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1Q 2020 passive income: COVID-19 disaster.

Tuesday, March 31, 2020

Unless new to my blog, everybody knows that AK is investing for income.


What this means is that AK is more concerned with the ability of his investments to generate income for him on a regular basis than the price movements of those investments in the stock market.

Of course, for this strategy to work, first, we have to ensure that a potential investment is a bona fide income generating asset and not a scam.

For an example of a scam, see:

$71,000 alternative or bogus investment?

Many people are calling Eagle Hospitality Trust a scam now as well. 

The other important thing with investing for income is to determine whether the entity has the ability and the willingness to generate income and share this income with investors.

If we are not investing with borrowed money or money we need for some other purposes down the road, whether in a bull or a bear market, if we invest in good income generating businesses, everything else being equal, most likely, our financial health will improve over time.

This is very important to remember because we do not want to have to liquidate our investments during a time of crisis like now.

This is very important to remember because investing for income is mostly not about getting rich quickly and is more about getting rich slowly but surely.





I know that many people are hurting financially now because of this COVID-19 disaster and many are looking for advice.

However, remember, I don't give advice here in ASSI.

I am just talking to myself here.

Now, although I feel certain that we will overcome the COVID-19 crisis like we did with SARS 17 years ago, we should take the warning signs seriously.

The COVID-19 crisis is similar to the SARS crisis but it is not the SARS crisis.

Same, same but different.

The COVID-19 crisis could take a much longer time to run its course compared to the SARS crisis.

There is no doubt by now that this crisis is going to create a global recession.

The consensus is that this global recession will be even more severe than the recession caused by the Global Financial Crisis (GFC).

So, although there is a chance of a V shape recovery, it is more likely that we will get a U shape recovery.

Pray that we do not get a L shape recovery which PM Lee mentioned in a recent interview as that would be more like an economic depression than a recession.

Let this sink in for a moment.

Deep breaths.

What are we to do in response?

I believe that how we behave should depend on whether we have the following:

1. Emergency fund

and 

2. War chest.





I know that there are people who do not believe in having an emergency fund but we all know that many people lose their jobs in a recession.

If we do not have an emergency fund, we should not be thinking about investing in the stock market even in times like this.

More so in times like this.

Banks are fair weather friends, whatever their advertisements might say to the contrary.

We could well see a credit crunch when, for fear of losing money, banks sharply curtail the lending of money.

It could happen and, of course, it has happened before.

People who do not believe in having an emergency fund, good luck to them.

People who do not believe in having an emergency fund and conduct courses to teach others not to have one, shame on them.

So, how much money should we have in an emergency fund?






As for those of us who have an emergency fund but who do not have a war chest, think twice about using the emergency fund to invest in the stock market.

Heard of bull traps?

No, I am not thinking of big holes in the ground dug by some hunters in the Stone Age.

Anyway, if we fall into this category, in fact, we should take some time to look at whether our emergency fund is sufficient for what might come.

I can almost hear some people going:

"Oh, but we might make money if we use the emergency fund to invest with?"

Remember, money not made is not the same as money lost.

If we need the money and it is not there, we might lose more than just money.

I say peace of mind is priceless.

What is the price tag of sanity?

"Never risk what we have and need for what we don't have and don't need." - Warren Buffett

See:
I do not believe in emergency funds.






If you are new to my blog or if you don't know or if you don't remember, you might want to read this blog:

Survivability and opportunity in times of distress. ("E-book")

Some might think it is too late for them.

Well, what's done is done or, for some, what's not done is done.

Choose whether to start doing the right things right now or to do nothing.

We have a choice.

Choose carefully.

Right?

I know that most of you are here for the numbers but I just had to get all of that off my chest.

I feel that it is important enough to do so.

OK, now that I have done it, the numbers.

My 1Q 2020 passive income:

S$ 24,668.56






Although it seems like I have a robust passive income stream, the COVID-19 crisis will very likely compromise the income generating ability of my investments.

The longer the crisis lasts, the more severe the impact will be.

We should be prepared for a reduction or a suspension of dividend payout in some instances.

Some might remember my explanation as to why despite having the passive income that I have, I still maintain an emergency fund.

Armageddon is not just the name of a movie.

People who are marginally financially free and who have retired from employment might have to go back to work.

In an environment where unemployment is most likely to be elevated, it won't be easy.





If we do get a U shape recovery, the bottoming process in the stock market is likely to be a bumpy one that might go on for several months.

We could be seeing the start of this bottoming process now although it would not surprise me to see prices going lower from here.

I have been nibbling at stocks and might continue to do so.

However, I won't be buying in a big way until I have greater clarity.

To be sure, we must be prepared for more turbulence to come.

If we are heavily leveraged, beware.

