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Motivations and methods in investing (UPDATED August 2018).

Sunday, July 14, 2013

I recently started to blog about NeraTel and revealed that I increased my investment in the company. 

Someone asked me what led me to increase the size of my long position when I did since its share price shot up shortly after I made my move. 

Did I have inside information?

Well, I cannot say for sure if I did have a distant relative or two in Myanmar or not. 

Such is the reach of the Chinese diaspora. 

However, I am quite sure that I do not have the benefit of knowing anyone who might be in the know with regards to the Telco contracts awarded by the Myanmar government recently.

Indeed, increasing my investment in NeraTel had much more innocent motivations.

I have been blogging for some time about how the very low interest rates cannot persist forever and that they will one day rise. 

I have also cautioned that we should not be overly optimistic when it comes to real estate investments in Singapore and also S-REITs. 

So, what is someone who is investing for income to do?

A big portion of my investment portfolio is in income investing. 

I got into S-REITs in a big way during the GFC and bought more of AIMS AMP Capital Industrial REIT and Sabana REIT in late 2011 when prices took a hit. 

Whenever prices took a hit, I would buy more. 

For example, I quadrupled my investment in Saizen REIT in mid 2012 when its warrants were close to expiring and its unit price plunged. 

Conditions were benign for REITs and buying more with an increased margin of safety was, well, safe.

Now, with the spectre of increasing interest rates on the horizon, the sea that is called REITs could become less placid. 

It could become choppy. 

Of course, thinking that REITs will go the way of the Dodo simply because interest rates are going to rise is ridiculous. 

However, not recognising that S-REITs will face headwinds as interest rates rise in future is myopic.

So, the 10x increase in my long position in NeraTel stems from a need to look for alternative investments which are high yielding but with a low or zero probability of being affected negatively by interest rate hikes. 

I like the comfort that comes from having a steady stream of dependable passive income and this remains my biggest motivation for investing in the stock market. 

The following graphic gives a good idea of how I think.


My investments for income, together with my war chests, form the wide base of the pyramid. 

On top of these but smaller in total value are my investments in certain stocks for growth and income or for growth only. 

At the tip of the pyramid and also representing the smallest total value are more speculative investments which sounds like an oxymoron, doesn't it?

Certainly, like I have always said, there is more than one way to growing our wealth in the stock market and I am not trying to say otherwise by showing the above graphic. 

My methods which are by no means immutable simply reflect my motivations for investing in the stock market.

Ask what are we trying to achieve (i.e. our motivations) and we will know where our money should go. 

Use the right tools (i.e. methods).

If you have read this blog carefully, position sizing is important too.

There is nothing to say that good investors cannot have speculative positions but good investors should keep speculative positions relatively small.

Related posts:
1. Never lose money in real estate?
2. Be cautious climbing S-REIT tree.
3. CPF or SGS?
4. Perpetual bonds: Good or bad?
5. For those who have paid higher prices.


AK71 said...

Hi Capricorn,

You have raised a pertinent point and one which I have been asked before.

Although not an exact answer, you might be interested in this blog post: S-REITs: Are we asking the right questions?

We have to be very clear on what we are after and we will know what to do.

For me, although I am primarily invested in REITs for income, I might divest partially if I am able to find better or similar yields in other stocks which are less likely to be affected by rising interest rates negatively. I think I have found two in NeraTel and SPH.

However, will I partially divest my investments in REITs right away? Nope. I feel that they are still able to provide me with the passive income I am accustomed to receiving from them at least for a while more.

So, should you lock in capital gains or should you stay invested for income? Well, what are you after?

If you really don't know and your current long position in REITs is causing you some anxiety, sell half. There, I have said it. ;)

Anonymous said...

Well said! I've missed Neratel and do you think it's too late to go in?

Don't you think with interest rates going up soon, maybe in 2014, not only REITs will be affected, every industries will be affected as well, especially high Debt to Income Ratio? You think we should start looking for such companies instead?

AK71 said...

Hi Vanson,

I think that although NeraTel's share price could go higher, it is no longer cheap. So, it is back to questioning your motivations and whether investing in NeraTel at this price still makes sense to you. :)

If interest rates were to rise in a growing economy, actually, it isn't too big a deal. Increasing revenue on the back of healthy margins would mean that companies have little trouble servicing their debt.

We really have to worry only about highly geared companies which are not doing very well and not likely to do well in the coming years.

Of course, at its most basic, higher interest rates will mean a heavier burden on all borrowers.

AK71 said...

How much warchest as a percentage do u usually keep? I am abt 65percent cash now. Haha. Not sure if its too high.

Very personal, that one. Depends on what gives you peace of mind. For me, it is usually not more than 50%.

AK71 said...

gd morning AK ☘️. I attend your talk yesterday and forget to ask u how do you do fund management on your stocks? how many trades did u go in for each stock and what is your cut loss %?

I think you are probably asking about portfolio management. You want to read this:
As for trading, I bought and sold based on signals. How many times would depend on the frequency of those signals. You need to learn TA for that. Cut loss % is personal. It depends on our stomach for volatility. 10% is common but some go for a tighter 5%.

AK71 said...

Ben said...

I bought one counter at the average price of $1.71 sometimes in 2013. My invested amount is about $80,000. Currently, the market value is $18,000 (at $0.40) as of today. This is a paper loss of $62,000.

Currently, my stock investment status stands at the paper loss of $41K plus as of today. This is taking into consideration of the realised profit and received dividend over the years. The loss status is mainly due to this counter.

The above circumstance has given me a valuable lesson in not overleveraging on one counter. This counter used to cover about 70% of my entire portfolio. I have since reduced it to 46% through the acquisition of other counters.

(Read Ben's complete comment here:

AK said...
Thank you for sharing your story.
Together with an understanding of our motivations and the use of appropriate methods in investing, position sizing is important. :)

CL said...

AK said...
"I quadrupled my investment in Saizen REIT in mid 2012 when its warrants were close to expiring and its unit price plunged."

Would you help me to understand the relationship between warrants and unit price?

AK71 said...

Hi Chris,

This blog post should throw some light on the matter for you:

Saizen REIT: Why did I buy and would I buy more?

Don't ask me to elaborate hor. I blur. :p

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