Why is the property market still steady?

From the newspaper reports these days, we can see that mid tier and slightly up market property projects are still enjoying decent take up rates, showing only little signs of slowing down. With the current bear market and poor growth outlook, why are we seeing such “erratic” buying interest? Shouldn’t the property market be also in “bear” phase together with stocks?

I have some opinions on this phenomenon.

We know people invest with their spare money. Some put it idling in FDs, some buy shares, UTs, currencies and properties. The definition of investment basically means to postpone current consumption for higher or more purchasing power in the future. Hence, money will be constantly flowing into the financial markets as investments when people do not spend it on goods and services.

There are five main components of the financial market, namely: Securities, bonds, futures, forex and property. The first 2 components are not doing well due to high inflation, low interest and growth rate environment. Our forex and futures market does not have much investment interest due to lack of education and awareness. MAS gradual currency appreciation policy does not encourage prudent investors to invest into alternative currencies.

Hence, investors with spare cash are likely to place their interest on the property market. Of course our low interest rate, growing population (migrants) and small land area is another positive motivation for our property market.

The income distribution in Singapore is also another contributing factor. In China, due to exceptional high income disparity, 80% of the bank deposits are held by 20% of the population, according to official figures. I am not sure about Singapore, but I am inclined to believe that 40% of our bank deposits are held by 60% of middle income families. Hence, slightly up market and mass market properties are still having healthy take up rates for investment and residential purposes.

The recent OCBC preference shares offer was 5 times over subscribed. This shows the excess liquidity or free cash, our population is holding. I believe that retail investors contribute to a large bulk of the buying interest. For the wealthy, they have better avenues to invest their money, such as through private bankers, their own businesses, antiques, fine wine, watches etc. Only poor people like me will be interested in gains of 5% and above. Again, this explains why mid-tier properties buying interest is sustained. Rental yields of 5% are not difficult to achieve at current property market.

With excess liquidity competing for limited goods in the economy, prices will have to go up to match demand and supply. Unless everybody work together to spend less and bring down prices of goods and services, high inflation is here to stay at least for the next 5 years.

I am also interested in buying a property when there is a good opportunity. For readers who are interested, I have a tip from my family trusted property agent. He said that there are people who bought a few high end properties at one go during the height of the property boom. These greedy people have no holding power to ride over the lackluster luxury property segment and bargains may be out there towards TOP. Check with your trusted property agent for potential fire sale deals. However, make sure you are investing for at least 3-5 years, to be safe.

Calm your nerves

Below are some quotes to calm your nerves amidst the volatile market. If the stocks you are holding are having excellent sound fundamentals, just hold and collect dividends for the time being. The returns will still be better than keeping in the bank. A person’s true tolerance to risk will only reveal during a bear market. I am taking this opportunity of this period to assess my risk profile more accurately.

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The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down.

Benjamin Graham, The Intelligent Investor, 1949

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It is nonsense to assess the economics of a business over the next five years and then trade its shares based on market perceptions of the next financial quarter.

Montgomery, Curtis J

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The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as "the possibility of loss or injury."

Academics, however, like to define investment "risk" differently, averring that it is the relative volatility of a stock or portfolio of stocks - that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the "beta" of a stock - its relative volatility in the past - and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.

For owners of a business - and that's the way we think of shareholders - the academics' definition of risk is far off the mark, so much so that it produces absurdities. For example, under beta-based theory, a stock that has dropped very sharply compared to the market - as had Washington Post when we bought it in 1973 - becomes "riskier" at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly-reduced price?

Warren E. Buffett, 1994

Just for laughs

Lesson 1

A man is getting into the shower just as his wife is finishing up her shower, when the doorbell rings. The wife quickly wraps herself in a towel and runs downstairs. When she opens the door, there stands Bob, the next-door neighbour. Before she says a word, Bob says, 'I'll give you £800 to drop that towel.' After thinking for a moment, the woman drops her towel and stands naked in front of Bob. After a few seconds, Bob hands her £800 and leaves. The woman wraps back up in the towel and goes back upstairs. When she gets to the bathroom, her husband asks, 'Who was that?' 'It was Bob the next door neighbour,' she replies. 'Great!' the husband says, 'did he say anything about the £800 he owes me?'

