STE: "I lost money enough to buy a 5 room flat in 2015!"

I always enjoy reading STE's very thoughtful guest blogs. Regular readers would know who I am talking about.

If you are new to my blog, you might want to read STE's other guest blogs as primers. You will find his name in the left side bar of my blog under the heading "Guest Bloggers".

Here is STE's latest contribution:

Honey, I lost a 5 room HDB## value in our stock investment in 2015!

Yes, that’s how our portfolio value fared as compared to Dec 2014 …but honey, don’t worry, market is such volatile in nature and this decrease is quite mild as compared to real crisis time e.g 1998 / 2000/ 2008 etc, which any portfolio value could be wiped out by 40 – 60%.

“But how about next year’s performance ?”

Well, we don’t have “ crystal ball “ to make any forecast, it might be better or worse . If anyone said they could give you a forecast or figure on stock’s performance next year, just listen with wide smile and walk away quietly .

Market is “random “ in short term and we should not be “Fool by such randomness “ ( read the book by Nassim N Taleb and Burton G Malkiel ). As I said, market could be worse or better next year, it could have another double digit drop in STI by end 2016!  It is anybody’s guess (read the book by Nate Silver ,, The Signal and the Noise ).

“In such volatile market, do we need to sell our share to avoid further loss in capital?”

Well , it depend on the stocks in your portfolio, any selling should be done based on changes of fundamental or underlying business of the stock and not the price. Panic selling based on price will not be good or help in your long term investment journey. We might be tempted to sell in panic ( read the book by Jason Zweig : Your Money and Your Brain and Richard H Thaler : MisBehaving ) but beware of the consequences of “market timing  as it may affect long term return of your investment .

“Well , you said investing in STI Index fund should be more stable and less risky, giving us around 8-9 %  average return p.a in the long run but why STI is down by more than 13% this year? Is Index investing safe?”

Ummm…. 8-9 % Index return (market return)  is being drawn on very long horizon (say 20-30 years). As mentioned, market is very volatile in short term, it can fluctuate from – 20 to 30% to  + 20 to 30% at any time.

Even in index investing, we should not lose faith in such investing strategy due to short term market volatility. Well, this is the “ Flaw of average “ ( Read the book by Sam L Savage : The Flaw of Average ). We tend to take the average figure by granted, eg we “anchor “ the figure of 8-9% return as benchmark of our return, but that average figure derive from long period of time .

“ What should we do if our portfolio value down by another 20%-30% next year? We may lose the value of a condominium then? “

Well , remember the concept of “ Mean reverting “ in my earlier post here in ASSI? The market moves in cycle and tend to revert to mean.

As mentioned earlier, “volatility “ should not be purely associated as risk … opportunities for profit are inseparable from RISK.

Honey, we deployed some of our cash to buy some stocks in 4^th Qtr 2015, well , price may drop further , really nobody knows but we see some value based on historically and statistically speaking . 

We often asking what will be the return of our investment in coming months or years.  But the more appropriate question to ask should be: “what will be the chances / probability of having returns in coming years.”

Allow me to quote: "Investors want certainty, and we cannot give them certainty. We can give them high probability; we cannot give them certainty" by Charles William Hamilton.

Statistically speaking, if market down by another 20-30%, chances of rebound in following year will be high if we could hold it for much longer period ( not using much leverage in stock investing ). We should deploy more cash if that really happen as what we did in 2009/2010.

Long term Market return of SP500 from 1924 till 2012:

“Do you think now is right timing for us to put our money into the market?”

Well honey, again, investing is about 3M = Market , Mind and Money Management.
 

Market :

As mentioned , market is volatile and unpredictable in short term , but we can see the trend in long term.

Market is not really cheap or deviate very far from long term mean / regression line but at the same time market is also not in very high valuation from long term mean. That’s why I said not too cheap and also not too expensive. Statistically speaking, it could down much from current level if real crisis hit . That’s why we are not deploying all our cash into the market at this point of time.

Always have “margin of safety “ and remember,   market could be irrational much longer than your think.  Buying at market PB of close to -1 SD will definitely give us some margin of safety.

90% of market movement in the short term is by psychology and only in long term , it shown an upward trend due to increasing economic value by demographic / technology innovation / productivities etc.
 

Mind :

 

Andre Kostolany, Germany's Stock Market Guru, said "Psychological create 90% market".
 

Investment is driven by "Psychology and full of Fear and Greed". Be a stoic investor and minimize our “Emo and Ego” throughout the journey of investing.

