Learn from a Fool: Investment Mistakes

I have made many investment mistakes in my life.  And the stock market is definitely an expensive to pay "tuition fees" with your hard earned money.  But it is inevitable.  Most investors will tell you that they lose money from time to time.  Even the best investors make mistakes.  Here I share some of my mistakes and perhaps you can learn from them and not repeat any of these mistakes I made.

Right up there on my greatest investment losses is perhaps investing in S-Chips or Chinese companies that are listed on the Singapore Stock Exchange.  Two of the shares that I own are still in the deep red with perhaps no end in sight.  Let me give you the story of one of these "darling" stocks.

There used to be an old forum called WallStraits where all the people who stand by Fundamental Analysis used to hang out.  Perhaps some of you remember that forum.  During those days, S-Chips were new and they all had such good financial records, P/E, NAV, etc that some stocks were being rated as BUY by nearly every member in the forum.  There were the darling stocks that were well-rated by all.

I read posting after posting during my spare time.  And when I finally made the decision to invest, I threw in a whole lot of money (in fact all of my spare cash) into one stock.  As the mantra went:  "Put all your eggs into one basket and watch that basket closely".  What could go wrong?  There were people who had lots more of experience then me and who had also put their money where their mouth was.  The stock was supposed to be one of those stocks that Warren Buffet would buy (if he lived in Singapore).

Well, the stock price went up a little and then it went downhill from then.  I averaged down my position thinking that it was undervalued.  Everyone was crying out that it was undervalued and that they were targeting it to hit a two or three fold return in a few months time when the stock market recovered.

To cut a long story short.  The stock market recovered.  Almost every stock rose back to their original price or even higher.  This stock however languished and truly became a penny stock.  I won't reveal how much I lost on that stock but it made me a lot more skeptical about the wisdom of crowds. Just because everyone is shouting that a stock is a "BUY" does not mean that it is one.  Everyone could be sincerely wrong.

My failure to cut my losses when I should also worsened the situation and I was so stuck into the stock that I  could not bring myself to sell it.  Today, that stock still sits in my portfolio.  It is the first stock that I bought and it sits in my portfolio worth a lot less than what I bought it for.  It is there as a reminder to myself that hours of research and being very certain about something does not mean it is a SURE BUY.

One of the lessons I learnt through this was also about asset allocation (Read about Yale Endowment Asset Allocation here).  Putting all your eggs into one basket is really risky risky business.  I was so certain that the stock was undervalued.  But it turned out the other way.  I hope people will learn from my mistakes.

Reader's Query

A reader read one of my postings and asked whether he could buy some of the stocks that were listed in that posting.

The short answer to his query is "No".

Let me share why I might from time to time share what is on my watchlist or what I have already bought into my portfolio.  It is basically to let readers know what stocks I own and what stocks I am watching so that they know I have vested interest when I am talking about those stocks.  In a sense, I am also trying to get some feedback and thoughts from readers on why they think certain stocks may or may not be good investments.

Learn From a Fool - Believing that I Can Find a Ten Bagger

I wrote two posts recently about my investment mistakes and some mistakes that I nearly made.  I guess that as one grows older and has a longer time spent in investing, one will certainly make some mistakes here and there.

The next mistake I will like to highlight it a mistake that can perhaps only be described as ..... sheer craziness.

There is perhaps this unspoken dream amongst investors to find that ten bagger stock - the stock investment that will return your investment capital by ten-fold.  That is an alluring argument since most investors start off with a small capital base and to multiply your returns with a 5 to 10% returns seems almost meaningless.  After all, a 10% return on a $1000 investment is only $100 in profits.  Yes, we all know about the effects of compounding.  But in the Singapore stock market, most stocks don't make 10% year in and year out.  They go up 10% one month and drop 20% the next month.  So it is almost impossible to get a consistent 10% return every single year.

But most people still hang on to the dream that they might find a stock that will appreciate in value by 10 times or more.  How many stocks are actually capable of doing that in the Singapore stock market?  Some times, in the blind pursuit of such a stock, many investors throw in lots of money on a penny stock hoping that it will increase in price by ten-fold.

How possible is that?  You judge for yourself.

How To Buy US Stocks in Singapore

I received a query from a reader about how to buy a particular US stock from Singapore.  This is a common question that I get and I thought that I might as well answer this through a blog post instead of replying to the email.

First of all, you will probably need a brokerage account.  When you open a stock trading account with a brokerage firm like UOB Kay Hian, they will give you the option on which markets (e.g. Singapore, Hong Kong, U.S) you want to trade in.  There are a few particular forms that you will need to fill in. To trade the US market, you will need a W8-BEN form which is downloadable from their website (usually).

