Investment Moats https://investmentmoats.com Wealth Mentor for Financial Independence Fri, 25 Sep 2020 00:20:51 +0000 en-US hourly 1 https://wordpress.org/?v=5.5.1 https://investmentmoats.com/wp-content/uploads/2017/09/cropped-sand-castle-3-32x32.png Investment Moats https://investmentmoats.com 32 32 28389540 Your Initial High Savings Rate May Not Let You Be Financially Independent On-Time Due to Lifestyle Creep https://investmentmoats.com/financial-independence/initial-high-savings-rate-financial-independent-lifestyle-creep/ https://investmentmoats.com/financial-independence/initial-high-savings-rate-financial-independent-lifestyle-creep/#comments Fri, 25 Sep 2020 00:20:50 +0000 http://investmentmoats.com/?p=12629 There is this befuddling lifestyle creep math that didn’t hit me until I saw the math. It is one of those things that if I pose this to you as a question, you would probably know the answer. But I would not have bet that everyone knows the magnitude of the impact. Nick Magguilli at […]

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There is this befuddling lifestyle creep math that didn’t hit me until I saw the math.

It is one of those things that if I pose this to you as a question, you would probably know the answer. But I would not have bet that everyone knows the magnitude of the impact.

Nick Magguilli at Of Dollars and Data helped another guy deconstruct the effect of lifestyle creep on your retirement timeline.

We have always been warned that we should be more aware of how we spend our money and not succumb to lifestyle creep if we wish to achieve our financial goals.

To put it simply, if you get a $1,000 salary increase, you have more financial bandwidth. I could choose to alleviate the stress in my life by hiring a maid instead of doing some stuff myself.

That is a kind of lifestyle creep. Necessary for some people but it is also an indicator that your quality of life is going up.

The First FI Math Trap: Assuming The Nature of Our Expenses Do Not Change Throughout Life

For a lot of us thinking about the amount that we need for financial independence or retirement, we would calculate how much of our expenses we are currently spending.

With that amount, say $50,000 a year, you can then work out how much you need to accumulate to so that you can retire in the future.

The issue for many of us is that like it or not, our expenses drift upwards.

So your $50,000 a year expense may become $70,000 a year when you are closer to that retirement goal.

But because you now need $70,000 a year, the sum you need now will need to be larger than the original sum.

What is the solution to this?

Not really a solution but this means that you would have to consistently evaluate how much you spend and what is the corresponding retirement sum.

You may have to routinely update the expense requirement and the amount you need for retirement.

A better way would be to envision your retirement lifestyle and then go through each expense line item to figure out how much you need to spend.

That would be more accurate but we also do not know our future self that well until much later in life (Read the end of history illusion and your retirement). So all this points to the need to routinely re-evaluate how much we need.

The Second FI Math Trap: If you Save More, Lifestyle Creep Will Still be a Drag on Your Financial Independence Schedule

In both their work, the most befuddling thing was that if you save more, you got to be more careful about lifestyle creep, if you wish to retire at the same timeline.

Suppose your expenses are $50,000 a year and based on the 4% withdrawal rate, you would need to accumulate $1,250,000. Let us assume that your current savings rate (out of your net income from work how much you have after spending your money) is 50% of your salary. That will make you a $100,000 a year earner.

The Retirement Grid
How many years it will take for you to be financially independent, based on your savings rate and investment rate of return

Based on my FI table above, at 50% savings rate, you would probably need around 15 to 17 years.

We all get increments at work and another decision point is how much we choose to spend that.

Nick and Nat’s numbers show that if you continue to save only 50% of your salary (it is weird to say a 50% savings rate is only), you would push back your point of retirement by a lot more.

If I were to summarize the math:

  1. Your expenses go up, and so you would need a larger amount of wealth (this is the first FI Math trap)
  2. Our ultimate goal is to ensure that we retire around the same time
  3. If you start off young, a large part of your salary will be earned in the future, and that means your spending rate is going up as well
  4. But because our original FI timeline is much shorter than traditional retirement…
  5. Our current savings rate cannot allow us to save a much larger amount for this expanded expense in the same duration

Nick and NAT reach a rule of thumb that if you save 75% of your increment, you can still keep close to your original timeline.

This means that if you get a $1,000 a month increment, put $750 away into investments and spend the other $250.

It Does Not Mean Those With Lower Savings Rate are Let Off the Hook

What about those with lower savings rate? Does that mean they are better off?

In Nick’s article, the guy with the 10% savings rate can save at the same savings rate and the impact to his retirement is “minimal”.

It is minimal because in terms of data science, if you push your retirement from 49 years later to 59 years later, that is just 20% more.

However, I do not think a lot of you would like either 49 years or 59 years.

Unless you find a job or industry that you see yourself in for the rest of your life, aim to pursue Slow-FI, this would not be an ideal outcome.

Conclusion

I always thought that there are two approaches to saving:

  1. You start off with a high base savings, be more frugal, then you spend your expenses
  2. You start off with a low base savings, but make sure that your expenses do not expand at an alarming rate

Both are OK.

The important thing is to be intentional about how you deploy your monthly cash inflow. Don’t be a financial zombie.

What is very myopic for me was the magnitude of lifestyle creeps on your future financial goal. We tend to be quite fixated on a magic number we derive some years ago.

We can take this moment to re-compute what would be a revised amount of wealth needed.

If the last time you did it was with your financial planner, then maybe it is time to make an appointment.

However, if you are apprehensive that you would be upsold something from your current adviser because you felt that you trust him or her less, then it is time to do it yourself or find another adviser that is more conflict-free.

Lastly, what was presented in the two articles are very rigid math.

In reality, most of you would not spend and save in a straight-line. But now that you realize that if your best earning years are in the future, you got to keep your spending in check with your values and not keep mindlessly expanding it.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Your Initial High Savings Rate May Not Let You Be Financially Independent On-Time Due to Lifestyle Creep appeared first on Investment Moats.

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Using CPF OA for Your Home Downpayment: You Should Use as Little As Possible https://investmentmoats.com/money/using-cpf-oa-for-your-home-downpayment-delay/ https://investmentmoats.com/money/using-cpf-oa-for-your-home-downpayment-delay/#comments Fri, 18 Sep 2020 23:30:17 +0000 http://investmentmoats.com/?p=12614 If you have a sum of money in your CPF Ordinary Account (OA), is it better to pay a greater down-payment or to take a larger loan and delay repaying your CPF Ordinary Account? A reader of mine asked me this question and my answer to him is that based on my past research (you […]

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If you have a sum of money in your CPF Ordinary Account (OA), is it better to pay a greater down-payment or to take a larger loan and delay repaying your CPF Ordinary Account?

A reader of mine asked me this question and my answer to him is that based on my past research (you can read Should we repay more of our 2.6% HDB loan to save 0.1%?) it should be better to drag out the loan.

I think the general idea is that if you have more lump-sum in your CPF OA as early as possible, it allows your CPF OA to compound over time. But there are a lot of things I cannot explain why this is the case.

The question today is more clear cut because instead of choosing to consistently repay $XXX a month more towards your mortgage, we are deciding whether or not to contribute more money to downpayment or not to.

I can tell you the answer is that it is mathematically better to take a larger mortgage loan versus making a greater downpayment.

Now, let us look at why this is so.

The Opportunity Costs of Using or Not Using More of Your CPF OA to Pay for Your Home.

This the problem brought in front of me:

  1. You can take a $400,000 home loan at 1.3% a year in interest rate, and have $200,000 in your CPF OA earning 2.5% a year currently
  2. You can reduce your home loan to $200,000 but you would have zero in your CPF OA

The pivot amount would be the $200,000 that you have in your CPF OA. In the past, CPF would force you to use all your OA to downpay for the home. What I understand is that this is no longer the case.

The way for you to think about is: What is the max loan that you could take?

Then, how much is in my CPF OA and how much do I want to keep in my OA.

If you choose to take a larger mortgage:

  1. You would pay more interest over 25/30 years. In theory, the interest that you pay is not fixed. At the start of your loan, you will pay more interest (due to the size of your loan). As your loan becomes smaller the interest is reduced.
  2. You would have money in your CPF OA to compound at 2.5% a year.

If you look at this math, intuitive this is a no-contest. We should do this since you would earn in excess of 1.2% if we take 2.5% minus 1.3%.

If you make a larger downpayment:

  1. You pay less interest over 25/30 years
  2. You will missed out on the 2.5% a year compounding in your CPF OA

So there is a 2.5% a year opportunity cost and your “return” is saving money on the 1.3% a year interest payment.

Net-net you will lose out on 1.2%.

We should always choose taking a large mortgage loan in this case. However, what if interest rate is closer to 2.5%?

What if you are taking a 2.6% a year mortgage loan? Let us see whether we can explore this.

Before we move on, do take note that the decision point is on the amount in your CPF OA that you need to make decision on, not the entire home loan.

Comparing the “Returns” Profile Between the Two Mortgage Financial Decisions

What we can do is to compare the internal rate of return for the two decisions.

Whoever has the higher internal rate of return is mathematically the better decision.

The internal rate of return (XIRR) needs to be computed between two streams of cash flow.

The XIRR, in very layman speak, is the “compounded interest rate per year” that you can earn based on this decision that you take. If we have an XIRR of 2%, you can interpret that this irregular stream of cash inflows and outflows will generate 2% a year compounded.

With this XIRR you can compare to other investments. For example, compare this to putting your money in an endowment plan earning an XIRR of 2.5%.

In this case we can compare the XIRR between both our decisions.

