Thursday, January 28, 2016

Thinking about the mini crisis caused by falling oil prices

The price of crude oil had fallen from US$110 to US$30 (-70%). Assuming oil prices remain low for a few years, many industries will be impacted:

  1. Oil exploration and support services companies are at risk of not receiving payment from their customers who are unable to pay because they are earning a lot less now. In Singapore. oil rig builders, Keppel Corp and Semb Corp Industries (Semb Marine) had already announced staff reduction and projects deferrment.
  2. Manufacturing companies supplying steel and other peripheral materials to build oil rigs will also earn less because fewer oil rigs are to be built.
  3. Communications companies supplying satellite communications for oil rigs to be connected to land officers will also earn less.
  4. Housing rental market in these oil producing countries will have increased vacancy as expatriates return home. However, the workforce shift may not be signficant because oil exploration work is mostly done by machines and construction done by locals anyway.
  5. Salesmen will lose jobs. Oil traders, bank loan arrangers, and the 101 middlemen who get commission cuts along the value chain.
  6. Banks and insurance companies with exposure to clients mentioned above will be at risk, somehow or another. However, banks and insurance companies are in a risk balancing business in the first place, so it's expected to have bad debt. Client selection becomes the key differentiating factor. In Singapore, DBS, OCBC and UOB all have some level of exposure, but I feel that <10% is still within a manageable range. Which bank is most exposed to the struggling oil and gas sector?

Assuming people lose jobs, will there be transferable skill sets?

  1. Salesmen will enter the tech or other new booming industries.
  2. Engineers will look for other jobs, maybe in offshore construction, such as solar farms on sea, or maybe underwater tunnels or living environments.
  3. Manufacturers will be forced to reduce costs by improving their product manufacturing processes.
  4. Explorators will be forced to reduce costs and look for alternative ways to get oil cheaper. 
  5. Advocates for alternative energies will be forced to reduce costs because cost savings is no longer the reason to switch.
Overall, I see depressed oil prices as a catalyst for businesses to transform to lower expense and look for new business areas.

In this mini crisis, I will fish for companies that continually manage their expenses well, have positive cash flow and invest in research and productivity improvements.

Sunday, January 17, 2016

Staying calm in rough waters

There are many similarities between facing paper losses on our investments and diving in strong currents. Weather conditions can vary widely but fundamentals remain the same -- be prepared before you dive (into the sea or investments), make sure you can swim well, stay calm and regulate your breathing, be aware of your surroundings and follow your navigation tools. I don't dive but I did pass my dive test to get an open water diving "license".

Personally, diving isn't my cup of tea. I was a good swimmer so it was very easy for me, but I didn't feel attracted to the sport. Investment, on the other hand, had a strange appeal. The satisfaction from being able to "forecast" made me feel like a prophet. In reality, there was no prophet, just lots of analysis and number crunching which anybody determined enough could derive.

To share a benchmark measure of my threshold for boring activities, when I was in secondary school, I completed my maths ten-year-series (TYS) twice. I can spend a weekend just reading a 500-page novel. I can drag myself to swim everyday so that I can reduce my sprint time by 1 second.

In investing, patience is a virtue. All things equal, the most patient usually ends up as the biggest winner. When one is patient, one is usually able to be calmer than others. When one sees a shark approaching for the first time, the one who is calm and can recall prep drills probably has a greater chance of survival. In investing, when one sees steep market corrections for the first time, the one who is calm and can recall textbook analysis of market corrections and crashes has a greater chance of not losing money. It's ok to earn less, just as long as you don't lose more. Never lose money unnecessarily. So if you are impatient, it is still possible to be calm and survive as an investor.

Everyone needs to weather a few crisises. The experience enriches one if one chooses to be enriched by it. Although I had only weathered through the SARS, lehman and 2009 crashes, I would say that staying invested and continuously studying companies when everybody said the markets were crashing like never before made me aware of the need to hold cash and be on a constant look out for value investments. If you were caught with your pants down, just make sure you have your pants more securely fastened in the next crisis. Constantly sitting out of the market will breed more fear and lost opportunities to learn how to weather storms.

Being prepared before one even starts investing means having cash, having your shopping list ready, being aware of the economic situations around the world. Being prepared also means being able to resist temptations to spend money that is sitting in the bank and ignoring the salespersons at banks trying to convince you to part with your money. Every $1 adds up, even if it is just a cup of coffee. Money spent on investments should be money one can afford to lose completely because that is the worst case scenario.

Knowing how to invest isn't important. Knowing what you are investing in is the most important. Buying a plot of land in Texas that gives you 20% annual yield? Buying wines that can be resold at a profit after a few years of holding the stock? Buying a shares of a casino company? There is no right answer to how to invest. Our characters reflect how we invest.

Everybody knows how to invest. Every decision we make in our lives is an investment. We decide whether to spend $5 at a hawker centre or $20 at a restaurant. We decide whether to eat fried oyster or chicken soup. We decide whether to sign up for music classes. We decide whether we want to buy insurance plans and how much to be insured for. We decide the school we attend, the jobs we work at, the friends we hang out with, the families we marry, etc. Every decision is an investment of our time and energy and money with a corresponding return. The yield is then how much we get in return for the decision we make, tangible or intangible, our value systems kick in to calibrate a measure of yield to aid us in our decision-making process.

So before you rush off to buy a book on how to invest or how to be rich or retire early, stop and ask yourself how buying a book on how to invest will help you in your objectives. The money is probably funding the writer's early retirement.

