The STI index had finally broken the 2300 barrier last Thursday or Friday after the end of the market rally which kept the index at a luke warm 2200 plus range. Investors have been cashing out under the doubt of sustainable growth of the economy.
SGX listed STI ETF had its prices drop below the 20 day moving average during the last 2 weeks, levelling out the upward sloping trend. Now that prices have passed the average once more, we will expect to see a slow and gradual increase in index as the market starts to build momentum over the coming week.
An optimistic prediction would see the ETF hitting at least $2.50 by end July, with direction of future movement heavily dependent on market sentiment. Judging from the performances between a portfolio of mid cap stocks and a one with small caps, it seems that the former is building up momentum more quickly than the latter.
With no major setback, the new support level should rest around the late 2200s.
Sunday, June 28, 2009
Wednesday, June 24, 2009
ETFs
Let me take this entry to talk about Exchange Traded Funds (ETFs).
ETFs essentially peg themselves to the market index of the particular market and are actually made up of a basket of selected stocks. In other words, the ETF of a market is somewhat similar to a unit trust in terms of structure. Your broker would tell you, invest $200 a month in Unit Trust A and I'll use my expertise to gather returns from Company B based in Country C and Company D in Country E. You get the idea.
Unit trusts are necessarily more diverse, and you normally hear brokers raving on and on about how their funds are located across the globe. But how many people who buy mutual funds actually know and understand the companies their money is being put into? Personally, I wouldn't allow someone else manage my capital without truly having understanding and control (I shall elaborate later) over any fund.
The S&P 500 index in the US market for example, achieves an annual compounding return of about 12% over the long term. A mutual fund tagging companies around the world could earn more, but there is a significant chance of earning less either.
Of course, there are plenty of funds in the market that basically 'buy' the index, which begs the question of why anyone would choose to invest in an index fund rather than an ETF. Afterall, a mutual fund has higher management fees, as you are hiring someone professional to manage your funds on a regular basis, with all the paperwork thrown in. More importantly, an ETF, which comes in the form of a regular stock counter in the market, provides full control over when you can buy or sell, so long as there is a buy demand for the stock. This is different from mutual funds, which normally requires a minimum holding period and a longer process of redeeming your capital and returns.
Liquidity is key, and you want to have sufficient capital at any point of time to move from a less valuable asset class to another, or simply from one equity to the next.
ETFs essentially peg themselves to the market index of the particular market and are actually made up of a basket of selected stocks. In other words, the ETF of a market is somewhat similar to a unit trust in terms of structure. Your broker would tell you, invest $200 a month in Unit Trust A and I'll use my expertise to gather returns from Company B based in Country C and Company D in Country E. You get the idea.
Unit trusts are necessarily more diverse, and you normally hear brokers raving on and on about how their funds are located across the globe. But how many people who buy mutual funds actually know and understand the companies their money is being put into? Personally, I wouldn't allow someone else manage my capital without truly having understanding and control (I shall elaborate later) over any fund.
The S&P 500 index in the US market for example, achieves an annual compounding return of about 12% over the long term. A mutual fund tagging companies around the world could earn more, but there is a significant chance of earning less either.
Of course, there are plenty of funds in the market that basically 'buy' the index, which begs the question of why anyone would choose to invest in an index fund rather than an ETF. Afterall, a mutual fund has higher management fees, as you are hiring someone professional to manage your funds on a regular basis, with all the paperwork thrown in. More importantly, an ETF, which comes in the form of a regular stock counter in the market, provides full control over when you can buy or sell, so long as there is a buy demand for the stock. This is different from mutual funds, which normally requires a minimum holding period and a longer process of redeeming your capital and returns.
Liquidity is key, and you want to have sufficient capital at any point of time to move from a less valuable asset class to another, or simply from one equity to the next.
Monday, June 22, 2009
A quick Monday update
I have been busy with rehearsals and singing recently, hence the lack of updates. Anyway, this is a short article taken from TODAY June 22.
US home sales, consumer spending rise
Consumer spending in the United States probably rose last month for the first time in three months and home sales increased as Americans became more confident the recession would end this year, according to economists in a Bloomberg survey.
Purchases advanced 0.3%, according to the median of 58 estimates in the poll, ahead of US Commerce Department figures due on Friday. Combined sales of new and existing homes likely improved to 5.18 million, capping the first back-to-back increase since 2006, the survey showed.
