" in the same asset class as your main form of diversification? 

How is your experience? Which works better? Or do you practice both?

Wednesday 22 February 2012

My time in Shanghai – the harsh realities there

Of all the 3 postings between Shekou, Shanghai, and Athens, I loved Shanghai the best!

Whenever I travel to a new place, I would savour the local food, water (I don’t drink), and “flower”:

Shanghai food – It suits me perfectly. I like sweet stuffs and Shanghai cuisine is sweet! I especially love this giant meat ball dish called “Lion’s head” (狮子).

Shanghai tea – Oh you have to try this Dragon well’s tea (龙井茶)!  This green tea is an interesting departure from the oolong Iron Guan Yin (铁观音) tea that I was brought up with in Singapore. Especially for those of you who are into healthy living; this Dragon well’s green tea has lots of anti-oxidant properties!

Shanghai girl – Let’s put it this way, they must have some special quality that makes the Shanghainese men willing to do the marketing, cooking, washing-up, and housekeeping after marriage! But beware, like sports cars, they’re not exactly low maintenance!

Behind all the glitter, prosperity, growth, and vitality in Shanghai, I soon learned the harsh realities there.

It’s better to hunt in pairs or in a pack

I was pleasantly surprised with the “liberal” lifestyle in Shanghai. Many of my mainland colleagues were co-habiting with their boyfriends or girlfriends? And singles were bunching up together 5 or 6 of them in a tiny apartment.

It’s more about economics than anything else. If you are away from the prying eyes of your family and relatives, “sexual liberation” becomes a bargaining chip to help oneself better survive the high cost of living in Shanghai. 

By sharing rent and food expenses, or get someone to pay on your behalf, life in Shanghai would be less arduous – especially if you are not local Shanghai born and bred.

There is this Hukou system (户口) that discriminates against non-city dwellers. Where you are born has a big impact on your life in China…

Less 10 years of striving

There’s a saying amongst the Shanghai girls there if you marry “well”, you would save 10 extra years of striving in Shanghai. This attitude is also prevalent amongst the well-educated graduates and career women.

There are 4 categories of good catches starting from the most desirable:

1)    Westerners (hmm, this sounds familiar)
2)    Overseas Chinese (Hong Kongers, Taiwanese, Singaporeans, etc)
3)    Mainland Chinese men who have worked or studied overseas  
4)    Local mainland professionals and businessmen

I can empathize as the wealth and poor gap is much greater in Shanghai than in Singapore. Nobody wants to fall behind. Who am I to judge?

Can you imagine being a Shanghai man? As if affording an apartment is not stressful enough, he now has to compete with the #$%&%(^! @* “foreign” men!

It’s English Premier League every year

We have a Shanghainese company driver and he was always very glad when the Shanghai property prices went up and up – despite the numerous central government “clamp-downs” (the most recent one seemed to have finally worked)?

He explained most Shanghai families would have at least 2 apartments. One bought very cheaply from their employers or state in the early 1990s when Shanghai finally joined the economic reforms in 1991. Another private apartment bought prior to 2000 before prices went ballistic!

This way, if they had a son, they would have a ready apartment for his marriage. In Shanghai - no apartment; no marriage.

So if the Shanghai property prices continue to go up, it would make it tougher for non-Shanghainese men to afford an apartment there. Making it harder for these non-Shanghai “talent” to remain in Shanghai to compete with their children – be it schooling, employment, or marriage!?

At the railway station, I often see two groups of faces.

One group beams with smiles and wide-eyed enthusiasm; the other with dejected and sullen faces.  No prizes on who is leaving, who is arriving. 

Promotion and relegation. Dream seekers and realists.

I guess this ritual is the same in all cosmopolitan cities – be it New York or London. And in Singapore.

Sunday 19 February 2012

How Winning Traders Think

I won't spoil this interesting video that I found with my commentary. It's better you watch it yourself and reflect on your own. 

We are all different ;)

Warning: The below video takes about 21 minutes. And may be more suitable for traders with some real money trading experience.

It's better to wait when you are not pressed for time and in a receptive mood before watching it:

How Winning Traders Think

For investors, if you can put down your pride and prejudice for a moment, you may discover some takeaways that are transferable to the realm of longer time frame investing.

Especially if you don't think in "compartments" ;)

It would be great if you are willing to share your reflections. I need someone to bounce my own reflections with!

Saturday 18 February 2012

Friday 17 February 2012

A tale of 2 M&As - Nera Telecoms and C&O Pharma

First of all, I’ve to say my thanks and appreciation to a young blogger at this blog called KT Wealth – aka “Cookieguy”.

C&O Pharma

I came to know about this S-chip called C&O Pharma from his blog early 2011.

This stock looks promising for an M&A play as Sumitomo had just bought into the company. I don’t copy and buy. I “borrow with pride”. I placed this S-chip under my stay tuned watch-list.

When C&O started to climb from 35 cents to 40 cents in high volume last July 2011, I piggy-backed on board at 42 cents (market moved faster than me) and continue to buy on the way up to 49.5 cents – when news finally broke that Japanese Pharma Shionogi was taking C&O private at 50 cents.