The first stream of cash flow is to not pay more downpayment but to take a larger mortgage. The cash flow would look like this:

  1. Year 1: Putting $200,000 in CPF OA – Outflow
  2. Year 2: Interest expense – Outflow
  3. Year 3: Interest expense – Outflow
  4. Last Year:
    • Get back your $200k principal from CPF OA – Inflow
    • Interest expense – Outflow
    • Accumulated interest earned from CPF OA over the years from the $200k in OA – Inflow

The second stream of cash flow is to contirbute more to downpayment and have less in your CPF OA:

  1. Year 1: Paying away $200,000 more to downpayment – Outflow
  2. Year 2: Interest expense that you saved by down-paying more – Inflow
  3. Year 3: Interest expense that you saved by down-paying more – Inflow
  4. Last Year:
    • Accumulating $200k in home equity after completely paying off the home – Inflow
    • Interest expense that you saved by down-paying more – Inflow
    • The opportunity cost of the accumulated interest we could earn from CPF OA over the years from the $200k in OA – Outflow

I decided to plot these two internal rates of return (XIRR) on a chart. The idea is to see how the returns change as time passes.

The return graph shows that the return profile of not paying off early is positive while making a greater downpayment is negative.

This more or less is inline with our guess.

Note: to be fair if you down pay more, at each point on the chart, you cannot get back the $200,000 principal (which I am assuming). The reality is that you would build up the equity of your home over time and only in the 300th month do you get $200,000. But let us assume here that even after 1 month, you could get back all your $200,000 equity.

The XIRR at the 300th month if you delay paying a greater down payment is 1.97%. It first dropped from 3.78% to 2.4% to 1.4% in the end of second year before going up.

This has more to do with the irregular nature of the interest payment (larger at the start and smaller at the end)

The XIRR at the 300th month if you use the $200,000 to downpay more is -6.3%. This is pretty crazy. I think the losses were that much because the opportunity was that great.

To give you an idea, after 25 years, the compound interest earned on that $200,000 was $173,000. The total interest expense paid was $35,000.

The conclusion at this point, just don’t increase the downpayment.

Would it be More Sensible to Increase Housing Loan Down Payment if Interest Rate is Higher?

This is a good question to ask.

The most obvious one will be to see if the decision changes if the interst rate is not 1.30% but higher.

Let us take a look.

Same as previous but the interst rate on mortgage is 2% a year instead
  • Don’t down pay more XIRR: 1.67%
  • Down pay more XIRR: -5.42

The results start to narrow.

When you take HDB Loan and incur an Interest Rate of 2.6%

Intuitively, at 2.6% interest, the expense is greater than the CPF OA interest of 2.5% a year.

This may tilt the scale in favor of putting more into down payment.

Same as previous but the interst rate on mortgage is 2.6% a year instead
  • Don’t down pay more XIRR: 1.41%
  • Down pay more XIRR: -4.63

Looks like it is still worth it after 25 years (300 months)!

But notice that at the start in the first six to twelve months, the XIRR return got very closed.

But even at this point, the total interest expense you will pay is $71,000 versus $173,000 in interest earned from the $200,000 in CPF OA.

Interest Rate of 4% – In Some Situation, it May Make sense to Contribute More Down Payment instead of Dragging Out the Loan

Same as previous but the interst rate on mortgage is 4% a year instead
  • Don’t down pay more XIRR: 0.79%
  • Down pay more XIRR: -2.66

Ok! Now we are starting to see the blue line overlapping the red line. This indicates that in a certain duration, it may make more sense to minimize the loans you take.

The cross over point is about 15 years or 180 months. However, if your loan is 25 years, it would still make sense to not put omre to downpay your home.

  • Total interest income: $173,000
  • Total interest expense: $114,000

The Interest Rate Which would make more downpayment more worth it: 5.8% a year

If you really want to know at what mortgage interest it will take to make the more downpayment option more attractive, you need to take it to a whopping 5.8%.

Same as previous but the interst rate on mortgage is 5.8% a year instead
  • Don’t down pay more XIRR: -0.01%
  • Down pay more XIRR: 0.02
  • Total interest income: $173,000
  • Total interest expense: $173,893

Right at the start, the XIRR for the decision not to downpay more starts working against you.

However, the money in your CPF OA gradually earns more such that you reached the break even point.

What is the Logic Behind This?

I think what worked for not committing more CPF OA to downpayment is similar to why mathematically, you should do lump sum investing than dollar cost averging.

When your returns and interest expense are both certain and you do not expect any volatility, by having more money at the start allows greater compounding effect than if you invest a little by little overtime.

When you choose to contribute more to downpayment, the interest you saved is on the amount of loan left.

As time passes, the amount of loan goes down, so the interest expense saved goes down.

In contrast, your CPF OA earns interest, and as time passes, the interest earns more interest. The power of compounding is very strong.

What May I Have Omitted from my Analysis?

Whenever the math is so befuddling crazy, I start wondering if my model is incorrect.

In this case, I do have a hunch my math is wrong.

If you commit to more downpayment for your home, you also have $200,000 more equity in your home at the start.

This means that if your home value goes up, and you sell off the property, you earn more.

That earns should be factored into my XIRR but I did not.

However, that is an area that is very subjective. How much should I put as the growth rate of the property?

Do I need to do a sensitivity analysis on different property growth rate?

I think if we factor in that equity property growth, I got a sneaky feeling the point where one decision tilt over would be earlier.

This will depend on the growth rate we expect for that property.

What if we are Evaluating Cash instead of CPF OA?

You can just replace the 2.5% return with the growth rate of cash, which is rather low. But if you are an investor, you may be able to earn more than 2.5%.

Your mileage (long term return) will differ based on your sequence of equity return.

Conclusion

The first time I did that analysis of whether it is better to put in more of my income to pay off loans earlier, I got a headache thinking about it.

This time it is more simpler but I think the issue is the same. There are some opportunity costs that is pretty hard to measure.

Some readers might prefer to have a peace of mind when you pay off your loans earlier.

However, I think that you do not have to pay off the loan. As long as you have enough liquidity to last for 3 years of mortgage payments, it may be more than adequate for you to ride out a tough situation.

In the worse scenario, just take the amount that originally was meant to down pay more and pay off a large chunk of it.

Right now, this plan makes more sense because the CPF OA earns 2.5% which is almost 50% more than the interest you can get from bank loan.

The CPF OA is interesting unlike cash in that, you cannot do much with it other than accumulate for retirement, put in investment or pay off your mortgage. With rates low and if you have return options, the decision may be more clear.

If you have another perspective to this problem, do let me know in the comments.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Using CPF OA for Your Home Downpayment: You Should Use as Little As Possible appeared first on Investment Moats.

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When a YOLO Lifestyle Should be Encouraged in Singapore https://investmentmoats.com/financial-independence/yolo-lifestyle-slow-fi/ https://investmentmoats.com/financial-independence/yolo-lifestyle-slow-fi/#comments Sat, 12 Sep 2020 23:20:48 +0000 http://investmentmoats.com/?p=12603 The term YOLO gives older folks the worst kind of ideas about young people nowadays. (YOLO stands for You only lived once, which is a philosophy to live that time is precious and you should live every moment as if it is your last) But then again, older folks will do a lot of YOLO […]

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The term YOLO gives older folks the worst kind of ideas about young people nowadays. (YOLO stands for You only lived once, which is a philosophy to live that time is precious and you should live every moment as if it is your last)

But then again, older folks will do a lot of YOLO things in their lives such as sleeping with someone other than their wives or husbands. That is not the most responsible thing to do, but… they still do it.

If you have someone in your age group doing that, you have less power to criticize the younger folks.

Why YOLO and F.I.R.E Can Both be Desirable Goals to Pursue in Singapore

In my boss’s seminar or webinar, he would mention that YOLO and FIRE are extreme ends of a spectrum. Being near both ends is not good. Most of us should be encouraged to be somewhere not at the tail ends.

I do agree with what he says mostly, but I think if you have someone who worked extremely hard for 10 years in a consultant job or as a mergers and acquisition investment banker, spending the next 5 years decompressing in a FIRE sense would not be irresponsible.

It would bring some sanity to your life.

What about YOLO?

Are there grounds that YOLO is a responsible pursuit?

I think there could be.

Those that YOLO values their time over money. The time you have now with people, your experiences cannot be bought back, no matter how much money you have in the future.

Joshua Sheats of Radical Personal Finance has this philosophy that you should live a financially independent life before you have the money to be financially independent.

I think this is close to what I would term a responsible form of YOLO.

The sound way to live life is to live one where whether you have money or not, you go through life in a comfortable, satisfied manner.

You would spend on what your family really value. Both your wife and yourself pursue careers that are progressive, pays enough for your efforts, and challenges both of you enough.

When you have excess money, you would allocate them to the areas in life that you value the most. This could be your children, one or two hobbies, family vacations, donation to charity or your faith.

You can let me know if that is a fantasy, but I think if you are able to find such careers, which gives you a balance between work and family, you might be living that financially independent life before you have the money for financial independence.

A Responsible Evolution of YOLO is called Slow-FI in Singapore

There is another name for this kind of lifestyle. Some people called this Slow-FI.

Slow-FI is described as when someone utilizes the incremental financial freedom they gain along the journey to financial independence to live happier and healthier lives, do better work, and build strong relationships.

A slow-fi couple pursues financial independence but they may wish to retire at traditional retirement age or even later. The key for them is to enjoy the journey as much as the destination.

Some of us chiong all the way to get to a position where our wealth enables us to be financially independent. When we get there, we have no idea what is that ideal life we wish to live.

So I can see the appeal of enjoying the process while you are pursuing financial independence.

And I think Slow-FI is more sustainable for the spirit because, if your money does not build-up, you are already winning by living a good life!