"There's more optimism as we get further away from last year's financial-market chaos," said Mr Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
"Spending on the part of consumers seems to be picking up after a soft patch. It looks like the housing has bottomed." - BLOOMBERG
Sign of the things to come? Americans are heavy consumers, both imports and domestic products. An increase in consumer demand will boost demand for raw materials and employment, a good step in the recovery of the economy. Optimism and positive sentiment is the key to economic recovery, and lies in the mindset behind producers, consumers and investors. Afterall, the equity market is usually one step ahead of indicating what direction the economy is heading.
The STI remains sugglish for today, carrying on from last week's steady decline to Friday's 2273 level. Market sentiment is pretty weak and actually a good time to wait out as the moving averages are slowly leveling out and might go into a slight decline.
US home sales, consumer spending rise
Consumer spending in the United States probably rose last month for the first time in three months and home sales increased as Americans became more confident the recession would end this year, according to economists in a Bloomberg survey.
Purchases advanced 0.3%, according to the median of 58 estimates in the poll, ahead of US Commerce Department figures due on Friday. Combined sales of new and existing homes likely improved to 5.18 million, capping the first back-to-back increase since 2006, the survey showed.
"There's more optimism as we get further away from last year's financial-market chaos," said Mr Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
"Spending on the part of consumers seems to be picking up after a soft patch. It looks like the housing has bottomed." - BLOOMBERG
Sign of the things to come? Americans are heavy consumers, both imports and domestic products. An increase in consumer demand will boost demand for raw materials and employment, a good step in the recovery of the economy. Optimism and positive sentiment is the key to economic recovery, and lies in the mindset behind producers, consumers and investors. Afterall, the equity market is usually one step ahead of indicating what direction the economy is heading.
The STI remains sugglish for today, carrying on from last week's steady decline to Friday's 2273 level. Market sentiment is pretty weak and actually a good time to wait out as the moving averages are slowly leveling out and might go into a slight decline.
Wednesday, June 17, 2009
Lessons learnt so far
The past few days have been days of reflection on my current portfolio. The bear market rally is over and unrealized profits have fell quite considerably. This brings me to several lessons I have learnt and what should have been done.
1)Investing 100% of my capital at one point of time
As prices were low and relatively affordable over the past month, I had invested all of my capital. The bear market rally saw some nice returns on paper but the past week, when the rally ended and prices started to drop, I had no more capital to buy in more stocks now that prices were lower. It's not nice to feel cash strapped especially when an opportunity comes knocking.
2)Not selling all of a stock when deciding to cash in
Investing for the mid to long term as a primary objective, I also do active trading from time to time. One thing I have started to understand about myself is that I place huge satisfaction on ownership alone. It is also in those instances when I release all of a certain stock only for it to rise later when I feel like stabbing myself. Of course, it might fall and selling all at that time would be great, but I didn't like how I felt when the former happened, so I always make it a point to keep at least one lot of a certain stock at any point of time, only selling when a downward trend is imminent.
3)My serious problem of over-diversifying
Having my capital spread thin over 40 counters, I begin to realise that it is a grossly wrong strategy that I have been taking. Capital spread thin will mean that potential profits are spread way too thin and I was actually spreading my exposure to risk. WRONG...It is about time I become more discerning in my purchases and streamline the portfolio SIGNIFICANTLY.
4)The problem of micro-managing
I did not have the time to manage all the counters efficiently which resulted in less understanding and control over every single one. Again, a streamline is absolutely necessary in this case.
What I should do now..
Since the indexes have been down, I am betting on the support level of around 2100 for the market to start rising (if it ever does) before cashing out and reinventing my portfolio. I used to have this concept of a 'Winning 6' which I should get back soon hopefully. Ideally, this should be done before the market actually starts building due to stronger fundamentals rather than on sentiment.
1)Investing 100% of my capital at one point of time
As prices were low and relatively affordable over the past month, I had invested all of my capital. The bear market rally saw some nice returns on paper but the past week, when the rally ended and prices started to drop, I had no more capital to buy in more stocks now that prices were lower. It's not nice to feel cash strapped especially when an opportunity comes knocking.
2)Not selling all of a stock when deciding to cash in
Investing for the mid to long term as a primary objective, I also do active trading from time to time. One thing I have started to understand about myself is that I place huge satisfaction on ownership alone. It is also in those instances when I release all of a certain stock only for it to rise later when I feel like stabbing myself. Of course, it might fall and selling all at that time would be great, but I didn't like how I felt when the former happened, so I always make it a point to keep at least one lot of a certain stock at any point of time, only selling when a downward trend is imminent.
