Sunday, June 30, 2019

Dividend Warrior 1H2019 Portfolio Update - Best Quarter Ever!

Portfolio Cost: S$457, 975
Portfolio Market Value: S$593, 943 (+39.2% year-on-year)
Portfolio Overall Unrealized Profit: S$135, 968 (+29.7%)
Portfolio YTD Unrealized Profit: S$68, 660 (+11.5%)
Portfolio XIRR (including dividends): 14.63%
Portfolio XIRR (2019): 48.71%
Dividends Collected (1H2019): S$13, 410 (+11.6% year-on-year)
Current Warchest: S$7, 800

Portfolio Actions in 2Q2019:
  • Initiated positions in APAC Realty, Propnex Group, HRnet Group, F&N and UOB
  • Took SCRIP dividends for OCBC
  • Took SCRIP dividends for Raffles Medical
  • Applied & allocated 1000 units for Frasers Centrepoint Trust's preferential offering

Singapore Market Becoming A Top Hub For REITs
Global markets had quite a roller-coaster ride from May to June, right? It had been a hectic quarter as I opened my warchest and deployed funds according to my preset investment plan. The escalating trade tensions between the US and China turned out to be a blessing in disguise, especially for my portfolio. A synchronized global slowdown would prompt the US Federal Reserve to be more dovish in the second half of 2019. And we all know REITs generally thrive in a dovish environment. First, prolonged low interest rates would reduce the burden of debt refinancing for REITs. Although the REITs I am currently holding have healthy gearing ratios (below 38%), I don't mind a 'helping hand' from a dovish Fed. Second, an extended period of low interest rates would lead to a world that is hungry for yield, thus boosting the demand for yield instruments such as REITs. Those glorious days of high fixed deposit interest rates are not coming back, ever. This is the new norm now. We have to face reality and make the best of it. 

Singapore's economy has become a capitalistic utopia/dystopia, depending on your perspective. It is a system of rental income extraction by entrenched giant landlords (REITs). Many developed countries with matured real estate markets do show similar signs. For example, collectively, the local retail market is dominated by CMT, FCT, MCT, Suntec REIT and Starhill Global. If one is invested in all these retail REITs, he/she would essentially gain exposure to almost all major shopping malls in Singapore. The Pioneer Generation did not have the opportunity to participate in this rental extraction bonanza. As the third generation Singaporeans, we should thank our lucky stars and try our best to extract as much financial benefits as possible out of this 'rental economy'. In my opinion, real estate is one of the very few business sectors left that is still resilient to disruption. For example, even a disruptive and fast-growing tech company like Grab has to lease office space for its employees. Grab will be leasing its new, state-of-the-art headquarters from Ascendas REIT at One-North business park. This new building will house Grab's largest R&D centre as well as around 3000 employees. Being a unitholder of AREIT, I stand to capture some of Grab's future growth indirectly.

Less Obsessed On Beating The Market
The grim reality is that most retail investors fail to beat the market over the long-term. Even professional active investment fund mangers struggled to outperform the market consistently over many years. All the fees and commissions erode long-term returns. The more actively you trade, the more harm you do to your portfolio. Our worst enemies in investing are often ourselves. So, how do we, as individual investors, beat the market? Well, we don't. Ignore the 'beat the market' hype that pervades the investing scene. 

We are not highly-paid fund managers who need to answer to demanding clients every quarter. No one to pressure me to take profits when the market appears 'frothy'. No need to chain ourselves rigidly to the STI performance benchmark. We are not competing against rival managers to attract more clients. We are in competition only with ourselves. I am alright that my portfolio performance does not beat the STI every year, as long as my dividend growth rate does. Don't get me wrong, I am not saying it is fine for my portfolio to be decimated more than 50% in a year. Nobody wants that! I'm just saying that I am no longer obsessed with a few percent gyrations in my overall portfolio. In any given year, under-performing the STI by 2%-5% is no big deal to me.  I stick to my dividend growth strategy.

