More reasons to invest in DBS, OCBC and UOB.

For readers who prefer reading, this is the transcript of a video I produced yesterday sharing more reasons why I am staying invested in Singapore banks?

During "Evening with AK and friends 2023" which happened last Wednesday on 10 May, I said I was staying invested in Singapore banks and would look to buy more on any significant weakness in their stock prices.

This is because Singapore banks still remain very profitable businesses despite challenges.

In several blogs and videos which I produced, I said that Net Interest Margins for DBS, OCBC and UOB likely peaked in Q1 2023.

Funding cost has finally caught up which will squeeze the said margin.

However, the banks will still benefit from the expanded net interest margin on a full-year basis.

For example, OCBC said in their Q1 2023 report that they expect Net Interest Margin to average 2.2% for the whole year.

This is higher than 1.55% for Q1 2022 last year.

DBS, OCBC and UOB have the ability to reward shareholders with higher dividends and they have also shown a willingness to do so.

As an investor for income, this makes me happy.

With dividend yields of 5% to 6% at a payout ratio of around 50%, Singapore banks provide investors with peace of mind.

Why would I invest in a healthcare REIT that has a distribution yield of less than 4%, especially when I remind myself that it has to distribute all or almost all of its operating income to achieve that?

Even as Singapore banks have demonstrated impressive growth, they have also remained cautious.

It is good to see that they admit they don't know what they don't know.

Loan to deposit ratios for all three banks are pretty low with DBS at 79%, UOB at 83% and OCBC at 79%.

Loan to deposit ratio is used to assess a bank's liquidity position by comparing total loans to total deposits.

Singapore banks will continue to grow their non-interest income, which is never a bad thing, of course.

This is especially when net interest margin growth will plateau.

In this aspect, UOB is likely to show the strongest growth.

This is thanks to their opportunistic acquisition of Citibank's retail business in 4 south east Asian countries.

In fact, UOB saw a 457% year on year growth in non-interest income in Q1 2023.

When we compare this to the 35% growth registered by DBS, we can see why there is good reason to be more bullish about UOB.

Singapore banks are also very well run and very efficient.

Their low cost to income ratio supports this observation.

DBS and OCBC both have ratios of below 40%. DBS at 38.1% while OCBC at 37.1%. UOB has its ratio at 40.9%.

This low cost to income ratio is possible in part due to the pre-emptive move by the banks to digitize early and to do it well.

It has reduced operating cost in no small way.

Singapore banks continue to report high return on equity. 

DBS has a ROE of 18.6%. OCBC has a ROE of 14.9%. UOB has a ROE of 14.7%.

Return on equity is a measure of how well a business uses equity or the money contributed by its shareholders plus its retained profits to produce income.

This is a reason why DBS has always traded at a high premium compared to OCBC and UOB. DBS has always shown that it has a greater ability to produce income.

This would appeal to investors who prefer a stronger growth angle which is probably the case for most institutional investors.

So, are you staying invested in Singapore banks?

If AK can do it, so can you!

I must remind myself of the most important investment idea from "Evening with AK and friends 2023." HERE.

4X your money with MUST! Curious AK takes another look.

For readers who prefer reading to watching videos, this is the transcript of a video I produced recently.

From time to time, I come across videos which claims to 10x your money.

Usually, they are pretty speculative at best, and in most cases, they are simply scams.

However, sometimes, we could get a gem or two.

Although keeping an open mind is a good idea generally, but it is only a good idea if we do not give up our own thinking process at the same time.

We want to stay critical and not outsource the thinking process.

Bloggers, Youtubers and even experts at research houses are as human as you and me.

Anyway, you did not come here to get lectured by AK.

You want to know what is this four-bagger investment?

Don't need to skip to the end of the video because you will know in a few seconds.

I have produced several videos and published a number of blogs on US commercial properties real estate investment trusts.

My view has been to avoid the entire sector as there is too much going on which could sink the ship.

Some might wonder if we could find a gem or two with blood in the streets.

This is all good and well in less treacherous circumstances.

However, what the sector is facing could be a tsunami of blood, and this could turn deadly even for those who are in the streets looking for gems.

In a report from CIMB research house, they said that they have a target price of 55 cents a unit for Manulife US REIT.

That was an eye-popping target price as Manulife US REIT trades at 14 cents a unit now.

If CIMB is right in their projection, then, Manulife US REIT is a four-bagger stock in the making.

Anyone wants to take a chance?

