More on bitcoin

So, today’s that kind of day where there’s a bunch of interesting stuff on bitcoin.

First, there’s this fantastic piece by Josh Brown that sums up a lot of what “investing” in bitcoin right now is like.

For the Bitcoin price to remain at $9,250 it requires approximately US$16,650,000 per day of capital inflow from new hodlers.

That’s a snippet of a quote from a commentary he has in his piece. Together with lots of examples about how some penny stocks have seen an influx of investors just by becoming associated with bitcoin, how the bitcoin mania resembles the dot-com bubble (early 2000s) as well as Thanksgiving-fuelled bitcoin conversations. There’s a lot more where that snippet came from so if I were you, I’d go read the whole thing. (full link here)

Anecdotally, I shared something about bitcoin on facebook with the caption saying how the new wave of people with some money to buy into bitcoin are probably too young to remember what the last crash looked like. A former student who’s now serving his National Service (NS) commented saying how half his bunk is already in bitcoin and that one of them is a trader of cryptocurrencies and is saying that “the price will never go down”.

Now, we just have to wait till the mainstream media* picks up stories of how 20-something-year-olds have “helped” their parents “invest” their entire life savings in bitcoin.

 

*You know it’s too late to join the party when the mainstream media puts it on their front page. In 2007, there was a story of how a university student was making tons of money and helped his family invest their life savings. Subsequently, he lost it all. Personally, I saw many others like the student in the story when I was at the university in late 2007.

 

Short follow up on SPH

So, a day after I wrote a report about SPH’s business, the company releases its results for FY2017.

As expected, results are better than last year, all thanks to the divestment of the online classified business which netted them a gain of about $150 million. No one really cared much about that though because, as highlighted by SPH in their press release, their operating revenue was down about $108 million, or 13%, from a year ago.

The difficult thing for SPH now is the fallout from their retrenchment exercise. It’s bad press (pun totally intended!), especially for the new CEO that hasn’t come in with that great a reputation.

While SPH hasn’t slashed the dividend by much, their payout ratio looks terrible. Of course, that little ^ mark matters. Their payout ratio is calculated based on recurring earnings. What does that mean? Only earnings from media and property (and now possibly the education and healthcare) part of the business are counted? If so, that leaves quite a bit of earnings from the investment side and this payout ratio can be considered pretty conservative. After all, with an investment fund of $1.1 billion*, you can get more than pocket change (relative to SPH’s core businesses) in interest and returns. Anyhow, I don’t have enough information to make a conclusion.

 

Are SPH’s dividends sustainable?

In short, I don’t think SPH’s results are anything out of the ordinary. Mr. Market apparently thinks the same way which is why there has been hardly any reaction to the release of the results. That’s it from me. This will probably be the last post in a long while on SPH unless something interesting develops.

*See their latest (FY2017) presentation slides, page 13.

 

What’s going on with SPH?

Full disclosure: I own SPH stock.

Disclaimer: The report is meant to present a factual representation of the company’s business and is not a projection of how the stock will do. It is not meant to be an inducement to buy or sell the stock. As far as possible, I have tried to ensure that there are no errors. Any errors are my own. Please seek advice from an investment professional should you choose to use this information as part of your decision-making process on whether to invest in the stock or not.

 

So, I came across a report on SPH* that did a horrible valuation analysis on SPH. The main problem with the report is that they valued SPH on the basis that it was not a going concern, calculating it’s NAV and then taking a discount from there.

The report (more like blog post actually) also made simple factual errors like including Seletar Mall in SPH REIT…

So, I did my own analysis of SPH. You can download it for FREE. Leave me your comments and let me know how I can do better. (SPH (T39) report 10 Oct 17)

For those that don’t want to read through the entire thing, I’m listing some of the main points below.

Negatives:

• The traditional media business is declining fast.
• SPH is taking on more debt in order to fund other lines of business.
• Other lines of business are not a sure bet.
• New CEO not from industry nor has a good track record.

Positives:

• Market’s current pricing of SPH seems to expect the worst.
• Media arm’s decline seems to be bottoming.
• Debt levels are still sustainable.

Neutral:

• Management is trying its best to diversify away from the media business

 

*I’m not even going to link to it because it’s so bad and they are obviously trying to get you to buy something from them

Mediocre investors can build wealth too

Holy cow! 1/3 of the year has come and gone. So how’s your portfolio doing?