Be Informed Consumers Of Media
News can be a good source of information if you are able to interpret and use it properly to your advantage. Avoid knee-jerk reactions to every headline. Most media outlets are profit-driven businesses. They want to turn a profit. They must turn a profit, or else they will go out of business. Their bread and butter is always selling advertising. To garner higher advertising revenues, they must attract eyeballs. The new views they get, the more the advertisers are willing to pay. As the saying goes 'If it bleeds, it leads'. News programmers know, if they lead the evening prime-time news with a heart-warming story of students performing a concert at a nursing home, no one will watch. They know they must lead with fire, mayhem, murder, robbery, riots, scandals and controversies. Bad news sells, especially Trump's tariff tweets. This is the media industry's way of maximizing profits. 

The more your money works for you, the less you have to work for money
Dividend Warrior

Thursday, June 20, 2019

Common Mistake 1 - Obsessed Over Market-Timing

Many investors believe that timing the market gives better returns and reduces risk. I am afraid that's not the case.
If you are in your thirties, you can expect to live through roughly 10 more bear markets, big and small, at least. Are you really going to freak out, panic and go fully into cash every time? It makes no sense. Market timing doesn't work over the long run. It just... doesn't! Financial advisors and investment managers would try to convince you they don't do market-timing, but they actually do. They 'packaged' their sales pitch in a different way, using fanciful investing jargon such as 'downside protection', 'asset-class rotation', 'tactical allocation', 'style-rotation' and 'sector-rotation'. All these strategies imply that they are able to predict when to move from one part of the market to another, which honestly they don't. Nobody does!

Lots of investors miscalculate/underestimate the risk of bad market timing. They assume that they possess great 'predictive powers' that allow them to sell at the top now and re-enter the market at even lower valuations in the future. Sell high, buy low, right? Safety first, right? Unfortunately, the risk of being out of the market is far greater than the risk of being in.

Alice and Jane received their annual bonuses of $10k each. Alice decided to invest all at once. Jane decided to wait in cash. 3 possible scenarios will always play out.

In the end, over the long run, being on the sidelines often results in permanently missing the upside. For example, REITs have rallied ferociously from their Nov/Dec 2018 lows over the first half of 2019. Yes, their prices might go back down, but will it go back to their previous lows? Maybe not. If prices don't go back down to that level, investors who avoided REITs will never be able to capture that returns again. A potential 10% capital appreciation and a 6% DPU yield in a year is a rather huge opportunity cost. 

The masses get it wrong, the media gets it wrong, the economists get it wrong, investment managers get it wrong and so does just about everyone else. Corrections are going to happen. Bear markets are going to happen. Bad things happen all the time around the world. You will do more harm to your portfolio than good by trying to 'predict' your way through them.

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves....." 
~ Peter Lynch

Saturday, June 15, 2019

Learn From Mistakes Of Others

"By three methods may we learn wisdom. First, by reflection, which is noblest; Second, by imitation, which is easiest; and third, by experience, which is the most bitter" 
~ Confucius

All investors are hard-wired with human emotions. When we experience failure in our investments, usually it's self-inflicted, which makes dealing with it objectively a daunting task. One of the best ways of speeding up our learning process is to examine and understand the blunders committed by others. This way, we increase our probability of avoiding similar setbacks. For example, one of my golden rules is to avoid S-Chips. After witnessing countless scandals/frauds associated with S-Chips over the past decade, they simply not worth the risks in my opinion. The latest corporate drama surrounding Best World and Midas Holdings reinforced this golden rule. There are two ways you can learn from others' experiences.
  1. Strive to replicate success. Kobe Bryant studied Michael Jordan. Paul Tudor Jones studied Jesse Livermore. Warren Buffett learned from Benjamin Graham.
  2. A different approach is to analyse stories of failures. Try to avoid whatever it is that tripped that person or company up. As Charlie Munger once said "Tell me where I'm going to die so I never go there."
These are my 6 Golden Rules after learning from the mistakes of others over the last decade.
  1. No airlines (Highly-competitive industry, capex intensive)
  2. No S-Chips (Higher-than-usual rate of corporate scandals/frauds
  3. No penny stocks (Usually not market leaders, earnings tend to be volatile)
  4. No O&G stocks (Highly cyclical, dependent on oil price, 2015-2016 oil crisis)
  5. No shipping stocks (Dependent on global trade, over-capacity)
  6. No utilities/infrastructure (Look at Hyflux's fall from grace. Huge initial costs to build up the infrastructure, followed by recurring high costs to operate and maintain the power plant or desalination facility. Lastly, lack pricing power in the market. Basically similar to the difficulties facing SMRT and SBS Transit years ago, before the LTA restructured the public transport business model into asset-light.)