I leave you with a few links that might be useful if you are interested in opening a trading account. As it is really self-explanatory, I will leave it up to the reader to navigate the technical details of how to open a stock trading account to buy US stocks that are listed on the US stock markets.

1. UOB Kay Hian.  http://www.utrade.com.sg/index.jsp  (go to the top menu bar on Getting Started and read the questions.  Pretty self explanatory)
2. POEMs.  http://www.poems.com.sg/ (go to Getting Started on left column)
3. Standard Chartered.  http://www.standardchartered.com.sg/personal-banking/services/online-trading/en/index.html
4. OCBC. http://www.iocbc.com/

Learn from a Fool: Mistakes I Almost Made Last Month

I almost made some serious investment mistakes last month.  While reading various analyst's reports, I came across trading BUY calls  for Bumitama Agri and Golden Agri.  In what was an almost rash moment, I was very close to buying into those shares hoping to make a quick buck that just seemed so tempting to resist.  After all, the upside forecasted by the analysts in their target price suggested that I will get a good return on my investment.  And besides, I had also liquidated quite a fair bit of my other shares.

It was good that I was too busy to think much about it over the past weeks and so I did not enter into any positions.  The prices did go up a little and finally slipped due to expected weak crude palm oil prices.  Apparently, there is going to be an oversupply in the near future and palm oil prices are expected to be low in the near future.

It shows that one should not be too quick to jump into investment decisions based on other people's analysis.  At the end of the day, all forecasts and projections are just anyone's guess.  We can make educated guesses but that is what it remains at the end of the day - just an educated guess.

When Is The Best Time to Invest?

When is the best time to invest?  This is probably a question that many new (or even old) investors might ask.  After all, market timing seems like an important factor when it comes to making investment decisions.  And most people won't want to be buying into a stock when its share price seems to be so high.

Perhaps I will share this quote that I saw recently.  It is by Sir John Templeton.





"The best time to invest is when you have money".
- Sir John Templeton




So probably the important question is not when to invest but what or where to invest one's money in.

Query from Reader - $20K to Invest

I don't usually do this but I got a query from a reader recently asking me what safe instruments one could invest in that will provide a better return than fixed deposits (FD).  Based on the sketchy information provided, here are the following facts that I got from the very brief email:

•  $20K cash
• "Invest on something safe"
• Earn more than FD (which I assume stands for fixed deposits).

Firstly, I think the reader must ask himself whether the $20K in cash is really spare cash.  Has he/she set up an emergency fund of 6 months expenditure (or for the kiasu ones - 6 months income).  Without questioning too much, I assume that he/she has already set aside money for an emergency fund and this is really SPARE cash to invest.

Secondly, I deduce that the reader is probably risk adverse.  Capital protection is probably key to him/her.  Stocks with their high volatility are perhaps not suited for everyone (even though I strongly recommend it to most people).  

One of the few options I can think of is to invest in SGS bonds.  That will give a better return than FD.  However, at the same time, the returns from bonds are not spectacular at all (at least to me).  Personally, I don't invest much in bonds (not directly anyway).  

Any thoughts from other readers?

Investing in things I use - Mapletree Commercial Trust and Breadtalk

It is always good to have some insider insight to stocks that one will like to invest in.  One simple way to do that is to invest in retail REITs.  There are many REITs in the retail/commercial sector and many of them own shopping malls in Singapore.  Just take a walk at one of the malls and it might give you a good sense of how business might actually be doing for the REIT, whether there is potential for rent increase, whether asset enhancement initiatives are ongoing, etc, etc.  It is almost like an insider's view of the business.

Mapletree Commercial Trust

One of the properties owned by Mapletree Commercial Trust (listed on the Singapore stock exchange) is Vivocity.  To those who are not familiar with Vivocity (or Singapore), it is one of the largest malls around located at the southern tip of Singapore just at the entrance to Sentosa (where one of the integrated resorts - Resorts World - is located at).

Vivocity has 1,038,000 sq ft of net lettable area and 2,179 carpark lots. The occupancy rate stands at slightly above 98% and has 300 over tenants.  More recently in the news, PageOne bookshop closed citing high rental costs.  When PageOne moved out, the space was quickly taken up by two other retail outlets - Franc Franc and Cotton On.

Just walking around Vivocity, you will be quite amazed at the shoppers who are there.  Families, teenagers, tourists, office workers, etc.  One would expect it to be less crowded during the weekdays but it is not.  Sited just beside harbourfront, tourists from cruise ships often go there to shop.  Not to mention that Sentosa is just conveniently located by a monorail from Vivocity to Resorts World.  

