16 November 2019

Quick update - Nov

  • Using US portfolio to hedge against SG portfolio was a mistake. Because they are not perfectly correlated, both in their direction and magnitude. Over the last couple of months, US stocks have been on the run up like crazy and I have lost about USD500+ on VXX which bet against the rise of index. It was opened with the intention of hedging against a general market downturn (which happened around this time last year) but didn't happen - given the trade war fatigue (though no confirmed deal signed), no shocking world news and relatively stable economic condition in the US (relatively low unemployment and low interest rate). So people have been parking their cash in stocks and the stock market has been on a steady climb. I entered too late a position in Mastercard Inc so only have peanut gains so far (a good buy point was at $270). Lesson learnt is to wait for uncertainty in the market and certainty in price action before trying to "hedge". We can never catch the bottom-most nor the top-most price but worse is the middle - trying to bet in which direction it will go.

  • Crypto seems to be in the limelight again. Here's what I understand - blockchain is a form of technology, it enables the existence of cryptocurrency. What made me skeptical about doing crypto investment is mainly counter-party risk. The whatever so-called high return platforms for crypto are offering the so-called derivative products and I am not sure how they are being regulated or what they are being backed up by. 

    With the emergence of various cyptocurrencies these days, how are each of their value being determined? [Read: https://www.investopedia.com/tech/what-determines-value-1-bitcoin/]


    If we reverse the coin and deem crypto as the "real money" of tomorrow, then what would be the truly secure way to procure and store them without counter-party risks? Until there's a widespread utility for these by-products of the great technology and there are some means to determine each of their worth, I think trading in them is highly speculative and I will steer clear for now. Amidst all that price volatility, I am not sure what's driving their demand and supply. From what I see, crypto's "spot value" is just pegged to the currencies that the particular crypto is being traded in (is USD the standard?), not pegged to gold, assets, nor businesses. Maybe someone with better knowledge could enlighten?

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11 November 2019

Watchlist: Mapletree NAC Trust

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7 November 2019

Revisit: Invest in one that grows!

Where capital appreciation and long-term yields are our investment goals, putting our hard-earned money in a company that grows (its earnings) is probably more important than one that gives out high dividend payout in terms of yield (yet has poor cash flow and does not grow its revenue much). One metric to look at would be Earning Yield. It is the inverse of P/E and expressed as a percentage. We can use Earning per share divided by Price per share. A higher than normal earnings yield indicates the stock may be oversold, provided nothing negative happened.

However, we should not simply rule out dividend yield in our buying consideration as companies that give good dividend yields are generally less volatile than those that do not give out dividends. This is because fund managers in times of bad market would rather sell off the shares of the company that give less dividend before the one that do if both trades at the same price [source article here]. So we can infer that good yield could give some kind of cushioning against extreme price drop in times when the stocks market crashes. When considering dividend yield, look also at the company's payout ratio which I would elaborate.

The difficulty always lies in spotting that healthy 'chicken' to lay our 'golden eggs'. The golden eggs here refers to BOTH capital appreciation and dividends. In choosing the 'golden chicken', below are some pointers to note.

1) The company should have 3 consecutive years of positive margin.

2) Companies that earn a profit can do one of three things: pay that excess money out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both. The company should ideally pay out 50% or less of profit as dividend so as to use the rest in business growth. This can be derived from the payout ratio.

The percentage of net income that is paid out in the form of dividend is known as the dividend payout ratio (read more). This ratio is important in projecting the growth of company because its inverse, the retention ratio, can help to project a company’s growth. A high payout ratio may not be sustainable in the long run unless you are looking at REITs or large companies with stable income and slow growth.

3) Dividend yield is consistent between 2 to 6%
Dividends are dependent upon cash flowof the company, not its reported earnings.

4) High ROE with little corporate debt
One way to analayze ROE is to break it down using DuPont Analysis.

DuPont Analysis Formula:

ROE = [Net Income / Sales] x  [Sales / Average Total Assets] x Equity Multiplier
where Equity Multiplier = Total Assets / Total Shareholder’s Equity

If ROE is high due to the first two components, then everything's good. HOWEVER, if ROE is high mostly due to the Equity multiplier component, then it is not so good.
Any increase in the value of the equity multiplier would result in an apparent increase in ROE. A high equity multiplier shows that the company incurs a higher level of debt in its capital structure and it reduces the overall cost of capital. Read more here [external link].

All of the above information can be obtained by scrutinizing the balance sheet and annual report of the listed company and from there we can have a better understanding of its revenues and financial health. Numbers being numbers, we should also not forget to find out what sustained the numbers and made the business great. Yup, that's the intangibles.



For REITs, we want to buy those with increasing DPU, long WALES, relatively low P/B ratio, high-occupancy/value properties (translating to high FFO) and not over-leveraged (in SG there's a regulated limit of 35%) by calculating the FFO to debt ratio. FFO to debt ratio tells us how long it takes for a REIT to pay off its debt using its income from its main business activities.

Do take note too of risk factors such as the current economic cycle, industry outlook, currency risk (especially those with assets oversea and earnings are in the foreign currencies) and loan interest (as REITs can be highly leveraged).

We could also look at other factors when choosing the REITs such as the quality of properties it owned, property types, geographical location, total assets value, how is the REITs being managed (structure preferably not too complex, management fee %), REIT's sponsor and the REIT's Weighted Average Lease Expiry (WALE).

Recommended reading - Investing in Reits by Ralph L. Block


Related posts:

Buying into the right business
Payout Ratio, Operating income and recent Watchlist

Revised post previously published on 9 June 2018.
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2 November 2019

Retirement planning

In simple terms, one can retire when one's annual passive income is more than one's annual expenses. A common rule of thumb for the sum needed to retire is the rule of 25 - based on the assumption of a 4% yield, your net worth should be 25 x annual expenses before you can FIRE.