There are many who criticize the F.I.R.E movement because no matter what they do, they cannot see themselves earning $200,000 in combined annual income and having a 50-70% savings rate.

It can get pretty dejecting if you realize that there is this F.I.R.E concept, know the formula to get there, try to execute that formula, and realize after some years of grinding, you are nowhere near.

The best advise that I can give you is to

  1. Work harder, climb higher, so that your wages go up
  2. Learn to live an intentional good life today

Sooner or later, we have to do #2. So maybe we should do it today than wait for when we have the money.

Slow-FI/YOLO in Singapore have 2 Main Problems That you need to take Note Of

The biggest problem with YOLO/Slow-FI is that

  1. People don’t do it in a responsible manner
  2. There are not much safety nets

I think the first one is a bigger problem.

How do you know the life you are living is a sound, responsible, intentional life? Who would you consult if you do not know the way you are living is… closer to more sound or unsound?

People criticise you because they think you are doing reckless, irresponsible things. The issue is that when you are young, you don’t think other people understand the situation you are in, or that you are afraid they will talk you out of it.

Most of us tend to overrate our decision making capabilities.

There are a few solutions to this:

  1. Get better at thinking about these decisions that you have to make. Learn to use what Daniel Kahneman calls System 2 or the slower mode of thought. Learn to look at your decisions as a spectrum of outcomes instead of black and white.
  2. Have a counsel of maybe 3 or 5 friends, mentors who you trust that can you know won’t be just “Yes” friends. They won’t be the type who would always be supportive of what you are doing or always be skeptical about things you do. It would be good that they make up of friends in your circumstances, mentors who are older and have seen more stuff, and since this is a money blog, preferably someone who has a sound financial brain.

The irresponsible YOLO are really the folks who consistently use System 1 modes of thought.

The second problem, the lack of safety net comes up because one of the constant in life is uncertainty.

If you valued time much more over money, and you spend almost every cent that you make, things can turned out OK if there are no hiccups.

But if there are some big hiccups, then you might not have the financial buffers then you might be in some big trouble. Am I being too extreme here? Personally, I do not think so.

During this period, many people are finding out that you can be living your life intentionally and yet overnight, you don’t have projects coming in, your whole industry has collapsed. Even if you would like to hustle, you cannot hustle!

However, I would like to caveat that if you really attained that level of responsible slow-FI life, you would not be in such a situation:

  1. Your conscientiousness to deliver good work have allowed you to earn a good income, and even if after you spend on living a good life, you would have adequate surpluses
  2. As you are good at your work, and people know you do good work, are quite OK to work with, you stand a higher chance to be re-employed again

In other words, YOLO does not mean irresponsible living.

Your surplus and wealth may not mean you could stop work, but for most, you could build up enough financial buffers to get you back on your feet.

If your philosophy is that time cannot be bought back with money, then the way to go is to really find the job you are good at and like to do, be really good at it so that you earn very well.

But I would caution that it is better that good life that you live not climb as fast as your income. If your annual expenses reaches a terminal state, whatever that you have left can be effectively channel to investments to build a longer runway to financial sustainability.

Totally non-related: Yohei Aoki could not connect with his job. So he moved into an abandoned school high up in the mountain area of Japan. He lived in the school alone, spending his time brewing coffee and playing music. The whole surrounding is very picturesque.

Personally, it will creep me out living in such a large, abandon compound on top of the mountain.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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Is This the Most Important Presidential Election Ever? https://investmentmoats.com/money/most-important-presidential-election-ever/ https://investmentmoats.com/money/most-important-presidential-election-ever/#respond Sat, 12 Sep 2020 00:53:16 +0000 http://investmentmoats.com/?p=12600 Since election season may be upon us, I thought this is a pretty good share. During this time, we tend to start seeing financial commentators or bloggers trying to show their authority by explaining how the election will turn out and what are the good stocks that will benefit from this. Then they will pitch […]

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Since election season may be upon us, I thought this is a pretty good share.

During this time, we tend to start seeing financial commentators or bloggers trying to show their authority by explaining how the election will turn out and what are the good stocks that will benefit from this.

Then they will pitch you their masterclass courses.

Sometimes, I wonder how much a change in president matters. Based on some of the things that I read about the influence of the presidential election may not be so much. This is because the decision making that would shape policy is not down to one man but also his or her interaction with the senate and congress.

One of my favorites writer Morgan Housel shared something interesting in an interview that he did on a Financial Independence podcast.

Morgan was asked whether the presidential election matters in investing and if it does, to what extent.

Morgan tells the story that in 2010, he has the opportunity to hear a great banking lobbyist talk.

This person have been involved with presidential elections for the past 30 years.

The banking lobbyist made a statement that in every election that he has been involved in, people said that this is the most important election ever. He made a joke that at some point, some of these election stop becoming the most important election ever.

Morgan reflected that he is not immune to this. Back in 2016, he truly felt that the election was the most important one. And today, it feels like this upcoming 2020 election is going to be the most important one.

There is a tendency for the incumbent party to threaten that if the other party wins, the country’s economy will collapse.

Overtime, this have been shown to be not very accurate.

Franklin Roosevelt, the 32nd President of the United States by and large is viewed as one of the most successful presidents of the United States. But back in 1932, his appointment was so controversial.

Many people really thought that his appointment would usher in fascism and communism into the country.

There is also a long tradition of investors saying if this political party wins, by these stocks. These folks tend to have the worst track record of any tradition.

When George. W. Bush won in 2000, there is a very rational narrative that the government will de-regulate the banks, so the smart thing to do is buy the banks. They are also going to do a tax-cut that should benefit the airline stocks.

If you fast forward to 2008, the financial crisis have resulted in the banks and airline stocks going almost bankrupt.

When Barack Obama was elected in 2008, a common narrative was to buy the solar companies because there is going to be a big push for green energy. Within years, most of the solar companies went almost bankrupt.

We all remember that when Donald Trump won, there was a general consensus that this would be terrible for the stock market and the economy.

It is very easy to look back and see all these events turning out to be the exact opposite.

People tend to give the president or the political party on each side more credit, or more blame than they deserve.

The general idea is that, in the list of variables that matter to the performance of the stock market, the president may be so far down the list then we imagine.

Each of us have strong political beliefs but the sound way may be not to let that belief dictate our money management too much.

Morgan explains that if you like your portfolio today in September, you should also be comfortable with this portfolio in November.

By and large, the outcome of this election will matter less to the performance. (If it does affect the performance, it is likely we are looking at it through the short term lens or that we are inferring the wrong things.)

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Is This the Most Important Presidential Election Ever? appeared first on Investment Moats.

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Giga – My Choice for Frugal Phone Plan (Promo Code Inside) https://investmentmoats.com/money/giga-choice-frugal-phone-plan-promo-code/ https://investmentmoats.com/money/giga-choice-frugal-phone-plan-promo-code/#comments Tue, 08 Sep 2020 23:10:27 +0000 http://investmentmoats.com/?p=12591 Nowadays, when it comes to mobile plans, our usage pattern varies from person to person. I used to work in the role of support in a security tight organization. This means that I do not have the internet on my computer terminal. I am constantly on the move. I do not consume a lot of […]

The post Giga – My Choice for Frugal Phone Plan (Promo Code Inside) appeared first on Investment Moats.

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Nowadays, when it comes to mobile plans, our usage pattern varies from person to person.

I used to work in the role of support in a security tight organization. This means that

  1. I do not have the internet on my computer terminal.
  2. I am constantly on the move.
  3. I do not consume a lot of rich media on the go.
  4. There will be those occasions I could not plan for that I need to check something technical that I am not too sure about, or that I do not know how to do, or whether it is correct.
  5. People do call me and I do need to call people as it is more productive to discuss time-sensitive things through a call.

With these needs, I do need a more dedicated mobile plan so that there is adequate data for me to perform these work functions.

Fast forward to today, for the past 1 year, my usage needs have changed a hundred eighty degrees.

  1. Mainly I work from home.
  2. I have broadband at home.
  3. At work, we have wifi access.
  4. I do not consume a lot of rich media content on the go.
  5. I do need to call but not so much.

With these kinds of needs, I just need a plan that gives me enough data when I am out and about with my friends and enough talk time for the occasional conversation with people.

So when my M1 contract ran down a few months ago, I began to see which plan on the market that fit these criteria and I hit upon Giga’s $10 a month plan.

Giga is Starhub’s fully digital mobile virtual network operator (MVNO), so they use Starhub’s cell network.

What I like about the plan is:

  1. No contract. There is no lock-in. If I do not like the service I can change anytime that I want.
  2. $10 a month. One of my goals is to spend only what I need. I think $10 is low enough.
  3. 6 GB of Data. When I started with Giga it was 5GB of data and usually, in a month, I would use about 1.5 to 2 GB of data. I know around how much I consume and so are pretty comfortable with this package.
  4. 100 SMS. I do not need a lot of SMSes, but I do need some SMS.
  5. 100 min talk time. You need some talk time for the occasional call-out.
  6. Free Incoming talk time and SMS. This might look like a standard but MyRepublic’s package back then did not include incoming SMS by default.
  7. Free Rollover Data. What this means is that if you do not use the data for the past month, it will roll over to the next month. This does not mean that if you keep having surpluses of data, your data would balloon to a lot of GB! Most of the time, I would have 12 GB of data on my plan (it used to be 10 GB in the past)
  8. Fully digital onboarding process. This is the first time I experienced a process that I do not have to talk to anyone and I can get a sim card and ready to use within one or two days (I cannot remember). They will give you a temporary number while your existing number is ported from your old telecom operator. I do not know how it works, but I did not experience any breakage in telecom services.
  9. Sim card of all sizes. Not sure if you have unpleasant experiences with other telecom operators but the sim card they provided can be broken into different sizes. This means that if you are on a legacy phone that needs to use a larger sim card, Giga would still work without much fuss as well.