The shops are also wide and varied.  There is Giant and Cold Storage (supermarkets) for those who want to do grocery shopping, a cinema, many food outlets and restaurants and lots of retail shops.  The shops cater to a wide mix of shoppers whether they are shopping for electronic products, home furniture, clothes, luxury goods, etc, etc

I think Vivocity will continue to do well but I am not certain what the impact of the new cruise terminal at Marina will have on the business it gets from tourists. Nevertheless, since it is conveniently located at the doorstep of Sentosa, I am certain it will continue to get lots of business from travellers who are staying at Sentosa.

BreadTalk

Well, it is easy to analyse a business if you can see how many customers there are.  Breadtalk is one of those business that has been expanding abroad.  While I am not too certain how the overseas outlets are doing, I can say that the outlets in Singapore are doing pretty well.  Breadtalk sells bread and together with many of the Breadtalk shops are Toast Box (basically a cafe like shop that rivals another famous Singapore brand Ya Kun).  

Anyway, let us focus on Breadtalk first.  Many of its outlets are conveniently located where there are office crowds.  Just walk into a Breadtalk outlet in the morning and you will be surprised to see the number of people queuing up to buy breakfast back to eat in office.  I figure that a typical Breadtalk shop can easily have more than 200 customers just during a one-hour window in the morning peak hour where office workers are streaming to the office and need to grab some food to eat.  Each customer probably spends $3 to $4 on their breakfast.  Many of them are repeat customers.

Conclusion

So there you have it.  Two businesses that are listed in the Singapore stock exchange that you can easily observe to determine how well they are doing.  At my writing, Mapletree Commercial Trust was trading at S$0.965 and Breadtalk was trading at S$0.50.

Retirement Planning Mistakes

[Photo credits: Image by kwerfeldein]

For most people, retirement is probably the best part of  life they look forward to. Yet, many people often make certain mistakes in retirement planning.  In this article, you will find out what are some of the common mistakes made and how you can probably avoid them.

Introduction

Retirement is a time when you will no longer need to work for income and when you can spend time doing the things you like to do, such as spending more time with your family or travelling. In order to enjoy this time it is important to plan properly for your retirement.

The best way to enjoy your retirement is to be financially secure. The only way to ensure that is to start saving towards your retirement fund early, and let compounding returns do its work.  Of course, you will also have to hope that you do not get caught out by any of the common retirement planning mistakes.

Start Early

The sad fact is that to get the maximum benefit for your contributions to a retirement fund, the money has to be in the account for as long as possible. This means ideally starting to contribute as soon as you start work and using 40 years of compound interest to increase the size of your fund.  Many people often think that they have time to spare and only start planning for retirement when it is too late.

The best time to start retirement planning is actually when you have just started work.  By planning early, you will get a good overall idea of how much you need for retirement and how much you ought to save to reach that amount.  Retirement planning and life expectancy also goes hand-in-hand.  One basically needs to know how many years you are expected to spend in retirement in order to save up sufficient money.

Taking Risks and Failure to Diversify

When you are younger it is tempting to take risks with your investment to increase the size of it faster. This will usually give you a bigger return much faster.  However, the downside is an increased risk of the investment going wrong and turning sour. This matters less when you are young as the fund still has plenty of time to recover, but when you are approaching retirement age,  it is best to be more prudent with your money.

At a point about ten years before you are planning to retire, consider moving your funds from a high risk investment to a lower-risk investment. This should reduce the risk to your money and make sure that as much as possible is available for your retirement.

The  mistake that people make when planning their retirement is to put all of their funds into the same place. This might give you the best return on your money, but if it encounters a problem you might lose some, or even all, of your investment. If possible diversify your investment so that the money is in several different places and invested in several different markets to keep it safe.

As people frequently mention, asset allocation is probably one of the biggest mistakes that people fail to take care of when doing investments.  How often it is that we hear about people who are near their retirement and lose all they have because of some risky investment.  This can be avoided if we allocate our assets properly.

Consult Independent Professionals

Can you trust your financial advisor? As well meaning as they might be, your friends, family and bank manager might not have access to the best information or access to the best products for your needs.  While they might be sincere in their intentions, they still might be sincerely wrong.  When you start retirement planning, avoid the common mistake of consulting the wrong people to help you plan your future. The best advice is always available from an independent professional, who will be able to find you the best retirement products for your situation.

Once you have chosen a retirement plan, it is important to reconsider it on a regular basis. Life changes, like getting married or starting a family, will need you to re-examine your situation and perhaps change your investment priorities.