At 49.5 cents, the arbitrage profit is “only” a few hundreds; but hey! Money is money!

All in all, I made around $11,000 for this swing trade – not bad for 3 months of “non-work”.

I took $3,000 of the profit and went for a 2 week vacation around Greece and Santorini Island.

I happy like bird.

Nera Telecoms

This “investment” was a trade gone wrong. And I’ve been holding it for 8 years… But the good news is that at the take-over price of 45 cents, I would make about 25% in capital gains plus a 2 bagger from the dividends collected over the years.

Nera Telecoms is one of my 3 main core holdings making up my 50% equities position vested in the market. So the potential dollar amount gains are much higher than last year’s C&O Pharma M&A trade!

Yet, I am not exactly thrilled…

Context is everything! 

Why one M&A I happy, the other M&A I not so thrilled?

Let me illustrate by sharing this property en-bloc story that happened in Queenstown during 2009 - HUDC Gillman Heights.

Despite the challenge of the minority dissenters (went all the way to High Court), the majority of the residents got what they wanted – en-bloc windfall!

Or so they thought. You sell high; but you have to buy high too. Remember the ballistic rise in property prices from 2009 to 2011?

All of sudden, this “windfall” can only afford smaller condos at locations further away than Queenstown from the city centre… Talk about inflation!

For C&O Pharma, the M&A happened just before the October 2011 “correction”. Wonderful!

But for Nera Telecoms, this ##@!#^$*% M&A happens now in mini-bull market. Buttocks!

Even if I got my “windfall”, what can I buy that’s value for money in SGX now?

Bull market rally or bear market rally?

If I believe it’s a bull market rally, I would close my eyes and buy high, and hope too sell higher. 

But since I believe this is a bear market rally (and it will probably go higher and higher), I rather be patient and fearful when others are greedy.

OK, I’ll take the cash from Nera Telecoms and probably rotate it into another asset class that’s less co-related to equities (if I can’t find another equity horse to ride). 

Start planning for 2013 after the 2012 US Presidential elections?

China is not the only country that “massages” their statistics ;)

P.S.  In case you forget, my trading time frame is 6-18 months.

Wednesday 15 February 2012

掌声响起- 凤飞飞

Besides 江蕙-美麗的交換, this song by by Feng Fei Fei plays in my mind whenever I receive accolades or compliments on my occasional sparks of "brilliance".

Behind each "success", there lie numerous setbacks, stumbles, and bruising come-backs...

At age 60, when most dream seekers are planning their next retirement phase of life, Feng Fei Fei has left us.
And the grace and dignity she handled her "moving-on" is something I find very inspiring.
I guess the moment of truth will be our first thoughts when we are told we have X more months to live...
Would I be more consumed with the bitterness and self-denial of "why me?". Or would I have the peace of mind and composure to focus on preparing my "good-bye" so that it leaves the least impact to the persons I love?

If I have lived a good life, what's there to fear or regret?

But if I have many regrets of should have, may have, what might have been, etc... I'll probably hurt those close to me by saying words like: "If not for you, I would have..."

Live for today.
Yesterday is gone, and tomorrow... Well, what if tomorrow never comes?

Monday 13 February 2012

My infinity returns via dividends in Nera Telecoms (well, almost!)

I started building my stake in Nera Telecoms during 2003. 

After 8 years of patient holding and receiving average 10% plus dividend yield annually, I’ve finally got my investment back in full last year.

It wasn’t one of my more successful “investments”. It was a “trade” gone wrong as the stock price has never done anything remotely ballistic for the past bloody 8 years… The reason I’ve kept this “mistake” for so long is because of this fun concept: infinity returns.

And I was so looking forward to receiving the dividends this year so I can gleefully declare I’ve earned my first infinity returns via the dividends route!
My cost of capital in Nera Telecoms was returned backed to me via 8 yearly instalments of dividends. Therefore, technically speaking, my existing stake in Nera Telecoms is “free”.

Future dividends / zero cost of capital = infinity returns!

And just when I can smell success, my candy is snatched right from my nose... ST Engineering is looking to take Nera Telecoms private for a song!

It’s not a done deal yet; but I won’t waste time whining or sulking, especially on things I can’t control.

I rather focus on what I can control: find another horse to ride.

As for what I can influence, I’m doing it. LOL!

Nera Telecoms minority investors, you may want to read this persuasive post from our fellow vested comrade Hyom. 

Why is Nera Telecoms not one of my better “investments”?

Simple. Do you prefer to get your capital back in 8 years or in 2-3 years? 

And how do we get our capital back in 2-3 years? Growth! Or to be precise, a doubling of the stock price after we have bought it.

Once that happens, I can sell half my stake and put the cash back into my opportunity fund; while the remaining 50% invested will be my “free” stake to ride any further upside.

Market goes up; I happy! Market goes down; I got dry powder!

I much prefer infinity returns via the growth route over the dividends route. Thank you very much!

And you thought I am plugging for the dividends play! Hee hee.

I am a Growth and Income speculator. Growth comes first. I consider dividends a consolation prize. No fish; prawn also good!

Now you understand why I’m not so upset with my potential “loss” of Nera Telecoms. I’m an equities man-whore. There will be other fishes in the ocean!

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