With all this, sometimes what I am afraid of is that the 100 min talk time is just not enough. There are some months that may be… some of the support calls that I need to render to some advisers may run longer than that.

The great thing about Giga’s no-frills plan is that if I feel that this is not enough, I could just spend $1 and add 100 mins of talk-time from their mobile app.

This allows me to vary my usage with a base amount of credits.

With the mobile app, I can monitor my usage so that I can add talk-time or data when I need to.

What This Plan is Suited For

I think this plan would fit those who have the same work profile as myself. Work at home or in the office most of the time and not the kind that consumes a lot of rich media.

It just sits at a very nice junction of having flexibility, a cost that is low enough, and flexible.

I like this plan so much that I signed up for my dad to the same plan after being on Singtel for ages.

You may wish to sign up for your parent’s whose calls are mainly incoming, does not call out so much, yet have enough data for their needs.

This might also be suitable if you have the kids and wish to control their usage, yet don’t have an autocratic plan that will be very hard for you to increase their usage if there are peak periods where they need more communication with their friends.

I do read a lot from website on the go in the past while I am in my IT job and seldom did I get into a situation where my data usage just based on reading websites rich in media goes above 5 GB.

In terms of network, Starhub’s network is not the best. I always had this reservations whenever I have friends complaining about the network but I got round to the idea that each telecom network has a weak point in certain regions. You just have to know whether these network are weak for the regions that you will frequent.

I have used their network for a while and I think it is serviceable. Never did it got to a stage where the thought of cancellation and switching came to my mind.

Where to Sign Up

Giga does have other no-contract plans on the higher tier, and if your needs are higher, you might want to go for them. I am not sure if it is getting popular to not have home broadband and just sign up for a jumbo mobile plan, but the 45 GB one might interest you (do let me know in the comments if, for your family, you choose only to sign up for mobile packages without a home broadband package.)

If you would like to sign up for Giga, you can use my Referral Code: bVW331

If you sign up with my referral code, you get to enjoy the Top Pick 45GB plan at just $15 (U.P. $25) for the first month. Or enjoy the 6GB plan at just $9 (U.P. $10) for the first month or 50GB plan at just $42 (U.P. $45) for the first month.

Enter the referral promo code bVW331 on the payments page when you sign up for Giga.

If you do not like it, remember that it is no contract and you can cancel anytime.

This post contains affiliate links. Kyith gets paid just a tiny amount when you sign up. Like half the price of a Starbucks coffee tiny.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Giga – My Choice for Frugal Phone Plan (Promo Code Inside) appeared first on Investment Moats.

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Why it is Important to Have Space for Thinking and Deep Work https://investmentmoats.com/money/why-it-is-important-to-have-space-for-thinking-and-deep-work/ https://investmentmoats.com/money/why-it-is-important-to-have-space-for-thinking-and-deep-work/#comments Sat, 05 Sep 2020 23:19:00 +0000 http://investmentmoats.com/?p=12585 A few years ago, an Indian who came from India decided to sell me some Ionised water. I thought it is a good idea to try out how my body would react if I use Ionized water, without the upfront cost of buying a full-fledged machine. You can call this ionized-water-as-a-service (IWAAS) before SAAS was […]

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A few years ago, an Indian who came from India decided to sell me some Ionised water.

I thought it is a good idea to try out how my body would react if I use Ionized water, without the upfront cost of buying a full-fledged machine.

You can call this ionized-water-as-a-service (IWAAS) before SAAS was popularized.

In one of our conversations we had when he delivered the water to my place, he talked about the school system in Singapore.

His expectation for his son is to be an average student.

That was his exact words. But I think what he meant maybe that he wishes that his son achieve average grades.

He explained that if he were to push his son to be one of the top students in the school or a top student in Singapore, his world will be pre-occupied with academics.

Being a very academic driven student would require a lot of work. He would rather him not have that work.

Without such a high commitment to school work, his son would have more room to play and learn things.

And that would be the ideal environment for his son to developed in a way he is happy about.

There is a caveat to this: Parents would need to equipped and ignite their child’s inquisitive nature and give them guidance how to learn things. His son can go to the internet and figure out certain complex topics that were out of school curriculum.

I find his point of view to be rather alternative.

For a long time, Singapore parents would want their children to be academically focused. Most of the time it is for our own good. Because that is the way to succeed in life.

But more and more, we are observing that there are successful people who manage to do well in something they are good at, and are able to build up net wealth using it.

This is not something taught in school.

However, it should also be noted that there are still a lot of people who took the standard academic path, may not always like what they do, but are pretty good at it, and able to build up their net wealth that way.

My Old Academic Days

I look at my life and sometimes I wonder what I am a product of.

For the first part of my life, I have been academically driven. I was like that not because I am good at it but because I was struggling with it. Sometimes, we hear of friends who can play all day but when the exam comes around they would always do well.

I am not like that.

So I spend a lot of time studying. The issue with that is… other than my academic discipline, I wasn’t so developed as a good worker for the knowledge economy.

I dunno how to build a social network. I don’t even know that in the IT industry, there are many different category of jobs.

I just study and study and study to get good grades.

You may only develop if you are not so busy

It was only when I got disillusioned with studying in my final year of university that I went deeper into exploring “other” things.

I kind of believe that if I didn’t lose interest in studies, it is likely Investment Moats would not be born and I would probably not be where I am now.

In contrast to school, my career has been one where I seldom have to do overtime. And because of that, you can discover investing, research stocks, build up competency in those areas. Write blog entries. Code programs that I am interested in.

There are enough people that told me not being extremely driven in the career hurt my compensation. Perhaps, in a different trajectory, the wealth would be accumulated faster.

But having wealth today might not mean you get to keep it.

You may only learn to manage wealth better if you are less busy

There are enough people who shared with me that they regretted not learning about these money-stuff. About investing.

At their age, learning is difficult because time is hard to come by, and cognitively, it is difficult for them to pick up new things.

They have money now.

But they would struggle with how to manage their money. What should they put their money into? What should they avoid? They do not dare to put in large sums of their money because they lack conviction in the investments they were introduced to.

A lot of their wealth building performance hinges on the people they trust. If their advisers are people with integrity and are competent money managers at the same time, wealth would built up.

However, most often managers/friends who have both integrity and competency are hard to come by. So most often, their overall wealth does not compound as fast.

Where you spend your time is pretty important. There might not be one correct answer.

  1. I don’t think you can conclude that I should focus on driving my career harder
  2. It might not be right to let the career take the back seat and focus on learning investing and how to manage well

The correct answer is to have a balance.

Find a job that you can do well in, and an environment that you can exact some influence in your career and time. There is seldom work-life balance in this time and age. However, by doing well, it creates more space for yourself. If you climbed higher at the right organization, you might be able to exact more control over your responsibility, delegating some to others and create more space.

Life Tip: Always try to Find Enough Space to Reflect and Do Deeper Work

If there is one advise I can give you it is to have enough space for yourself.

I define space as enough “me time” to do deep work and deeper thinking.

Whether you wish to learn about investing, or baking, you need enough space. This is not just time per-say. You need enough space away from your children, spouse, work, bosses to think or do things.

Space is what allows your thoughts to run wild. Space is also needed for you to develop your thoughts.

It applies to wealth building as well.

For example, you are an individual stock investor.

You managed to read a few books, listen to a few people and started down investing in 5 individual companies. One day, one of the companies you own have a company announcements. They announced a certain expansion plan.

You wonder in your head how big is this impact.

But you are in the midst of an IT project that is about to go live. You do not have much time so you all you could do is to think through and ensure that this is not a negative development for the company and go about with your work and life.

If you have space, and you make use of that space, you could have developed that original thought about what is level of impact of that announcement.

If work is not so busy, this thought would linger in your head whether this could actually make the company’s future cash flow potentially much bigger. If the future cash flow is bigger, the intrinsic value of the company is higher.

Your conviction in the company may increase and you may put in a larger sum of your wealth into the company.

This kind of space is something that I have lost since joining Providend.

That previous headspace is needed to think about work stuff. And there is enough stuff to think about.

The fxxking thing about thinking is that not everyone can do a good job shutting down your brain and not think about something.

If you use up that space for thinking about work, you have less for personal endeavors.

This is a tradeoff.

It means maybe I do better at my work. It also means that personally, I function less well as an individual investor.

I am quite sure that if I don’t have this current job, I would have navigated this year’s financial markets better.

You trade your time making more money today. However, you might not have “invest” well in building up the competencies to manage and grow your wealth over the long term.

I had dinner with three good friends of mine from my old job. On the way back, one of them was sharing with me his challenges at work.

He does not want to move up because that is not what he values at this stage of life (lets just say that he is also poisoned by these financial independence stuff that I write about frequently).

However, due to the nature of the business, he might be tasked to take on more responsibility. More responsibility, less time for other things. The pay might not compensate for the added responsibilities.

One alternative is to leave the company so that he avoids that path. I explained to him, you go to a new job, new environment, work is not often exactly the same, you need to commit a large part of your head space to getting that job into a stable state (if it ever gets there) before you have more room.

Sometimes, there are benefits of work that follow mundane routines.

I have been doing that for a large part of my 15 years IT career. I have seen my friends in the tuition line, civil service, freelance finance consultant benefitting from that extra space in the mind.

If you feel bored, you can go down various rabbit holes to scratch that boredom.

You might developed some valuable competencies!