Conclusion

We are all not financial experts, so it is easy to make retirement planning mistakes that will affect the quality of life during your golden years. Get independent advice from experts and diversify your investments to protect your future and make the most of your retirement.

Investing in Real Estate

Real estate is usually one of the most expensive purchases that a person ever makes. The cost of real estate has risen significantly worldwide over the last decade until the economic problems came to life. Even now that housing prices have stabilized, they are still much higher than at the start of the last decade.

This can make it difficult for people to buy or invest in real estate, but it is great for anyone who bought before the prices started to rise. As any loans on the property are paid off over time, the cost of living there will be limited to any taxes and repair bills.

Advantages of Real Estate

As well as providing you with somewhere to live, or work, real estate can really work as an investment. If you own housing, you can rent it out to bring in a nice amount of money every month to supplement your salary. You will have to pay out for any repairs, and bad tenants can do a lot of damage, but many landlords have an agency that takes care of all that for you. Another advantage of property is the high cost of it. It might cost you a lot of money to buy, but you can usually sell it for a profit. Many landlords accumulate a portfolio of property that they use as a retirement fund, and sell it off when it is time to retire.

Disadvantages

Real estate is really expensive, and it can be difficult to borrow the money you need to buy a property. This can make it very difficult to start investing in real estate, although treating it like a business and presenting a solid plan to your bank may help if you want an investment property. A lot of people also end up asset rich and cash poor.

Choosing Real Estate

The hard part is choosing which real estate to invest in. Your intended use of the property will determine which is suitable. A house for your family might be a completely different choice to a property intended for rental to the holiday market in a resort area for example.

If you have the necessary skills, then you can make a lot of money by buying properties that need renovating and performing the necessary repairs. Your skills will enable you to perform the repairs quickly and cheaply and you can turn around real estate like this for a profit within a short space of time.

Building and maintenance skills are also useful if you want to be a landlord. By doing the repairs yourself it will save on the costs of paying for skilled craftsmen. It will also save money if you can manage the real estate yourself and deal with the tenants, but many people prefer to use an agency to do that.

Real estate can be a great property investment that can make a great profit, but can lead to large losses. Anyone considering property as an investment needs to research the market properly and invest in the right property in the best location they can afford.

[This is a guest post]

Investing in Silver

Since man first discovered silver, it has been an object of desire for both its value and its use as a form of money. This usually means that investing in silver gives a good long-term return to the investment.  Not too long ago, I wrote about buying silver in Singapore, how I was buying more silver (for collection purposes) and also some of my broader investment thoughts for 2012.  Of course, I warn readers not to take what I write as any form of personal finance advice.

[Picture credits to digitalmoneyworld]

The Silver Market

The market for silver is not as big as the gold market, but is still worth an estimated $15 billion annually. Traditionally, the price of silver tracks the price of gold. The ratio was set by United States law at 1:15 in 1792, but price increases in both metals meant that the gold/silver ratio rose to over 1:60 in 2009. The price of silver has continued to rise and reached record levels in 2011, with the average price reaching $41.20 for one troy ounce.

Like most commodities, silver trades on a market with traders buying and selling the metal to make a profit. The London silver bullion market is one of the main places where it trades. Another is iShares.

Silver in Banks

In some countries investors can walk into a bank and buy silver bullion over the counter. This can then be taken home and stored in a safe or kept in a safe deposit box in the bank. It is even possible to store your silver in allocated or unallocated storage with a bank or dealer to keep it safe.

Silver comes in a variety of bars, including:
* 1000 oz troy bars (31 kg)
* 100 oz troy bars (3.11 kg)
* 1 kg bars
* 10 oz try bars (311 g)
* 1 oz troy bars (31.1 g)
* Odd weight bars

The most popular bars are the 100 oz troy, with popular brands including Engelhard and Johnson Matthey. The branded bars are usually worth more than unbranded or odd weight bars.

Investing in Silver

Silver can be both a long-term and short-term investment. In the short-term, investors can trade silver for a profit in the same way as any other commodity by always aiming to buy low and sell high. Market fluctuations can give profits on each trade, but also losses meaning that this can be a risky investment as one needs to know how to time the market (something I admit I am totally not good at!)

Over the longer term, the price of silver has generally risen, with a sharp rise over the last few years. This is great news for anyone that owned silver before 2005, but not so good for anyone thinking of investing now. Of course the market price could continue to rise, but nobody knows for sure and it could fall back down to earlier levels.