3)My serious problem of over-diversifying
Having my capital spread thin over 40 counters, I begin to realise that it is a grossly wrong strategy that I have been taking. Capital spread thin will mean that potential profits are spread way too thin and I was actually spreading my exposure to risk. WRONG...It is about time I become more discerning in my purchases and streamline the portfolio SIGNIFICANTLY.
4)The problem of micro-managing
I did not have the time to manage all the counters efficiently which resulted in less understanding and control over every single one. Again, a streamline is absolutely necessary in this case.
What I should do now..
Since the indexes have been down, I am betting on the support level of around 2100 for the market to start rising (if it ever does) before cashing out and reinventing my portfolio. I used to have this concept of a 'Winning 6' which I should get back soon hopefully. Ideally, this should be done before the market actually starts building due to stronger fundamentals rather than on sentiment.
Monday, June 15, 2009
Singtel launches Amped music service
Singtel has launched an online music store in conjunction with Universal Music to provide new and existing customers with unlimited downloads from the new music portal, which currently offers about 500000 songs.
This is the first of such a service provided by a telecommmunications service provider, as previous 'music stores' were only offered by specific phone companies such as Sony Ericsson.
So 'What lies behind Singtel's latest music foray?' - Business Times 15 June
The motivation behind the move by Singapore's most dominant telco is not about uncovering a new source of revenue, at least not for the short term, but to strengthen its existing market share.
Singapore's mobile penetration rate currently stands at 133.2% or 6.45 million cellular subscriptions within a population of 4.5 million. This market is already saturated, as it seems and product and service differentiation plays key in sustaining or growing market share.
Singtel is going in the right direction though, with the Iphone being in its stable and monopolistic ownership lasting till end 2010 at least. This service makes up for the absence of an Itunes store locally, and it gives budding users another reason to purchase an Iphone if bundle packages are competitively priced.
We should expect the 2 other telcos to come up with more competitive packages and prices to retain or win any potential customers in the face of Singtel's new competitive advantage.
Growth should be rather slow, however, given the nature of the sector, but stable. At below $3, the stock presents great value for long term holding. Afterall, we are looking at the dividends/yield of this stock, and the capital gains, secondary.
This is the first of such a service provided by a telecommmunications service provider, as previous 'music stores' were only offered by specific phone companies such as Sony Ericsson.
So 'What lies behind Singtel's latest music foray?' - Business Times 15 June
The motivation behind the move by Singapore's most dominant telco is not about uncovering a new source of revenue, at least not for the short term, but to strengthen its existing market share.
Singapore's mobile penetration rate currently stands at 133.2% or 6.45 million cellular subscriptions within a population of 4.5 million. This market is already saturated, as it seems and product and service differentiation plays key in sustaining or growing market share.
Singtel is going in the right direction though, with the Iphone being in its stable and monopolistic ownership lasting till end 2010 at least. This service makes up for the absence of an Itunes store locally, and it gives budding users another reason to purchase an Iphone if bundle packages are competitively priced.
We should expect the 2 other telcos to come up with more competitive packages and prices to retain or win any potential customers in the face of Singtel's new competitive advantage.
Growth should be rather slow, however, given the nature of the sector, but stable. At below $3, the stock presents great value for long term holding. Afterall, we are looking at the dividends/yield of this stock, and the capital gains, secondary.
Sunday, June 14, 2009
REITs
UOB-Kay Hian has called a buy on Frasers Centrepoint Trust (FCT), Ascendas Reit and K-Reit Asia. Apparently, the optimistic view on this sector has been related to lower inflation and lower refinancing risks, despite falling rents.
REITs or Real Estate Investment Trusts, have been one of my areas of focus recently. Having bought in several REITs such as CapitaComm(CCT), Suntec, Saizen and K-reit, I feel that the diversity in commercial, industrial and residential properties that these REITs cover should be a good long term equity investment.
Properties never go out of 'style', and generally stable given the nature of property holding and investment. The next 2 years should see gradual growth in this sector as the economy recovers and derived/end demand returns. The low interest rate should also see people putting their money in other asset classes other than in fixed deposits, and one of these might be in the property market.