I just wanted to share a great insight on investing prowess vs. building wealth. Obviously, the better an investor you are, the quicker you’ll build your wealth. However, for mere mortals like most of us, I want to assure you that it’s still possible to build wealth.

Enter exhibit A. (Actually, this is the only exhibit.)

 

NAV per share (in blue) vs. Growth of actual portfolio (in yellow)

The blue line (NAV per share) shows how much $1 invested in the portfolio would have grown to. So naturally, this involves removing the effects of adding more cash to the portfolio which basically shows us how good an investor I am.

The yellow line (Actual growth) shows how many times the portfolio has grown by relative to the starting date. Of course, this includes savings and additional cash added to the portfolio.

If you’re aiming to be financially free, I can’t think of why building wealth would be inferior to being a good investor. Sure, being a good investor gets you there quicker and probably allows you to enjoy consuming more at the same time but if the goal is to eventually not have to worry about working for money, then getting a big enough portfolio that will allow you to live off a safe withdrawal rate (3-4%) should be your main priority.

My experience so far is that being an average investor will help you get there too.

 

PS: Of course, once your portfolio gets huge enough, your savings will hardly matter. An average household in Singapore makes something like 80-90,000 SGD a year. If the portfolio reaches 2 million SGD, saving half a year’s income (which is near to impossible for most people) will only move the needle by about 2%. Having said that, if your household can’t retire in Singapore on a 2million SGD portfolio with your house fully paid for, you have a spending problem.

SG property market valuation (updated with SRX Feb ’17 data)

An update on the Singapore property market. For background on this, read here. All data from SRX.

Using the price of HDB flats as the benchmark, we can see that prices for private property in all categories are at a sizable premium to HDB flats. Among the different classes of private property, the premium for private landed remains the highest although the index seems to be on a downward trend. For non-landed, it appears that resale units are at a lower premium than new units.

As for sales of all (new and resale units) non-landed private property, it appears that the area commanding the highest premium to HDB flats are in the RCR (Rest of Central Region).

Of course, prices will vary for individual projects and units but from a macro perspective, it’s going to be much easier to bargain hunt during periods like the early 2000s and ’09-’10 where there was hardly any premium over HDB flats. In fact, times like 1999 would have been a godsend to property investors.

I guess my two main takeaways are (1) despite the Singapore property market supposedly being in a doldrum, private property prices are not cheap right now and (2) HDB flats do keep their value quite well being the cheapest form of housing in Singapore and therefore is a reasonable benchmark for evaluating priciness (or cheapness) of the private property market.

If you were banking on your HDB flat to be financially free, think again.

In not-so-latest news, Minister of National Development, Lawrence Wong came out to caution people from buying older HDB flats* in hope that the government places the flats under a SERS programme under which owners of the old flat get compensation in the form of cash (with the flat valued at market rates) or a choice selection of a new flat in the vicinity.

Of course, the good minister didn’t want his words misconstrued as “all other flats not selected for SERS, which make up a majority, have a chance of their value plummeting should the leases be allowed to run its course” so he came up with additional thoughts on why HDB flats retain their value.

First thing to notice is that the good minister did not say that HDB flats are a good form of wealth enhancement. He only said “store of value” which everyone who has done econs 101 would interpret as keeping its “real value”. In other words, any monies sunk into an HDB flat will retain its purchasing power should you wish to monetise your flat. If you make money from your HDB flat, then count yourself lucky.

The second problem, which other netizens have pointed out, is that Mr. Wong’s example doesn’t reassure buyers who bought older flats which have already run through a good chunk of the leasehold life. (For details, see this link)

This brings me back to a point I made some time ago. Most Singaporeans sink their CPF monies into their property. If your property is going to, at best, hold its value, you better think twice about counting solely on your property to retire.Even

Even monetising your HDB flat through the HDB’s lease buyback scheme where you trade the remaining years of the lease for a monthly income has problems. First, the payouts are not inflation-indexed. Second, inflation for retiree households tends to be higher as healthcare and transportation are two of those components in CPI that rise faster than the average component in the basket. In short, fixed incomes and rising costs don’t make a sound retirement plan.