In their latest results, the real estate investment trust reported a lower occupancy of 86%. Businesses which are renewing their leases are downsizing or right-sizing.

Physical occupancy which is a more important measure and a forward indicator of things to come is only at a bit more than 30%.

This means that almost 70% of their buildings are not occupied although they are leased out at the moment.

To me, what is the biggest issue with Manulife US REIT is the gearing ratio of 49.5%.

The manager was growing the real estate investment trust in what I would say was an irresponsibly aggressive way.

Of course, they still got paid their fees.

Now, without borrowing another single dime, that gearing ratio could breach 50% as their assets could see valuations decline.

This is why I keep emphasizing that we want to invest in entities with strong balance sheets. 

This is especially when we have a treacherous mix of weaker economic outlook and much higher interest rates.

Manulife US REIT still has almost 20% of leases expiring by end of next year, with about half of the expiries happening for the rest of this year.

I don't know how CIMB researchers came up with a target price of 55 cents a unit for the real estate investment trust.

I say this because it is most likely that Manulife US REIT would have to do fundraising and with gearing nearly at 50%, the only option is an equity fund raising exercise.

With their current depressed unit price, it would probably have to be a very dilutive private placement plus preferential offer.

So, investors have to be prepared to cough up more money.

This makes a target price of 55 cents simply untenable.

I get the feeling that the manager of the real estate investment trust is looking a Mirae as a lifeboat now. 

And other investors might want to do the same and look for their own lifeboats.

Like I said in my blogs and videos on Eagle Hospitality Trust, insiders can sell for many reasons. 

However, when insiders decide to bail out when things are looking bad, it is probably because things are really in a bad shape.

Of course, we can choose to take a bet that things could turn out well but with so many pieces of the jigsaw puzzle in place, we can tell that the odds are not very good.

Fortune favors the brave as Matt Damon said in his ad.

What about AK?

AK is not brave and has no fortune.

AK talks to himself.

No one cares more about our money than we do.

Don't ask barbers if we need a haircut.

We don't have to make back our money the same way we lost it.

Don't throw good money after the bad.

If AK can talk to himself, so can you!

虎口拔牙.

That one, AK dare not do. 

You dare to do?

Reference:
1. Buying US office REITs in 2023.
2. Fortnight of banking crisis. Lessons.

Most important investment idea from "Evening with AK."

Producing my latest video on Singapore banks made me think about questions from a few readers during "Evening with AK and friends 2023."

Although they were different questions, I could thread them together as they had something in common.

This could be the most important investment idea participants could take away with them that evening.

Someone asked me if I already had a very large position in a good investment, would I add more to it or look for other investments?

I said I would rather stick with an investment that was doing well and was likely to continue doing well than to go look for another investment which I was unfamiliar with.

I likened it to having a good wife who took good care of me and cooked for me everyday.

In such a situation, why would I go look for a mistress who might not know how to cook and I might have to cook for her instead?

Why look in far off places for gems when we could find them in our own backyard?

There were members of the audience who asked if they should invest in US REITs and a couple of healthcare REITs listed in Singapore.

I could have answered those questions using the same analogy.

We don't want to diversify just because we think diversifying is a good idea. 

As Peter Lynch once said, we could end up "diworsifying".

We are likely to find it easier to make better decisions and far less likely to make mistakes when we compare a potential investment with a good investment we already have in our portfolio.

See the "wife and mistress" analogy?

Of course, as an investor, we could be polygamous, so to speak.

A member of the audience asked me what should he do with investments suffering paper losses?

He further told me that they were not paying dividends and could end up asking for more money from their investors.

That sounded like a nightmare that's worse than Tesla or Alibaba. It sounded like GRAB.

Sometimes, we must simply bite the bullet, accept that we made a bad decision and get a divorce.

Sometimes, to be fair, it was not a bad decision to begin with but things changed for the worse over time.

A divorce could be costly but it isn't the end of the world.

Pick up the pieces and life goes on.

Then, a member of the audience asked why did I put money in Lion OCBC HS Tech ETF since it did not pay a dividend?

I am quite sure I blogged the reasons why I did it but to thread it with the theme of this blog, I would have some fun now.

Sometimes, although investors are polygamous, we might get bored with having the same partners.

So, we go out looking for fun.

When we go out looking for fun, please remember to keep it that way.

"Milk the cow to drink the milk but don't bring the cow home."

Translated from a Chinese saying.