Over the past few years, investing in silver has been a great way to make money. The price has increased by eight times in 11 years and doubled since last year, but that does not mean that it is guaranteed to continue that way so never risk any money that you cannot afford to lose.

You might also be interested in reading the recent article on Investing in Gold.

Investing In Gold

Gold is one of the most valuable and desirable substances known to man. For many years it has been a status symbol as well as a form of currency since the days before money. It is also the most popular material for making jewellery, with roughly half of all gold being used in this way.

Gold Price


For many years, the price of gold was a relative standard for currencies around the world. This started to change in the 1970s when the value of the US dollar stopped being linked to the price of gold and finished in 2000 when the Swiss Franc was the last currency to remove the link.

Like all commodities, it is possible to treat gold as a short-term and long-term investment. Over hours, days or weeks, the fluctuation in the price of gold on an exchange allows traders to buy and sell for hopefully a profit. With luck or skill, a gold trader can buy some gold at a low price, sell it at a higher price and buy more when the price drops. Repeating the process allows an investor to make a lot of money, but if it goes wrong they could make a loss on each trade.

Historically, the price of gold has risen at a steady rate making it a great safe investment. In fact, during the recent financial crisis many people turned to gold as an alternative way of saving. This is a relatively safe way of investing in gold, but still leaves you with the problem of finding somewhere to keep it safe. Most experts recommend that gold is a rainy day investment, like an insurance policy that should be kept until you absolutely need to sell.

Gold Coins/ Bullion


Another way to invest in gold is gold bullion coins. These cost slightly more than the spot price of gold, but are easier to buy, trade and store than larger pieces. Typical sizes include 1/10oz, 1/4oz, 1/2oz and 1oz. The governments of the UK, USA, Canada, China and most other major world powers mint these coins, so they are very reputable.

Mining Stocks or Close Ended Funds


Apart from investing in physical gold itself, one can also invest in the mining companies that are involved in gold production.  There are also certain funds that invest in various mining stocks.  One of these close ended funds is Gamco Global Gold & Natural Resources Trust which pays out a monthly dividend.  If you have been reading and following this blog, you probably know that I have loaded up on GGN just recently..


Storing Gold

Many major banks will store gold for customers, as will specialized gold exchanges and trading houses. You can even walk in to some banks and hand over your money in exchange for a gold ingot. Once you have carried this heavy bar home, you need somewhere secure to store it. If you do not have anywhere secure enough then most banks will have a vault that you can use for a fee.

Every major bank and most of the governments in the world store gold. Since the start of the economic woes in 2007, the world banks have become net buyers of gold which shows just how great an investment it really is.

This desire for gold and its scarcity and it being difficult to obtain means that it should continue to keep its value, but like anything the price of gold is not immune to market fluctuations and could even crash.

The Mystery of REITs

I read with interest Mr Colin Tan's article in Today newspaper regarding REITs.  It is titled: "A decade on, REITs remain a mystery"

Indeed, after ten years since real estate investment trusts (REITs) were listed on the Singapore Stock Exchange, it seems that many people (including me) still do not really understand much about this asset class and the investment opportunity/risk involved.

I started taking note of REITs sometime back due to the potential dividends that I could receive.  It seemed like a choice investment instrument for me as I was really into income investing and was looking for ways to increase my passive income. My first investment was in First REITs. I subsequently divested it because it was too heavily focused on healthcare with its assets largely in Indonesia.  But while REITs are usually positioned as defensive play, I can agree with Mr Colin Tan that for Singapore REITs, many of them are still on the acquisition trail and are trying hard to expand their portfolios.

What does this mean for investors?  It simply means that once can expect money to be raised through rights issue. If one does not subscribe to the rights issue, your overall shareholdings as a % drop.  Whether this translates to a drop in distribution is probably a study to be taken up by somebody more experienced.  But I do agree that it seems that many of the REITs are linked to their parent companies and it might be questionable how the valuations are done (including of course the timing of the transaction).

The domestic market is also pretty small.  And I guess there are certain economies of scale required before REITs should start expanding overseas.  (Just think about the airfares that have to be paid for management to do the site visits, meetings, etc).  Of course, REITs are also tied closely to the property market and rental market and one needs to keep in mind all these factors when investing in them.  If one invests in REITs which has properties overseas, you are also exposed to other country risks that are involved.

Nevertheless, REITs still feature in my portfolio. I still intend to purchase more and diversify across the various REITs in order to diversify my risk accordingly.

Well, REITs is still a mystery to me in many ways and I am still slowly learning more about them day by day.  In a sense, they look simple.  But when one studies them further, you will come to realise that there are actually lots of complexities involved.

