Annuities

With the increasing discussion of CPF Life, it led me to consider if there is an alternative. And it struck me that property investment could be viable.

Why?

By paying a huge lump sum to CPF/insurer, in return receiving a monthly payout. It is similar to purchasing a property and collecting rental every month. The key is for the property to generate positive cash flow.

Of course, I hear the naysayers with all the potential problems.
1. Insufficient down payment, resulting in mortgage payment higher than rental.
2. Mortgage for older age will have shorter duration.
3. Loss of income during rental gaps/change over.
4. Depreciation of property value.
5. Property management as landlord.
6. Various fees like taxes, legal, maintenance, renovation, repairs, insurance, agents, etc.
7. Interest rate fluctuations.
And the list goes on...

However, consider the advantages.
1. If you are placing $300k in an annuity, it could well afford a HDB 3-room flat or at least a down payment for a $500k condo. The rental most likely will be more than the mortgage (if any).
2. When you pass on, the property can be sold as a gift to your surviving loved ones. Or they can continue to enjoy the passive income. Annuity normally only give back a small portion of the remainder, if any at all.
3. Property is considered a good hedge against inflation. Most annuity do not increase the pay out with inflation.

As with all investments, property investing also carries risk. However, risk can be reduced with knowledge. I am not saying that annuities are useless, just jump into properties. But I am recommending that it is a possibly better alternative after considering the advantages and disadvantages, and the risk are properly managed.

Annuities would still be better for the risk adverse and do not want to learn about property investing. However, there is also risk (a major one in fact), and that is inflation. And with CPF Life, investment fluctuations are also transferred back, i.e. the low pay out is not even fixed, it can go lower when inflation goes up!

It is important to keep an open mind and explore alternatives so that we are aware of the options we have before making the decision which will affect the rest of our retirement years.

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Negative Sum Investing Theory

Recently read an interesting story that I would like to share:

Once upon a time, a large family owned all the shares of the top companies in the market. They just held on to their shares without doing anything. As the companies of the underlying shares made profit, they received dividends. Some more than others but nobody lost. (There was no capital appreciation as there was no trading done to determine price.)

Then one fine day, some discontented people decided that they wanted to trade shares with others for what they felt were better companies. So, they engaged a middleman to go around finding those who wanted to sell/exchange their shares for a negotiated price. Each time a trade was successful, the middleman took a percentage of the price.

After trading for some time, some were happy as they indeed got the better companies, however, some were worse off as the company they traded for performed worse. So, the discontented ones decided to engage analyst to help determine which are the better companies. The analyst charged a fee of course (PhD holders do not come cheap).

Believing in their analyst (people with PhD can't be wrong, right?), they traded more. As time went on, those analyst that were correct, were paid more. And soon, everyone was looking for their own analyst and trading a lot based on their recommendations (more commissions for the trader too).

Some felt it was very time consuming to work with their analyst and trader all the time, so they decided to engage a manager to do all the management on their behalf. Again, for a fee of course. At any point in time, definitely there were some managers which performed well and they were highly remunerated, but all were remunerated nonetheless.

Now as time when on, there was so much choices and it was mind boggling to handle all the information and selection. So, some decided to engage a consultant to make sense of everything and recommend a good manager for them. Again, for a fee of course.

Soon, they realized, only a small minority of the family had the good fortune to make profits while the family as a whole were worse off.

Unknowingly, they have turned a positive sum game to a negative sum game for themselves! And created a new positive sum game for Mr Trader, Mr Analyst, Mr Manager and Mr Consultant!

Moral of the story/My comments:

1. Mr Trader, Mr Analyst, Mr Manager and Mr Consultant are all very profitable because it is a sure win game for them! Mr Trader is happy so long as you trade and pay his commission; Mr Analyst is happy to analyze and write reports so long as you read and pay for them; Mr Manager is happy so long as you pay for the fund management service; Mr Consultant is happy so long as you pay for his advice and recommendations.

2. Is their value add worth the amount you are paying? How many funds performed better than the index?

3. They should fire all these people which didn't exist in the first place. Pull all their shares together and divide the profits among themselves equally. Back to an all win state. That is the exact purpose of an index fund.

It is my humble opinion that investing already involves risk. By adding more variables of selecting the above mentioned people increases the risk. And in fact paying for the additional risk! It makes absolutely no sense.

No doubt that you may be in the minority that are actually better off. But the question will be, how consistently will you be better off? Unless you know what you are doing, I would recommend that the most efficient passive management technique is to practice dollar cost averaging into a good index fund or ETF.