Last month, CCT and Suntec Reit announced that they had secured loan facilities of $160 million and $825 million respectively, so refinancing should not be much of an issue in the short term.
Furthermore, our local REITs will be buffered from the inflation from US's take on quantitative easing (printing cash) due to the strong Singapore dollar. The coming week will be an interesting one to see how the prices of Ascendas and Frasers go. Afterall, target prices from UOB-KH are $1.93 and $1.44 respectively. Could consider if the STI takes a dip.
REITs or Real Estate Investment Trusts, have been one of my areas of focus recently. Having bought in several REITs such as CapitaComm(CCT), Suntec, Saizen and K-reit, I feel that the diversity in commercial, industrial and residential properties that these REITs cover should be a good long term equity investment.
Properties never go out of 'style', and generally stable given the nature of property holding and investment. The next 2 years should see gradual growth in this sector as the economy recovers and derived/end demand returns. The low interest rate should also see people putting their money in other asset classes other than in fixed deposits, and one of these might be in the property market.
Last month, CCT and Suntec Reit announced that they had secured loan facilities of $160 million and $825 million respectively, so refinancing should not be much of an issue in the short term.
Furthermore, our local REITs will be buffered from the inflation from US's take on quantitative easing (printing cash) due to the strong Singapore dollar. The coming week will be an interesting one to see how the prices of Ascendas and Frasers go. Afterall, target prices from UOB-KH are $1.93 and $1.44 respectively. Could consider if the STI takes a dip.
Friday, June 12, 2009
GM Stocks Plunge After Shareholder Warning
11 June 2009
NEW YORK (AP) -- General Motors Corp. shares tumbled in over-the-counter trading Thursday after the automaker said that it is "highly unlikely" that its shareholders will be able to recover any of their investments when the company emerges from bankruptcy protection.
In morning trading, GM shares dropped 22 cents, or 13.8 percent, to $1.36, after falling to $1.28 earlier in the day.
The drop same after six-straight days of gains for the Detroit-based automaker, which filed for Chapter 11 on June 1 and was subsequently delisted from the New York Stock Exchange. In the last six days, GM shares have more than doubled to close Wednesday at $1.59.
"While GM does not control the market or its stock price, GM management strongly believes that any recovery for the common stockholders in the chapter 11 bankruptcy process is highly unlikely, even under the most optimistic of scenarios," the company said in a statement late Wednesday.
In a chapter 11 situation, shareholders generally only receive a return on their investment if all claims of the company's creditors are fully paid.
I sold my GM shares last night before the prices could drop below sub-normal profit levels. The bullish sentiments the previous few days had been probably related to positive sentiments about a new and leaner GM with the recent appointment of a new chairman. I had held the counter for a while, through the weeks when it had hit excess of $2, thereafter dwindling to the levels of $1 and subsequently $0.70 before the bullish weeks when it hit $1.60.
Though the sales might be seen as little late, I am glad I decided to recoup some capital before it got any worse. There is a possibility of course, that share prices might sustain and the stocks will continue to do well after a new GM emerges.
However, it is not a risk I'm willing to take as common shareholders after all, only get a share after everyone else receives theirs.
NEW YORK (AP) -- General Motors Corp. shares tumbled in over-the-counter trading Thursday after the automaker said that it is "highly unlikely" that its shareholders will be able to recover any of their investments when the company emerges from bankruptcy protection.
In morning trading, GM shares dropped 22 cents, or 13.8 percent, to $1.36, after falling to $1.28 earlier in the day.
The drop same after six-straight days of gains for the Detroit-based automaker, which filed for Chapter 11 on June 1 and was subsequently delisted from the New York Stock Exchange. In the last six days, GM shares have more than doubled to close Wednesday at $1.59.
"While GM does not control the market or its stock price, GM management strongly believes that any recovery for the common stockholders in the chapter 11 bankruptcy process is highly unlikely, even under the most optimistic of scenarios," the company said in a statement late Wednesday.
In a chapter 11 situation, shareholders generally only receive a return on their investment if all claims of the company's creditors are fully paid.
I sold my GM shares last night before the prices could drop below sub-normal profit levels. The bullish sentiments the previous few days had been probably related to positive sentiments about a new and leaner GM with the recent appointment of a new chairman. I had held the counter for a while, through the weeks when it had hit excess of $2, thereafter dwindling to the levels of $1 and subsequently $0.70 before the bullish weeks when it hit $1.60.
