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"E-book" by AK

Second "e-book".

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Create more passive income with limited capital.

Saturday, May 29, 2010

I have blogged about how Warren Buffet is a "know something" investor whereas I started out as a "know nothing" investor to being a "know a bit more" investor and, now, a "know a bit more than a bit" investor. Warren Buffet buys a lot of something which he thinks is a winner whereas for the rest of us it seems that diversification is the way to go. See: Excuse me, are you an investor?

Obviously, as is seen in my blog's header, I am more interested in building a reliable passive income stream than anything else. So, yield is a big thing for me and REITs naturally have a role to play in my strategy.

The meltdown in the global stock markets after the Lehman Brothers crisis shocked me out of complacency and into action, action which saw me beefing up my FA and picking up TA. I refused to be beaten and I was furiously reading and updating my knowledge, reviewing my past mistakes and planning for the future. 

REITs are a big part of my portfolio and they gave me much angst during the crisis. I also blogged about the lessons learnt. See: High yields: Successes, failures and the in betweens.

I went on to accumulate more units in REITs which met my selection criteria and currently the top three holdings in my portfolio are REITs.  They are Saizen REIT, AIMS AMP Capital Industrial REIT and LMIR.  These are all trading at big discounts to their respective NAVs, they have low gearing (or in Saizen REIT's case, lowered gearing) and high yields (or in Saizen REIT's case, potential high yield).

I was not a unitholder of Saizen REIT when they recapitalised.  I do not have any historical baggage.  I only looked at the numbers in mid 2009 and decided that there was immense value and that there was potential for a very high yield when income distributions resume. Today, the fundamentals have improved and my opinion has not changed. Persistent insider buying suggests a high level of confidence that the REIT is undervalued and that income distribution will resume as promised.  I also like the fact that Credit Suisse is now a major unitholder of the REIT.  See: Saizen REIT: 3Q FY2010 results.

I was a unitholder of MI-REIT and I was not very pleased with the recapitalisation package proposed late last year but I recognised that it was the best way to strengthen the REIT as there were no other viable alternatives (even though the CEO of CIT claimed there was). The renamed REIT is stronger in its balance sheet which is the most important thing in any business, in my opinion.  Why bother objecting to the recapitalisation plan on the grounds that unitholders' equity would be heavily diluted if the balance sheet remained terminally ill? The renamed REIT has the lowest gearing for industrial property REITs in Singapore now, next to the new kid on the block, CLT.  See: AIMS AMP Capital Industrial REIT (MI-REIT).

I have always been a unitholder of LMIR and I stayed positive on the Indonesian economy through the crisis. LMIR's very low gearing means there is little chance of it going to unitholders for funds. In fact, it has more room to gear up if there should be yield accretive purchases available. Even though some might be unhappy with a lack of growth in dpu in the current timeframe and how the forward hedging of the Rupiah/S$ exchange rate does not allow dpu to benefit from the stronger Rupiah, I remain sanguine about the situation largely because this REIT is still delivering a very healthy yield in excess of 10% at the current price. See: LMIR: More units at 10% yield.

Recently, some suggested that I might be overexposed to REITs.  In my usual way, I told them that it really does not matter to me if something I am investing in is a REIT or a company as long as it is able to satisfy certain criteria I have of which high yield is one. I rather concentrate my limited resources on a few good REITs than to spread out over tens of REITs and companies for the sake of safety through diversification.  I think Warren Buffet got it right to concentrate rather than diversify, in such an instance.

Many bloggers are quite comfortable revealing how much they receive in dividends on a monthly basis. I am somewhat less open but I will say that in the month of May, a big chunk of my dividends came from LMIR.  In the month of June, I am expecting a similar amount of income distribution from AIMS AMP Capital Industrial REIT.  Between LMIR and AIMS AMP Capital Industrial REIT, the annualised income distributions I receive could be as much as 4x my monthly salary. It is like getting 4 extra months of bonus every year. You like the idea? I do too.