Don't let something which is supposed to be fun become something "ma fun" which means "troublesome" in Chinese.

I know what some might say.

"It's complicated."

How difficult is it to drink milk outside and not to bring the cow home?

In my opinion, it becomes "complicated" if the cow is brought home.

Before I get carried away, back to the ETF.

So, the ETF was something I bought for trading because its price became too enticing to ignore.

Fortunately, I made money not once, not twice but thrice doing it.

I even said in one of my blogs that it reminded me of why I did so much trading in my younger days.

So, do you see the common thread?

Something to chew on for the weekend, maybe?

Now, a nice way to end this blog is to remind myself why would I want to add to my already significant investments in Singapore banks?

I will remind myself why with my latest YouTube video.

Hope you Like the video. Hint, hint! ;p

If AK can do it, so can you!

Related post:
Hope you enjoyed "Evening with AK."
Recently published:
1. Fixed income update.
2. Why AA REIT?

Why AA REIT? Still one of my largest investments.

During "Evening with AK and friends 2023" which took place in the evening of 10 May, I said that I liked a few real estate investment trusts listed in Singapore.

I mentioned a couple of videos I produced on some possible red flags to look out for when investing in real estate investment trusts.

As for real estate investment trusts which I liked, I mentioned AIMS APAC REIT as being one of them.

AIMS APAC REIT is one of my largest investments and this has been the case for many years since the Global Financial Crisis.

I told a long story about the real estate investment trust, and I hope the audience wasn't bored by it. 

Anyway, I shared some of the reasons why I liked AIMS APAC REIT and still like it after so many years. 

George Wang, the person who led the recapitalization exercise together with AMP back in the Global Financial Crisis has a meaningful stake in the real estate investment trust. 

He is the chairman of the management team, and he said the following recently. 

“For a structure to grow tall, its foundations must be strong and sturdy. It is only through the disciplined enhancement and selection of strong foundational assets that we are able to achieve financial resilience and sustainable growth. The quality of our portfolio has underpinned our robust performance throughout the COVID-19 pandemic and this period of rapid interest rate hikes, and I am very pleased to see our FY 2023 DPU increase by 5.1%, following FY2022 DPU increase of 5.7%." 

Leaving aside the numbers which are commendable given the challenges, I really like what he said about foundations being strong and sturdy to grow.

Very down to earth. 

I really like that he did not lead the rescue of the real estate investment trust so many years ago and then left everything to the management team. 

It is evident to me that he is still active in giving directions. 

During "Evening with AK and friends", I said that I liked AIMS APAC REIT because of the way they pursue growth. 

The CEO said this recently. 

"Looking ahead, our markets remain attractive and continue to offer abundant growth opportunities despite market headwinds. We are actively reviewing opportunities within our portfolio to drive organic growth, which includes adding value through active lease management to secure higher contracted rents, to underpin our future earnings." 

The real estate investment trust still has properties with underutilized plot ratios. 

The management has a track record of successfully redeveloping such assets to grow value and income for investors. 

I am always wary of real estate investment trusts which keep buying properties, no matter the quality in order to grow and to collect fees, of course. 

It is like growth at all costs. 

Sometimes, growth can be too costly for us as investors because we are the ones who end up having to pay the price.

We have to be wary of managers who would even suggest buying properties which are only half occupied or properties with very short remaining leases of 15 years or so, for examples. 

The only people who would surely make money from such situations are the managers. 

Investors have to be more discerning on what kinds of deals to support.

Always ask if it makes sense or if we should be parking our money somewhere else?

Bear in mind the following.

Money should go to where it is treated best or even if this place is not the best place, it should be treated better here than in most other places.

Most people are incentivized by fees and there is nothing wrong with this if they made decisions which would benefit everyone. 

However, many people are selfish, and we have seen ample examples in real estate investment trusts listed in Singapore. 

I have many blogs about Sabana, VIVA and ESR, for examples, if you care to read more. 

Anyway, back to AIMS APAC REIT. 

They own a portfolio of 26 industrial properties in Singapore and three in Australia. 

I like their relatively strong balance sheet with aggregate leverage at 36.1% and a blended debt funding cost of 3.4% and a weighted average debt maturity of 3.1 years. 

About 40% of their portfolio is in the Logistics and Warehouse segment. 

This segment has been experiencing double-digit rental growth across the four quarters, with leasing demand largely driven by third party logistics providers. 