First Steps to Success as a Property Investor

Successful property investment requires a good knowledge base. It’s important to get a good basic grounding in all the practices of property investment, from selecting properties to management and financing. These are the real bread and butter elements of property investment. It’s extremely important to learn each aspect and understand the issues in each part of the process. This is a type of business where learning by experience can be very costly.

You will need some professional assistance with property investment, including legal support and professional investment advice, particularly if you’re buying high value properties. There’s a large range of issues involved in any purchase or sale of property, and this advice can both save and make you a fortune, quite literally.

The property investment market has a nasty habit of boom and bust cycles which need to be well managed to ensure profitability and good returns on investment. Losses can hit hard, particularly if you’re borrowing to invest, or you have an investment that needs capital commitment to be profitable in a falling or stagnant market. A good working knowledge of the right market strategies and tactics will give you an advantage in any sort of property market or investment situation.

Stage 1- Basic elements of property investment education

Before you make any investment moves, it’s well worth attending some of the professional property investment seminars. These seminars are particularly useful for investors in need of fundamental information regarding markets, risk management and investment strategies. Property markets can be quite volatile, and some local markets may be flat while others are booming. These are primary principles in property investment, and it’s critically important to develop a clear vision of the issues in your own property market.

Stage 2- Finding the right property investment advisory services

The best property investment companies offer a range of services which include:

·        Resources for property research- These include market reports, news and other up to date information which can provide valuable insights into your property investment options.

·        Property investment strategy advice and programs- The most successful property investors have a clear market strategy which sees them through boom and bust markets. Defensive and aggressive investment strategies have their benefits, and learning these strategies is a  

·        Consultation services- These services can be absolutely invaluable, providing full spectrum support for investors, whatever their needs. (Please note that in the early stages of investment, this consultative process is also very valuable as “advanced training”, because your advisors will be able to walk you through the issues and explain them for you and provide good options for each investment.)

Stage 3- Your own investment team, on standby

At the end of your education phase, you’ll find that you have excellent knowledge of your investment options, as well as a team of professional experts on hand whenever you need them. The most successful property investors in the world have professional teams to support their every move, and the best property investments are never accidental.

Talk to a professional property investment advisor, and check out their services. You’ll never look back.

 [The above is a guest post]

2011 Good Year for Investing?

With the new year celebrations just over, it seems that the stock markets have had a breath of new life. Overall stock portfolio is up and I do hope that this bull run continues. Even with global uncertainties in America and Europe, it seems that people are still pretty optimistic about the future.

What else can we expect from 2011? Here are how things are playing out in my head.

Scenario 1 - Europe and America sink due to debt concerns. Asia's domestic demand not sufficient and developed enough to propel the rest of the world economy. Economy starts to slump by mid or end 2011 due to some silly event.

Scenario 2- whole world recovers and we see another bull run for 2 to 3 years and people who were thinking that Scenario 1 will take place end up cursing their luck for the missed opportunities of the best bull run in Asia.

So which scenario do you think will take place? Let's do a poll!

Cheapest Way to Invest (Part 2)

Last month, I wrote a very quick and dirty post on the Cheapest Way to Invest. This post has also been published at CPF's IM$avvy site.

In the previous post, I outlined that the cheapest way to invest is probably a "wrong" question. Instead, the question should be posed as follows:

1. What investment incurs the lowest brokerage charges, sales charge or commissions?

2. What is the cheapest form of investment (cheapest in the sense of lowest monthly premium committment or lowest initial capital outlay)?

Lowest brokerage charges, Sales charges or commissions

There is no easy solution to finding a good investment with low brokerage charges, sales charges or commissions. Afterall, people who sell investment products need a way to make their living and very often, these people are compensated based on the amount that the customer invests.

As a rough guideline, the charges one should expect to pay for investing in shares should be around a minimum of $20 to $30 per trade (depending on the size of the trade). If the amount you are buying or selling is larger, the brokerage charges are actually a percentage of the amount. For lowest brokerage charges, do shop around in Singapore for the lowest charges. Carrying out the trades by yourself through the internet is often cheaper than getting the broker to carry out the trade for you.

For investments into funds (e.g. Fundsupermart or investment linked plans), the norm is a 5% sales charge. Over the years this has been reduced and some funds are now offering sales charges for as low as 1% or even promotional rates of 0.2%. One needs to understand that the sales charge is the difference between the bid-offer spread of the fund prices. Some platforms or companies also charge an annual ongoing fee based on your investment amount. This means that the larger your investment amount, the larger the ongoing fee. Take for example an investment of $10,000 into a fund with a 5% sales charge. That basically means that your investment amount is reduced to $9,500 almost immediately upon investing into the fund.