So let's say you are a lean spender who spend $1000 a month, theoretically you would need 25 x 12000 = $300,000

This theory looks simple but has many underlying assumptions to take note of.

1) Spending remains the same or less

Which means zero inflation and minimal lifestyle changes. At different phase of life, our lifestyle may change, our spending may change to meet our expectations on quality of life. At some point in time when we are old and need hospital care or stay in a Home, the expenses are often not predictable or accounted for.

The younger we choose to retire, the higher the chance of meeting some sort of life contingencies down the road that might involve the expenditure of a big part of our retirement / investment savings. That is why getting good insurance is an important part (though not all) of the equation. Of course some may have the excuse of using family as their insurance.

We also need to take note that money from dividends that we spent cannot be saved up (as warchest) or invested. There would be lost of opportunity costs.

2) Our investment capital for yield is protected throughout our retirement years

Which is not true. Whatever that we chose to invest in has risk - be it equities, ETFs, REITs, bonds... even putting money in the bank has risk. So an ideal scenario is to park our retirement money in somewhere with the least risk for maximum return. To get a 4% return, money has to be parked into a basket of assets with moderate risk, or average out to be so. 

If we adopt the barbell strategy, then we would be parking our money partially in extremely low risk and low yield assets (eg. FD, SSB) and the partially in extremely high risk and high return assets (eg. equities, crowdfund, crypto) that might be risk getting written off anytime. 

Another idea is to partake in high risk investments and yet work really really hard in our youth to generate enough capital to be parked in low risk assets when we retire. So that when we retire, we can draw on preserved capital during a market down-turn or for emergency.

3) Yield stays consistent at 4%

Yield is highly dependent on Mr Market (be it equity market or property market), who is as unpredictable as our emotions when we deal with it. 

Historical data may not be accurately extrapolated unless we draw data sets from different points of the market cycle way back in time to do the calculations. When we use data sets from a deep economical recession period to do extrapolation on the rate of return, suddenly things look very gloomy (invested capital shrinks, yield shrinks). We have no crystal ball to know for sure at which point of the market cycle would we retire in. So people tend to be more optimistic, being in the present market state, and do calculations based on current rate of return when planning for retirement. 

Capital draw down

As mentioned above, our preserved liquid capital is our main buffer during retirement should there be a market downturn. I don't count property as liquid capital. When we write off yield itself and focus on only capital draw-down for retirement, the rate of withdrawal will determine how long our stash lasts. We need to put an arbitrary figure to the life expectancy to calculate what a "safe" withdrawal rate would be. The later we choose to retire, the more stash we will have and the higher is the margin of safety when it comes to capital withdrawal.

Note the word 'preserved'. The equation will not work out if the capital is out there subjected to market risks and fluctuations. It's like trying to plan for weight loss when you only weigh yourself that one time.

Planning till 100 years old

Not everyone lives to a 100 years old. If we plan for a period too long, we may end up stretching ourselves too thin and our quality of life (QOL) goes down. If we don't plan long enough, we will be unsettled by what may come when we run out of money. Do we want to enjoy luxuries for ourselves or leave the money for others to enjoy luxuries? Again, we don't have the crystal ball.

Obviously government does not trust us to plan for our own withdrawal well enough to give us a one lump retirement sum. However, we can somewhat take comfort that as long as Singapore and its government remain stable, and we have contributed substantially to our CPF OA/RA (the preserved capital), we can depend on our CPF LIFE scheme from age 65 onward till we kick the bucket. Read more.

Bear in mind that if we choose to retire early, it would also mean less contribution to the CPF nest.

Is retirement pressing the pause button or to level up in life?

Reaching the golden retirement figure to FIRE is indeed a tempting milestone in life (I still have no idea what's the golden figure to settle for without too many assumptions) and we might say having a goal post is better than none despite a moving one.

The means to an end, however, are just as important. When we are in the accumulation phase of seeking FIRE, we could seek to achieve milestones not just in net-worth (see Investment Moat's stages of wealth) but also in
  • networking / social life (so that we know who we can borrow money from should we run out of it. Ok, just kidding.)
  • knowledge
  • skill sets

When we retire, are we pressing the pause button to stop ourselves from achieving more in the above? 

I don't think it's very fulfilling to retire early and live to a ripe old age of 100, only to realize at deathbed that my life achievements are only at level 10 and not at level 100 that I had envisioned. Therefore, the retirement sum to me may need to encompass the amount needed to do what I want to "level up in life" without having to work 9-5.

Another idea if we are tired of working life, is doing a series of "mini retirements". Pause, go, pause, go. The only catch here is inertia.

My ideal retirement is to sit here all day watching the sea...
[Image credit: Elena Saharova @Unsplash]


In retirement planning, there is no one-shoes-fit-all solution. It is all about finding the optimal balance between - saving up, spending for QOL, undertaking investment risks for returns. 

We often put ourselves in the "ideal" scenario when doing calculations based on the assumption that dividend yield does not fluctuate and neither does our invested capital. Having a sustainable dividend with capital growth is only possible in a secular bull market.

When we actually retire, we can choose to live off our "passive income" and/or "capital draw down". Capital draw down being the riskier option due to the risk of running out of money before we kick the bucket. A safer option is to go into a semi-retirement state when we are still fit to contribute to society by working and so minimizing capital draw down for as long as we feel comfortable.

When planning for passive income, the best is to generate multiple streams (aka own a diversified portfolio). At different phases in life and in the economic cycle, we may need to customize our asset allocation to match.

Despite all the planning done, remember that Life is not a constant and it never will be. So learn to enjoy and make the most out of it whilst planning!

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