Moral of the story: If you share critical information pertaining to credit and risk with your shareholders in time, you may be in a position to prevent avoidable exposure.

Lesson 2

A priest offered a Nun a lift. She got in and crossed her legs, forcing her gown to reveal a leg. The priest nearly had an accident. After controlling the car, he stealthily slid his hand up her leg. The nun said, 'Father, remember Psalm 129?' The priest removed his hand. But, changing gears, he let his hand slide up her leg again. The nun once again said, 'Father, remember Psalm 129?' The priest apologised 'Sorry sister but the flesh is weak.' Arriving at the convent, the nun went on her way. On his arrival at the church, the priest rushed to look up Psalm 129. It said, 'Go forth and seek, further up, you will find glory.'

Moral of the story: If you are not well informed in your job, you might miss a great opportunity.

Lesson 3

A sales rep, an administration clerk, and the manager are walking to lunch when they find an antique oil lamp. They rub it and a Genie comes out. The Genie says, 'I'll give each of you just one wish.' 'Me first! Me first!' says the admin clerk. 'I want to be in the Bahamas , driving a speedboat, without a care in the world.' Puff! She's gone. 'Me next! Me next!' says the sales rep. 'I want to be in Hawaii , relaxing on the beach with my personal masseuse, an endless supply of Pina Coladas and the love of my life.' Puff! He's gone. 'OK, you're up,' the Genie says to the manager. The manager says, 'I want those two back in the office after lunch.'

Moral of the story: Always let your boss have the first say.

Lesson 4

An eagle was sitting on a tree resting, doing nothing. A small rabbit saw the eagle and asked him, 'Can I also sit like you and do nothing?' The eagle answered: 'Sure, why not.' So, the rabbit sat on the ground below the eagle and rested. All of a sudden, a fox appeared, jumped on the rabbit and ate it.

Moral of the story: To be sitting and doing nothing, you must be sitting very, very high up!!!!!!!!!!!!

Lesson 5

A turkey was chatting with a bull. 'I would love to be able to get to the top of that tree,' sighed the turkey, 'but I haven't got the energy.' 'Well, why don't you nibble on some of my droppings?' replied the bull. 'They're packed with nutrients.' The turkey pecked at a lump of dung, and found it actually gave him enough strength to reach the lowest branch of the tree. The next day, after eating some more dung, he reached the second branch. Finally after a fourth night, the turkey was proudly perched at the top of the tree. He was promptly spotted by a farmer, who shot him out of the tree.

Moral of the story: Bullshit might get you to the top, but it won't keep you there.

Lesson 6

A little bird was flying south for the winter. It was so cold the bird froze and fell to the ground into a large field. While he was lying there, a cow came by and dropped some dung on him. As the frozen bird lay there in the pile of cow dung, he began to realize how warm he was. The dung was actually thawing him out! He lay there all warm and happy, and soon began to sing for joy. A passing cat heard the bird singing and came to investigate. Following the sound, the cat discovered the bird under the pile of cow dung and promptly dug him out and ate him.

Moral of the story:

(1) Not everyone who shits on you is your enemy

(2) Not everyone who gets you out of shit is your friend

(3) And when you're in deep shit, it's best to keep your mouth shut!

Cutting loss

Cutting loss is extremely painful thing to do. Not only it shows that you have made an error judgment on investing in a particular stock or fund, you also face the reality of losing your hard earn money by acknowledging this mistake. You will also face the dilemma to wait for “a few more days” to cut loss or to terminate your relationship with the loss-making investment immediately. There will be a number of “what ifs” resonating in your mind when you are contemplating to cut loss.

What if the stock rises after cutting loss? I already feel stupid for buying that stock at a lousy price. Now I feel even more stupid to sell the stock at a lousier price.

What if I don’t cut loss now and if falls further? Now I feel stupid not to sell earlier. Do I cut further losses immediately then or wait for recovery? Either way there is risk of feeling even more stupid if things do not go my way and I cut my loss anyway.

Is it possible NOT to feel this way?

YES!

Investors that face such dilemmas often only have an entry strategy (ie to buy stock) but no exit strategy (ie to sell for profit or cut loss).

One of the maxims in value investing is that you only exit when you make money. In value investing, you NEVER cut losses. You buy more when your stock drops. The rationale is simple from the illustration below.