Commissions are paid out to insurance agents/financial consultants/relationship managers/financial planners/brokers/etc whenever they make a sale of an insurance product. In today's context, many investment products are now tied in with insurance and the insurance companies pay a distribution fee to the agents who manage to sell the products to customers. This distribution fee is the commissions that are paid out as wages/commissions to the various levels of people in the insurance company.

Whatever the case, it is always good to source around for the lowest charges. However, it is also important to note that such charges are hard to escape from and there will definitely be charges to pay. Take a look at the Benefit Illustration for products from insurance companies to make the comparison.

Lowest Monthly Premiums or Lowest Initial Capital Outlay

Based on what I know, $100 is usually the lowest monthly premium for any regular investing/savings plan. However, it is not uncommon to see endowment savings plans that allow you to commit as little as $50 per month. Philips also has a ShareBuilders Plan that allows you to buy certain blue-chip stocks on SGX for as little as $100 per month.

For investment into funds, the usual minimum investment amount should be $1000 though it is not uncommon for some to have investment amounts of $5000.

Unregulated Investments

MAS does not regulate certain investment products so the consumer has to beware when investing in the following:

1. Land Banking

2. Oil pods

3. Wine Investments

Others like ponzi schemes and multi-level marketing are also investments which consumers should take note of. I did not include these products into this post because I feel that they are not really worth the risk. You make your own call =)

Cheapest Way to Invest

I 0ften get questions from readers of my blog asking what is the cheapest way to invest.

This question is abit baffling to me sometimes as I do not really understand what exactly they are asking about. I am supposing that the question is actually twofold:

1. What investment incurs the lowest brokerage charges, sales charge or commissions?
2. What is the cheapest form of investment (cheapest in the sense of lowest monthly premium committment or lowest initial capital outlay)?

So the question on what is the cheapest way to invest perhaps is a question on what is the lowest amount of money one can invest in and at the same time incur very low charges or fees that could potentially "eat" into the initial investment amount.

Well, if you ask me, the lowest amount of money one can invest is actually in shares. This is considering the fact that you can buy like 10 shares of SingTel which together with brokerage charges will cost you less than a $100. But that is of course not very efficient as the brokerage charges will make up more than 50% of your initial investment.

For example, a person buys 10 shares of SingTel and the brokerage charges is for example $25 per trade.

If SingTel is trading at $3.00, 10 shares of Sintel will cost $30 while the brokerage charges will make the total investment cost $55! What this basically mean is that for buying 10 shares of SingTel, the investor has paid $55 which brings the average cost of purchase per share to $5.50 compared to $3.00.

What I have shown in the example above is just to show that if you put in a low amount of investment capital, it might be cheap and expensive at the same time. Cheap in the sense that you only required $55 to invest but expensive because the commissions and charges make up a huge percentage of your initial capital outlay.

Well, to cut the whole story short, one needs to balance both the intial capital outlay as well as the charges incurred. I hope to expand on this article in the near future...

So what is the cheapest way to invest? Any tips from anyone?

Falling In Love with Our Stocks

Why on earth do we make the silly mistake of falling in love with our stocks..or investments?

A few days back, I posted about the 7 Investment Sins and some brief thoughts on the Price versus Value debate.

Over at MusicWhiz's corner, he had also written about the various investment sins too.

Today, I thought I would just write more about one of the problems that most investors (including me) suffer from:

FALLING IN LOVE WITH OUR STOCKS (and sometimes our investments too!)

(Beautiful Image Above by kwerfeldein )

Human beings tend to get emotionally attached to the things that they possess. Certain people have gone on to suggest the reasons why we fall in love and why it even feels so good to be in love.

Apparently, being in love helps to trigger some of the circuits in your brain that gives you pleasure. Dopamine which is the main chemical that is involved produces feelings of euphoria, sleeplessness, and focused attention on the thing that we fall in love with. Also, the feeling of love tends to last for two to three years. INTERESTING FACTS!

Does that explain why most of our stock holdings only last for two to three years? We research them, fall in love with them and them ditch them for something better after a time frame of usually two years!

This is my experience personally. I have been investing for close to 7 years and I can say that I hardly own any of the stocks that I first owned when I started out investing!

There is however one particular stock that remains in my portfolio today. It is Unifood holdings. Back in the good old days of early 2002, people were singing praises about this stock. I did my research and made the mistake of falling in love with it. The price dropped and I was too emotionally attached to let go of it. I had fallen in love with it. 7 years on, the stock price has dropped. I am now stuck with it.

