Risky Investment?

I went to a local bank to place a 12-month fixed deposit to take advantage of their promotional rate of 1% p. a.  The gentleman serving me kindly recommended some other alternative options to gain a slightly higher return.

One option is to place the money in a structured deposit, which will give out returns as follows:

1st Year 1.4%
2nd Year 1.5%
3rd Year 1.6%
4th Year 1.7%
....

If you average out all the years, the effective return is ~2% p. a.  I thanked him for recommending this option to me, but I stated that I was not interested.  The return is too unattractive.  I told him that a 10-year Singapore Government Bond has a return of 2.45%.   Then his argument kind of surprised me.  He said bonds are risky investment, compared to the structured deposit that he is offering, which is totally risk-free.

I had nothing to say if someone claims that Singapore Government bonds are more risky than a Singapore bank's structured deposit!

I feel lucky that I had spent the time and effort to learn all the basics of finance, and the nature of different investment instruments.  As a result, I am not at the mercy of ill-informed RMs, or even worse, dishonest RMs.

Real Estate Bubble?

There has been quite a lot of talk of a real estate bubble in the brew in Asia for some time, but it has never come to me that it would be this heuristic until I read this blog post from a fellow Singaporean investor.

To my limited knowledge, I only knew that we could at best borrow 100% of the value of the property from any financial institution.  Years ago, a Malaysian property expert once told a small group of people that the banks are your best friends, as they will finance your debt, you only need to pay 5% of the value of a property, and the bank will take care of the rest.

At 120% loan ratio, of course people can buy a lot more properties and they will do very well under a very low interest rate environment.  What if the rates go up?  What if there are too many properties available for rent, everyone is a owner and everyone is looking for a tenant?

There are arguments to say that if there is another financial crisis in Asia, then anyway the interest rate will continue to remain low, and some governments will continue to print more paper money to devalue their currency.  In that case, real estate will only become more expensive in local currency terms, and you can preserve the purchasing power of your hard earn money.  It is much better than putting your money in the bank to depreciate every single day.  The fallacy of such an argument is that under that scenario, would you still be able to find a tenant who will pay a rent that can cover your mortgage?  In the worst case scenario, can the rent cover both the mortgage and your & your family's living expenses?  

Elliott Waves on DJIA

In my previous post, I mentioned the DJT indicates that we will still have some room to move upwards in DJIA.  This week, we will take a look at DJIA with Elliott waves.

This is the 5 waves that I marked on DJIA.  It seems like we are already at the end of wave5.  That means we are towards the end of the up cycle and should expect some correction.  However, anyone with some basic knowledge of Elliott waves should be able to tell that my marking is wrong, especially for wave3.  It is the shortest of 1, 3, & 5 in the chart, so my marking is invalidated.  Then where are we now?  I will guess we are somewhere in wave3, ie, we are still in the middle of a growth cycle.  We still have some room to move up, assuming March 2009 is the beginning of the new up cycle.

In this exercise, I also find that Elliott wave theory is fantastic, but just as what we say about the Mathematicians, they always tell us something that is true but useless.  While we are in the wave, we couldn't tell with great confidence where we are; by the time we are able to tell and demarcate the different waves correctly, the show is already over.  Money to be gained has been gained, money to be lost has been lost.  Marking the Elliott waves correctly on hindsight doesn't benefit us, and history will repeat itself anyway.

Risk Management

In investing, risk management is always an integral and important part of investing.  We know we must always have your stop-loss ready, even before you enter a trade.  You can have no profit target, but you cannot have no stop-loss.  That's how important a stop-loss is.  And more importantly, you must stick to your stop-loss.  When it is time to sell, you have to sell, no matter what!  There is no what if, there is no this time it is different, there is no let's wait and see.

However, it is always said than done.  What I witnessed today is stunt reminder to how we evaluate risk.
Look at this screen capture.

The shares of Mosaic Co, a fertilizer manufacturer, droped USD$11.00!  Actually it dropped as much as USD$12.00 at market open.  $12 over a $50 stock, that's more than 20% drop!  In such a scenario, how do you handle your risk?  How do you handle your stop-loss?  Do you sell immediately suffering a large loss?  Do you hold to understand what has caused the sharp fall?  What will you do?  As an investor, you must prepare yourself for such an unexpected event, have a contingency plan ready before you enter the trade.