Assume you believe Singpost is a value stock (like me).

It has long operating history, high profit margins, consistent dividend payout history and policy, high ROE and low debt. It is currently trading at below historical PE.

If you are willing to buy 10 lots of Singpost at $1.10, when Singpost dips 10% to $0.99, you should buy at least the same number of lots or even more. This is because for the same amount of price I spend on Singpost originally, I can now buy more with less money. I will collect more dividends with the same amount invested and at the same time, dollar cost average my investment.

Assuming I bought another 10 lots at $0.99, my average cost will be $1.045/lot. Singpost only need to rebound 5.6% from $0.99 to breakeven. It will take Singpost to rebound more than 11% from $0.99 for me to breakeven at $1.10.

You must believe in the companies you have initially invested in. Do not lose faith just because others have bought and sold it at a different price you had bought. The price changes all the time, not the fundamentals. Hence, do your homework thoroughly before you take the plunge and only invest in companies you believe in.

Then, you will never need to cut loss. You will be happy to buy more.

Financial advisors EVERYWHERE

I meet up regularly with my JC classmates and at the age of late twenties, we inevitably meet the crossroads of our careers: To continue our present job or head for a career switch?

Some of us are in favour of a career switch, citing low pay, high pressure and boredom as the main reasons, with the exception of those in the financial industry.

In fact, 80% of my JC friends who studied engineering, computing and science are in the finance industry doing sales. Even at the current market, they are able to clock an average of $10,000 in sales commission monthly.

No wonder the remaining 20%, including myself are attracted by the prospects of finance industry.

One of my friends had even given up a $5,000 a month salary as an accountant to join an IFA firm with ZERO basic pay.

I am sure this phenomenon is not exclusive to me. Do you hear more and more of your friends joining banks as personal bankers or joining insurance companies as agents? Of course, becoming an IFA is also a highly sought after career alternative given the potential lucrative income.

If you have read today’s Recruit, it yet again featured a young chap in his thirties earning in excess of $300,000 per annum by simply giving financial advice and selling insurance.

A first class honours graduate after going through the HSBC management associate programme, will become a relationship manager (RM) in commercial banking (also a sales commission driven post).

With successful examples and role modals “everywhere”, it will be queer if there is no rush to join the ranks of financial consultants.

However, consider this scenario: Who is going to buy insurance from you when every other man on the street have either bought it or can buy from someone he knows better from school? Worse still, the man on the street is likely to be an insurance agent himself.

Insurance companies are selling their products, banks are aggressively advertising with free gifts and higher FD rates, IFA firms are dishing out free seminars and claim nobly being exclusively “fair and unbiased” in selecting the best plan for their clients.

I think the main reason for the current phenomenon is the low barrier of entry required to become a financial advisor. Just 4 “O” levels passes, a few hundred dollars and several hours of self-studying will give one the relevant qualifications and licenses to dish out useful, life long financial advice.

This sounds rather silly and dangerous to me. I have personally interacted with a fair number of RMs, IFAs and tied agents. To be really honest, from the products and plans they offer me, it seems that they are only interested in selling products and squeezing me for their benefit!

Example: All tried to sell me life policies when I have told them I already have a $200,000 whole life policy. I have also informed them that I am remain single and my parents have reached financial independence. In other words, I have no dependents. Then why do I need a whole life policy? Well, because the commission is the highest!

Actually I only need a top up term insurance for critical illness and a private H&S policy. However, all are not willing to even meet me to sell the H&S policy or follow up on it as the commission is too low for their attention.

Of course many tried to sell me unit trusts by recommending Japan, European and US Funds. Sales talk includes Japan stocks have been in decline for the past 10 years, a rebound is likely; US and European Funds have large market capitalisation companies and should give good returns every year etc.

Of course I will prefer to DIY and buy UTs and stocks through online portals for investment.

In my opinion, there are a large number of incompetent and sales driven financial advisors, and only a small number of them who place clients’ needs before their personal pay cheque. In fact ideally, the most competent advisors should be those who have earned an average income throughout their lives and yet have reached financial independence through careful planning and investments. Such people, far and few do not have to worry about sales targets and will be able to provide proven and tested strategies to their clients on achieving financial freedom. They are living examples, isn’t it? Just like a teacher who teaches a subject he has a degree conferred for his area of expertise. He is proven to be a master of the subject is thus qualified to provide guidance and advice to the young. Can you imaging paying hefty sums to learn maths from someone who has just taken a few lessons in advanced?