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Property Investing Journey

3 aspects of property investing to learn:
1. Buying
2. Renting
3. Selling

Factors to consider:

Buying
1. Timing (Market cycle)
2. Budget (Loan approval and Do not over commit)
3. A selection system (Purpose/Location/Price)
4. Renovation (Sunk cost)
5. Think long term (Do not speculate)
6. Partnership agreements (Have it in writing)

Renting
1. Landlord rights (Scrutinize tenancy agreements)
2. Rental yield (Positive cash flow against property loan)
3. Property tax (Affect profits)
4. Agent commissions (Negotiate upfront)
5. Maintenance (Repairs, painting, furnishings, etc)
6. Other charges (Conveyancing fee, legal fee, insurance, etc)

Selling
1. Patience (Greed and fear)
2. Sprucing up (Presentation)
3. Timing (Market cycle)

Wishing you success in your property investing journey!

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Psychology vs Probability

When investing, ever wondered why most people take small profits instead of letting profits run and hold on to huge paper losses instead of taking a small loss early?

A lot has to do with the human psychology towards money. Our rational mind knows probability, but our sub conscious mind knows emotions like fear and greed. Which one prevails will determine your approach to investing and your overall success.

Which would you choose:
Option 1: A sure win $700 bet
Option 2: A bet for 75% chance for $1000 with a 25% chance of losing everything

If psychology of fear prevails, you will take the $700 bet because it means assured immediate profits in the pocket. However, the rational mind knows the probability of the expected outcome for option 2 is $750, a potentially better outcome.

Another choice:
Option 1: A sure lose $200 bet
Option 2: A bet for 75% chance to lose nothing with a 25% chance to lose $1000

If psychology of greed prevails, you will take the bet to lose nothing as the chances looks stacked in your favor. However, the rational mind knows the probability of the expected outcome for option 2 is a loss of $250, a potentially worse outcome.

From these 2 simple illustrations, the first one explains why most take profit too early instead of allowing their profits to increase further; the second one explains why most hold on to losses, hoping for a recovery instead of cutting losses.

Investing involves risk, risk is about probability. Hence, it is more sound to approach investing with a rational mind. Letting the emotional mind to control investment decisions complicates matters because investing has no relationship to emotions.

This first step of learning to invest is often neglected. However, it is the most important step. If you frequently encountered situations where prices move higher when you took profits and prices move lower while you hope they recover, it is time to reexamine your psychology towards investing.

I know, i know, it is easier said than done... Well, who said investing was easy.

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Living Within Means

An inspirational video showing how it is possible to live reasonably comfortable with little or no money.

If there is a will, there is a way.

Instead of complaining about inflation and how things are always so expensive, focus on what can be controlled and opportunities will start emerging.

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Trading Quotes

"Markets need a fresh supply of losers just as builders of the ancient pyramids in Egypt needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry."

"There are thousands of analyst, some of whom are certain to be on a hot streak at any given time. Most analyst become hot at some point in their careers for the same reason a broken clock shows the right time twice a day."

"When you trade, you compete against the sharpest minds in the world. The field on which you compete has been slanted to ensure your failure."

"The market is emotionless. It does not know you exist. You can do nothing to influence it. You can only control your emotions and behaviors."

"Price is what the next greater fool is willing to pay."

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Speculative bubble in property market

Speculative bubble in property market a risk, says MAS
By Yasmine Yahya/Ryan Huang, Channel NewsAsia

KEY POINTS:

1. The rise in risk appetite and sharp rebound in financial markets since the start of the year may have outpaced economic fundamentals. Asia has bounced back from the financial crisis faster than expected, the global economic outlook remains uncertain. The recovery in the world's biggest economies – the United States, Japan and the European Union – has largely been dependent on government stimulus.
2. Despite such uncertainties in the global outlook, Singapore's property market has taken on its own dynamics. Private home prices rose almost 16 per cent in the third quarter – the highest quarterly increase in almost three decades.
3. MAS said although the government has already introduced several measures in September to temper the exuberance in the market and pre-empt a bubble, more measures might be needed.
4. On a brighter note, MAS said local banks and insurers have remained resilient through the crisis, maintaining high capital and liquidity ratios. It added that local banks' earnings have dipped but remained above market expectations.
   

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Shopping For Stocks

A question often asked by my clients looking for the holy grail is "How to pick the right stocks?"

It is still an ongoing debate if fundamental analysis (FA) or technical analysis (TA) is more superior. It is important to learn both, only by applying them together will you "FA TA" (mandarin for prosper). Long term investors believing in value investing will rely more on the FA aspect and short term traders rely more on the TA. My opinion is to use FA to select the companies and TA to plan your entry and exits. Details of either method will not be discussed here.

Instead, I'll touch on "How to avoid picking the wrong stocks."

1. Looking for sales or discounts

Many are familiar with the mindset of shopping when making purchases, i.e. look out for a sales and discounts to determine a good deal. So when making purchases for stocks, many tend to apply the same method. They look for stocks that are "On Sale! It has fallen 50% from its peak, that is a 50% discount!". Make the decisions based on that only to find that its prices were further slashed.

Buying stocks is like employing a worker to generate income for you. Good workers are not cheap and cheap workers are normally not good. Would you pay top dollar for a good worker or low wages for someone who does not work at all?