"We never want to count on the kindness of strangers in order to meet tomorrow’s obligations." -Warren Buffett

Till the next blog, be socially responsible and help keep us all safe.

We are #SGUnited.


Watch PM Lee's interview with CNN on the battle against COVID-19:






Recently published:
1. COVID-19 defeated already?
2. COVID-19 defeated in 2021?
3. Eagle Hospitality Trust: Extinction?

17 comments:

laurence said...

We're all here waiting for AK to unleash his tsunami of war chests at the drowning markets. ;)

AK71 said...

Hi Laurence,

Alamak.

Be warned.

I might fall into a longkang and drown instead.

JH said...

V shape recovery is coming! April is the month! :)

AK71 said...

Hi JH,

I wish for a V shape recovery to happen.

I hope you are right. :)

Jawnzy said...

Thanks for sharing your thoughts

Hope both you and your family stay safe during this period

AK71 said...

Hi Jawnzy,

Welcome to ASSI and thank you for the encouragement.

I hope all of us stay safe. :)

Elaine said...

Hi AK

Thank you so much for this post - such a timely reminder for myself.


https://www.straitstimes.com/business/banking/covid-19-individuals-can-apply-to-defer-property-loan-insurance-premium-payments

While i cheer this relief for the cash strapped individuals and SME, I wonder what this means for the banks in terms of margins & book value.
As you mentioned the local banks are stocks you would like to add to your portfolio, may I know your thoughts on this development? Could you pls talk aloud to yourself? :-b

AK71 said...

Hi Elaine,

The situation lacks clarity.

How many would need to defer payment and what is the amount to be deferred?

Your guess is as good as mine.

However, our banks are in much better shape today than in the days of the Global Financial Crisis.

They are currently trading below their book values too.

Having said this, a retreat to recent lows or even lower would provide a greater margin of safety.

Hard times could get harder.

AK71 said...

"The ongoing COVID-19 outbreak and a Russia-Saudi Arabia war of attrition over oil have tipped the global economy into a rapidly deepening recession. Even as infection rates fall and factories resume work in China, the recovery will be sluggish, unlike the V-shaped recovery expected by many during the early phase of the outbreak. Services make up a majority of China’s GDP; loss of activities in that area will be very difficult to recover.

"Also, as the outbreak spreads worldwide, a wave of negative supply and demand shocks are percolating through the global economy.

"Our risk dashboard shows rapidly rising stress across asset classes. The extent of stress is still below 2008/09, but the pace with which stocks have sold off and credit spreads have widened have been striking. This reflects how quickly sentiments have had to adjust, and the amount of lingering uncertainty about where all this is going in the near term.

"Our key focus is on emerging markets and credit as an asset class. As commodity prices correct and growth outlook dims amid lockdown, bonds from energy, transportation, and tourism sectors are coming under pressure. Despite lower interest rates, a credit crunch is very much on the cards. Policy intervention (liquidity injection, income support, and tax cuts, for instance) may soften the blow, but is unlikely to backstop credit risks until economies bottom."

Source:
DBS (31 March 2020)
https://www.youtube.com/watch?v=AYzp7iiuZKU

AK71 said...

DBS Group:

The bank on Monday announced that it will defer dividend payments to shareholders until after a new date for its annual general meeting (AGM) is fixed.

The payment of the proposed final dividend of S$0.33 per ordinary share for the financial year ended Dec 31, 2019, is subject to shareholders' approval at the AGM, which was originally scheduled for March 31.

Source:
The Business Times
https://www.businesstimes.com.sg/stocks/stocks-to-watch-dbs-singtel-singapore-airlines-city-dev-flt-fcot

laurence said...

Oooops........ Centurion's Westlite Toh Guan dormitary becomes a Covid cluster!!!!!

laurence said...
This comment has been removed by the author.
AK71 said...

Hi Laurence,

I was wondering when it might happen since Centurion's business is about communal living which makes it more conducive for the virus to spread.

Wendy said...

Hi AK/ Laurence,

Even if one of their dormitories is affected by Covid, it doesn't affect their core business of housing foreign workers. However, I noticed a decrease of share price (relative to other shares). Wondering if this is a case of heart over mind... Any thoughts?

AK71 said...

Hi Wendy,

A dormitory is almost like a microcosm of Singapore in that it is about living in a densely populated environment.

There is no doubt that it is an environment that is more conducive to the spread of communicable diseases.

However, if full preventive measures are in place which we have in Singapore, then, these dormitories can be as safe as Singapore.

I wouldn't lose sleep over the daily movement of prices in the stock market. :)

keng said...

No need to lose sleep especially when Mr Han and Mr David Lim kept on buying OU8 shares :)

AK71 said...

Hi keng,

Obviously, Centurion's insiders see value at this price and even in this current environment. ;)

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