I know some of you may be displaced due to this very challenging period, but perhaps try to see if there are new competencies you could build up.

For those of you who are investors, perhaps you could use this period to deepen your craft.

If you manage to emerge out of this ordeal and get back on the income-generating curve, at least you managed to build up the wealth management competencies, allowing you to have greater confidence when deploying and managing your money.

Cherish those space to think or do stuff.

Folks with family will tell you that is hard to come by and so they have to be more intentional about creating that.

I would also need to learn to create more of that space to use for myself than for work.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Why it is Important to Have Space for Thinking and Deep Work appeared first on Investment Moats.

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The Prospect of High Inflation Eating Equities Alive https://investmentmoats.com/money/the-prospect-of-high-inflation-eating-equities-alive/ https://investmentmoats.com/money/the-prospect-of-high-inflation-eating-equities-alive/#respond Sat, 05 Sep 2020 01:20:08 +0000 http://investmentmoats.com/?p=12582 There are some parts of the work scope that is not part of the official work scope. One of them I feel is to anticipate what would pre-occupy the minds of an average client. If you think like a wealth builder that is starting off, then you might be able to be more attuned to […]

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There are some parts of the work scope that is not part of the official work scope. One of them I feel is to anticipate what would pre-occupy the minds of an average client.

If you think like a wealth builder that is starting off, then you might be able to be more attuned to what they would be asking.

They might not be asking it today, but at some point in the future, they might start asking.

The issue is that you might need some time to find out these answers. I would classify doing this as a proactive kind of risk management process.

With so much money printing in the world, there would be enough people wondering about what are the solutions if high inflation were to rear its ugly head again.

The most “sensible” solution is gold, silver, commodities, bitcoin, mining companies, commodities-related companies.

Buffett Seems to be Thinking About Something

Warren Buffett recently just sunk a small part of his money in Barrick Gold, after saying so long publically negative things about gold.

But watch what he do not what he says.

This week, we found out on his 90th birthday that he also took 5% stakes in the five largest “Trading houses” on the Japanese stock market. Warren from time to time, have invested in international companies. So him doing this is not new.

What we can learn from these great investors are what they say but also what they do. And you can only appreciate it if they explain later. In this case, we have to guess why he choose to purchase these 5 companies.

One reason is that they are cheap. 4 out of 5 companies trade below their book value. They have decent dividend yields and their PE ratio hovers below 10 times (if you ask me for these kind of companies there is a reason why their PE should be below 10 times)

Another reason could be what they see on the horizon and they decide to take a bet on it. I am not sure about the thesis here. A weaker dollar leading to better risk versus reward in emerging markets, cyclical companies?

I think that is likely.

These trading houses deal with very traditional commodities like businesses. So I suppose he is of the view that these would do well.

Would the ETFs that You Own Fare Badly?

In any case, some may interpret that higher inflation is on the cards and what can you do about it.

The usual suspects would be the solutions that I wrote above.

But I think many people may not realize that their portfolio is already setup to hedge against inflation.

You have equities in your portfolio.

In How Did Stocks Perform During High Inflation Periods, I tried to find out how equities did in possibly the worst retirement sequence in our history.

This is the period starting from 1966 to 1986. The reason why this period is challenging is that you can imagine the normal foodstuff that you absolutely must eat going up by 6% on average in these 20 years.

Your spending will kill your portfolio.

My research shows that equity do rather decent during that scenario:

How do stocks perform in high inflation periods 4
Growth of $1 million for different UK indexes versus US consumer price index and personal consumption expenditures

This is a weird comparison crossing two different countries but I wanna show that this equities outperformance is not localised to just the US market.

You can read more about it in the article.

How well your ETF would do will depend on whether you can capture the performance of the sectors or countries that are performing the best.

How can we explain this phenomenon?

Well, if you look at the China or emerging market indexes today, it looks very different from the emerging market indexes 10 years ago. Back then, it was dominated by trading companies, commodities-related companies, financial companies.

Today they are dominated by tech companies.

Companies get more valuable and take a larger proportion of the index. Companies faced challenges and take a smaller proportion of the indexes.

The beauty of owning a portfolio of stocks in say in a few emerging markets is that you capture both the returns and the risk of these region.

If that inflation scenario rear its head, the supply and demand dynamics, the fat profit margins due to the operating leverage of these mining companies, the weakness of these growth companies, may result in these tech companies taking a backseat versus some of these companies (key word is May because we do not know the magnitude of these changes)

If you want a more recent example, look at how well the Malaysian stock index have been doing recently versus the Singapore stock index.

What was different? We owned stocks that faced challenges in this environment. Malaysian stock index contains rubber, glove companies which shot through the roof because of the sudden, massive shift in demand and supply dynamics.

There are usually not just one solution to a problem like high inflation. It is just the efficiency of things.

So maybe, you should be less worried. If it ever rears its ugly head.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post The Prospect of High Inflation Eating Equities Alive appeared first on Investment Moats.

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Singapore Savings Bonds SSB October 2020 Issue Yields 0.90% for 10 Year and 0.26% for 1 Year https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-october-2020/ https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-october-2020/#comments Thu, 03 Sep 2020 00:35:11 +0000 http://investmentmoats.com/?p=12576 Here is a safe way to save your money that you have no idea when you will need to use it, or your emergency fund. The August 2020’s SSB bonds yield an interest rate of 0.90%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS) […]

The post Singapore Savings Bonds SSB October 2020 Issue Yields 0.90% for 10 Year and 0.26% for 1 Year appeared first on Investment Moats.

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Here is a safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The 10-yr and 1-yr Singapore Savings Bonds Rate since the first issue in Oct 2015

The August 2020’s SSB bonds yield an interest rate of 0.90%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 0.26%/yr.

$10,000 will grow to $10,914 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10-year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 0.93%/yr for 10 years and 0.27%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

The Application and Redemption Schedule

You will apply for the bonds through the month. At the end of the month, you will know how much of the bond you applied was successful.

Here is the schedule for application and redemption if you wish to sell:

Click to see larger schedule

You have 02 to about 25th of the month (technically the 4th day from the last working day of the month) to apply or decide to redeem the SSB that you wish to redeem.

Your bond will be in your CDP on the 1st of the next month. You will see your cash in your bank account linked to your CDP account on the 1st of next month.

How does the Singapore Savings Bonds Compare versus SGS Bonds versus Singapore Treasury Bills?

Singapore savings bonds is like a “unit trust” or a “fund” of SGS Bonds.

But what is the difference between you buying SGS Bonds and its sister the T-Bills directly?

Both the SGS Bonds and T-Bills are also issued by the Government and are AAA rated.

Here is an MAS detailed comparison of the three:

SGS Bonds versus Singapore T-bills versus Singapore Savings Bonds
Click to see bigger comparison table

What is this Singapore Savings Bonds? Read my past write-ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions on how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

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I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
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The post Singapore Savings Bonds SSB October 2020 Issue Yields 0.90% for 10 Year and 0.26% for 1 Year appeared first on Investment Moats.

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What I Learn About the Art of Valuation. https://investmentmoats.com/money/art-of-valuation/ https://investmentmoats.com/money/art-of-valuation/#comments Sat, 29 Aug 2020 23:30:40 +0000 http://investmentmoats.com/?p=12556 I thought I would put out a short piece on valuation. In this world, you are always trying to understand the intrinsic value of something versus what you would pay for it. Whether you are a buyer, seller or someone holding on to an asset, you want to know what is something worth. The buyer […]

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I thought I would put out a short piece on valuation.

In this world, you are always trying to understand the intrinsic value of something versus what you would pay for it.

Whether you are a buyer, seller or someone holding on to an asset, you want to know what is something worth.

  1. The buyer wants to pay as low as possible, so that he has enough margin of safety such that his purchase will work out
  2. The seller wants to charge as high as possible, so that he can gain in excess of what he thinks his company is worth
  3. The holder wishes to know that the value of his business is still greater than what people are willing to pay for it now

This article will try to go through what I understand about the art of valuation. I try to minimize too much crap talk but if there are some areas that you think I did not explain well, do put them in the comment below.

What is Intrinsic Value?

The goal of valuation is to understand what you have, or what you think of buying and get to know what it is worth.

Imagine there is this magical number that tells you the true value of an investment.

Valuation is the goal of finding out this magic number.

If you know this magic number, you can then look at the price people are selling to you at or what people are willing to pay for, and make a decision upon it.

Knowing the Quality of the Asset/Business is a Vital Part of Valuation

We can start by going through whether it is better to use discounted cash flow, dividend growth model, price earnings ratio or EV/EBITDA.

However, the most important part to get right is the level of quality of the business. This is perhaps why you would hear fund managers say: “While the price we pay is not cheap, we are purchasing a quality business.”

High quality business is hard to come by. There may be more medicore and poor quality businesses around.

If you have a high-quality business you can pay a reasonable price for it. This is because a high-quality business either has a high future cash flow growth rate or that the future cash flow is so well protected that it lasts for longer than other businesses.

If the price you pay very low, relative to the intrinsic value, then you have an absolute bargain.

If the business is of mediocre or low quality, then to gain a good margin of safety, you have to ensure that you only purchase it below it’s intrinisc value.

If not, you can only depend on hope that someone guillible comes along and buy it from you.

How do you assess Quality?

Assessment of quality is a combination of quantitiative and qualitative analysis.

  1. Quantitative: Assessing the financial data and industry metrics
  2. Qualitative: Assessing its business, management, competitive forces

This means that you need two different skillset.

This is where the majority of where the job needs to be carried out.

The better you do the job, you will come closer to the true nature of the business.

