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Building and preserving our wealth.

Saturday, September 4, 2010

When I was a secondary two student, I had to write an essay on whether television had brought more harm than good to our society?  The internet did not exist then. To own a 25 inch CRT TV set was a BIG thing.  I doubt school teachers would set an essay question like that today.

Well, I remember giving it much thought and decided that the television was just a tool and whether it did good or harm depended on how we used the tool.  This is true with any other tool as well.  A tool is just a tool.  How we use the tool is the important thing.  Similarly, in the world of investment, there are many tools at our disposal. All these tools, if used appropriately, could boost our wealth.

Human society has grown more complicated from the days of Socrates and Plato.  In those days, scholars were learned in different aspects of life.  As our knowledge base widened over time, we built colleges and universities. Within these institutions, we find different faculties and within faculties, we find different departments and within departments, we find different subjects.  Scholars have become specialists and not generalists in modern society.

We classify things, putting things in neat boxes with labels, to manage the complexities of modernity. This promotes efficiency as it helps us know exactly where things are and what they do.  However, compartmentalising also masks finer details which could set apart one item from another in the same box.

Two of the boxes in the world of investment are labeled "Blue Chips" and "REITs". 

Some prefer Blue Chips, believing that these are strong companies with stable dividend payouts with a nice possibility of share price appreciation.  I have been a shareholder of SPH and ST Engineering for as long as I can remember.  I was also a shareholder of Chartered Semiconductor and, unfortunately, I remember this too.  Certainly, not all Blue Chips are created equal.

Are REITs then all created equal?  Most certainly not. Some are stronger and better than others. REITs are primarily income instruments but they are not just income instruments.  Like any counter traded in the stock market, REITs have the ability to appreciate in price.  If they have the ability to appreciate in price, are they beginning to sound like certain entities with stable dividend payouts with a nice possibility of share price appreciation?  In fact, many S-REITs are now trading above their NAV.  There are still many S-REITs out there which offer value as they are still trading below NAV, have high yields and relatively low gearing levels.  The attraction of high yields coupled with the possibility of capital appreciation is universal.

Any undervalued counters could appreciate nicely in price once discovered by enough people who believe in them.  It does not matter if they are REITs or companies. The risks and rewards of investing in companies and REITs are similar, if we think of it less dogmatically.  Invest in the right ones and we could be rewarded. Invest in the wrong ones and we're sunk.  There are certain characteristics of a REIT which make it a REIT and not a company, for sure, but I would stop there and not over read.

Some might say that REITs are for the rich or the rich and old because these people don't need to grow their wealth aggressively, that they just need regular passive income since their wealth is sizeable already. I do not think that this is entirely correct as there could be the not so rich or the not so rich and young who just want to make sure that their wealth is not being eroded by inflation.  Choosing the right REITs could do this for these people. So, REITs are not just for the rich or the rich and old.  What we choose to invest in would depend on our motivations for being in the stock market in the first instance.

Finally, most wealthy people are wealthy because they run successful businesses. For most of us, having a well paying job and having good money management habits are the bedrock to building our wealth. Whether we choose to invest in Blue Chips or REITs later on could then build and preserve our wealth at the same time. Indeed, why not invest in both? I am not religious about either one.


Anonymous said...

totally agree bro. i like both. I will also say put maybe 10-20% into growth stocks. They tend to be high gearing but can turn out well. They can also turn out to be a nightmare. Think genting vs ferrochina.


AK71 said...

Hi bro,

Well, we have to take the good with the bad. If we want growth, we need to take risks. How much risk are we able to stomach is something we have to work out ourselves. It would be nice to find stocks which could grow without risks! :)

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