Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Sunday, 28 December 2014

2015 will be a Great Investment Year

2015 will be a great investment year for everyone - if we buy the right investment.
Historically over the last 70 years, the third year of all US presidents have been the most positive year in the US stock market.

Photo from Kenneth L. Fisher's Market Never Forget, Chapter 7 - Poli-Ticking

Above is a photo shot I had taken from "Markets Never Forget", listing the stock market's (S&P500) historical returns since President John Calvin Coolidge, Jr . 

Since 1943, the 3rd year of all presidents have ended positive; that's 71 years worth of historical data and trend.

Well, you may ask, it is the US market that will be good, how does it benefit investors residing outside of US?

The surprising part is, the US stock market is actually positively correlated to most of the other countries' stock market, and the correlation has only been more positive instead of less. Thus it can be safely deduce that next year will be a good year for most global investments.

Photo from Kenneth L. Fisher's Market Never Forget, Chapter 8 - It's (Always Been) a Global World, After All

The above image is a shot I took from Ken Fisher's book. It shows the price correlation between S&P500 (US Market) and of MSCI EAFE Global Index (Global Markets). As can be seen, other than a few instances, most of the movements are positively correlated, except for the different percentage changes in price.

I think the best books that I have read that talks about all these economic/financial history and correlations comes from Ken Fisher's books - Debunkery & Market Never Forgets.
Ken Fisher (Kenneth L. Fisher) is the son of Philip Fisher (the author of the famous investment book - Common Stock & Uncommon Profit). He has been a Forbes columnist for more than 20 years and manages his fund (Fisher Investments) for an even longer period.

Ken Fisher's 2 books are both written in short chapters with plenty of historical economic data and charts that help investors see clearer the investment world. Eg: Bonds are safer than stocks but only to a certain period.

Both books are good reads to both new and seasoned investors.
I believe they are both available in public libraries.
Do read on them and improve your investment prowess! :D


Friday, 26 December 2014

EVERYONE should Invest

Everyone who wishes to retire should invest in their future, regardless of their jobs and status.
Anyone relying on their savings for retirement is bound to experience a shortfall in their future income for 2 reasons:
1) The interest rates you get from your savings will never be able to match the inflation rate.
2) If you save 10% of your salary each month for 40 years and aim to retire for 30 years, assuming the interest rate you get matches inflation rate, there is no way mathematically you will be able to draw even 10% of your last payment. So if your last salary is not at the $10,000 level, I don't think a comfortable retirement is possible.

Accrued Interest More than Housing Profits?
CPF +1% Interest for those age 55 & Above
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest
CPF +1% Interest for those age Below 55

Warren Buffett, one of the best investor and richest person in the world, recently gave some advice to all when he was on CNBC, stating that investors should invest for the long-term. He stated that a low-cost investment vehicle such as an index fund is a great choice for the long-term.

I think most people should invest some part of their savings in an investment vehicle such as a low-cost index fund as retirement planning. Start young and allow the compounding interest to grow the money for a future source of income.

An index is a "tracker" that tracks the price of its underlying asset(s). Example, an S&P500 index tracks the price of 500 largest US companies such as Apple, Google, Wal-mart and Mcdonalds.
An index fund is an investment tool for individuals to buy an index.

Recommended Post: What is CPF Basic Retirement Sum?

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Thursday, 25 December 2014

Ethical reporting has never been more important

While the creation of the Internet has allowed information to flow more efficiently and effectively, it has also resulted in extreme volatility in the markets. An example of such is the oil prices, where its price can fluctuate more than 3% in a week due to a simple announcement of the performance of US economy.
This led to the importance of information and especially the "appearance" of it.

What do I mean by appearance? People form views or perceptions on every piece of information they gather and how we perceive it is different from one another. Someone's good news may someone's bad news. As such, these perceptions creates individual opinions of  how the market will move, hence impacting the markets (or prices) differently.

While this might not be the only reason as to why more companies are falsely reporting their financial performance, I believe it is one of the main reasons causing the trend. Management is often paid based on the performance of the company and rewarded with share options. Hence, they are motivated to present a positive performance, some to the extent of cheating or lying.