Once you know the true nature of the business, then you may be disgusted with it or realize you discovered something great.

If I am not good at this… I would assess that a mediocre business as great, or a great business as mediocre.

This is one of the reason someone would be selling while others are buying.

The Cheat Sheet

I will probably go through different valuation models in this article.

For those who are just getting acquainted with this, it might be a bit hard to relate to. So maybe it is a good idea for me to give some guidance which model to use for what type of business:

  1. Property: Total return: CAP Rate + Capital Appreciation over the long run, XIRR
  2. Businesses that have seemingly consistent or recurring cash flow: PE, DCF, Reverse DCF, EV/EBITDA, EV/EBIT
  3. Same as #2 but with more debt: EV/EBITDA, EV/EBIT
  4. Business whose operating a business is not the focus but have a rich balance sheet: Price-to-book, sum-of-the-parts
  5. Software as a service business with earnings: PE, EV/EBITDA, EV/EBIT, DCF, Rule of 40
  6. Software as a service with no earnings: PTS, Rule of 40
  7. REIT: free cash flow yield and dividend yield, price to book
  8. Recovering business: Price-to-sales, PE using conservative recovery earnings
  9. Insurance companies: Price-to-embedded value, Price-to-book value
  10. Cyclical companies: Difficult… case by case basis. May use different methods
  11. Lumpy earnings like property developer: PE factoring a short period of high growth rate
  12. Matured business with recurring earnings: PE, EV/EBITDA, DCF
  13. Conglomerates: Sum-of-the-parts

Using Price Earnings Ratio or Earnings Yield to Value Businesses

Out of all the valuation metrics, Price earnings ratio or PE ratio is one of the easiest.

You would just need to get the price of the stock and the earnings per share, then divide the price of the stock by the earnings per share, and you have the PE ratio.

If you invert the PE ratio, you will get the earnings yield.

For example, if the price of a stock is $20 and the earnings per share is $1, the PE is $20/$1 = 20 times.

If you invert it (1 divide by 20), you will get 0.05 or 5%.

PE or Earnings yield is better?

We cannot say whether one is better than the other.

Having both allows you to compare the business in different ways.

A 5% earnings yield allows you to compare this business against other competing financial assets. You can compare against the 10-year bond yield of 0.6% or a REIT with an earnings yield of 6%. You could also compare the business to a property with a net rental yield of 2.5%.

With an earnings yield, you can compare against businesses in the same industry. Competitor A could have an earnings yield of 5.3% while competitor B has an earnings yield of 7%. Competitor B looks attractive price-wise (not sure about the quality).

The issue is in the financial world, people compare valuation based on PE more.

You can use PE to compare against listed and non-listed business.

However, PE is better for the business whose earnings are recurring in nature. If the business is cyclical, then the PE of the company will go through “emotional mood swing” kind of fluctuations.

Using PE to Measure against the Risk-free Rate

PE or earnings yield is quite useless unless you know the quality or lack of quality of the business.

Suppose you have a golden goose that lays a golden egg a year that you can sell for $1000 and a normal goose that lays a normal egg a year that you sell for $0.20. The golden goose cost you $20,000 and the normal goose cost you $5.

The PE for the golden goose is 20 times and the PE for the normal goose is 25 times.

Which is a better investment?

The answer may be none. How long can a goose survive for? Can the goose even survive for 10 years?

Valuation have to be in relation to the thing you are assessing.

A PE of 25 times for a business used to be expensive. If you invert that, the earnings yield is 4%.

However, we have to compare against other competing financial assets.

The risk free rate or the 10-year government bond rate is 0.6%. This used to be closer to 4%.

If you compare the risk-free government bond at 4% versus a business that has an earnings yield of 4%, the business might look expensive.

The risk premium (the earnings yield minus the risk-free rate) is 0%. There is no risk premium which indicates the market is pricing in zero risks in the investment. This likely is not the case. The asset might be overvalued, unless the company can grow at some great growth rate.

But if the earnings yield is 4% and the risk-free is 0.6%, the risk premium is 3.4%. There may be value there.

Using PE to Measure against Other Businesses

The price earnings may be better to compare against peers or other companies you wish to invest in.

If you have only $10,000 and can only put into something, which business would be better?

A PE of 30 times, by historical standards may look expensive. If you have another business in the same industry that trades at a PE of 15 times, the latter looks like a bargain.

However, the quality of the former may be better than the latter. The former may be dominant in the industry, continue to be dominant. The latter may be facing competitive headwinds, losing its edge.

The difference here is that the high PE business may last for 20 years in the business while the low PE business may only last for 5 years.

If you view it from this lens, you might wish to pay up more for the business with 30 times PE.

In general, to make things simple, you can frame quality down to two metrics:

  1. The length of time the business can keep going, maintain its competitive position. The longer it can, the higher PE is reasonable.
  2. The growth rate of its cash flow. How long can they maintain a high growth rate. The higher the growth rate and if they can maintain that high growth rate, a higher PE is reasonable.

The current example explains #1 more.

Let us consider the growth rate when valuing using PE.

Relating PE and Growth Rate Together

From “Using PE to Measure against the Risk-free Rate” and “Using PE to Measure against Other Businesses”, we sort of know that there is a reasonable price to pay for a certain quality of business.

The first thing is that you need to determine what is this.

Suppose the business quality is high enough. Based on the risk-free rate, you might think that if the business do not growth its cash flow, a reasonable or fair PE is 25 times.

You would pay 25 times for this business.

If you can get it for 20 times it is even better.

But currently this business trades at 100 times PE. 100 times PE would look absurd. However, if the earnings can grow 50% for three years, buying th ebusiness at 100 times PE may not be so absurd.

Let us go through an example.

A Super High Growth Business with a Competitive Edge

100 times PE would mean you pay $100 for a business with $1 in earnings.

  • The first year, the earnings grow 50% to $1.50
  • The second year, the earnings grow 50% to $2.25
  • The third year, the earnings grow 50% to $3.38

If you purchase the investment today at $100, 3 years from now the PE, based on the future earnings of $3.38 will be 29.5 times.

29.5 times may not be close to the fair value of 25 times we are willing to pay if the business does not have much growth. However, what is the chance that a business that grew 50% for three years cannot grow at 10% for the next 10 years?

Paying $100 for a business that eventually would trade at 29 times PE three years from now, and still have very good quality may be very reasonable.

A High Quality Business Trading at a High Multiple

A less bombastic example would be an investment that trades at $35 with earnings per share of $1. This gives it a PE of 35 times.

You have assessed that based on the business quality, 25 times PE is pretty fair to pay for the investment.

You have seen the business delivering 15% earnings growth for the past 7 years.

Let us be conservative.

Can the business deliver earnings growth of 10% for the next 3 years then grow at a terminal growth rate of 3%?

  • First year earnings: $1.10
  • Second year earnings: $1.21
  • Third year earnings: $1.33

Three years from now, at your purchase of $35, the PE would be 26 times.

You are essentially paying for a better cash flow in the future, today.

Your margin of safety would be:

  1. Your understanding of the quality of the business
  2. Assuming that the high growth rate will only grow at a lower and shorter amount

You would have overpaid if #1 and #2 are untrue.

A Mediocre Company at a Reasonable Multiple

In the last example here, we have a business that trades at $15 who earns $1. This gives the investment a PE of 15 times.

You would have to do your work assess the quality of the business. Suppose you have asesssed that you cannot tell for certain if the company can buffer itself well against competition, or that you seen that at times the earnings can fall off the cliff, you might want to err on the safe side.

You cannot tell for certain that the growth rate would be consistently 3% a year or how long it would be.

You would choose to value this business as if it does not grow at all. At 15 times or 6.66% earnings yield, this might be a fair value to pay.

But to be safe, you might wish for a greater margin of safety to grab it at a lower PE.

Your margin of safety would be

  1. A seemingly undervalued price
  2. Assuming zero growth

Can We Use EV/EBTIDA to Value Companies instead?

Yes you can.

In fact, using EV or enterprise value is better as in it factors in debt and takes out the cash.

What you need to be aware of is that EBITDA does not factor in depreciation, taxes, and interest payment.

Compare a companies EV/EBITDA against a group of similar quality companies’ EV/EBITDA to assess whether it is undervalued.

Just don’t compare the inverted EV/EBITDA against say properties net rental yield or something because when you do not factor in depreciation and amortizaiton, it is like valuing a business that you are not sure how long it will last.

A better measure may be EV/EBIT.

You can use that in a similar way.

  1. Assess the quality of the business
  2. The duration and magnitude of growth
  3. What is a reasonable stable state EV/EBIT that it should trade at

Can We Use Dividend Yield in Valuation?

Dividend yield used to be the original value investing measurement.

However, in recent times, it has lost its appeal.

I still think you can use dividend yield to value business.

You can use dividend yield to compare against:

  1. Same industry peers
  2. Companies that are in the same dynamics
  3. Compare the attractiveness versus itself at different points in history

Dividend yield may be more suited to value businesses in industry where the dividend payout ratio tends to be high such as utilities, property companies, REITs.

For example, you may see this kind of dividend yield chart in analyst reports. In this case, it shows the dividend yield of the Singapore REIT index from 2012 to 2017.

You would be able to assess whether the current dividend yield is high or low, relative to history.

This kind of analysis works because for an industry like this, the dynamics do not change a lot. It is a cyclical industry that is prone to swings between high supply to low supply, high demand to low demand, euphoria, and pessimism.

Over time, I tend to ask people to focus on using earnings yield or free cash flow yield.

This is because some companies may pay out more out of their earnings as dividends, some companies less.

How do you do a like-for-like comparison between two investments?