Remember:  Rule #1 of Investing is NEVER lose money.  Rule #2 is never forget Rule #1.

Outlook for DJIA, DJT, SSE & STI

It has been quite a while since my last blog post, now it is time to brush up and do my homework.

Stock Indice around the world has seen some good days recently, especially Dow Jones Industry, S&P and the phenomenal Nikkei.  In contrast, the all mighty Shanghai and Singapore stock markets are nothing but a bit lackluster.

What will happen next?  Obviously I won't know for sure, but let me look into my crystal ball and have my opinion.  Are they right or wrong?  Nobody knows, only when future becomes reality then we will be able to tell, so read my opinions at your own risk.

Dow Jones Instustry Average

We can see very clearly here DJIA is in an uptrend.  The slope of the uptrend actually has increased recently, from a gentle 30 degrees slope to a more steep close to 45 degrees slope.

Looking at the Fibonacci levels, we can expect DJIA to have another 20-30% upside potential, if not more.  US stocks in general are not expensive at this moment, with reasonable P/E levels.  Although we are again at an all time high of DJIA, but we are not seeing P/E at ridiculously high levels.

Dow Jones Transport

As a leading indicator of DJIA, DJT will give a glimpse into the future.  Here DJT is in an uptrend too, but the uptrend is not very strong.  The slope has been more gentle, and there is compression of the GMMA.  This signals we may have some head winds in the DJIA in the coming months, but the uptrend should still hold, but at a more gentle pace.

Shanghai

Shanghai is in a downtrend, with 1960 as its current support.  If this support level doesn't hold, we can expect to go down to 1837/1760 as its next support levels.

In the short term, I don't have a positive view on Chinese stocks.  Wealth is too concentrated in too few people.  The general public are still not very rich, at least not as rich as some foreign media depict them to be.  The reason some Chinese appear to be rich is because they do the same as some Wall Street bankers do.  When you go out of the big cities and visit their less developed areas, people are still very poor.

Singapore

STI was in a nice uptrend, until recently.  Now it has fallen below its uptrend line.  Next, I will expect it to either go sideways or down.  Singapore alone is still ok, but its strong link with China will see its stock market to be dragged down by the poor performing SSE.

That's all for my crystal ball for today.

Mind Your Land Banking Investment

It is reported in today's news that Edgeworth Properties, a Canadian land banking company, has filed for bankruptcy protection.

Edgeworth came to the InvestFair at Suntec around 2009/10, and they were marketing their land banking investment to Singapore investors at that time.  Each plot of land went for around US$10,000.  Their land is in the province of Alberta, a province thriving with activities of oil sands.  I was quite tempted to make that investment at the time, but then based on the principle that don't put all your eggs in the same basket, and considering I already have one land banking investment and still yet to see any good outcome, I decided not to.

Looking back, it was really lucky that I didn't make that investment, otherwise, my money might be gone by now.

The moral of the story is that:  If you want to invest in something, make sure you have some good knowledge about what you are investing, and must know the company that you are dealing with.  Well, you can never be 100% sure, but then at least it will help you minimize your potential loss.

Happy investing! 

Invest Wisely in 2012 with Dr Alexander Elder

This morning, I attended an investment seminar with Dr Alexander Elder at Marina Bay Sands Convention Center.

Dr Elder shared with the audience some interesting perspectives.

1. Valuing  shares is like valuing your house.  How do you know what price your apartment can command?  Probably you will look at the price of the one above your floor, the one below your floor, and then you take an average of the two.  Moving average is like the average of your house price.  If share price is above the moving average, then you know now it is above its value.  Quite an interesting analogy.

2. When looking at a stock, always look at it in 2 time frames, for example, weekly & daily charts.  Use weekly chart to get the big picture, then daily chart for buy/sell decision.

3. Risks:  Information risk vs money risk.  Information risk refers to information on which direction the stock will go; money risk refers to your target price and stop-loss price and size.

