Saturday, 13 October 2018

Revisit: How interest rate affects the market - a mathematical courtship

What would happen when the banks increase their interest rate? Here's a very simple theoretical summary of the relationship between interest rate and securities.

  • REITS might be adversely affected due to the increase in their debt's interest (so they either have a higher sum to repay as a result or may cut down on borrowing for expansion). That's why we always talk about NAV and gearing ratio when we look at REITs. On the bright side for those looking to get in cheap, REIT yield would increase when their share prices drop.

    To learn more about REITS, I would recommend these 2 blog posts by namely Heartlandboy and Financial Horse:
    How to understand REIT jargon when investing in Singapore REITS
    5 things to look out for when investing in REITs
  • Bond prices would decrease, because again more people will choose to park money in the bank (risk-free). Bond yields of new bonds issued would increase to compensate as a result.

Conversely, in bad economy, governments would lower interest rates to help stimulate the market. So a falling interest rate would typically cause the market to change from bearish to bullish. Borrowing cost for companies would be lower in a low interest rate environment and companies could then use the borrowed money to grow their businesses. When earnings improved, it would drive up the market. It's slow multi-year transition from bad economy to good economy then back again. Nevertheless, I think many of us would have experienced the cycle at least once in our life.

So with that, we have a rough idea of how the money flows and why re-balancing of portfolio allocation in a cycle might make sense.

Related news for reading pleasure:


Wednesday, 10 October 2018

Trade risk management - a lesson

My trading motto is "Be clear on my trade set-up and risk-reward, AND find out the catalyst for current stock price movements".

Finding out the catalyst, as what I have mentioned earlier, is keeping up with market news.

When we talk about managing risk and using a risk-reward ratio, it is about HOW MUCH WE GAIN when we are right and HOW MUCH WE LOSE when we are wrong. Then we perform all that TA magic to find out if the ratio is satisfactory for us to enter a trade.

To control how much we lose when we are wrong, we need to have a stop loss or trailing stop loss in place.

Sunday, 30 September 2018

DEFG - Desire, Effort, Faith, Grit

I am only at the second chapter into Napoleon Hill's 'Think and Grow Rich', the contents are so impactful that it took me into my reflective mode almost right away.

"Desire" is a key word which appeared many times from the very first chapter and it resonated strongly with me as I recalled my childhood. I am born to Singaporeans and not born with a golden spoon, I think not even a silver spoon. I am born to a below-average family with my father working in a blue-collar job and my mother a homemaker.

Life was simple, and I roughly knew that there were times of financial struggle, as I recalled money talks between my parents and there were instances when my mother brought me along to a pawn shop. In my primary school days, I got $1 a day for pocket money, most of my clothes and books were hand-me-down from my cousins and I owned no big ticket gadget (a watch is my priciest gadget). My first computer and printer were also hand-me-down from my cousin after I entered secondary school. When I need a computer, say for projects, I will go to my friend's house and 'borrow' from her. When my peers were learning ballet, piano and abacus (yeah "zhu suan" was all in the rage those days), I was learning swimming - because that was one of the more 'affordable' activities. Somehow I never felt deprived, perhaps at that times there were less high-tech stuff and material wants (children were pretty satisfied comparing small ticket items like stickers and books). My biggest deprivation in school, I felt, was my poor grasp of English language as my parents were both from Chinese ed schools. My mother at that time had a very strong desire, and that was for me to become highly educated and earn a much better living when I grow up.

High value is not the same as low price

There was a recent blog post by Seth Godin that describes value from a marketer's perspective. Similarly, high value cannot be extrapolated from low price when investing.

The lower the price of a stock, the harder it is to find value. I define what is 'low price' by looking at the price of a stock with respect to say other stocks within the same sector in the same time period. There is often a reason for every low price - especially if the price stays persistently low for years. It could be due to no growth or slow growth of the business, it could be due to a lack in profitability, it could be due to high liabilities or simply a lack of business moat. Just like an item on sale, it is either that it is not durable, expiring or not in high demand. We all know that a gem won't stay cheap for long right?

Saturday, 29 September 2018

Share Buyback - what it means and the implications

When a company initiates buyback of its own shares, the news is often received in a positive light - that the company deemed its current market share price as undervalued.

Understanding the implications of share buyback of companies would help us make better investment decisions, as we seek to delve deeper behind the action and how it changes the face values of the various metrics.

  • Does the company genuinely think that its share price is under-valued? 
  • Does the company believe in its future earnings and growth such that it would rather invest in itself rather than invest elsewhere or pay down debts with the spare cash? 
  • Or does the move spell alternate motives?

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