It is tough. You might as well value based on the thing that dictate everything: earnings or free cash flow.

Earnings per share or Net Income?

Another reason dividend yield is not very favored is because more and more, due to the shift in taxation rules, companies in the United States and some other countries favor stock buybacks.

When a company buy back their shares, their amount of outstanding shares get reduced.

For example a company earns $100 in a year and they have 100 shares outstanding. Their earnings per share is $1.

If the company bought back 10% of the shares within 3 years, the number of share fall from 100 to 90.

If the income remains the same as $100, the earnings per share becomes $1.11.

Just by doing a share buy back the earnings per share get boosted by 11%.

If you use dividend yield, you would have missed out on that management is value adding by buying back shares.

The next question you would ask would be: Do we use the net income or earnings per share?

Earnings per share would show the effect of buying back shares, but sometimes you would want to know whether a company is boosting it’s share price through crazy buy back.

A lot of the companies in US are doing that. If they are not buying back shares, they are doing something not right.

But you could also argue, this is financial engineering, and this is what may have gotten so many of these companies into trouble during COVID-19.

I would tell you… compute both market capitalization divide by net income or free cash flow and price per share divide by earnings per share or free cash flow per share.

The goal here is to appreciate the company for what it is. If you look at these two over 10 years, you can tell if they are doing this.

IBM was the classic case study of a business that stopped growing but due to its share buyback, the earnings per share keep growing.

Eventually, the business not growing became a bigger problem.

In this Covid-19 period Apple share price did very well, but their income growth was satisfying but not spectacular. What boosted Apple’s share price was the buyback, which boosted the earnings per share.

Apple may be a different situation compare to IBM because the quality of their business is still good.

But having an appreciation of both PE based on EPS and net income would give you an idea whether to go through with this investment or not.

Price-to-Sales (PTS) – Valuing Business with No Visible Earnings

Price-to-Sales gotten popular in recent years because technology companies are in vogue.

Majority of these technology companies reinvested whatever they earn to boost market share. The greater the market share garnered the greater the network effect, or economies of scale and scope.

They also reinvest in research and development and so the more they put the distance betweent themselves and their competitors, the more valuable they get.

Due to that, usually they are like loss-making.

Price-to-sales is the popular way and the way it is used is something like PE or EV/EBITDA.

You compute the price-to-sales by dividing the price by the revenue.

Some of the PTS can be a bit crazy like 10 times, 25 or 33 times PTS.

But like my explanation for PE, you have to relate it to the growth rate. If a business have a PTS of 30 times but in the next 2 years the revenue growth is 200% (ask yourself if this is possible at all), then a 30 times PTS becomes 10 times in 2 years.

PTS suffers from the same issue with PE: You need to know what is reasonable to compare against.

My problem with PTS is that unlike PE, there isn’t a competing asset or historical PTS that you can use to compare against.

Aside from that PTS is useful for determining if a company that became loss-making has turned around.

The Rule of 40

One of the recent arcane art introduced to us in this tech craze is the rule of 40.

The rule states that if a company can achieve year-over-year revenue growth plus profitability margin that equals 40% or more, this is a company that is reasonable to invest in.

The rule of 40 is specific for software-as-a-service (SAAS) businesses because their business is highly recurring.

Customers either pay a monthly or yearly subscription per user, or based on volumes of transaction.

The unit economics of the business dictate that a company may be better off spending ahead of the curve (the same reason as I shared in the PTS section above). They would also need capital to be available (which is available now with low interest rates).

However, at some point, these businesses will need to translate to actual profit and loss.

How do you resolve between loss-making to build their edge versus becoming profitable?

This is where the rule of 40 comes into the picture. If you are a business that do not have profitability, to be a reasonable investment, you have to grow very, very well.

If you slow down your growth, you got to make sure that your free cash flow or adjusted earnings margin shows that you have a moat or competitive advantage.

A business with a high free cash flow or earnings margin is an indicator that the business have some pricing power.

Hence it is to aggregate business who are either fast growing or have developed their edge.

Discounted Cash Flow (DCF) Model

If you go into any finance course they will teach you this valuation model call discounted cash flow model.

The discounted cash flow model calculates the intrinsic value of a company based on the discount of its aggregated future cash flow.

A business’s value is made up of what the business can earn in the future.

What it earns in the future is a stream of cash flow. This cash flow grows at a certain rate. In some years they might grow more, in some years it might not grow.

Businesses can grow at different rates.

Suppose you have a company that could grow 25% for 4 years, then maybe you believe growth will slow down to 12% for the next 10 years and then it will slow down to a terminal growth rate based on GDP growth.

This can be reprsented in the DCF Formula above. The cash flow can be free cash flow or earnings. That is divided by a discount rate.

The discount rate is like an interest rate or hurdle rate that makes it worthwhile for you to invest your money in this business.

As you are risking your money in this business, as oppose to putting your money in a risk-free investment like a 10-year government bond, you demand a respectable return for it.

The cash flow on the denominator can grow at a certain rate like 25% for 3 years, then 12% for 10 years follow by 2% forever.

How I use DCF

I used to do a lot of DCF in the past. What I would do is use #2 the Fair Market Value estimate.

I would compute how the cash flow will grow for the first 10 or x number of years. How long I will use depends on the nature of the business.

For business that we do not know if it will last, we tend to use 3 years. You cannot see things longer than that.

For companies that have been operating for a while like a telecom business, we can use like 20 years.

After assessing the business, I will typically have an idea of the nature of the growth. It could be 5% for a long time, or very uneven growth rate.

I would then assign a growth rate to the cash flow.

The second part would be the terminal value. This would be the aggregate of its future cashflow at a terminal growth rate. The terminal growth rate could be 0% , 1%, 2% or 3% depending on the situaiton.

In summary, a period of high or possibly hopeful growth + a period of terminal growth.

What Discount Rate to Use?

Finance text book will tell you the discount rate would be the weighted average cost of capital to use. This would be the hurdle cost of the company.

In any case, the discount rate is a subject of many debate.

The way I look at it is: What would be a good rate of return to compensate me to put my money in this investment?

The more risky or uncertain the business or if there are more things I do not know about the company, I would use a higher discount rate.

Generally:

  1. High risk: 12%
  2. Normal: 10%
  3. Low risk: 8%

These are rule of thumb I learn from a Bruce Greenwald. I think if you can earn something higher than 10% a year it is pretty good.

Should you modify this in this low rate environment? I think you should.

How low? I have no idea. Having a high discount rate stops you from buying a lot of the investment because many would not past this intrinsic value test.

But we have to be realistic. Perhaps lower it to

  1. High risk: 9%
  2. Normal: 7%
  3. Low risk: 5%

Why don’t I use DCF nowadays?

I do not use it nowadays because I believe valuation shifts.

And also I believe that intrinsic value is not a number. The value changes all the time. Using DCF requires you to assume that this business grows at a terminal growth rate of X%, current growth rate of Y% and a discounted rate of Z%.

Too much assumptions.

What is DCF Suitable For?

I think DCF is suitable for business with recurring cash flows

What I still use – Reverse DCF

While I seldom use DCF, sometimes I do still use the reverse of DCF when assessing some business.

Reverse DCF means:

  1. I assume today’s price is the intrinic value. The market is efficient
  2. I input the current cash flow
  3. I assume different profile of cash flow growth rates

What I want to determine is that at today’s price, what is the discount rate.

I would assess if this discount rate is a good “interest rate” in this environment.

This is probably a good way to assess Cross Harbour’s (HK:0032) value. The bulk of Cross Harbour’s business lies in the ticketing revenue of the Western Tunnel, and that tunnel’s concession is ending soon. You can compute based on the current profit, and a conservative growth, over this finite term, what is the discount rate.

The last time I compute that figure, if you net off the cash on the balance sheet, is north of 10%.

That is a pretty good return for that business. Especially when it may be so hard to find competing assets yielding a cash flow as high as 10%.

Reverse DCF is equal to XIRR or Internal Rate of Return.

Your margin of safety would be how conservative your growth profile is.

As you can see, the assumptions are reduced to just one, the growth rate.

The Intrinsic Value of an Investment Will Keep Shifting

A novice mistake that I observed (but a necessary one) is that we think once you compute a PE, that PE does not change.

PE is made up of price and earnings.

The price changes because it is affected by

  1. The psychology of the general market
  2. The psychology of the people holding the stock
  3. The fundamentals of the business

The earnings changes because

  1. Earnings are affected by externalities
  2. Earnings is affected by business dynamics (what your competitor does, what your supplier and buyer does, what your management does)

If both of these changes, the PE changes.

The intrinsic value does not stay static.

What this means that a business with low intrinsic value would shift to a higher intrinisc value and a business with high intrinisc value may degrade.

The Danger of Having Growth as a Valuation Input

In many of these valuation models, you would notice that the growth rate is a big input.

The thing about growth rate is that…. it is less certain. In the COVID-19 age, you get some of these business with crazy high growth rate.

However, if you take out this period, traditionally, the level of growth is uncertain.

And so in traditional value investing, they tend to err on the safe side. Either they assume growth will only take place for just a few years and then it will taper off.

Or that they assume zero or 3% growth rate indefinitely.

If you bake in a lot of growth into your valuation model, do be careful if the growth rate does not lived up to expectation.

During recent earnings result, we can observe that there are some business with great growth rate. These justify high price-to-sales ratio.

However, when they give some guidance that the future growth might be more moderate, the share price took a massive hit.

This is because current price baked in a lot of growth expectations.

If for a period, the growth does not live up to expectations, the share price will get punished.

If this is just one year, that is a buying opportunity.

However, if this is the start of the business losing their edge, you will be paying for something real expensive.

