PE10 Update (1 Dec 2018)

Updated the STI PE10 stats.

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As of 1 Dec 2018, the STI closed at 3,117.61 with a PE of 11.53x. That gives it a PE10 of 12.6x or if you prefer, a ten-year average earnings yield of 7.94%. On this basis, markets haven’t been this cheap since early 2017.

In fact, the STI was cheaper just a weak ago which shows us how fast sentiments can change. The STI would have been cheaper still if we go back to late October where it briefly dropped below the 3,000 mark.

Over in U.S markets, November was probably a horrid month for most investors. Major drops in the Dow, S&P, Oil and even Bitcoin marked a month where the only refuge was in cash.

 

 

 

Where are the hodlrs now? And what do current market movements tell us?

In case you weren’t following the crypto scene, “hodl” is a typo for “hold” and someone that became a meme for crypto fanboys to buy and hold crypto for the long run.

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As Josh Brown reminds us, this week is roughly the one year anniversary of when most of the world suddenly realised that people were “making tons of money” from investing in something called “bitcoin”.

Plenty of other cryptocurrencies followed but we haven’t really heard of the widespread use case being implemented. That basically means that the usefulness of bitcoin and other cryptos have not been proven yet. The only thing that has been proven is that the technology consumes a shit ton of energy.

I hate to say I told you so but I told you so (here, here, and here).

The next shoe is already dropping

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By the way, remember when I said that bitcoin and cryptos were just a symptom of easy money going into certain areas of the market and those areas ride a lot on optimism which has a high chance of not coming true?

That whole setup largely explains why tech has been getting hammered the way it has. Just a few months ago, we were talking about companies with trillion dollar market caps. As of today, Apple’s market cap has fallen to just under $750b and is no longer the largest publicly-traded company as measured by market cap. As of writing, that honour belongs to Microsoft.

Now, don’t get me wrong. I’m not saying that Apple is a lousy investment or a company on the brink of disaster. What I’m saying is that the fact that what’s happening in the markets right now is all a reflection of Mr. Market’s mood swings. Just a few months ago, he was totally positive on tech which propelled Apple and Amazon to trillion dollar market caps. Right now, the bipolar Mr. Market is obviously running the other way.

 

In local news

So what does all the above mean for the local market?

Surprisingly, the STI has held up relatively well despite the carnage in tech. Possibly because the STI is financials-heavy and our markets don’t really have a huge pie in the tech sector. The property and financial sector will hit the STI much harder than anything in tech and to be honest, those sectors have been hit pretty hard already in the last few months.

However, MAS has come out to warn that interest rates are on their way up and that households need to “be prudent”*. For some months now, I’ve been saying the same thing. That if mortgage holders aren’t able to service their loans with an interest rate of at least 3%, then they need to be very careful.

The STI is going to fall much further if an economic downturn happens and interest rates in the U.S. continue to march upwards as that will directly impact defaults in the loan sector. I mean, what could be worse than losing your job while your loans get more expensive?

Having said that, valuations on the STI are not demanding. If you ask me, it’s on the cheap side (but not dirt cheap!) but the macro headwinds seem to be blowing hard.

Notes:

*It’s nice that MAS gives a mention that interest rates in SG are closely linked to rates in the U.S. If you want to know why, here was my take on it.

STI PE10 update: November 2018

Sorry for the late notice but the PE10 has been updated.

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Following the selloff in the last week of October, the PE10 reached lows that we haven’t seen since early 2017. At a PE10 of 12.2x, that translates into a 10-year earnings yield of slightly over 8%.

It’s cheap but it certainly isn’t dirt cheap. Dirt cheap would be when the PE10 is hovering around 10x average 10-year earnings. That would mean that the STI would be at levels of around 2500 or so.

Having said that, there’s no guarantee that the STI will fall to those levels. The market has run up a bit since I took the reading so who knows where we’re headed. What I’m confident enough to say is: based on what we’re seeing in the market, we’re certainly close to cheap than expensive.

Quick word on the Temasek 5-Year, 2.7% p.a Bond

This won’t be a complete run-down of the investment characteristics of the bond. If you want a detailed take on the attractiveness of the bond, you can check out either Financial Horse’s (link here) or Investment Moat’s (link here) post.

Instead, I want to comment on a few things regarding the media’s profiling of the bond and a hidden factor that not many people seem to be focusing on.

