Bad news over the weekends

According to my finance lecturer, the worst performing day of equities for the past 100 years is not Friday, but Monday.

Apparently, the worst news are released when market closes on Friday as companies hope that investors have a nice weekend to enjoy thus mitigating the sell down that will happen on Monday.

It rarely works.

Perhaps this is why Great Eastern reported the “good news” that it will take a hit of 250M for its Q3. This is a significant payment as the profits for its Q2 is only 97.7M. Understandably, OCBC will also be dragged down on Monday when market reopens as it expects to take a 218M hit on its books in 3Q.

Of course it is no mere coincidence that OCBC will be reporting a decent set of 2Q results on Monday (3rd August) to mitigate the negative news.

I am not sure how market will react on Monday, but I do feel puzzled that GE and OCBC are not acting on shareholders interest, but on customers’ interest.

The objective of all (for profit) firms, theoretically is to maximize shareholders value. Considering DBS who have paid out only 10% of its earmarked impairment fund for DBS High Notes and Minibonds, it has incurred the wrath of many except the stakeholders.

I presume that GE is expecting this move to increase its image and translate to better sales and maximizing shareholders’ value in the future.

That said, GE and OCBC are great companies to own and if their stock prices dipped to an attractive level of $10 and $6 respectively, there is no harm picking them up for long term investment.

A visit to Vista Residences

I visited Vista Residences show flat today and was appalled by the prices of private property prices! A 1 bedroom 646 square feet unit costs $1370 PSF! After factoring all stamp duties, legal fees, it will cost almost $1400 PSF. Yet there are only three 1 bedroom units left and all 2 bedroom units are sold! The project is at least 80% sold at the 3^rd week of launch!

Consider a district 12 property, selling at this kind of price and high take up rate, does it feels like a bubble brewing?

The Toa Payoh MRT station was not within sight and I have to walk at least 18 minutes to reach Toa Payoh central. This is a far cry from the 7 minute stated on papers. It is near PIE, which means the noise from expressway will probably accompany you everyday. Traffic was quite bad even during off peak hours, the lanes are narrow and I do feel some stress navigating the neighbourhood.

Of course it was the price that totally put me off! The stamp duties and legal fees are not even absorbed. The sales agent even has the cheek to ask me to pay a 5% booking fee within 15 minutes of viewing. He thought I was buying vegetables in the market.

I would have to pay 3% more if I opt for interest absorption and payment deferment.

Consider Vision Crest, a district 9 property near Plaza Singapura. It was initially launched at $1100 PSF in 2003 (recession) and peaked at $2500 PSF. It is currently selling about $1650 PSF, which has an average of $5.92 median rental (1Q09 data).

As I stated in my earlier posts, I am still looking for a $600 PSF freehold property near novena area, for investment purposes. The current prices will definitely be unsustainable as the recession’s impact has yet been unleashed.

I foresee some cheap lelong sale coming up in 2010 and 2011 when the backlog of properties are being cleared by developers and huge influx of projects TOP.

Hopefully by then I have enough cash and CPF to scoop up nicely TOP apartments and can see what I buy.

Buying over priced apartments based on photos, artist impressions, showrooms, floor plans, architectural models and imagination are still too sophisticated for me now.

Bond funds??

I was reading an online magazine and a financial advisor from a reputable company suggested a bond fund portfolio for risk averse people. He claims that it has low risk and by having bond funds, one can invest in global fixed income and withdraw a portion of it from the bond fund periodically, funding one’s retirement.

Well, even though I am about to have exams in less than a week’s time, I can’t help but to write something to kick the joker’s ass.

I have compiled, as much as possible the SGD returns of bond funds, available to the DIY investor from fundsupermart. The below data are correct as at June 22^nd, 2009.

Returns tabulated using the data of bid to offer returns to account for sales charges. Returns tabulated are also compounded. Example, if I invest $100 in Fund A and it gives me a 3 year compounded return of -2%, I will have $94.11 at the end of 3 years.

I have tried to compile the funds that are named like fixed income instruments. I could have inevitably missed many other bond funds. Apologies on that.

AIGIF SINGAPORE BOND FUND

Bid to offer returns:

3 years: -0.7%

5 years: 1.8%

ABN AMRO STAR EUROPE BOND

Bid to offer returns

3 years: -1.6%

5 years: -0.9%

DBS ASIA BOND FUND SGD (CL A) (only up to 3 years data)

Bid to offer returns:

3 years: -3.9%

5 years: NA

UOB UNITED INTERNATIONAL BOND FD

Bid to offer returns:

3 years: -2%

5 years: -0.1%

PIMCO HIGH YIELD BOND USD

Bid to offer returns:

3 years: -7.5%

5 years: -3.2%

SGAM TOTAL RETURN BOND S$

Bid to offer returns:

3 years: -3.7%

5 years: -2.2%

DBS SHENTON DYNAMIC BOND

Bid to offer returns:

3 years: -6%

5 years: -4%

FIDELITY INTL BOND A-SGD (only have 2 years of record)

Bid to offer returns:

1 year: -9.5%

2 years: -6.1%

FIDELITY US HY USD

Bid to offer returns:

3 years: -5.1%

5 years: -0.7%

ING RF EM MKTS DEBT HC EUR (only 4 years of record)

Bid to offer returns:

3 years: -3.3%

4 years: -0.9%

As one can see, most if not all of the bond funds returns are in the red!!