With current rampant ethical issues, investors must now check and cross reference the financial statements. Investors must also be equipped with skills to detect inconsistencies in the statements so as to protect themselves from getting caught in a financial scam.

I recommend the following book: Financial Shenanigans by Howard Schilit and Jeremy Perler. It consists of numerous guidelines on how the management manipulates accounting rules to adjust or beautify their companies' performance. All of which are illustrated with famous examples such as WorldCom and Enron.

Sunday, 21 December 2014

2 Must-Read for all New Investors

Today, I would like to recommend 2 books that I think are by far the best investment books I have read since I started investing.

Warren Buffett Stock Portfolio.
Warren Buffett and the Art of Stock Arbitrage

Both books are by Mary Buffett and David Clark.
They are easy to read and easy to understand for a new investor.

Warren Buffett Stock Portfolio explains how Warren Buffett identify which companies are great and worth investing in simple layman terms - Earnings Per Share (EPS) and Growth Rates. It comes with plenty of examples as well to aid in the understanding of them.

Warren Buffett & the Art of Stock Arbitrage explains the 7 strategies used by Warren Buffett to grow his wealth. Most of the 7 strategies are still applicable in today's world.

It is available in most public libraries and I would say is a must-read for all investors - new and old.
I recommend this to all my friends who are interested in investing because these 2 books have taught me a lot about investment, and I would recommend it to you too!


Saturday, 20 December 2014

Asset Allocation VS Investment Period

Most investment professionals would emphasize that a good asset allocation is key to great investment returns. Having a portfolio consisting of stocks, bonds, other investment assets and cash is like the safest strategy anyone of any age group can follow.

Today, I wish to offer something different. I would like to say that the Time Horizon you have to invest is equally important as to what you invest in.

Based on the video below by Fisher Investment, stocks tend to perform better than bonds over a long period - despite the higher volatility (price movements).

If you are planning for a retirement 30 years later, putting your investment into 100% stocks makes more sense than to have a portfolio consisting a mixture of stocks and bonds. This is simply because  over long periods, stocks are more positive than not, and provide better returns than bonds or mix.

Compare the above scenario against if you are going to retirement in 3 years time. You might not wish to have periods of high volatility during this period, thus you might wish to skew your portfolio towards more bonds.

Thus, it is not just Asset Allocation that is important, your Time Horizon is equally important!
Do not neglect that part of your portfolio!

Just in case you think stocks are risky, below is the price chart of the S&P 500 from 1950 till 2014.
It is a rising trend. You might wonder "how can anyone lose money on this?"
In fact, a lot people did lose money, because they tried to trade in and out instead of buying it and holding it throughout the whole journey.
If you bought during 1956 at price of $45.35, it is worth nearly $2070 today!
Now that is an investment!

Sunday, 14 December 2014

Is Investing Risky?

Ever heard your parents, your grandparents, your friends or relative told you that investing is risky?
Watch this short clip and understand why investment is not as risky as they say.
Share it to those who tells you that investment is risky and make them all a better investor!


High Inflation Coming to US

High inflation rates will be coming to US because of the huge amount of printing by the Fed and a dysfunctioning fiscal policy. It will not be tomorrow, next year, or 5 years, but it will definitely come when the Fed is no longer able to support the economy.

PS: This will be a economics lesson, and the market outlook will be at the bottom.

The current monetary and fiscal policy in the US (and most other countries) are dysfunctional and highly skewed towards creating inflation.

Fed's duty is to control the money supply and interest rate in the economy. However, the Fed only has the mechanism to pump money into the economy (permanent supply) but am only able to remove money out of the economy by increasing interest rates and issuing bonds (removes money supply temporary).
All bonds have a maturity date. The money will have to flow back into the economy with interest once it is matured. Some may argue that the Fed can keep rolling over its bonds to lower money supply, but it is only snowballing the monetary catastrophe to the future with either higher interest payments (hence higher money supply that inevitably will reach the market) or ever-expanding money supply.
The Fed has no way of removing money from the economy permanently.