I guess I will not be entering the financial industry for now, but to continue saving and investing for a better tomorrow.

AM Fraser: SPH

SPH ($4.28) – Falls to low end of $4.20-60 trading band seen as opportunity to accumulate as long term 10-year support around $4-$4.20 signals a buy

Target price $4.50-60
Support $4.10-20

It is a marvel to know how under-performing SPH when we consider that its 1998 high was $3.93 and 10 years later it is hardly above water if we compare with this year’s $4.09 low.

Thus it is not surprising that patient traders would accumulate the stock whenever it drops to near $4.20 which is at the low end of its past 4 years’ trading range.

It may be hard to believe that when STI bottomed out at 1205 in March 2003, SPH had reached a high of $3.82 that month and when the new STI peaked at 3831 last Oct, SPH’s high was only $4.64, a gain of a mere 21% compared to 218% for the index.

It is thus hardly surprising that the counter has fallen out of traders’ radar screens but there are still some trading chances especially after a prolonged downtrend which has just been seen.

The price has fallen to its lowest level last week ($4.21) since its early April year’s high of $4.64 which matched the Jan 22 close of $4.21 when SPH hit intra-day low of $4.09 (STI also hit first support around 2860-70 that day). Underpinning this low is the 2007 low of $4.06.

With so obvious historical support around $4-$4.20, traders who have remembered this stock stuck around $4.40-60 for much of the time since late2006, would have the courage to accumulate around current levels as the chances of a return to this higher band are good.

After all SPH is still an index heavyweight with a market cap of $6.8b and attractive dividend yield of about 6% and trading around market PE of 13-14x with lots of loyal long term shareholders.

It should be relatively resilient to a market selldown based on its sluggish 10-year track record, which suggests the absence of stale bull positions.

The short term technical picture shows the daily MACD beginning to improve and the Bollinger bands suggest it is unlikely to break $4.20 support. In fact the 2-month sideways pattern should have ended and SPH moves back to its traditional $4.40-60 range.

Sgbluechip says: I have analysed SPH’s past 10 years’ dividend payout and dividend growth rate. For the past 10 years, the dividend growth rates range from -53.3% to 172.7% (YOY). The mean growth rate for past 10 years is about 15%, 10% for the past 5 years. The lowest dividend payout was $0.08 (1997, split adjusted), highest was $0.30 (2000, split adjusted). The past 10 years’ dividend payout has amounted to $2.33.

If you had bought SPH in 1997 at a price of $4.00 and sold it at $4.45 immediately after getting this year’s $0.08 dividend, your total gain will be 58.2%(dividends)+11.25%(capital gains) = 69.45%

I believe dividend growth will slow down to about 5% annually. Hence, the dividend payout for FY 2008 for SPH is estimated to be $0.28 or a minimum of $0.27.

I will continue to pick up SPH when it hits $4.20.

Stock transactions and June portfolio summary June 08

BUY (CASH)

None

SELL (CASH)

Starhub: 35000 shares@ $2.92

Realised gains of $1100

BUY (CPF)

Starhub: 3000 shares@ $2.67

HL Finance: 3000 shares@ $3.41

SELL (CPF)

Starhub: 3000 shares @ $2.73

Realised gains of $165 (CPF)

Summary

In June 08, I have received $1,575 of dividends from Starhub. Together with the capital gains, I made a net profit (cash) of $2,675 in a month's time.

The reason I sold starhub is to free up more cash to pick up bargains at current valuations. In fact, I queued daily for 10 lots of SPH @ $4.20 daily but with no luck at all!

Also, I am worried that Starhub's profitability may be threatened due to number portability and increased advertising expenditure. Considering Starhub Q1's report, EPS is @ 4.5 cents, dividend payout is also 4.5 cents, a 100% dividend payout ratio. I am concern if Starhub can keep up with the dividend payout.

Nonetheless, I will keep Starhub under my radar screen and will start to buy again when Starhub drops below $2.65.

Currently, I feel that HL Finance, SPH and Suntec Reit are worth a second look as they are trading at attractive valuations. I will monitor them closely and buy at huge dips.