Though the sales might be seen as little late, I am glad I decided to recoup some capital before it got any worse. There is a possibility of course, that share prices might sustain and the stocks will continue to do well after a new GM emerges.
However, it is not a risk I'm willing to take as common shareholders after all, only get a share after everyone else receives theirs.
Thursday, June 11, 2009
Return of the bulls?
It was just over a week ago when I more or less decided to reap half of my portfolio returns. I was quite convinced that the STI will fall back to lower levels, though not to the level reached in early March. It was not until a few days back that I decided that it was not the risk I had wanted to undergo, and convinced myself to hold on to the counters, many of which were undervalued at the point of purchase. The new low, if it ever would to happen, won't justify a second purchase of the same counters.
I came across this fairly interesting business comment in the Today Newspaper on June 10 Wednesday. It is 'Bull-market story in the making?' by Matthew Lynn. In a nutshell, it has 4 logical arguments why this recent rally is not going to die down so soon, if it ever dies down.
Savings
People living on credit was one of the big reasons that led to the financial meltdown. It is stated that the US savings rate in April had jumped to 5.7%, the highest in 14 years. Households, much like banks, are repairing their balance sheets. Probably faced with the possibility of unemployment and further recession, people will want to save more. However with interest rates close to zero, it will bring greater value if the cash was placed in other assets like equities.
Inflation
According to the article, central banks around the world are following the policies of 'quantitative easing' aka printing money. Possible increases in inflation and the fear of it would cause people to convert their cash into other tangible asset classes that are able to sustain value. Equities will be something that can tide them over.
Takeover
The economies of Brazil, Russia, India and China are buying over businesses in the West, and they are willing to pay for them. This takeover boom will put a premium on these assets to be acquired, a factor which may push up the respective equity values.
Shareholders
Companies had various ways to raise capital: banks, bond markets, shareholders. They could even get a friendly private-equity firm to buy them out. In these few years following the meltdown, capital will be in short supply. Banks will not give out loans so readily. Shareholder importance, will hence, increase. Just look at the recent spate of right issues happening right here in SG, where companies seek to raise funds for debts and development. Increased shareholder significance will warrant greater dividends and stock prices.
Present portfolio in the US market is registering a loss of around 5%. It has been a rather bullish week for US stocks and I'm expecting it to hit an average loss of 3% tomorrow. Not touching them for the moment, as the small caps are picking up rather quickly and I have also expended my funds. We shall see.
I came across this fairly interesting business comment in the Today Newspaper on June 10 Wednesday. It is 'Bull-market story in the making?' by Matthew Lynn. In a nutshell, it has 4 logical arguments why this recent rally is not going to die down so soon, if it ever dies down.
Savings
People living on credit was one of the big reasons that led to the financial meltdown. It is stated that the US savings rate in April had jumped to 5.7%, the highest in 14 years. Households, much like banks, are repairing their balance sheets. Probably faced with the possibility of unemployment and further recession, people will want to save more. However with interest rates close to zero, it will bring greater value if the cash was placed in other assets like equities.
Inflation
According to the article, central banks around the world are following the policies of 'quantitative easing' aka printing money. Possible increases in inflation and the fear of it would cause people to convert their cash into other tangible asset classes that are able to sustain value. Equities will be something that can tide them over.
Takeover
The economies of Brazil, Russia, India and China are buying over businesses in the West, and they are willing to pay for them. This takeover boom will put a premium on these assets to be acquired, a factor which may push up the respective equity values.
Shareholders
Companies had various ways to raise capital: banks, bond markets, shareholders. They could even get a friendly private-equity firm to buy them out. In these few years following the meltdown, capital will be in short supply. Banks will not give out loans so readily. Shareholder importance, will hence, increase. Just look at the recent spate of right issues happening right here in SG, where companies seek to raise funds for debts and development. Increased shareholder significance will warrant greater dividends and stock prices.
Present portfolio in the US market is registering a loss of around 5%. It has been a rather bullish week for US stocks and I'm expecting it to hit an average loss of 3% tomorrow. Not touching them for the moment, as the small caps are picking up rather quickly and I have also expended my funds. We shall see.
Myths of investing part 2
Having taken a nice nap, I figured it was time to be back for more myths of investing. Having taken a glance at the SGX earlier on, I don't think there needs to be any adjustment for the day.
