Saturday, August 9, 2008

My response to Musicwhiz’s comments

I would like to thank Musicwhiz for his encouraging and honest comments left on my blog. In fact, I am happy that another local financial guru has noticed my blog. Thanks MW!

Below was his comment:

Hi there, just came across your blog which was linked through Nuffnang. Thanks for visiting mine recently and also adding a link to mine.
After reading some of your posts on portfolio buy/sell decisions, I still can't really get a handle on your investment philosophy. Are you a trader (speculator) or an investor? It would seem on one hand that you are going for regular income to act as passive income to work towards financial freedom (S$1K a month) but at the same time, also doing trading and contra (very risky) in the current bear market. Perhaps you can enlighten on your approach?
I also noted that you mentioned that volatile stocks are risky. Volatility to me assists one in getting a better margin of safety once you assess the underlying business, and thus should be exploited.
It's good that you start investing while young (with a very large war chest of S$300K!) and that you have time to learn from mistakes; but I personally feel it would be good to have a sound framework for buy/sell decisions moving into the future, otherwise it may be difficult to make consistent profits from the market.
P.S. - Also wondering if you could express your returns (nett all gains/losses) as a % of your total portfolio ? That would be more indicative instead of mentioning $-amount gains. Thanks!

MW, I understand your confusion on my investment approach. I seem to be a hybrid of trader and long term investor! Allow me to clarify my approach towards the market these days.

At current market, volatility reigns and fundamentals are thrown out of the window, almost entirely. My current take on the market is that there is still room for stocks to fall further. I feel that the downward trend is likely to last till at least 2H of 2009.

In the meantime, it does not make sense for me to keep my money in 0.5% deposit accounts. I rather sit on paper losses and earn 6% P.A on dividend stocks than keeping them in banks and wait for market to bottom out. I will not be able to catch the bottom anyway!

If you have seen my earlier portfolio summaries, you would have noticed that earning $1000 recurring income per month from a fully invested amount of $300,000 is actually quite easy. I would just need to earn 4% P.A to achieve that. I have about 50 lots of SPH and Singpost (coincidentally), which at a yield of 6% would earn slightly above that targeted amount after adjusting for paper losses.

In fact, it is also my ultimate wish to apply pure passivity into my portfolio of stocks so I can concentrate on other simple pleasures in life.

I do admit that the current bear market packaged with huge dips and rises have made me more inclined to trade the market for quick gains.

In the midst of all gloom and doom, while it might not be the best time to cherry pick, I do see quite a lot of trading opportunities around.

Example: Starhub reported a good set of results for 1Q. However, towards its XD period (for 1Q), it dipped from nearly $3 to $2.85, in which I picked up 35 lots and sold off after XD, netting $1575 dividends and $1100 capital gains. Had I held it till today, I would probably be missing out a lot of other trading opportunities. It doesn’t help as Starhub last traded at $2.65.

This is the same case of DBS and HL Finance. Earlier I contra off SPH (6 lots) when market went up sharply and bought back (5 lots) when market came down (within 2 days), also to participate in trading opportunities.

I will also sell off Capitaland tomorrow when market recovers (temporarily) if possible.

The current market in the short term does not reward long term investors in the short run. I am capitalizing on it.

The strategy I have adopted is simple: Buy blue chips on sharp dips and sell within a few days for a quick profit, while waiting for the next lower entry price of the stock. At the same time, I have a core portfolio likely to generate $1000 monthly through dividends.

Hence, I allocate about $50k to trade the market. Of course, it is a small amount and I understand very well that I might get “stuck” if I read the market wrongly. However, the stocks I am trading are all blue chips and have a consistent dividend payout history. In the event that my purchase fails, I will either average down my cost or hold them purely for dividends.

For trading purposes, I am looking at banking stocks (dividend yield of 4%), property stocks (2-3% dividend yield) and oil and gas related businesses (above 4% yields).

In either scenario, my portfolio will still yield $1000 on average monthly, providing my targeted regular income.

I agree that one should have a sound framework and philosophy when it comes to stocks investment. However, my philosophy (farmer and his assets theory) I have come out with serves merely as a guide. As long as my main objective ($1000 monthly income) is achieved, I allow myself to deviate within reasonable boundaries to realize higher profits. Definitely my investment plan is not perfect and even not sound to many, but I believe it is the most comfortable one for me. Do stay with me and see how I succeed or fail!!

With regards of providing nett gains in percentage terms, I will probably come up with a summary on end Dec 08 on the annualized returns of my portfolio. I guess it is my personal preference to update in absolute dollars and cents!

Thanks again to MW for providing comments that set me to ink out my thinking!

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