4. We are now in the early phase of the 3rd stage of the recovery story.  This is the best stage and stock prices will soar.

There were other presenters at the seminar too.  One is Mr Joshua Tan from Phillip's Security.  He depicted a gloomy picture of 2012, reason being Euro Zone's debt crisis, China's slow down, and the fake American recovery.  In Mr Tan's opinion, the good news coming out from USA has already peaked.  QE3 will come no matter what.

The seminar came at a price of S$48 at the door, S$38 if you purchased the ticket online.  There are many other options, including a bring-a-friend price of S$18.  For me, I paid S$28 after a S$10 discount by Phillip's Security.

This seminar definitely is interesting, but at S$28, it is slightly on the high side of cost.  Anyway, my objective is just to see Dr Elder in person and listen to his talk.  Objective achieved :)

Singapore's Savings Account Interest Rates

As we ushered in the new year, we also ushered in a new low in savings account interest rates in Singapore.  A check on the 3 major local banks, DBS, OCBC & UOB, the interest rates for savings accounts are uniformly low at 0.05%, this is down from last year's 0.15%.  This is when SIBOR is at 0.3%!

Considering inflation of 5%, and ~3% if you exclude private transport and housing, the 0.05% savings account interest rate is still way too low for any meaningful preservation of purchasing power.  

Stop Loss

When I opened the financial page this morning, the first thing is Dow Jones Industry Average has gone down more than 600 points.  Before I went to bed last night, it was only down around 300 points, at some time, there was even some sign of recovering.

In such times, it shows how important it is to have a plan, know your stop-loss price and execute your trade according to the plan.  The purpose of a stop-loss price is there to protect you.  The stop-loss tells you that your original judgement had been a mistake under the current market condition.  It tells you maybe you are on the wrong side of the table, so better jump out quickly and join the right side.

There should be no hesitation whether to execute your sell order or not once your stop-loss is hit.  Use Nike's slogan, JUST DO IT!  Nobody will know for sure after you sell your shares, whether it will quickly rebound or fall further, but it is to prevent the worst case scenario.

Happy investing.

Best Savings Account Interest in Singapore

The current environment is the super low interest environment.  I have just checked, DBS/POSB, OCBC & UOB, all three local big brothers in banking are offering savers a pathetic 0.1% pa on their savings accounts for their first S$50,000.00, and then slightly higher after that.

Standard Chartered bank offers its e$aver account holders 0.15% pa on their savings accounts, which is 50% higher than all the 3 local banks, sounds good in percentage huh, but not really in absolute terms.

Maybank is offering its savers 0.1875% for the first S$5,000.00, then 0.3% from S$5000 to S$50,000.00.

Then it comes Plus! U, a collaboration between NTUC and OCBC.  This savings account does not offer you any over the counter services, everything is done through internet banking.  As such, this savings account offers you, again, slightly better interest, 0.2% pa for the first S$50,000.00, then 0.4% after that.   The good part about this is that, they also give you a credit card, which you can use as an NTUC link card and membership card.  You can get rebates from your purchases at Fairprice, and ear Link points.

The ultimate best savings account should be CIMB's StarSaver account.  It gives you 0.8% pa if your month-end incremental deposit is S$500 or more; and 0.5% if less than S$500.  This sounds really good, but then the downside is that they only two branches in Singapore, both are far away from me.

Singapore's inflation is going up, ~5% based on January's data.  The core inflation, which excludes private transport and housing costs, is still around 2-3%.  Even at the low core inflation rate, the real saving account interest rate is negative!  You are losing money every single minute you lend the banks your savings.  Singapore always tames inflation by controlling the sing dollar's exchange rate, but not much on the interest rate.  I think it is high time MAS raised the interest rate too, in order not to blow a bubble and penalizing the diligent savers!

As you can see from the savings account interest rates, none of them is even close to what the inflation rate is. This low interest environment is going to force lots people to seek better returns elsewhere, and stock market is one place people can think of.

Redemption of DBS 6% NCPS

As I flipped through Friday's TODAY newspaper, there was this announcement of the redemption of DBS Bank 6% Non-Cumulative Preference Shares.