Fiscal (Govt)
Fiscal policy on the other hand is unable to pump money into the economy, however, it does have the ability to suck the money supply out of the economy permanently through taxes. Technically, only taxes are able to remove money supply from the economy.
While the Govt are unable to pump money into the economy, they can help ensure that there is more supply flowing in the market by not sucking them out (eg; lower taxes).

Marriage of the 2 is a Disaster
Fed is currently nearly addicted to QE (printing money) and low interest rates because the market demands for it and the Fed does not want big swings in the market - because big swings in market usually results in big swings in the economy, which for a still recovering US economy is not good.
No one likes high interest, every one likes a low interest, it makes the housing loans, student loans, any other loans cheaper. So the Fed in its attempt to please the market and the economy, will have to continue keeping interest rates low.

Govt (Democrats or Republicans) do have the ability to control money supply in the market, but they will not use it until it is the last resort - they might not even use it as a last resort. No one likes high taxes, be it personal, consumption or corporate, no one likes them. Any party that suggest a higher tax rate would most likely face losing the next election. And because getting re-elected is the most important thing for a politician, they will not risk raising taxes even if it is the right thing to do.

With the 2 working hand-in-hand, we have a financial  system that is prone and made for an unrestricted expansion of monetary base without the desire to reduce it. Any politicians attempting to reduce the supply will be faced with unpleasant retaliation from the economy. Fed chief would face a possible market downturn while a politic party risk losing the election.

With an inflationary situation almost unavoidable in US, it is best to position yourself with investment products that are inflation-hedge like stock indexes and commodities (real commodities like gold bar! Yes! start buying gold bars).
On the other hand, you can also start diversifying your portfolio to include securities and assets from other countries to hedge against a possible free-fall of the US dollar.

Tuesday, 9 December 2014

Confession of an undisciplined investor

This is a confession post of an undisciplined investor that sought to cut corners in investing. From what you already know, the market is ruthless and it only reflects your performance to the amount of work you put in. Once you are complacent and assume that you are better at beating the market, it will whip you till you beg for mercy.

Being a young investor, similar to all beginners, I had beginner's luck (sort of). I made some wise investment decisions and made a decent rate of return. While it is not fantastic, I am still proud as I had beaten the market average.

However as time passes, I began to slack off and took shortcuts in evaluating my investment choices. I was not prudent in checking the ratios and analysing the company's strengths and weaknesses. The market knew it and began its punishment.

Slowly, it took away my previous profits and gradually reduced my rate of return. Mistakes began to pile up and more profits were eroded.

The previous trainings on discipline and risk management were off my mind. I lost focus. Then, came the moment when I had to admit my faults. I cut my losses, which was supposed to be done earlier on.

From this humbling experience, I paid a price - my hard-earned profits. However, I gained back several lessons of which I would like to share.

1. Never to cut corners
When times are good and your investment decisions are proving to be on-spot, never let your guard down as you will never know when the market will reach out its paws and claw back your cash. Always analyse the companies well before making any investments.

I was browsing an online article and found this to be useful.

Questions to ponder:

Financials. Are there any potential red flags amidst its financials?

-Ratio of Total Receivables to Revenue (Channel Stuffing?)
Related Party Transactions (Tunneling?)
-5 Year Earnings Trend vs Industry Trend (Does this company consistently keep growing revenues when all companies in the industry are showing otherwise)
-Margins (Comparing the margins of the company to peers to understand the average)
-Management. Is management one that is transparent or dubious?

-Transparency of Annual Reports (Does the CEO only report positive announcements every year?)
-Board of Directors (Country of Origin)
-Chairman vs CEO positions managed by separate individuals (Problems of family-owned companies)

2. When things go wrong (and they usually do), turn to your risk management procedures and follow through. No one is perfect and you have to cut losses sometimes. If not, in order to earn back your losses, you will need to recuperate 2x of it.

While this setback is disappointing, I have gained something in return. The only consolation I have.