Understand the pitfalls and shortcomings of our Mind will help ( read book by James Montier : Behavioural Investing ) to know better about bias  ( Confirmation biases / Over-Confident / Anchoring / Loss Aversion / Endowment effect / Mental Accounting / Money Illusion etc ).

This might avoid common mistake of “selling in panic / buying hot stock / keeping loss stock (even knowing Fundamental has change and hoping for rebound ) / trading too much / looking at 52 weeks high / low as selling or entry price etc.
 

Money Management :

As I mentioned in earlier post, understanding our Cash Flow / expenses/ debts level  is very important even before we talk about Investment.

"Well, honey, don’t worry, we still have positive cash flow even our stock value dropped by that much. We could still save more than 60% of our “portfolio income “ after all expenses in 2015."

We live like it is before my “sabbatical leave “ in Nov 2014 , we manage our expenses by not spending on things beyond our mean. Our standard of living has remained the same.

Life is about making choices and what kind of life style we want is a choice. Everyone has expectations on the life they want to live with. We cannot really say my life style is good but it suits my expectations.

We are happy that we could go on 3 holidays and have more quality time with our kids in 2015 since my early retirement.

“Honey, some people said “dividend income “ is just from “right pocket to left pocket “ due to price change after XD, what do you think about this ?

Ummm… is quite subjective. Let’s see if I could explain better based on my own understanding.

 

Well, at least some institution or government agency do not recognize “dividend“ as income. I have seen this recently in one of the blogs post that he is facing problem is explaining “dividend“ as income in getting his domestic helper since there is no CPF contribution from employment or IRA’s statement to show that.

"Honey, we may face the same problem since these agency / financial institution do not recognize “dividend “ as income"
(hahaha.  that’s just side joke …but is true and facts.)

Well, you may notice that I use “portfolio income“ and not “dividend income“ in above mentioned. Dividend from stocks is just part of the income generating from one of the asset class. Income can come from Fix Deposit with bank / rental from housing / interest from Bond etc .

Each asset class is having their own Risk/Reward characteristic. Even cash or FD is subject to risk of value depreciation due to inflation and bond also could subject to default by issuer .

With stocks, we could see prices fluctuate second by second. We don't see this fluctuation when collecting rental from real estate which we rent out, for example. We don’t get quotation on the value of our house minute by minute (since we do not intent to sell it).

Stock prices are not static. Sometimes, stocks can be overvalue or undervalue. In an extreme example, if price stay at $1 and the company announce 10cts of dividend each year, price adjust after ex-d, will the price become –ve in Year 11? No, as people will see the value from the asset which generated the consistent cash flow and reflect in stock price eventually. It is not a zero sum game. Well, accounting is useful but sometime is not meaningful.

It would be more practical to look at the capability of the underlying business in generating the “cash flow“ to pay out the dividend or is the dividend declared from cash flow derive from “debts“ or other source of “creative accounting “.

As AK mentioned, a “Healthy cat“ is more important than “regardless white cat or black cat , if it could catch the mice“.

Lastly , look at our cash flow and spending money wisely is more important than defining the “cash flow“.

Appendix :

STE's Portfolio Income generated from share (exclude Bond / FD /CPF) in 2015 : $ 180,454

** We should  treat CPF interest as part of our total income as this will be our money eventually .

We continue to do voluntary contribution in 2015 although we don’t have contribution from employment .

Combining average interest of around 3.1 % (OA/SA/MA) is rather high since we treat it as AAA low risk bond rate .

Well, this another “margin of safety“ in our portfolio, with combine interest of more than $20+ K p.a from CPF, this would gave us another $ Mil upon reaching our withdrawal age of 55 .

 

“We will be fine, honey! You know, we are very “kia shi“ type of people that having more than 30 stocks in our Portfolio as we diversify across sector and industry.” This is to ensure that we will not have any problem in case any counter went “kapuk“ in our portfolio since it will not take more than 8% of our total value.

Well, same time we will not see our portfolio value growth much since it is very diversify and a ten bagger in our portfolio will not increase the value much. Again, it suits our investment strategy.

Lastly, wishing all A very Happy and Prosperous New Year in 2016 and hope all will have a very successful investing journey ahead! Cheers!

A big thank you to STE for this guest blog which is loaded with wisdom.

Related posts:
1. Invest for income and ignore the two Ms.
2. What to do as stock markets crash?
3. AK is showing off his CPF-OA and MA.