 

Notes:

*HDB or Housing Development Board flats are Singapore’s form of public housing. The flats are of decent size (compared to places like Hong Kong), decent quality and generally cheaper on a dollar per square foot basis compared to private property. However, all HDB flats are on a 99-year lease from the government. At the end of the lease, the flat is returned to the government. However, with Singapore being such a young country, there hasn’t been a single case of whether the government pays any compensation for taking the flat back or the value of the flat goes to zero.

 

Becoming Warren Buffett

In case you haven’t heard, there’s a new documentary on Warren Buffett. If you don’t even know who Warren Buffet is…well, it’s time for you to find out.

HBO’s documentary on Buffett is a fantastic introduction to the living legend of a man. Why’s Warren Buffett a legend? Well, he’s not just one of the richest men on the planet but he’s pledged and has already started giving, a substantial portion of his wealth away.

For me, there isn’t much that I haven’t already heard before (the part on him buying breakfast from McDonald’s was interesting) but it’s always refreshing to see it on a screen rather than from the pages of a book. For a more detailed account of his life, check out his authorised biography, The Snowball by Alice Schroeder.

Why Warren Buffett is such an inspiration to me is a more personal tale. It started sometime in 2006 when I was still studying at the National University of Singapore. The NUS Investing Society (or Finance Society), which probably stems from the Business School, was organising a book sharing by Robert Miles, author of Warren Buffett Wealth, and I guess they wanted a wider audience and so they were putting up all these advertisements around the Faculty of Arts and Social Sciences where I was.

Prior to the talk, all I knew about Warren Buffett was that he was one of the richest guys on the planet but other than that, I knew nothing about him. I knew nothing about the stock market. Heck, I didn’t even know what I wanted to do after university. That talk changed everything.

After that talk, I started reading up on Buffett, Graham, Value Investing, the stock market, financial statement analysis, stock valuation and so on. And there’s something new to learn about the markets every single day. I’m now approaching the tenth year that I’ve begun investing for myself and it’s all thanks to that talk back in 2006. Probably the most useful thing that came out of my university education. Watching Becoming Warren Buffett just might do for you what attending that talk did for me.

PS: I’m not sharing a link to the documentary because I’m pretty sure that goes against copyrights but I’m sure whoever’s reading this will know where to find it.

Are you ready to take short-term pain for long-term gains?

So, this story turned up on my Facebook feed this morning and I thought it’s an excellent example of how life sometimes requires struggle before you see the reward. The story is about how the Philadephia 76ers basketball team is starting to see the results of a strategy that was started some years back. The strategy consisted of being deliberately bad for a few years in order to get better players that would be around for the longer haul. Unfortunately, the owners of the team couldn’t wait long enough to see the results and forced the general manager in charge of the strategy out. I’m not an expert on basketball and there might have been a less painful way to turn a team around but the one thing you can’t argue is that the strategy didn’t work because going by the 76ers current record, things are certainly much better than before.

What I think is important is that the above also applies to many areas of life. Some months back I read Paulo Coelho’s The Alchemist for the first time and the book tells a simple tale of never giving up and having faith in the journey that you have to take in order to reach your dreams. While the story doesn’t reflect the complexities of real life, the struggles that the character goes through for practically the entire tale does provide a cautionary tale for anyone who dreams of success- that the path to success is often filled with numerous false starts and it is a long and arduous journey not for the faint of heart.

Since humans develop habits by the way of a cue, routine and feedback, savings money is a pretty easy thing to do. Money that comes in from a paycheck (the cue) can be channeled to an account used for investing (the routine) and as you see that amount get bigger, you feel a sense of satisfaction (the feedback which is positive).

However, things can screw up when it comes to investing. After putting money into a carefully selected invested, the value of the investment could decrease. This leads to the investor questioning his or her ability when it may be no fault of theirs if markets tank in general. It may also not be of concern if the stock tanks in the short term due to unnecessary pessimism. The bigger question is, will the investor be able to stomach a decline in value of their holdings?

This is where I think it’s absolutely necessary to have an investment process which should be able to do a few things. One, it should help an investor enter or exit the market during periods of extreme valuation. Two, it should help investors select securities (equities or bonds) which have a more than fair chance of surviving in the long-run. Three, results should be evaluated over a period of at least 3-5 years and certainly not just over a year or two.