The problem of falling in love with our stocks is that we let the emotional part of us go into overdrive and after spending some cognitive energies rationalising why we should purchase that certain stock, we simply stop our cognitive engines and rev up our emotional engines. We start to grown a certain attachment to the stocks that we have just bought into. Just the way love is blind, we stop seeing the flaws and only start to see all the good points of the business.

And yet most investors know that we should never let our emotions get the better of us. We are supposed to be cold blooded people just trying to squeeze the last penny out of every investment that we make.

And just like any marriage, we only start to see the flaws after it becomes too late. By then, the emotions are gone and we stare in disbelief at the stock sitting in our portfolio which we thought was the best in the world and should have risen up by ten-fold or twenty-fold.

Have you suffered from the same experience?

Or what strategies do you use to remove the emotional part of investing?

Price is What You Pay, Value is What you Get

As the common saying goes: "Price is what you pay, value is what you get."

This saying is supported by people who support fundamental analysis. These are the faithful followers of legendary investors like Buffet, Fisher, Graham and the like.

Not too long ago, I wrote a short post on the 7 Investment Sins many investors make. Today, I am expanding on one of these "sins" which is basically people ignoring a stock's valuation when they purchase it at a certain price.

But before we can even go there, there is a difference we need to make between the PRICE of a stock and the VALUE of a stock.

In fact, Warren Buffet notes that there is really no distinction between value investing and growth investing as both are so integrally linked that any true investing must be based on an assessment of what the relationship is between price and value. Wise words indeed. Buffet goes on to suggest that any investing strategy which does not employ a comparison between price and value is tentamount to speculation.

So What is Price?

The price of a stock fluctuates from day to day. It's price can easily be determined either by turning to the Bloomberg channel or by checking up with your local stock broker. The price of a stock is what Mr Market offers you on a particular time and day. It changes from time to time and seems to be irrational at times.

Benjamin Graham's Mr Market is used to describe the price fluctuations that take place in the market. He appears daily and names a price where he would either buy or sell you a certain stake in a certain business.

Mr Market being moody and prone to maniac swings from joy to despair offers prices that are sometimes higher, sometimes lower than the value of businesses that are being traded on the stock exchange.

To put it simply, the price of a stock DOES NOT EQUAL to the value of a stock.

What is Value?

Valuing a stock is based on certain principles. Many people use price multiples. This include the simple price to earnings, price to sales and price to book ratios. These ratios however are based on price and basically compares what investors are paying for one stock to another stock. It does not really tell you anything about the value of a stock.

Morningstar believes that stocks should be purchased because they are trading at some discount to their intrinsic value. The value of a stock is calculated based on the present value of its future cash flows. To calculate an intrinsic value, the following steps are used:

1. Estimate cash flows for the next year
2. Forecast a growth rate
3. Estimate a discount rate
4. Estimate a long-run growth rate
5. Add the discounted cash flows to the perpetuity value.

After this is done, one goes on to calculate the Margin of Safety. This margin of safety is basically the discount price of the stock compared to your calculated valuation. It has been suggested that an average of 30 percent to 40 percent margin of safety should be present before the fundamental analyst purchases a certain stock.

The question is this: "Do people even bother to calculate intrinsic value and the margin of safety they have before they purchase a stock?" Do you?

7 Investment Sins

In making any investment decisions, there are often things we do or fail to do that results in disastrous investment results. This can be called sins of commission or omission. Either way, the result is a bad investment decision. I gleaned this of from a book that I have been reading and tried to contextualise it into our current context.

Here are seven common sins that are made in investment decisions:

1. Buying risky penny stocks without any fundamentals.
2. "It will be different this time".
3. Falling in love with the stock.
4. Panicking when Market crashes (remember 2008?).
5. Thinking you can time the market.
6. Ignoring valuation.
7. Relying too much on price-earnings ratio. (Cash flow is what matters).

The advice above is timeless. We should be careful not to fall into these mistakes. I know some people will think differently about some of the points listed here.

Nevertheless, I think the advice from the book will go a long way in guiding you when you make any investment decision. So instead of making these mistakes, here are some things that you should do instead:

1. Focus on finding solid companies or businesses with shares selling at low valuations.
2. Understand market history, read past stories.
3. Don't get swept away by exciting new products or businesses. Check out the business model first.
4. Fear is your best friend. The best time to buy is often when people are panicking.
5. The market cannot be timed.
6. Pay attention to valuation. Don't hope that some other investor will buy at higher prices.
7. Cash flow (operating cash flow minus expenditures) is what is important for a company's financial performance.

I hope these tips help.