Myth #7 Strong economic growth and strong profit growth are good for stocks and poor economic growth and falling profits are bad
Generally true over the long term, but at cyclical extremes it is usually wrong and a big mistake. The crucial point according to the article is that stock markets are forward looking, so when data is really strong, due to strong economic data, the market has probably already factored it in. In fact, there may already be fear in the market about rising cost pressures and rising short term interest rates.
An interesting point to note in the article is the example of the bottoming out of the bear market in 2003, where global economic indicators were very poor and a general fear was off a "double dip" back into global recession. Despite this, stocks turned around, with better economic and profit news only coming later in the year.
Which leads me to relate to the present and I personally feel that markets would not dip back to sub 2000 levels (SGX) but continue from a slow upward climb to breach 2600 levels by end of 3rd quarter. That is..no major event further disrupting the recovery.
Myth #8 Strong demand for a particular product produced by a stock market sector should see stocks in the sector do well and vice versa
Nearly similar to #7, any good data for that sector should have already been reflected in the stock prices before the masses get hold of any news, which leads me to question the varying degrees of efficiency in the market, and whether it is actually possible to beat the market consistently. I shall attempt to touch on that in a later entry.
Myth #9 Having a well diversified portfolio means that an investor is free to take on more risk
Oliver comments that the common strategy to build up diverse porfolios less dependent on equities with greater exposure to things like hedge funds, commodities, direct property or infrastructure may in fact, cause the investor to avoid truly defensive asset classes such as government bonds. A diverse collection of risky assets apparently do not reduce overall portfolio risk but increase risk exposure overall, especially in the recent years and the global crisis, which basically affected most asset classes anyway.
Myth #10 Tax should be the key driver of investment decisions
Afterall, level of tax tapers off after a certain level of investment right? Hence, decisions to invest should be based on that. Probably to a certain extent, but the first priority should always be the value of the investment and the fundamentals of a company, not how much tax refund you can get.
Myth #11 Experts can tell you where the market is going
Bottom line: No one has a perfect crystal ball. Forecasts for economic indicators are useful but need to be treated with care. The key value in investment experts' analysis and forecasts is to get a idea on all issues surrounding the market and understand the general consensus. Experts are also useful in placing current events in their historical contexts, and this can provide valuable insights for investors in terms of market potential.
I was just telling my friend the other day that economic analysts basically were putting nothing across in the best way possible, because stock markets are volatile and no one can give a definite answer on how the market moves. It is afterall, just a prediction based on current values and information.
Ok, have finally touched on all the myths that the article has covered. Generally, these are pointers pointing toward market sentiment and crowd behavior, something commonly seen these days, especially in this so called 'bear market rally'. Just be careful and don't go too much with the crowd.
Myth #7 Strong economic growth and strong profit growth are good for stocks and poor economic growth and falling profits are bad
Generally true over the long term, but at cyclical extremes it is usually wrong and a big mistake. The crucial point according to the article is that stock markets are forward looking, so when data is really strong, due to strong economic data, the market has probably already factored it in. In fact, there may already be fear in the market about rising cost pressures and rising short term interest rates.
An interesting point to note in the article is the example of the bottoming out of the bear market in 2003, where global economic indicators were very poor and a general fear was off a "double dip" back into global recession. Despite this, stocks turned around, with better economic and profit news only coming later in the year.
Which leads me to relate to the present and I personally feel that markets would not dip back to sub 2000 levels (SGX) but continue from a slow upward climb to breach 2600 levels by end of 3rd quarter. That is..no major event further disrupting the recovery.
Myth #8 Strong demand for a particular product produced by a stock market sector should see stocks in the sector do well and vice versa
Nearly similar to #7, any good data for that sector should have already been reflected in the stock prices before the masses get hold of any news, which leads me to question the varying degrees of efficiency in the market, and whether it is actually possible to beat the market consistently. I shall attempt to touch on that in a later entry.
Myth #9 Having a well diversified portfolio means that an investor is free to take on more risk
Oliver comments that the common strategy to build up diverse porfolios less dependent on equities with greater exposure to things like hedge funds, commodities, direct property or infrastructure may in fact, cause the investor to avoid truly defensive asset classes such as government bonds. A diverse collection of risky assets apparently do not reduce overall portfolio risk but increase risk exposure overall, especially in the recent years and the global crisis, which basically affected most asset classes anyway.