Media’s Profile of the Bond

On Wednesday, when the offer for the bond was first announced, many of the local media outlets ran the story with a focus on how the bonds return a “fixed 2.7%” per year. For example, Channel NewsAsia (link here) ran this:

The five-year notes, which will mature on Oct 25, 2023, offer a guaranteed fixed interest rate of 2.7 per cent, the Singapore state investment firm said on Tuesday (Oct 16). The interest will be paid at the end of every six months.

Now, my problem with this is that if the media has to highlight to the public that bonds return a fixed amount, then maybe what the public needs aren’t bonds but more investor education.

Plain vanilla bonds are pretty easy instruments to understand and if your target audience doesn’t understand bonds to the extent that they need to know that it returns a “fixed 2.7%” per year, maybe they shouldn’t be buying bonds in the first place.

I’m not sure if any of the media outlets bothered to explain why the bonds return a “fixed 2.7%” per year because, in the secondary market, they could possibly return more or less than 2.7%. Understanding this is crucial to understanding bonds.

The Main Risks of this Issue

While the media correctly emphasised Temasek’s credit quality in order to assure retail investors that they would most probably (I’d put it at 99.9%) get their money back upon maturity, the media didn’t point out that with high-quality bonds such as this, the core risk is not so much with default but with inflation.

If you subscribe to these bonds, the main risk, in my opinion, is getting back less than what you put in, in terms of purchasing power. If you have been tracking the core inflation rate, you’ll see that 2.7% isn’t even a percentage point higher than the recent core inflation rates of 1.9%.

Furthermore, if you have a huge chuck of change stuck in these bonds when the market crashes, there is an opportunity cost of deploying funds in the market. The bonds can be sold in the secondary market but at what cost? Will the bonds still be priced at par when the markets turn south?

In my opinion, that’s pretty unlikely because investors don’t fly to the safety of corporates in the event of a market crash. This means that the bonds would probably be priced below par in the event of a market crash.

Conclusion

Any investor considering the Temasek Bond will realise that the rate of return is better than a savings account and slightly better than a fixed deposit or the CPF-OA. But in return, you will be giving up the chance to effectively deploy cash in the markets over the next 5 years if there is a crash (which seems more and more likely by the day) as well as the fact that the return on the bonds may barely cover inflation.

Why Have The Markets Fallen?

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The answer is simple — who knows?

And frankly, unless you work at CNBC, Bloomberg or the local paper, it’s not your job to find an answer. Despite what the media says that it’s Trump’s fault for starting a trade war, or it’s because of machines doing the trading that caused the fall, the point is that those are all conjecture.

No one really knows why the markets crashed on Wednesday and Thursday.

If it was Trump, then why did the markets wait till the 10th and 11th of October? Trade wars have been a feature of Trump’s presidency since he took office. If trade wars were the factor, then why did markets still go up before coming down?

Ditto for machines or any other reasons that the media provides.

The Good News

The good news is that investing in the market doesn’t take the IQ of a Nobel prize winner to do well. What it takes is a good sense of when we have value emerging in the markets.

Typically, value emerges in the emerge when prices go down. After all, the same burger from McDonald’s is the same burger whether it’s priced at $2 or $4. Value emerges at $2 because you get the same product that you might have otherwise paid $4 for in normal times.

Of course, the markets aren’t as simple as buying burgers. You have to question if the burger remains the same? Unscrupulous operators may reduce the size of the patty or cut back on the sauce. That’s precisely what could happen even if a stock gets cheaper. Maybe the stock is cheaper due to fundamental reasons. i.e. The company’s business is taking a turn for the worse.

Being able to see value means being able to see if the company’s fortunes are taking a temporary hit or a permanent hit. Or being able to see if the drop in price is much more severe than the downturn in the fortune of the business. This takes experience and a lot of study.

Proceed with Caution

Before anyone gets too excited, I’m not saying that markets couldn’t go down further. Heck, in Singapore, we haven’t even reached the commonly-held definition of a bear market which is 20% down from the most recent peak. In the U.S., markets aren’t even 10% down.

But what I’m saying is that if the current downtrend continues for a few more weeks, it will provide a buying opportunity that could rival some of the best times to buy.

Unfortunately, for that to happen, we’ll see some more pain for investors.

Go read Howard Mark’s latest memo

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Howards Marks of Oaktree Capital just dropped his latest memo (“The Seven Worst Words In the World“). It may be somewhat of a promotional material for his upcoming book but if you are a serious investor, please go and read it. If you are a beginning investor, please go and read it.