Know what you are buying and spending on. Observe and look for businesses that are profitable. Before long, you will realise that every second in your life is an investment decision and that conscious effort to evaluate your actions will translate to a need to want to buy certain (profitable) companies. That's when you take action and part with your money. That's the conviction every investor needs.

That's when you realised that you are still calm when your portfolio is suffering paper losses. You know that dividends will still appear in your bank account every month because the companies you invest in have profitable businesses. Remember that stress is created when you don't know what to do or what will happen. To reduce stress, you need to have the answers to those two questions or just simply not be involved in the investing process.

Thursday, January 7, 2016

What will I buy with $3000 (Jan 2016)?

Read more about First Stock Series.

On 7 Jan 2016, the China market suspended its stock market after a 7% drop in prices for the second time in a week. It was the government's way of stablising the market. The Singapore stock market also fell to a new low and closed at 2,729.91 points. Lots of guts is needed to buy when everyone is panic selling. What will happen tomorrow is anyone's guess.

1. Singapore Press Holdings* $3.76, 5.3% yield. Pros: Diversified investment strategy (property, retail, childcare) to mitigate risks of falling media revenue. Buy 800 units, and expect to get $160/year.

2. SPH REIT* $0.95, 5.7% yield. If you buy 3,000 units, you can expect to get $150/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable.

3. DBS* $15.70, 3.8% yield. Pros: Banks are usually the first to rebound in market upturns. If you buy 200 units, opt for scrip dividend payouts to get about $120/year. Depending on the share price, scrip dividends round up anything more than 0.01, so you can easily get 1 unit free. Example, when the payout is $0.30 per share half yearly, 200 units x $0.30 = $60. If the share price is $16, $60/$16 = 3.75 units. DBS will pay you 4 units. Two payouts will give you 4 x 2 = 8 units. 8 x $16 = $128, which is more than $0.60 x 200 = $120 if you have opted for cash payout. What's more? You reinvest your dividends without paying commission fees to SGX and your broker!

4. Singtel* $3.46, 5% yield. Pros: Diversed recurring income from mobile subscription in Singapore, Australia, Indonesia, Philippines, Thailand, India and Africa. Stable income from government sector. Buy 800 units, and expect to get $134/year. Read a recent Stock Review.

5. AIMS AMP Capital REIT $1.33, 8.5% yield. Pros: Diversed industrial properties (business parks, light industrial buildings, warehouses) on rental with continual asset enhancement activities (i.e. rebuilding/renovating old buildings). Buy 2,200 units, and expect to get $249/year.

There you go! Google search, read the financial statements, before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

First Stock Series: What will I buy with $3000?

I decided to start a new series called "What will Ï buy with $3000?" The plan is that every month, I will pick 5 stocks (ball park) that I will consider buying with $3000. This is to cater to my friends who have about 10-20k of savings and would like to start investing. Don't ever showhand in one transaction... please. $3000 is a reasonable amount for 1 transaction so as not to overpay the commission charges to the brokerages.

While reading blogs, I also find it difficult for a person to pick the first stock. Of course, it can be as brainless as buying Singtel. If it's a stock review, it's a rather in-depth analysis, else it will be a show and tell about how much the writer has earned from a certain stock. I thought that one approach is to help the person focus on a few stocks to study first, hence I decided to write a First Stock Series.

I am merely documenting my thought processes as I am also on a constant lookout every day for value-for-money buys.

The writer owns shares in Singtel.

Saturday, January 2, 2016

How much have I earned and lost in 2015?

For a change, I channeled more time to read and invest in 2015. The 2015 new year resolution was to invest a little more to build a passive income to work towards a target of $12,000/year passive income.

STI in 2015
I spent some money from Nov 2014 through Jan 2015, probably around $30k. When the STI peaked in Apr at 3,550, my portfolio looked superb with 15% paper profit. However, when the STI dropped to 2,800 in Aug, my portfolio was -20%, a paper loss. I poured in another $20k/month between Aug to Oct and felt very poor after that.

The dividends for the new shares purchased in the later half of the year haven't realised, but it's looks set to be realised next year, barring any further market corrections or economic downturns. For the whole of 2015, I managed to squeeze out $8k of earnings from various sources. I keep cash in OCBC 360 and UOB One account that pays an average of 2% p.a. for balances up to 60k and 50k respectively. Those alone will yield $200/month. (I also spend a lot of time budgeting my expenditure and maximising credit card payment options to make sure that I spend just enough to meet the minimum $500 credit card spending I need with each bank.) I put my excess cash in Singapore Savings Bonds (SSB) which is expected to pay me 1% to 3% p.a. gradually stepped up over 10 years.

2015 earnings with projected 2016 earnings
Overall, 2016 should get me nearer to my target of $12k passive income. The $10k estimate has already factored in a margin of losses, i.e. I assume that the yield from shares will be 5%. However my current portfolio of stocks is already giving me a 7% yield. If I really get 7% yield, I will reach my $12k target. So my "new year resolution" is to save money to "recover" from my spending spree in 2015. If the STI hits new lows, I am likely to be spending again. If the STI hits new highs, I will cash out about 20% of my positions to return some money to my warchest.

Note: the Aug market was unexpected and capitalising to buy when everyone is dumping shares would not have been possible if I didn't have a warchest that I had not touched for 2 years. Luck + preparation enabled me to stock up shares in 2015, at yields higher than average.