Myth #10 Tax should be the key driver of investment decisions
Afterall, level of tax tapers off after a certain level of investment right? Hence, decisions to invest should be based on that. Probably to a certain extent, but the first priority should always be the value of the investment and the fundamentals of a company, not how much tax refund you can get.
Myth #11 Experts can tell you where the market is going
Bottom line: No one has a perfect crystal ball. Forecasts for economic indicators are useful but need to be treated with care. The key value in investment experts' analysis and forecasts is to get a idea on all issues surrounding the market and understand the general consensus. Experts are also useful in placing current events in their historical contexts, and this can provide valuable insights for investors in terms of market potential.
I was just telling my friend the other day that economic analysts basically were putting nothing across in the best way possible, because stock markets are volatile and no one can give a definite answer on how the market moves. It is afterall, just a prediction based on current values and information.
Ok, have finally touched on all the myths that the article has covered. Generally, these are pointers pointing toward market sentiment and crowd behavior, something commonly seen these days, especially in this so called 'bear market rally'. Just be careful and don't go too much with the crowd.
Myths of investing part 1
My dad, who has a bigger porfolio (not necessarily more diverse though) told me once to predict what most common investors were up to, basically their sentiments, and then make decisions based on what might not be a herd instinct. I had never really gotten hold on the point he was trying to make, but an article in The Business Times on 10 June clarified some doubts that I had.
This article is called 'Myths that stand in the way of investors' by Shane Oliver. The 11 myths he has stated make much sense, and provides me much needed insight into equity and sentiments.
Myth #1 High unemployment will prevent an economic recovery
As interest rate falls, the boost to household discretionary income from lower mortage bills, tax cuts or stimulus payments will offset the fear of unemployment for the bulk still employed, and consumption will then pick up from there. As we all know, consumption boosts output and derived demand. One good point to note here is that share markets normally lead economic recoveries, and a peak in unemployment comes a long time after shares have bottomed.
Myth #2 Business won't invest when capacity utilisation is low
Cap utilisation is low in a recession simply because consumer and business spending (investment) is weak. With a pick up in demand, profits go up and drives a increase in business investment which leads to increase in capacity utilisation. An increase in demand maybe in the later part of the year may lead to increased investment although production plants may still be idle.
Myth #3 Corporate CEOs, being close to the ground, should provide a good guide to where the economy is going
It is pretty interesting how some papers and financial annuals publish 'insider movements', on the various purchases and sales of the big shots in the company, and in previous books I've read, following closely insider movements might be a good way of learning which way a company is going. According to Oliver, these people are often overwhelmingly influenced by their own sales figures and have no particular lead on the future. This does not mean though, that their comments are worthless, but should be seen as telling us where we are rather than where we are heading. This is right, for one can never base our decisions on the actions of a few, whose investing goals might be significantly different from us, not to mention the massive amounts of capital we lack.
Myth #4 The economic cycle is suspended
I have always been a firm believer of business cycles, because simply what goes up will eventually come down and vice versa. It is just simply the mechanisms of business interest and consumer sentiments working the demand and supply, which determines the peaks and troughs. Oliver states that 'new eras of prosperity' and 'continued tough times' are common talk when the extremes of both states of the economy are reached. However, history has shown us otherwise. This has also been one of my pillars of confidence behind some of my more risky investment decisions.
Myth #5 Crowd support for a particular investment indicates a good thing
It's a 'safety in numbers' concept that investors have in mind when they put their money in an equity that everyone else has their capital in. This approach is a trap. The reason being, if everyone is bullish about a certain stock, there will be no one left to buy when there is more good news, but there is plenty to sell if some bad news hit. 'Investors' who do this usually base a lot on sentiments rather the actual value of a stock, and I feel this might be the reason how big players manipulate a counter, using market sentiment and media exposure of certain equities, and pull the plug when the time comes. Another reason why sentiment is never a good basis of choice to invest.
Myth #6 Recent past returns are a guide to the future
The difficulty in processing information, short memories and wishful thinking, recent poor returns are assumed to continue and vice versa for strong returns. This, combined with the problem of 'safety in numbers' will result in investors getting into the markets at the wrong times: buying high and selling low.
I shall continue with the rest of the myths in my next posting, probably in the evening after the SGX closes and before the US market starts business.
This article is called 'Myths that stand in the way of investors' by Shane Oliver. The 11 myths he has stated make much sense, and provides me much needed insight into equity and sentiments.