If you care about money at all, please go and read it. It’s probably the most important thing you’ll read this week.

He makes very pertinent points on market cycles and he backs up a lot of what thinks about the current state of affairs with evidence that he sees in the markets today. It’s interesting that he also points towards SoftBank’s $100 billion venture-cap fund as a sign of the times. Guess who else pointed that out some months ago?

The funny thing is that I was also going through Ray Dalio’s “A Template For Understanding Big Debt Crises” and Dalio pretty much makes the same point as Marks does in his latest memo.

The point is that we want to be careful when there is too much money chasing too few deals.

But, but..Isn’t that Market Timing?

For those that think that this is market timing, it isn’t.

Timing the market means that one believes that one can predict exactly when the market is going to turn up or down. This is something that most of us in the fundamental camp don’t presume we’ll be able to do.

In fact, Marks makes it very clear in his memo that he doesn’t know exactly when this will happen. It’s just that, to him, it’s very clear that we aren’t in the part of the cycle where pessimism rules the day and bargains are aplenty.

In this environment, it’s more likely than not that bad deals are going to be done because prices (and the assumptions that the price hinge on) are too optimistic. The details of the mechanics behind why these sort of deals are done can be found in Dalio’s book.

For those that worship Warren Buffett, you should also realise that Buffett is keenly aware of these cycles. He famously shut down his partnership in the late 60s when there weren’t bargains to be found. Warren Buffett also tends to let cash accumulate when deals can’t be made at good prices.

His partner at Berkshire, Charlie Munger, also once said that the way they ran their insurance business was very counter-cyclical to other people. When too much competition drove prices down, they chose NOT to underwrite policies at discounted prices because they knew that these prices would eventually come back to haunt their competitors in a downturn and that’s when they would want to be writing policies.

Do Yourself A Favour

Having said all of the above, please DO NOT take what I’ve said as a signal to go to cash or gold or whatever other asset class. You have to remember that being completely out of the markets has a cost — You give up the returns that you could have got by holding risky assets.

A good example is a colleague of mine who has been (mostly) out of the markets since 2015. He’s missed out on what is probably a 5% per annum return on his capital as well as the 20% growth in the markets last year. For a person with his amount of capital to compound, that opportunity cost might easily be six-figures large.

To conclude, do your future self a favour and go read Mark’s latest memo and Dalio’s latest book.

STI PE10 Update: 1 Sept 2018

LOL. I didn’t mean to choose a pic of such an exotic exchange.

 

We’re heading deep into the 3rd quarter of the year. The STI’s been largely directionless while U.S. markets have continued to hit new highs. Nothing surprising here as markets outside of the U.S have been weak since the start of the year. It also reminds me of a post by Ben Carlson on how U.S. markets and World Markets don’t exactly have a one-to-one correlation. In fact, the correlation can sometimes be negative. A good reminder of why we need to be diversified beyond our home markets.

Having said that, it does mean that other markets are cheap relative to the U.S. If that’s the case, then where should you put your money?

I think the answer’s fairly obvious.

Check out the PE10 stats here.

Retiree Investor Loses Money in a Stock. Should We Be Sympathetic?

 

Everyone’s favourite piece of paper

Francis Tay feels cheated.

The former Singapore civil servant says he’s lost almost S$50,000 in the implosion of Noble Group Ltd, the commodity trading giant. He also says shareholders like him have been let down by regulators whose job it is to protect them from the sort of crisis that’s brought the company to the brink.

‘I was cheated’: Tales from the collapse of commodity giant Noble – The Business Times

When I read the above, I immediately thought of the whole Minibonds saga that emerged during the Global Financial Crisis. Of course, the difference is that many of the investors who bought Minibonds thought (or they wanted to think?) they were buying something safe and that even in the worst case scenario, they would get their capital back.

In this case, investors in Noble are crying foul that the regulators didn’t do enough to ensure that Noble’s financial reports reflected economic reality. There were probably things that SGX could have done as the regulator but ultimately, based on the accounting rules at the time, it doesn’t appear that Noble did anything illegal.

What Matters Most

I was pretty wary of the commodity trading firms not because I suspected they were up to some financial shenanigans but because of the economics of the commodity trading business. It’s econ 101 that the commodity business is a low margin business. Net profit margin is typically in the single-digit range.