In Finance 101, we know that bonds are definitely part of the stock portfolio to lower the overall beta and risk of the portfolio. However, bond funds are altogether a different animal. There are a lot of expenses, upfront and inherent costs that erodes away investors’ value. The recent 3 years should theoretically be a bull market for bond funds, as equities tanked (they are inversely related, theoretically). Why is it that they are performing poorly as well? Are fund managers acting on the best interests of the investors? Are they imposing too hefty expense ratio or incurring unnecessary transactional fees that are ultimately borne by investors? We do not know.

If I were to invest in bonds, it will be truly bonds that pay me a fixed coupon rate and redeemable upon maturity. Not bond funds that pay me nothing and return me less than my principal!

Just for information sake, a bond is a debt issued by a company and pays a fixed amount (coupon) which will be redeemable at par value(price which was originally sold) by the company upon maturity. The maturity date can be 1 year to 100 years, depending on the financing needs of the company. It can be traded at the secondary (bond) market.

Ok, I hope I sound more convincing than the joker financial advisor. Who is employing me for financial advice now? Kidding!

Marriage: A risky business

Lately I came to know a few friends from different social circles getting married. I am not sure if you call it pre marriage jitters, but 2 different couples who have already bought HDB houses are already having 2nd, 3rd thoughts about that person they want to marry.

One couple was together for 6 years, and the reason for getting married is because they have already known each other for 6 years and time is running short! The guy in the relationship really hates to receive SMS and calls from his fiancée, often trying to avoid her whenever possible. Breakups have been tried and failed due to pressure from the fiancée’s whole family, he was time and again held hostage emotionally by them.

As for the other couple, they rushed into a marriage less than 1 year of their relationship as they were keen to receive the 40k CPF housing grant by buying a resale HDB. Both are unwilling to go through the marriage now, but the house had been bought, banquet booked, bridal shoots taken and renovation paid. All by installments. There is little they could do but carry on with the mistake. And by the way, they no longer talk anymore, even over dinner.

Needless to say, we can foresee that they might not live happily ever after upon marriage.

Risk: Considering sunk costs

“It will be a waste if we don’t get married after being together for so long” is not a good reason to get married. Even if we were to analyze the issue from finance perspective, knowing each other for years is actually a “sunk cost” which should not be considered when making cost benefit decision. (Sunk costs are costs that cannot be recovered once they have been incurred. However sunk costs greatly affect actors' decisions, because humans are inherently loss aversive and thus normally act irrationally when making economic decisions. )

Actually marriage is a cost benefit decision between 2 persons. We should be choosing the person we love that would provide the biggest benefit and lowest cost to us in FUTURE. In order words, we want to maximize returns and minimize risk. Hence, “sunk costs” like knowing each other for years, already spent a lot of money on him/her, already bought the house etc should never be considered for marriage decision making, if you are a rational person.

We should rather, be concern about opportunity costs. If I forgo this girl (or project) and I invest time and money in another girl (or project), what is the projected benefits (cashflows) from the new selection? Is the net present value or internal rate of return higher? It depends on your expectations (discount rate) though!

Unfortunately, for marriage, the payback period for the investment is often minimum 40 years. Hence, it is a risky investment!

Risk: Non diversifiable risk

The other reason to consider marriage as a high risk activity is because of its non diversifiable nature. I can only choose one spouse and live with it. I cannot marry many (for non muslims) and spread my (their) eggs over few baskets. Hence, it is of paramount importance to choose the correct one! Even if one may argue that you can choose the best wife from many girlfriends (though not ethical), choosing the correct girlfriend may not turn out to be the correct wife, mother (for you children) and daughter-in-law.

Just like business climate, tax policies and consumers’ taste change rapidly; your spouse will also change. The same spouse today may not be the same one 10 years later. You will need to discount and adjust your expectations accordingly, which may be painful and difficult experience.

Risk: Unfavourable historical returns

Look around yourselves. Are there happier married couples or happier singles? What is the percentage of divorce and broken families? Again, from current statistics and “historical perspectives”, most people are better off single, which again points to the risky nature of marriage!

So if you are considering to get married, do think carefully! Do not get married for the wrong reasons!

After all, life can only be understood backwards; but it must be lived forwards.

Temasek sells BOA stake, loss estimated to be US$ 4.28b

Just read online that Temasek has sold its 13.7b percent BOA stake during 1Q 09.

Reuters cited a source briefed on the deal saying that the shares were sold for between US$2.53 and US$14.81 in the first quarter.

Based on a Reuters calculation which assumed an average price of US$8.67, Temasek may have suffered a loss of about US$4.26 billion.

SIGH

I thought the banks bought in were supposed to be for long term? 2007 till now is barely 2 years, "long term" is defined like this?

