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STE's story: Investment strategy.

Friday, August 9, 2013

In this second instalment of STE's story, he shares his investment strategy. Here, we see how he frankly admits that luck plays a part in the grand scheme of things.

Like I found out the hard way, never trust anyone who says that his success is due to foresight and that luck has nothing to do with it.

Someone who is humble and admits that he was lucky as well is the more credible investor.

..................................................

My investment philosophy is simple. We only need to know two things:

1) Margin of safety
2) Mean Reversion

In the long run, the stock market trends upwards and, of course, it is hard to catch the bottom. However, one should try to avoid hype and enter the stock market when things are hot. If we had invested in tech stocks when their share prices were chased sky high, I think we might not have recovered even now.

Most of time, the stock market is stable and doesn't move much. Although stock prices will fluctuate, big fluctuations are rare and maybe happen on less than 5% of days.

"Mean reversion is a mathematical concept sometimes used for stock investing, but it can be applied to other assets. In general terms, the essence of the concept is the assumption that both a stock's high and low prices are temporary and that a stock's price will tend to move to the average price over time."
Source: Wikipedia.

I suggest that we study and understand the market by reading some books on behavioural finance and economics. This, I believe, is more important than any books on investment. They help us to understand market psychology.

I was lucky to buy some shares during the 1998 Asian Financial Crisis. I bough a lot of Malaysian banking stocks back then. I skipped the dot com bubble. I also bought stocks of many blue chip companies like IOI, Perlis Plantation and Genting, making a few hundred thousand dollars soon after.

As we decided to switch citizenship in 2007, we disposed of all our assets in Malaysia, including our house in JB. On hindsight, we were really lucky because the sub-prime crisis erupted at the end of 2008 and we had the cash to take advantage of the situation.

At that time, I wondered what to invest in. Since the property market was badly hit, I thought it must be a good bet and since I needed some margin of safety, I decided to invest in REITs which generate stable income. Most REITs were giving double digits distribution yields then. I bought into Suntec REIT, K-REIT, Mapletree Logistics Trust, Cambridge Industrial Trust etc. I am still holding on to some of them now.

Another reason why I invested in REITs was because of "price stickiness".  Rents might be adjusted downwards but I believe they will not go to zero especially in Singapore which is such a small country with high population density. Although interest rates might increase in the next few years, inflation will still be a problem.

I would usually try to maintain 10 to 20% in cash BUT this time round I bet BIG and invested all, including my CPF money. I might be wrong but who knows for sure?  Anyway, every 2 to 3 quarters, we will have more than $100K collected from dividends. Since we are both still working, we can save all the dividends collected.

We plan to retire by age 50 and that is 7 years away. Using the magic of compounding, our investment portfolio should have added another $2 million by then without any fresh injection of capital. I believe that we will be able to retire comfortably if we are not extravagant, keeping our life simple. We are happy and contented with what we have.

I hope to inspire others with my story that we could achieve financial freedom through our own efforts even without anything in the beginning.

Read the other blog post on STE:
STE's story: Personal finance.

Related posts:
1. To be richer, be comfortable with being invested.
2. REITs: For those who have paid higher prices.

24 comments:

INVS 2.0 said...

Oh yeah, my REIT portfolio has increased recently after prices crashed down from their peaks earlier this year. I also took the pain and went out to work for a holiday job, just to use the pay to invest. :)

Capricon said...

Hi STE, AK,
Thanks for the sharing and the act to inspire !
Unknowingly your decision to exit the market was at the right time and seized the next opportunity that arises.
But we may need that little bit of luck first and at the right time ... Haha

However I believe most of the readers here would be building up the war chest and getting ready for next opportunity.

Cheers,

MrNg said...

Hi AK and STE,

I always feel a tinge of pain when I read about such success stories. I totally believe all these stories and the wonders discipline can do, but alas, I am torn with my wife family, who are much well-off than I, and believe in yearly overseas trips and indulge in weekend dine out. Things have been much better now, after years of psycho I think they kinda of catch a bit of my thrift bug. I felt torn sometimes as I know if I ask them to totally fit into my values and lifestyle, they will most prob not get use to it. I have talking about scrapping the car for years now as I know the money saved and invest and compound will do magic. Money aside, I know I have a good life, a great son and wife and happy family life. Just that the thoughts of "what if" still lingers ...