This means that the company’s survival depends heavily on cashflow and if the company wanted to boost returns, then they would probably use a fair amount of leverage to do so.

Obviously, if you live on the edge, the chance of falling off the edge should a strong gust of wind blow in the wrong direction becomes much higher. This is exactly what happened to the commodity houses such as Olam and Noble when short-sellers started to accuse them of accounting trickery. Add to that the downswing in the commodity cycle and you have a recipe for disaster.

Of course, in hindsight, we know that Olam has emerged relatively unscathed while Noble seems stuck in an eternal downward spiral which may eventually result in bankruptcy or some form of major dilution for existing shareholders.

Francis Tay really shouldn’t be moaning about his $50,000. If you plan to invest in a company, you need to be prepared to lose the entire sum should non-systemic risks like this come to pass. This is exactly the reason why people have a diversified portfolio. You diversify across asset classes and within the asset class, you diversify across holdings. Of course, there is danger in going overboard with diversification. As with everything, moderation is best.

Human Nature

By the way, Francis Tay should take comfort in the fact that he’s probably not alone. Few people curse themselves when investment decisions go bad and many pat themselves on the back when the decision goes right.

Also, I’ve heard of people who are trained in accounting and finance who buy into stocks with bad economics or products like the minibonds.* Aside, buying stocks with good economics at the wrong price may hurt as well.

Smart people can make stupid decisions too. It’s pretty common when you let fear and greed convince you of the narrative that you want to hear. That’s why I prefer to make a plan and stick to it. I know I’m going to do something dumb at some point. It could be thinking that I can time the market or that I’ve made some superior insight into a company. That might lead to bad behaviour like trading too much by going in and out of the market and in the process, incurring lots of trading costs. Or it could be that I bet the farm on my superior insight, only to lose everything.

Final Thoughts

Please don’t be Francis Tay. Unless you were coerced or misled by an advisor** into making a financial decision, moaning about your losses won’t make you a better investor. Throwing good money after bad is also going to make you poorer. And lastly, don’t buy on myths like “blue-chips are forever” or “Temasek will always save the day”. Please think of your plan and stick to it. If you can’t invest, then maybe it’s better that you buy a low-cost index fund or ETF. In fact, that’s probably the right choice for most people.

 

Notes:

* I know a guy who used to be an audit partner who was telling me to buy tigerair and Singpost many years ago. Last I checked, prices never went above the price that he was telling me to buy at. I also know of a finance lecturer who bought the minibonds. Not sure if she thought they were capital guaranteed or she knew how it worked and she was just taking a bet.

** I have some things to say about so-called financial advisors too. More on this some other time.

Best Things I’ve Read All Week: 26 Aug 2018

It’s the weekend! There was a public holiday, mid-week, in Singapore so this feels like déjà vu. Anyhow, here are my picks for the week.

 

Some great reads to start your Sunday

After the Bitcoin Boom: Hard Lessons for Cryptocurrency Investors (New York Times)

I hate to say I told you so but…I told you so. (here, here and here for example. For a complete list, see here.)

It’s not surprise that some people have been burnt quite badly by the Crypto boom last year. Also not surprisingly, the ones hurt bad (i.e. relative to their income or net worth) are the ones who can least afford it. These are usually the least informed people in investing and when these people come onto the bandwagon, please get off.

That aside, I’ve noticed how many people are writing about their portfolios these days. It’s a trend that Financial Horse (whom I’ve never actually heard of until a few months ago but is pretty famous) has written this. I’ve been investing and writing about these things for almost 11 years now so I don’t think I qualify as new blood.

Of course, most of them write more about Financial Independence rather than investing per se so I don’t think that qualifies as a sign that we’re at the top. Valuation-wise, the STI is nowhere near exuberant levels.

 

A VISIT TO THE LAND OF A MILLION SHOKUNINS (The Food Canon)

While the subject of the article is about food, the idea of craftsmanship applies to all professions. I’m probably the worse person to tell you about craftsmanship because I’m impatient and lazy.

However, craftsmanship is probably going to be more and more important in the future. Why? Because machines are getting much better at doing the tasks that are routine and mundane. This isn’t a new phenomenon. Mechanization started with the industrial revolution and now, with A.I, I suspect it’s going to move into the realm of white collar jobs.

All the routine and mundane administrative jobs can (and should) go. I love the people in the admin department in my school but seriously, most of their job revolve around filing paper and “copying and pasting” stuff in emails.