SIGH

They better have a good reason to realise the loss at the worst possible time. US$4.26b is not a small sum, considering Temasek can even buy 100% of SPH for S$4.26b.

SIGH

Portfolio balancing is definitely not the best reason to sell. More news on this will definitely follow.

When facts are false

"There are three kinds of lies: lies, damned lies, and statistics." The statement refers to the persuasive power of numbers, the use of statistics to bolster weak arguments, and the tendency of people to disparage statistics that do not support their positions.

Statistics is a powerful to induce people to make wrong decisions based on numbers.

Consider the following statement: “Attempting to move in and out of the market can be a costly affair, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods. Looking back at the performance of the S&P 500 since 1980, an investor who missed out on only the five best performing days in the market would have ended up with a portfolio worth roughly 26% less than one that had been fully invested throughout the period.

Further, missing just 30 of the best performing days for the market since 1980 would have reduced the value of a portfolio by about 73%, compared to one that remained fully invested.”

Source: MARE: Market Analysis, Research and Education, Oct 16, 2008. “Stock market, exit at your own risk”

There is nothing wrong with the statement. All the above stated are known facts. However, it gives people the false impression that you will definitely lose out if you exit the market “prematurely” upon investing and you only miss out the 5 or 30 best performing days but got hit by all the worst days, which is unlikely. Basically, it condemns market timing and embraces long time investment.

Consider the market turmoil last year, if you had exited or cut your losses in Jan 08, you would have missed the 40% downturn. You would probably miss the 20% recent rally, but you will still be better off!

The notion that statistics lie is common knowledge, but we should also be mindful that the motivation behind each statistics evidence is to induce people to make certain decisions. Consider the following fictional examples:

There is an epidemic in Singapore. 10,000 people are infected and on the verge of death. A new drug is available. If you choose to administer the drug, you will save 5000 people. If you do not use the drug, 5000 people will die. What will you do?

There is an epidemic in Singapore. 10,000 people are infected and on the verge of death. A new drug is available. If you choose to administer the drug, 5,000 people will die. Will you administer the drug?

You should be indifferent on both choices. However, the above simple example shows that the way numbers are phrased and presented will induce different emotions (thus choices), formation of different perspectives and possibly even different investment or life philosophies.

I once had an IFA agent who used to service my insurance polices and investment, 2 years back. The first thing he did when he met me was to scrutinize my then present polices and lament on how poor protection I had, how irresponsible my past insurance agents were.

He gave me his blog address to show his superb knowledge on finance and his “many” testimonials of satisfied customers. Eventually, when I invested with him, he disappeared and when I asked him difficult questions, requested financial transactions, he even scolded me (without my name) in his blog and classify me as one of the “clients from hell”.

Eventually, I fired him and sold off all my holdings for his poor and tardy after sales service in 3 months. Today, he is still doing extremely well, possibly earning in excess of $150k per annum. (When I met him, he was earning $120k per year!) Well, he made use of statistics to help him earned a good reputation. Uploading positive testimonials of satisfied clients (minus the complains component); bragging on how accurate his prediction on market was by linking his past posts when 50% of his predictions were wrong; portraying an upright image on himself by thrashing tie insurance agents etc.

All the above are just another form of manipulation of numbers and facts to induce people to make favourable decisions, to erm the “owners” of statistical evidence.

So the next time people show you numbers to prove a point, take it with a pinch, opps, I mean with a bucket of salt!

Sales talk

My property agent called me today to promote a 500 sq ft property selling at $950/sq ft at balestier area. He claimed that the swine flu is similar to the Sars period in which after that, it is likely that properties would soar. The property is only a 15 minutes walk to Toa Payoh MRT station, good buy best buy must buy!!!

I kindly declined his “lobang”.

To put things in perspective, the swine flu is not even 1% of Sars impact. Firstly, swine flu though contagious is not as lethal as Sars. Many people have recovered from the flu virus and it is still a mystery why people in Mexico die from it.

The global financial crisis is still unfolding, GM, Chrysler and Ford may face bankruptcy and that means millions of jobs off the table. Weak recovery is expected only in 2010 2Q.

Banks are still not lending, credit crunch is still at its thawing stage.

Property market have reached the peak 6 months ago and are now sliding slowly now. Buying a property now is akin to catching falling knives. And if you are leveraging, it means catching falling knives naked!

Usually when they claimed that it is “10 mins” from town or MRT station, you have to add another 50% margin error. Their estimation is usually grossly misleading.

It doesn’t take rocket science to figure out if that person is trying to earn commission or giving sound investment advice.

In another case, my colleague was persuaded to offload their newly TOP at a loss by their property agent as he claimed that their house has depreciated 20% and banks will demand top up on their depreciated amount. Example, they bought the house at $1m, taking an 80% or $800k loan. Now the property is only worth $800k and the bank is only willing to loan them $640k. Hence they are liable to return $160k, “anytime”.

Again, unless they default on their monthly mortgages, banks do not demand sudden top ups for no good reasons.

I believe there are knowledgeable, good property agents around. But the only way not to get ripped off by agents is really to educate yourself.

Sorry agents, but my money is hard earned and hard to earn.