Change your mindset when selecting stocks. I am not saying to not buy them at a discount. But discount is a relative word, cheaper compared to what? Do not use past performance of its peak as the benchmark, instead determine its intrinsic value to compare against.

2. Going for the HOT stocks

Been to an IT fair, travel fair or Expo sale? Does it seem the rest of the 4.99 million Singaporeans are also there. Everyone is there means it definitely the place to get the best deal, is it not? Do we also apply this mindset to selecting stocks?

Stocks that is featured in the news and every analysts are rushing to cover them, definitely all the experts cannot be wrong, right? Firstly, news has a publishing time lag and analyst require management approval before pushing out reports, so by the time you hear about it, it could already be too late. Secondly, journalists and analysts have an agenda, they are in sales. So they have to over sensationalize information and hence they views can be very subjective. Thirdly, everyone rushing in would have artificially inflated the price too high already.

Beware of hot stocks as they are normally overpriced and will start crashing the moment the hype is over.

3. Based on gossip

Stories of a friend making a lot of money and suggested you go in as well to a certain stock. Sound familiar? If you start getting stock tips at the coffee shop and taxi drivers, i think it is time to get out of the market. Warren Buffett has one simple rule when it comes to investing, "Be greedy when others are fearful and be fearful when others are greedy".

Our education has been based on textbooks, research at the library, mentoring from qualified professionals (teachers from MOE), so why base your financial education on rumors from the man on the street? Investing already carries a certain amount of risk, relying your decision on gossip further increases the risk.

What about financial planners or worse insurance agents selling Investment Link Plans? Are they qualified? How many years have they invested profitably consistently? How are they remunerated? You determine for yourself after answering those questions if their advice falls under gossip. (Refer to my article of selecting an investment adviser)


If you are thinking of investing, you have just learned a valuable lesson which caused 95% of the investors to lose. If you have already invested and lost, I believe you can relate to the above mistakes and do not repeat them.

Back to picking the best stocks. There is no easy answer. It took about 15 years of formal education to teach us the skills we currently have. Do we rely on our teachers to take the exams for us? So, shouldn't we also commit that same level to our financial education to take the exam of selecting the best stocks ourselves. (An investment adviser like a teacher is good, but only to provide guidance to speed up the learning process. You will have to take responsibility on passing or failing the exams eventually.)

Investment is a journey, it is not a shopping experience.

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SGX Investor's Guide

Singapore Exchange (“SGX”) recently introduced two educational guides, ‘An Investor's Guide To Reading Annual Reports’ and ‘An Investor's Guide To Preparing For Annual General Meetings’, to enhance retail investor knowledge and improve shareholder engagement at annual general meetings (“AGM”).   The two Guides are now available in both English and Chinese versions on the SGX website.

http://www.sgx.com/wps/wcm/connect/mp_en/site/highlights/highlight_contents/Investors_Guide

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To Win In Investing, Think About Losing First

What is the first thing that comes to mind when we talk about "Investing"?

I believe to most it simply means money making money! Doesn't that sounds exciting and attractive.

However, it is time for the reality check, not all investments make money. In fact, many investments lose money.

So, it is quite amazing that since investments lose most of the time, shouldn't the first thing that comes to mind when mentioning "investing" be losing money.

That is why, the first step before even considering investing is to determine how willing you are to accept loses and still sleep well at night. No point to start investing only to find yourself affecting your physical and mental health when the investment takes a turn for the worse. You will be better off placing your investment in a fixed deposit and look for other more suitable ways to generate wealth.

The next step is the amount you can afford to lose. Set aside an emergency fund for a rainy day, the rule of thumb is about 6 months of your income, this amount must be kept in a liquid asset like cash, do not invest it in illiquid assets like property.

For the remainder you wish to use to invest, determine the amount you intend to lose the use of it for a period suitable of that investment asset. For example, if you have any intention to use it for short term goals (within 3 years) like purchasing a car or your wedding, do not go into stocks/shares and risk having to liquidate at a loss during a bear market when you urgently need the funds.

Instead of the common advice of risk / reward, think more holistically of risk / loss / reward. For example, if you invest $10, it is often advertised only the good side, a probability of 50% to make $5 profit. However, the picture is not complete. You also need to consider the risk of 50% chance to lose $10! Would you still take this investment? Definitely NO! Even the casino gives better odds than this. This is similar to the deal those who invested in the lehman related minibonds got.

To summarize, think of all your potential losses before jumping on the investment bandwagon.

1. Loss of sleep due to losses
2. Loss of use in an emergency
3. Loss of other opportunities it could be used for
4. Loss vs Reward vs Risk

This may be a "wet blanket" article, but it is better to be prepared than to learn it the hard way after you started investing. Focusing on losses and practicing proper money managing techniques like stop losses and good exit strategies, the winnings will subsequently follow.

Happy investing by analyzing the potential losses first. ;)

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