This is perhaps why, even in the growth baked into the PE model, we try not to project too long out. The margin of safety would be partly in being conservative in the duration of high growth.

Qualitative Versus Quantitative Analysis – Which is more Important?

You need to have both.

Professor Damodaran have a pretty good analogy to how we should look at this:

  1. The qualitative part of the analysis lets you float into the air
  2. The quantitative part of the analysis keeps you grounded

If you have only one, you either float too high or be so grounded you won’t make a move.

So both are important.

Overtime, I feel that I may respect the qualitative part more because it determines more things.

However, eventually, the numbers must show performance.

How Important is the Risk-Free Rate in Valuation?

It is important enough.

The risk-free rate dictates two things:

  1. The cost of borrowing
  2. The risk-free rate is a competing asset

If the rate is persistently low like now, cost of borrowing is low and it affects downside risks. We are currently in an unprescedented situation where not many gets hurt by making bad decisions.

A low risk free rate also means that a fair value PE of 20 to 30 times is reasonable.

But all that could change if the risk free rate goes back up to 4%.

If the risk-free rate is 4% and your high quality stock is 3% in earnings yield, why would you invest in the stock?

You would probably do it if the growth rate is 5 to 7% a year in the long term. But if your business does not have that growth rate, your stock is going to be punished.

Valuation is Part Science and Part Art

I probably missed out price-to-book and sum-of-the-parts but after 5,000 words in one afternoon, I think I prefer to take a break.

I hope that if there is any takeaway from this article it is that what you use depends very much on the nature of the business.

We start this article off by saying the intrinsic value is a magical number.

I learn that there is no one magical intrinisc value number.

I also learn that you cannot get your assessment of the business exactly correct. For example, how many of you really believe that Amazon or Apple would grow to this size, through these few segments of businesses?

How many would know that the thing that bring down so many retailers was a pandemic?

Even if you believe that this business has potential, what would get them to where they eventually be, might be very far off from their current segment of business.

For example, a business could acquire another business, bolt it on, and that business might be the one which became its main segment 10 years from now.

Because of that, valuation is an art sometimes.

What you can try to do is to work with what you have and try to get reasonably correct. These fundamental valuation models do help in that if you layered them on top of one another, it gives you sense if this business leans closer to overvalued, fair or undervalued.

In the end, it is just a sensing.

You can learn more about active stock investing in my series below.

We talked a fair bit about earnings and cash flow. I have written an article explaining Net Profit, EBITDA, Operating Cash Flow, and Free Cash Flow in detail here. It might be complementary to this article.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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Looks like Stashaway Simple’s Yield is Really Virtual https://investmentmoats.com/saving-and-investing-my-money/stashaway-simple-yield-virtual/ https://investmentmoats.com/saving-and-investing-my-money/stashaway-simple-yield-virtual/#comments Wed, 26 Aug 2020 23:03:00 +0000 http://investmentmoats.com/?p=12549 This morning, some of my friends received a mailer from Stashaway. In the email, Stashaway updated that they will lower the projected interest rate for its cash management portfolio Stashaway Simple, from 1.9% to 1.4%. This will take effect from September 1 onwards. The reason given by the CIO is that “to stimulate the economy, […]

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This morning, some of my friends received a mailer from Stashaway.

In the email, Stashaway updated that they will lower the projected interest rate for its cash management portfolio Stashaway Simple, from 1.9% to 1.4%. This will take effect from September 1 onwards.

The reason given by the CIO is that “to stimulate the economy, global central banks keep lowering interest rates. Although this is great news for people looking to borrow money, the lower interest rates also make it more difficult to earn rates on cash.”

So they analyze and believe interest rates won’t go back up for the foreseeable future.

Stashaway Simple is made up of two LionGlobal money market unit trust:

  1. LionGlobal SGD Money Market Fund
  2. LionGlobal SGD Enhanced Liquidity Fund

Stashaway also said that these two funds have not been performing well a few months ago but StashAway had added a rebate to bridge the difference between the projected 1.9% rate and the actual rate.

My friend zzXiaoboizz has written his thoughts about this reduction. In his piece, he goes a bit deeper on why he was not surprised these two funds were not able to endure and give 1.9%.

Cash Solutions like Stashaway Simple are Not Immune to Market Interest Rate Forces

There is not a lot that I would add but maybe I will talk about the Enhanced Liquidity Fund later.

I told those folks around me to be realistic about your returns from short term safe instruments.

A lot of my friends find these pools of money to be refreshing. However, beneath a very nice sounding wrapper, the underlying are unit trusts that have existed for a long time.

These unit trusts, or money market funds, typically invest in fixed deposits or equivalents. Some funds, such as the LionGlobal SGD Enhanced Liquidity Fund push their holds to bonds/debt instruments that will mature within the next 12 months.

These bonds are more risky and because they are more risky, they may give a higher return to compensate for the risk.

If you find that the interest rate of all your fixed deposits are collapsing, then it is a matter of time that the returns of these money market funds move closer towards your fixed deposit returns.

The only way to get higher returns

  1. Go further longer in duration to capture the term premium
  2. Go further out the credit quality to capture the credit premium

Basically premium is a nice sounding word for risk.

The High-Interest Projection Have Served its Main Purpose

Here’s the thing: Everyone in the industry knows the way to attract money to your company is to offer attractive savings interest rates.

The majority of the people are not investors, they are savers and on the lookout for safe products with attractive rates. This is how Yu-Er-Bao grew in China. This is why when the government structure the digital license, they did it in such a way that the future digital banks cannot compete through the attractive interest rate way (correct me if I am wrong).

If you advertise you have a savings solution that is cash deposit like that give near 2%, you are going to attract a lot of money.

You just have to check out Endowus and Stashaway’s websites. The hottest, most visible areas of both their sites are reserved for their cash solutions. For the rest such as MoneyOwl, FSMOne it is buried deeper.

If they bring you in with the cash offer, then they can slowly massage you to invest with them.

The cash is more of a lead generation.

Stashaway came up with a very sophisticated system that is able to know when the economic regime is going to shift, compute the correlation of different asset classes, sectors, then dynamically shift the portfolio allocation.

What are the chances they don’t know a 1.9% return sometimes is unsustainable? If it is unsustainable, why not just… maybe give a lower return?

They just got another round of funding, so by right they should be in a more comfortable position to continue rebating the difference in performance.

I think they have gotten all of you in. That is done already and no need to keep sustaining this.

Some Notes on the LionGlobal SGD Enhanced Liquidity Fund

This fund is damn hot.

You can find it in FSM’s CashSweep, Both of Endowus Cash Solutions, Stashaway Simple.

If Stashaway said the performance have been poor then I think all the solutions will be impacted.

The fund is rather new (incepted in November 2018). The fund seeks to preserve capital, enhance income and provide a high level of liquidity by investing in a broadly diversified portfolio of high-quality debt instruments.

The portfolio can invest in various debt instruments, of different tenures but seeks to maintain a weighted average portfolio credit rating of A- and an average duration of around 12 months.

The fund currently has a management fee of 0.35% a year. The year to date return of the fund in 2020 is 1.06%.

Since inception, the fund has delivered a return of 1.6% per annum. This contrasts with the 1.8% return per annum of its benchmark, which is the 3-month MAS bill.

The fund’s holdings is not fixed deposits or equivalent securities. The holdings are higher credit rating bonds that are maturing soon.

Here are the fund’s top 10 holds:

The LionGlobal SGD Enhanced Liquidity Fund can enhance the return over the traditional savings deposit by:

  1. Going further out the risk spectrum by holding corporate bonds of companies they deemed to have at least credit rating of A-. While you may find that a bond rated with rating of A- is high, there are bonds with higher credit rating of AA and AAA.
  2. Flirting with bonds that are longer in maturity to capture the term premium

While we think that over the long term, the fund should yield positive returns, because the majority of their holdings are corporate bonds, in the short term, there is a likelihood that the value of your investment may be negative.

The Bloomberg chart above provides a snapshot of the total return for 5 of the top 10 holdings during the period where the bond market experienced greater volatility.

On a short-term basis, some of the bonds suffer losses (refer to the column labeled Total Return).

If we extend the timeline from the start of 2020 to the 4th of Aug 2020, you will observe that majority of the bonds recovered in terms of total return.

The manager of LionGlobal SGD Enhanced Liquidity Fund needs to manage these short-term fluctuations well.

This does mean that there exists the possibility that the value of the fund can dip into the negative range.

The returns chart for the fund looks very smoothed and you do not see these price volatility. I think the reason is that the manager do not mark-to-market the value of the asset.

Conclusion

In the spectrum of risk versus returns, stuff like this would lean closer to the low-risk side. I am not going to be that idiot who dug up some data and then proceed to tell you not to put money into it.

But I do find that our brain tends to go into that lazy mode that this should be relatively safe. Just know that these are safe but not going to be the super safe sort.

In the grand scheme of things, if they fund can still get 1.4% a year, it is better than decent. However, based on zzXiaoboizz thinking, even this would prove to be a challenge.

If you ask me, I will tell you I dunno how the rates will go. The way to use these cash account is…. to use it for the real purpose: To have a certain pool of money for liquidity purpose.

Take advantage that these money market funds, through their economies of scale, can get better interest rates that you could not.

Expect the rates to fluctuate.

Don’t treat these cash account as your main wealth-building machine. View the cash portion in totality with your higher-risk investments. Manage your cash, bonds, equity allocation according to your duration and risk tolerance.

If you follow zzXiaoboizz que, maybe even for the most risk averse one, deploying 10-15% of your portfolio in equities, might yield a better return while keeping the volatility of your portfolio low.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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