Having said that, sometimes we also need a little faith that we’re doing the right thing. Trust the process.

Beware the Halo Effect: Straits Times Invest series edition

A little deviation from regular programming.

For some reason (reporter ran out of sources? strategically paid for advertising?), the daily paper here in Singapore recently ran two very similar stories in their Invest section.

Story 1 (published 25 Dec 2016) had this as part of the blurb:

Investor learnt about value investing using options a few years ago and has since built up a $2.2 million portfolio.

While story 2 (published 22 Jan 2017) had this to say:

“When buying options, you need to be making directional trades all the time, but I got rid of that by selling options on either direction. I don’t care if the stock goes up, down or doesn’t move, as long as the price stays within range.”

MR BHARATH JAYARAM, on how selling options on equities and indices that are not very volatile has worked for him.

Thing is, I really used to like that section for profiling successful investors or business people but in recent years, that section has fallen by the wayside. I don’t doubt the authenticity of the stories featured but I highly doubt the value of the stories. At best, the stories featured will get more people interested in options trading and some of those people might make it but it’s highly likely a majority will probably lose money. What’s worse is if a majority dive head in, thinking it’s easy money and then get burnt in a horrendous crash in the markets.

First, let me say that the timing of the stories point to what I suspect is a bigger problem for any investment. In the foundational economics class that I teach, this is what we call the Fallacy of Composition. The fallacy is in thinking that what works for a few people will work for everyone else and therefore when people start to follow in the footsteps of a few highly publicised cases, that very act of following ensures that the initial method stops working. For example, when a place with a bargain gets publicised enough, the ensuing crowds all but guarantee that the bargain won’t last too long.

Given that both stories were about people making money through trading options and that trading options is usually limited to the US markets, I’m beginning to suspect that the days of making easy money through options may be over for the least savvy investors and those who have just joined the party might just find the reason to swear off the financial markets for the rest of their lives.

Of course I could be wrong, the way the story may play out would be that an investor new to selling options start by selling puts, make some decent money on those puts as the market runs up, then decides to go all in by selling puts and buying calls only to see the markets drop off a cliff and wipe them out completely. Some close variation of that scenario could also play out.

I don’t know for sure but what I’m sure is that the Straits Times isn’t doing anyone a service by publishing those two stories.

Investing 101: Turnover is costly

This is part four of my 10 things every beginning investor should know post.

#4 Turnover is costly

I touched briefly on this in part one so let’s go into more detail here.

Be wary of managers who buy and sell stocks like they would change their underwear. It’s the same thing with dating people who keep having partners, it’s a signal that these people have poor judgement or don’t know what they are doing.

Before we go into that, what exactly is turnover?

In general, turnover refers to transacting. Therefore, a turnover can be thought of as each buy and sell transaction. In evaluating a portfolio, investors can see how often a manager turns over the holdings in the portfolio but looking at something called the ‘turnover ratio’. Investopedia defines this as such:

The turnover ratio is the percentage of a mutual fund or other investment’s holdings that have been replaced in a given year…

There are a few reasons why turnover is costly. Firstly, transaction fees have to be paid each transaction. This means that for each buy and sell transaction, fees are twice.

Secondly, turning over means that investors incur taxes on short-term gains which are usually higher than taxes on long-term gains. While that may not apply here in Singapore since there is no taxes on capital gains, there is no reason to believe that Singaporeans only invest in funds that invest in SGX-listed companies.

Thirdly, even if the manager matches the returns on the market. With the additional fees paid when turning over a stock, it means that returns are compounded over a smaller base.

Fourth, turning over means that the manager must consistently find winners. It’s just pure odds. Let’s be generous and say that the odds of picking a winner are 50%. Having the manager pick just once means that the manager’s odds of picking a winner are 50-50. However, the more times a manager has to pick, the lower the odds (as a total) are because to pick two winners in a row would mean that the odds are 1/2 multiplied by 1/2 which now gives us odds of 1-in-4. Even if the manager has a secret sauce which increases his or her odds of picking winners, the odds that winners are picked must necessarily fall over time due to mathematical laws and as other market participants start to follow the same kinds of strategy.

To sum up, in the words of legendary economist Paul Samuelson:

“Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas…”