Things should get better from here as from the month of September, income distribution from Saizen REIT would add to my passive income stream. I might just stop trading the market and sit back, relax and let the passive income stream in.  Of course, it remains to be seen if my calculations as to Saizen REIT's potential income distribution would come to pass.  See: Replies from AK71: All things Saizen REIT.

I remember watching and very much enjoying a cooking program in my teenage days, "If Yan can cook, so can you!". Now, I say to anyone who wants to create more passive income with limited capital, "If AK71 can do it, so can you!"  See: Seven steps to creating passive income from the stock market.

19 comments:

Createwealth8888 said...

You said:" the annualised income distributions I receive could be as much as 4x my monthly salary." You may have limited limited capital as most investors do; but I don't think your capital is small. :-)

AK71 said...

Hi CW,

Everything is relative. You are right, of course. That is why I did not reveal any numbers in $ terms. :-)

Whatever his monthly salary, I believe that anyone can achieve from the stock market a passive income equivalent to a few times his monthly salary if he has been saving and investing "correctly" and reinvesting. It takes only 7 steps. ;-p

Royston said...

Hey AK,

Wow...4 months pay worth of dividends, that's pretty impressive! Hopefully i can work towards that as well! :)

AK71 said...

Hi Royston,

I am sure you will achieve more in time. It is not difficult. Just needs the right mindset and the right approach. Kampatei! :-)

Mao Mao said...

Hi AK71,

I'm still not comfortable/confident with Saizen's "confirmed" dividend distribution. Are you speculating that Saizen dividends are coming soon? If so, will Saizen be distributing dividends on a regular basis after its first celebratory payout in mid 2010? I calculate intrinsic value based on the stock's consistent and predictable dividend payments (e.g. Starhill Global, Suntec, etc).

AK71 said...

Hi Mao Mao,

Of course, if there is a past history of consistently good performance, it would inspire confidence but one must remember that there is really no absolutes. Past performance is not a guarantee of similar future performance which could also mean that past failures do not preclude success in future.

I look at past data but I try to be forward looking too in my analyses and make logical (but not absolute) conclusions.

Saizen REIT will resume income distribution. This is a given. It is not speculation. The first distribution in a long time will take place in September 2010 and then quarterly from then on.

You can see my calculations in "Replies from AK71: All things Saizen REIT". :)

Anonymous said...

Hi AK,
I like this post very much, informative, clear and concise. A good investment guide to many of your readers.
Do keep it up.
Thank you.

Cheers
KL

AK71 said...

Hi KL,

Some think that making money from the stock market requires trading frequently. This, as we know, is not necessarily the case.

If this post is helpful in anyway to anyone, I am glad. You are welcomed. :-)

Createwealth8888 said...

If you are making a living from the market, you need to have income from the market as frequent as possible; otherwise, there will be no food on the table.

If you are building future wealth from the market, then it is a different ball game.

AK71 said...

Hi CW,

If a person is making a living trading the stock market full time, I expect that he should have a sizeable capital. If he has very little capital and he depends on his gains from trading to put food on the table, a prudent thing to do is to find a salaried job. ;-)

If a person is able to create passive income from the stock market equivalent to 12x his monthly salary, theoretically, he could stop working and still be able to put food on the table and more. I know people who have achieved this and this is also my goal.

Of course, there are many roads to Rome. Each one of us would choose the road we know best. :)

Andrew Hallam said...

I enjoyed your post. This is the first time I'm visiting your site, and I'm very impressed with the readers' contributions as well.

Here's a question:

How dangerous do you think reaching solely for yield is? I'm more interested in holding every sector, just in case. REITs have their place, as do high dividend yielding stocks, but a balanced approach between stocks, bonds and REITs can be beneficial over the long run. Rebalancing, by being fearful when others are greedy and greedy when others are fearful is a great long term approach. You can end up with more money and less volatility.
During a crash, such an approach would have you running towards the assets that tanked, and away from the assets that held their ground. I'm just talking about a rebalancing process---not abandoning short term "winners" for short term "losers". As long as they're diversified ETFs, non junk bonds, diversified REITs and super blue chips stocks, you won't be throwing good money after bad, considering that (over a very long period of time) asset classes like REITs, for example, with all dividends reinvested, come out equivalent to stocks, with all dividends reinvested.