The good education Minister actually has a point about emphasizing skills over paper qualifications. The problem is that most parents still have this mindset that qualifications matter. I suspect that that will change quite soon because we now have more and more people who are graduates (thanks SUTD, SIT, SUSS, and all the other private education providers!) but will not be able to find jobs that (1) pay well and/or (2) are interesting to do over a long period of time. It’s not really the fault of anyone but that’s what the world’s going to be like.

If I were a graduate today, I would make sure that I’m also a craftsperson of some sort. I might make good food, good beer, woodworking, an artist, photographer etc. Just make sure you’re really, really good at something that few people are good at. Just like this guy — The Secret Instagram Account Selling Black Metal–Inspired Biryani.

That said, damn…I need to make a trip to Hokkaido.

 

Steve Einhorn’s Bear Market Checklist (The Big Picture)

Recently, I wrote about having an investment plan. Part of the plan is having criteria to know when you should buy or sell. Howard Marks has also written about this before and I can’t wait for his new book to drop in October. Steve Einhorn, an investor and hedge fund manager, has this version which looks nice and simple to follow.

Long story short, it doesn’t look like we’re anywhere near a recession in the U.S. And I guess by now, we all know what that means for Singapore.

Thinking about Net Worth

For some reason, if you go over to thefinance.sg, you’ll see a collection of posts from many Singaporean bloggers on their net worth. I find it kind of amusing that so many people would want to publish their net worth so openly. I guess it’s inspirational for others who may be around a similar age group but it’s probably also #humblebrag.

My point today is not so much about a person’s net worth in Singapore but how it’s calculated. On the site, I’ve seen a few people in their late 20s or 30s with a self-reported net worth or portfolio of investments in the 600K-700K range. It’s not that the numbers are impossible but it’s just that I find it quite rare to have so many people report similar numbers.

That’s when I realised that many people have different ways of calculating their Net Worth. Some only include their excess cash and investments (stocks, property etc.) while some include money in their CPF accounts, and some even include the share of their home equity (i.e. the value of their primary residence minus outstanding mortgage).

In my opinion, there are only two approaches we should be using and I’ll go through each of them and what they mean.

Approach #1: Comprehensive a.k.a What the Government does

How the government measures household net worth. Source: Singapore Department of Statistics

From the table above, you can clearly see that the government’s version includes everything one owns minus everything one owes. This includes all forms of property, be it your primary residence or your CPF monies.

I call this the “comprehensive approach” as it measures all your assets net of your liabilities. Some people may argue that CPF monies are highly restrictive in their use and your primary residence should not be included because you actually “consume” housing when you live in it instead of being able to rent it out and gain some rental income.

The counterargument to both those claims is that money is fungible. One could always migrate overseas and the monies in your CPF accounts would be released. The argument for your primary residence is that we cannot confuse cash flow with investment gains. One may not be able to rent out one’s house while staying in it but there is still the chance of capital gain if one chooses to sell the house.

Anyhow, if you choose to use this approach to measure your net worth, this is the most comprehensive approach. MoneySense provides a nice calculator for you to measure this.

Approach #2: Conservative a.k.a What Bankers Do

HNWIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables, and consumer durables

• Capegemini Asia-Pacific Wealth Report 2017, footnote 1

Alternatively, if you aspire to join the ranks of the wealthy, then it makes sense to measure yourself like one. Banks also classify clients by Net Worth but their calculations are slightly different. They use a benchmark called “investible assets” which doesn’t include the place you stay in or other assets that may not be so liquid (i.e. not so easily converted to cash). In this case, I don’t think the monies in your CPF account counts.

Since this approach only counts what can be converted to cash without economic tradeoffs (your primary residence doesn’t count because if you sell your house, you still need to spend some cash finding another place to live in), this is probably the best measure of how wealthy you are.

In other words, this approach actually measures how much you would be able to freely spend on goods and services.

Conclusion

Doing both calculations, I find that the first approach gives me a much higher number than the second approach. This is because a substantial amount of my assets are in my CPF accounts and home equity.

I suspect that most Singaporeans will find themselves in the same shoes as me and if I were the government, I would be really worried about the ratio of approach 2 to approach 1. The more wealth that is tied up in CPF accounts and home equity, the more people may think of moving overseas to unlock the assets that are essentially trapped in their homes and CPF accounts. After all, what’s the point of having so much money that you can’t use because most of it is locked away in the form of a house or in an account that drip feeds you the money?