Ego Getting In The Way
Our inability to process information that challenges our ego is one of the biggest reasons why many investors fail to capture good returns. There is a name for this natural mental malfunction. It's called cognitive dissonance. This type of behaviour is not limited to the Average Joe investor. In fact, the more experienced you are, the more confident you are, and the less likely you are to accept you're wrong, even when evidence goes against your belief. For example, some people have been bearish on S-REITs since 2017, citing the Fed rate hikes as a potential reason for a crash. Now, in 2019, the 'crash' did not materialize, even amidst a raging trade war. Despite 3 years of DPU and NAV growth while maintaining healthy gearing levels and WALE, this minority group of naysayers are still adamant of a 'REIT crash'. Admitting that they are wrong would be too painful, maybe even embarrassing, because it means they missed out on the substantial cash distributions as well as capital gains over the years.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." ~ Mark Twain

One of Warren Buffett's strengths is his willingness in acknowledging his mistakes. We need to recognize that mistakes are part of the investing journey. My way of guarding against overconfidence is to list down all potential risks/threats that a company might face before investing in it. I take constructive criticisms of my portfolio seriously. Criticism is information that will help improve my investing strategy.

Wednesday, June 5, 2019

Dividend Warrior's 2nd Pot Of Gold Series - BTO Flat Downpayment

Yesterday, I attended an appointment at Toa Payoh HDB Hub and settled the downpayment for my HDB BTO flat using my CPF OA savings. I also paid the 'Buyer's Stamp Duty' as well as conveyancing fees. This is another step closer to owning my first residential property on this lovely tropical island. My second pot of gold! 

  • The entire process took roughly 15 to 20 minutes. Not much verification of documents involved. The important thing is to remember your HDB Portal and CPF log-in passwords and bring along your smartphone/OneKey token. You are required to log into the HDB Portal on-the-spot to complete the transaction. 
  • The HDB staff informed me that the key collection date should be in March/April 2023 tentatively. Could be earlier depending on the construction progress of the main contractor.
  • The HDB staff also provided guidance on the home financing matters. She advised me to pay for my flat in full when I collect the keys 4 years later. Right now, after settling the downpayment, there is around $126k left in my CPF OA. Over the next 4 years, my CPF OA savings would continue to earn 2.5% interest annually and I would keep contributing to my CPF OA through my full-time job. All these add up. By 2023, my CPF OA savings should exceed $150k, so I do not need a housing loan. Buying a new flat, but staying debt-free. How awesome is that! To all my foreign readers out there, the public housing system in Singapore is pretty sweet right?  (>_<)
  • The $500 option fee which I paid during my flat-booking appointment back in April would be reimbursed to my bank account. 
  • After settling the downpayment, I was told to visit the SP Group counter/booth to find out more about the 'Centralised Cooling System'. This is a pilot project. The SP Group representative explained that chiller units would be built on the roof-tops of each HDB block, and the chilled air would then be piped into our flats. There is no need to do maintenance on individual condenser units because there aren't any. This is the main selling point for me. My parents had to change the faulty condenser unit in their old flat numerous times over the last 20 years. That was rather costly and troublesome. In terms of pricing, the representative candidly stated that it should be cheaper than conventional air-con, 'otherwise nobody will sign up' (his own words).