What are your thoughts?

Again, great blog--I'm glad I found it.

Cheers,

Andrew

AK71 said...

Hi Andrew,

Firstly, a warm welcome to my blog. :)

Definitely, it is very dangerous to have yield as the sole consideration in our investment decisions. There are other factors to consider. I have shared my past experience here in my blog before.

A recommended post:
High Yields: Successes, failures and the in betweens.

I agree that continual re-balancing of our investment portfolio is useful and, indeed, necessary in ensuring optimal gains while minimising losses.

There will always be a good time to be in REITs and a bad time to be in REITs. This could be due to macroeconomic factors or it could be due to REIT specific considerations.

During the bear market bottom more than a year ago, I scooped up shares of companies like E-pure, Golden Agriculture, Healthway Medical and SPH. I also scooped up units of certain business trusts and REITs.

Over time, I sold away large portions of my investments in the companies mentioned, locked in the gains and moved more of my funds into selected REITs. The capital gains are put to work in these REITs, collecting more passive income.

The important thing is to be pragmatic and not to be overly bullish or bearish, I believe. One day, it could be time to get out of REITs. ;)

Thanks for visiting, the encouragement and a great comment. :)

Drizzt said...

i have a feeling that now is a bad time to be in alot of stuff. its already pass days to buy a company in Singapore with a strong economic moat at an attractive price.

AK71 said...

Hi Drizzt,

I do share your feelings. However, as both of us know, the market could be quite perverse. ;)

INVS 2.0 said...

Hi AK71,

I hope my presence on this old blog post won't be seen as awkward. :)

I share the same sentiments with you when it comes to REIT investing. Too often, people comment that I am overexposed to the REIT market. In fact, I only have 2 counters at present and they are REITs. But I have differing views from the masses.

First of all, the REIT market is very diversified. You have industrial, healthcare, retail, office, and hotel REITs, with each REIT company investing on different things. Even a single REIT company like AIMSAMP is diversified within the industrial sector. So to say, I believe the REIT is one of the safest bets in the long run and most suitable for beginners looking for the next-higher level investment after ETFs/mutual funds/bonds.

So far so good, I am satisfied with the results. The August's US meltdown is the first crisis since I entered the REIT market and it stood up relatively well. Although I have incurred paper losses, they are much lower than my past investments on other economy sectors. I used to see my old counters shot down in flames and paid only 2 - 4% dividends, until I sold them off during the June rally.

No regrets coming to the REIT market. :)

AK71 said...

Hi INVS 2.0,

Never an awkward time to share well considered thoughts like yours. ;)

Like you, I believe that my investment in selected S-REITs is the right thing to do given current conditions.

Thanks for taking the time and effort to do it. :)

Anonymous said...

Hello AK

Reviewing some old post, this topic catches my eyes and relevant to my goals.

Would you like spare a bit of time to reviewing and updating this topic, in today's climate ?

thanks

SnOOpy168

AK71 said...

Hi SnOOpy168,

I have been updating my blog consistently since this blog post was put up.

With regards to Saizen REIT, you want to see:

Saizen REIT: Full Year 2011 results.

With regards to AIMS AMP Capital Industrial REIT, you want to see:

Balancing AIMS AMP Capital Industrial REIT and Sabana REIT.

If you want to know what are my five largest holdings in S-REITs, see:

Bloodbath continues and AK71 went shopping.

What am I doing in today's climate? See:

Sleep well at night with a plan.

I am now working on a new blog post which will explain how my plan remains unchanged. Look out of it. :)

AK71 said...

No change to my plan as I plan changes to my life.

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