I have been holding these shares since 2008, at the height of the Singapore stock market.  Subsequently, I saw its descend from S$110 to below S$100, and now back up a bit to ~S$102.  This has been my largest loss-making counter, if the dividends are not counted.  According to the share's prospectus, the dividend rate for this preference share will go down from 6% pa to 2.23% + 3 mth SIBOR after May 2011.  At the current low interest environment, with SIBOR at 0.44%, and bank savings interest at 0.1%, the 2% + interest is still not too bad.  But now even that is not possible.

You can check out more details here.

Good luck to your investments.

Standard Chartered's 24-Month Step-Up Interest Time Deposit

In recent years, the interest rate on savings account has been dismal.  Same goes for fixed deposits.  The prevailing interest rate for savings account is a great total of 0.1% p.a., it looks so pathetic in an environment of 5.5% inflation rate!  

Anyway, good company with good dividends actually can give you much better returns, but if you are the super safe, risk-averse type of person, then maybe you should consider this 24-month step-up time deposit offered by Standard Chartered Bank.  

Basically you need to deposit a minimum of S$10,000.00, then the money will be locked in for 3 months, at an interest rate of 0.5% pa.  Interest will be paid at the end of 3 months.  If you decide to withdraw your deposit within the first 3 months, you have to pay a penalty of S$250.  After the first 3 months, you will be free to withdraw at any time, without paying the penalty (but you may lose your interests earned since the last interest payout date).  

For details, you can take a look at their interest table here.  Please note that if you leave your money in this account for the full 24 months, you will get an effective interest rate of only 1.025% pa.  This is way higher than the savings account interest, but then still way below the inflation rate.  This account will not help you beat inflation, this account is only good for you to park some of your unused funds temporarily, without losing too much to inflation.  

25% Cash Machine

Title: 25% Cash Machine
Author: Bryan Perry
Publisher: John Wiley & Sons, Inc 2007

In this environment of super low yield, investors are constantly looking for high yield and safe investments, in place of the traditional safe but low yield investment products.

The book was published back in 2007, a year before the arrival of the great recession in the states, as a result, some of the investments do really look very favourable, high yield although they are, their prices have come down by more than half.  However, this book is still quite an eye opener, opening your door to a new world of high yield investment.   Some of the investment principles are still valid in this post crisis world.

It is a book worth reading.

Mastering Trading Stress - Strategies for Maximizing Performance

Title: Mastering Trading Stress - Strategies for Maximizing Performance
Author: Ari Kiev
Publisher: John Wiley & Sons, Inc

It is a book on the psychology size of trading.  The author examines the different aspects of trading stress, the common mistakes traders make.

Although it is a rare book on trading psychology, the author spends too big a portion of the book on case studies, and the case studies are mostly conversations between the author and the trader in question.

In the last two chapters of the book, the author introduces some practical tips that you can apply to manage your stress.

SIA 2.15% 5-Year Corporate Bond

SIA for the very first time in Singapore's history to issue corporate bonds to retail investors, at a much lower capital requirement.  The minimum investment sum has been reduced from the normal S$250,000.00 to a mere S$10,000, with applications in increments of S$1000.

In terms of return, the bond yield is really low, it is only 2.15%.  Mind you, the official inflation rate for the past quarter in Singapore is ~3.5%.  This means the bond yield is not even enough to cover the depreciation by inflation, but then if you compare with the interests the banks give out to your savings accounts or fixed deposit accounts of less than 1% pa, it is still much better.  It is no surprise then the bond issue is still very very hot.  I applied for 10,000 units, but I got none!  This means there are many people out there with some cash savings looking for more decent yield.

What this reflects will be something interesting to ponder.  Happy investing :)

The Little Book That Builds Wealth

Title: The Little Book That Builds Wealth
Author: Pat Dorsey
Publisher: John Wiley & Sons, Inc 2008

This book is one of the The Little Book series from MorningStar.  A large portion of the book is dedicated to finding the economic moats of companies.  It opens new perspective of looking at companies.