Myth #1 High unemployment will prevent an economic recovery
As interest rate falls, the boost to household discretionary income from lower mortage bills, tax cuts or stimulus payments will offset the fear of unemployment for the bulk still employed, and consumption will then pick up from there. As we all know, consumption boosts output and derived demand. One good point to note here is that share markets normally lead economic recoveries, and a peak in unemployment comes a long time after shares have bottomed.
Myth #2 Business won't invest when capacity utilisation is low
Cap utilisation is low in a recession simply because consumer and business spending (investment) is weak. With a pick up in demand, profits go up and drives a increase in business investment which leads to increase in capacity utilisation. An increase in demand maybe in the later part of the year may lead to increased investment although production plants may still be idle.
Myth #3 Corporate CEOs, being close to the ground, should provide a good guide to where the economy is going
It is pretty interesting how some papers and financial annuals publish 'insider movements', on the various purchases and sales of the big shots in the company, and in previous books I've read, following closely insider movements might be a good way of learning which way a company is going. According to Oliver, these people are often overwhelmingly influenced by their own sales figures and have no particular lead on the future. This does not mean though, that their comments are worthless, but should be seen as telling us where we are rather than where we are heading. This is right, for one can never base our decisions on the actions of a few, whose investing goals might be significantly different from us, not to mention the massive amounts of capital we lack.
Myth #4 The economic cycle is suspended
I have always been a firm believer of business cycles, because simply what goes up will eventually come down and vice versa. It is just simply the mechanisms of business interest and consumer sentiments working the demand and supply, which determines the peaks and troughs. Oliver states that 'new eras of prosperity' and 'continued tough times' are common talk when the extremes of both states of the economy are reached. However, history has shown us otherwise. This has also been one of my pillars of confidence behind some of my more risky investment decisions.
Myth #5 Crowd support for a particular investment indicates a good thing
It's a 'safety in numbers' concept that investors have in mind when they put their money in an equity that everyone else has their capital in. This approach is a trap. The reason being, if everyone is bullish about a certain stock, there will be no one left to buy when there is more good news, but there is plenty to sell if some bad news hit. 'Investors' who do this usually base a lot on sentiments rather the actual value of a stock, and I feel this might be the reason how big players manipulate a counter, using market sentiment and media exposure of certain equities, and pull the plug when the time comes. Another reason why sentiment is never a good basis of choice to invest.
Myth #6 Recent past returns are a guide to the future
The difficulty in processing information, short memories and wishful thinking, recent poor returns are assumed to continue and vice versa for strong returns. This, combined with the problem of 'safety in numbers' will result in investors getting into the markets at the wrong times: buying high and selling low.
I shall continue with the rest of the myths in my next posting, probably in the evening after the SGX closes and before the US market starts business.
Why I'm starting this...
My very first post at My Investor Info begins on a beautiful Thursday morning in the second week of June, somewhere near the middle of the long term break from school. The motivation for starting this blog comes from the thought of compiling useful information regarding equities and investing that I have read into a space where I can constantly refer to.
Essentially, I'm starting this to function as a notebook of investor and financial information, minus the glue and paper. I figured it would help me sort out my thoughts and remember better if I write it down.
Having only started in equity investing late last year after the financial system gave way, I am still pretty much a greenhorn in this area trying to learn as much as I can. Along the way, I'll be roping in the help of other like-minded friends in contributing to this blog. Hopefully, this collection of information can help us to become more informed investors.
I have always believed that investing is a necessary way of life and not just seen as something optional or like what some people say, gambling. It is only gambling if you do not know what you are doing. I have the strong belief that everyone who has the extra cash should seriously consider investing as it is one of the strongest ways to grow your wealth for a better future.
Ok, I shall start for good on the next post! Happy investing!
Essentially, I'm starting this to function as a notebook of investor and financial information, minus the glue and paper. I figured it would help me sort out my thoughts and remember better if I write it down.
Having only started in equity investing late last year after the financial system gave way, I am still pretty much a greenhorn in this area trying to learn as much as I can. Along the way, I'll be roping in the help of other like-minded friends in contributing to this blog. Hopefully, this collection of information can help us to become more informed investors.
I have always believed that investing is a necessary way of life and not just seen as something optional or like what some people say, gambling. It is only gambling if you do not know what you are doing. I have the strong belief that everyone who has the extra cash should seriously consider investing as it is one of the strongest ways to grow your wealth for a better future.
Ok, I shall start for good on the next post! Happy investing!
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