Haha just spouting nonsense... Thanks for the post STE and AK

AK71 said...

Hi INVS 2.0,

As always, you are a very prudent young man. :)

AK71 said...

Hi Capricorn,

I get the feeling that STE is 100% invested right now. I am not so brave. I always need a war chest on standby. :)

Will there be a market crash? I don't know. However, I want to be ready if it should happen.

matchbox said...

Hi Ak,

Very inspirational! Thank you & STE for sharing.

Matchbox

AK71 said...

Hi Mike,

Don't be too hard on yourself. Very few of us are prudent all our lives, whether by choice or not. I know I'm now.

Like you said, the more important thing in life is to be happy. Count our blessings. We have much to be thankful for. :)

AK71 said...

Hi matchbox,

I am happy that you are inspired.

I am just the messenger but you are welcome. ;)

Gary said...

Nice!

Sincere Ken said...

Hi AK & STE,

Being an ardent investor, I'm truly touched by STE's vested journey and on his way to be adjourned. Absolutely inspirational :)

Hey AK, when your turn ahh??

New Reader,
Modest Ken

AK71 said...

Hi Gary,

I also say. :D

AK71 said...

Hi Ken,

You mean writing stories about myself? I have done that on and off. Will run out of stories one day. ;p

Sincere Ken said...

Hi AK,

Are you sure? Ahem ... so long as you are surviving, stories will not die down, isn't it?

M.Ken

AK71 said...

Hi Ken,

Your have a way with words. LOL. OK, maybe so. ;)

AhJohn said...

Not sure whether STE can share some books also. Thanks!

AK71 said...

Hi AhJohn,

I have sent him an email to let him know that the blog posts are published. Will see if he responds. :)

AhJohn said...

I keep thinking if one more crisis come, should I invest in property or stock. Eg. 200k cash, suppose stock market retreat 50%, will have chance to have capital gain in 100%, also maybe 8~10% yearly dividend; then property maybe 30% gain and 3% rental (with 90% loan). So property is still a better investment?
How about your view?

AK71 said...

Hi Ah John,

I guess the question is for me. :)

I don't have an answer with specifics for you because we do not know the specifics of the next crisis.

However, generally speaking, I believe that properties have limited room for further appreciation and they have to pull back. Their fundamentals are easy to understand and a situation of oversupply will take time to correct.

With the measures taken by our government to enforce financial prudence, the correction is likely to be of a smaller magnitude. So, I do not expect a crash in property prices. A 20% or so correction would not be out of order but more than that is hard to imagine.

Investing in real estate in Singapore is quite simply investing in a belief that Singapore will continue to experience prosperity. However, unless we have plenty of money, we are putting all our eggs in a single basket.

I am invested in both properties and stocks. I can still see some stocks as undervalued but I don't see properties as undervalued now.

Will this change in future? Well, I don't know but decisions are not that difficult to make when it all boils down to "value for money". :)

Novice198 said...

Hi AK,

What percentage of the total investible funds should be kept aside as a warchest to take advantage of the opportunities if and when they present themselves.

Cheers
Novice

AK71 said...

Hi Novice,

I am sure I replied to a question like this before but I cannot trace it. Too many comments to plough through.

Anyway, I don't think there is a fixed formula although I think if a person has a bigger portfolio, a smaller portion held in cash is still a lot of money. Say, 30% cash perhaps? For a person with a smaller portfolio, 50-50 might be a good idea.

There is nothing magical about these numbers. The idea is to have a war chest that would be able to make a meaningful difference if Mr. Market should suffer from a manic depression.

SnOOpy168 said...

Is there a new chapter coming soon ? This is more exciting than K-drama lah....

AK71 said...

Alamak, I don't think so. The road to financial freedom is not as convoluted as the plots in K-drama leh. ;p

Raymond said...

Thanks for sharing. I was definitely inspired.

Currently still studying, but I'm trying to read up and save as much as I can. Although, the more I read, the more confused I get and the more i have to find out. Investment is definitely an art. I plan to hopefully retire before 45, before 40 if possible.

Ak, if it's okay, would like to know at what age did you start investing?

AK71 said...

Hi Raymond,

It is a good sign when the more we know, the more we feel we don't know. If we feel that we know everything after reading a blog or two, we should be afraid.

Retire by 45? That reminds me of a story:To retire by age 45, start with a plan. ;p

When did I start? Hmmm... I think when I was 24.

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