Then the book dedicates some small portion on how to identify companies with moats, how to do valuation, and the most important aspect of good investment - sell at the right price!

It is a good book for any potential investor.  If you don't want to read the book, you can take a peek at the book's website:  http://www.findingmoats.com.  You can make sure of their free service on finding companies with moats.

Happy investing!

A Failed Hedging Strategy Using VXX

I mentioned about using VXX as a hedging instrument in this blog entry, as well as detailing the pros & cons of VXX.  I personally have tried out the strategy and find that VXX is very leaky ETN.  As it was pointed out by the market expert, the ETN holds short-term options expiring in 1 month and 2 months.  When VIX drops, these options become worthless and the ETN loses money.  At the same time, in order to track the VIX, the ETN has to pay a higher price to buy new options expiring in the following 1 month and 2 months.

In the scenario where S&P 500 goes bullish and continues to rise, the VXX ETN will continue to lose investor money, at a faster pace than the fall of VIX.  Even if VIX does not drop, for example, VIX hovers at around 22 points for a few months, the VXX will not be able to hold at around the same price for a few months.  Instead, it will continue to drop, even though VIX holds.

Applying the buy and hold strategy to VXX is akin to committing a financial suicide.  Your money will leak continuously.  You will be better off not buying any VXX at all.

However, does it mean VXX is no-touch ETN?  Not really.  If the market expects volatility go up, it is ok to buy some VXX to ride on the rise of volatility, but once volatility starts to fall, you must be ready to sell off all your VXX holdings, otherwise, it will hurt you, and hurt you very badly.

Using VXX as A Hedge

There are many different ways to hedge your portfolio, in this blog entry, I will discuss the pros and cons of using  the iPath S&P 500 VIX Short-term Futures ETN as a hedge.

First, the meaning of ETN.  ETN, just like ETF, means exchange-traded NOTES.  Basically is a financial derivative instrument using options.  You can take a look at their profile at Yahoo! Finance.

Then we look at the pros.  As it is an ETN, it closely tracks the movements of the CBOE's VIX.  In general there is about a 2 points difference between the price of VXX and the VIX index.  VXX is also traded like any other stock in the stock exchange.  You can easily buy and sell the ETN without any complicated actions to take other than your normal buy & sell.  VXX provides you a means to hedge with great convenience.

However, everything comes at a price.  VXX has its flaws too.  There is a more detailed write-up on why you should not use VXX as a long term hedge here.

Know you are doing and happy investing!

Nikkei 225 Update

In my previous update on Nikkei 225, we observed the continuation of the down trend in the Japanese index.  Today, that down trend is even more obvious strong.  Today, Nikkei 225 finished at 8995.14, which is below the 3-time tested support level of 9072.  This is not really a good sign for the long investors.

The oscillator has shown the index is in oversold area, which means some technical rebound should be expected.  If there is indeed a technical rebound, it will be a good opportunity for people who still have Japanese shares to unload at a better price.  It will also be an opportunity for the short sellers to short the market at a better price.  The down trend in Nikkei 225 is intact.  There might be a chance for it to even test the March 2009 low.   Would it happen?  Let's wait and see.

Happy investing!

Getting Started in Options

Title: Getting Started in Options
Author: Michael C. Thomsett
Publisher: John Wiley & Sons, Inc 2010

This book is like one of those 'dummy' series of books on how things work.  It is really down to the very basics of options trading, explaining all that jargons, the conventions, and most important, the strategies and risks.

It is eye-opening for someone who has never traded options before.  There are many established strategies and they are so interesting.

I will definitely recommend this book to whoever wants to have some exposure to options.

In addition, this book emphasis on the importance of paper trading, before getting your hands wet in the real options trading.  Many might be tempted by the great profit potentials options offered, whilst overlooking the grave risks involved.  Options is a complex investment instrument, and if used wisely, it will boost your wealth significantly, but it can hurt your as well.

The author recommends using the paperTrade platform, free of charge, offered by the Chicago Board Options Exchange (CBOE).  This virtual trade platform lets you get a feel of options trading.  The trading environment is the same for real trading, except the money you use is virtual, can carries no real value (of course, your risk is virtual, too).