In FY2024, 21.4% of leases are due for renewal, of which 90.6% are from the Logistics and Warehouse segment and this presents strong positive rental reversion potential. 

They also completed the conversion of a multi-tenanted lease to a master-lease arrangement for 23 Tai Seng Drive in FY2023. 

Following an asset enhancement initiative or AEI which cost $1.6 million, the property is fully leased to Racks Central, a data center operator, for an average lease term of seven years. 

It also lifted the valuation of the property by 32.0% from $29.4 million to $38.8 million on 31 March 2023. 

I really like their strategy of organic growth to create value. 

The manager is also evaluating several potential asset enhancement initiatives and redevelopment projects. 

Upon completion, these properties are projected to deliver a stabilized net property income yield of between 7.0% to 8.0%. 

AIMS APAC REIT has been and still is one of my largest investments. 

I believe that the real estate investment trust will continue to bring home the bacon. 

Leadership provided by George Wang who has skin in the game, a capable management team, a relatively strong balance sheet and a shareholder friendly strategy to grow value are just a few reasons to like AIMS APAC REIT. 

Whether you should have AIMS APAC REIT in your portfolio depends on what you are looking for. 

Remember that AK has been invested in AIMS APAC REIT for donkey years starting from the time when each unit was only 17 cents before 5 to 1 share consolidation took place a little later. 

You want to ask if there are better investments than REITs now in an environment where money is significantly costlier.

Having said this, well run REITs which offer a reasonably attractive distribution yield will always have a place in any income investor's portfolio. 

If AK can do it, so can you!

P.S. After "Evening with AK and friends 2023" ended, I had a few more thoughts to share. I published a blog in the wee hours of the morning. See:

Hope you enjoyed "Evening with AK and friends."

References:
1. Why AK invests in REITs?
2. How to invest in REITs?
3. AA REIT's media release.

Why I avoided investing in EC World REIT?

A reader told me that, fortunately, he heeded my warning about EC World REIT and did not invest in it.

To be quite honest, I could not recall when I did that.

Doing a search of my blogs, I found out that I blogged about EC World REIT in early 2018 to explain why I had my doubts about the REIT.

When in doubt, I stay out.

I don't have to do a complete analysis to know that I want to avoid investing in something.

If I see a red flag or two, that is enough for me to stay away.

OK, I admit I am lazy.

As if you don't know.

Anyway, it could be interesting to revisit the reasons why I avoided EC World REIT and also a chat I had with a reader.

At the time, I was concerned about the relatively short land leases. 

They were similar in length to most Singapore industrial land leases. 

Of course, later on, I found out that it was a characteristic of Chinese real estate. 

So, it became less of an issue. 

At the time, I was also concerned with the relatively low distribution yield. 

The distribution yield was about 7%. 

If I remember correctly, we could get much higher distribution yields back in 2018 from comparable REITs in Singapore. 

Also, that 7% distribution yield was only possible because of sponsor support. 

Without sponsor support, distribution yield would have been less than 6%. 

That was some aggressive financial engineering at work.

Lower than 6% in distribution yield?

Definitely too low for such short land leases, I felt.

The sponsor also accounted for two thirds of the REIT's income. 

That was a huge concentration risk.

I also did not like that their debt was denominated in Singapore Dollar. 

It reminded me of Lippo Mall Trust. 

REITs should strive to borrow in the currency of the country their properties are located in to benefit from natural currency hedge.

To employ forward hedging against currency movement is expensive.

A natural currency hedge protects against disadvantageous foreign exchange movements without incurring extra cost. 

I didn't like that a seaport was part of the portfolio. 

EC World REIT was supposed to be about e-commerce assets. 

I got the feeling that the sponsor was just trying to dump assets on unsuspecting investors by including a port in the offer. 

In response to my blog, a reader had the following to say. 

"I actually view the Singapore Dollar denominated debt as being good for EC World REIT. 

"This is based on the likely appreciation of the Chinese Yuan against the Singapore Dollar. 

"Indeed, the Chinese currency has appreciated against the Singapore Dollar in recent times and, going forward, I believe this trend will continue given international pressure on China to reduce trade deficits. 

"I am quite heavily vested in EC World REIT. And thanks for sharing your views."

Regular long-time readers of my blog would know what I would have said to that. 

We can have an opinion on what might happen to the Chinese Yuan against the Singapore Dollar.

However, we must recognize that when we do that, we are speculating. 

What I have stated about natural currency hedge is a fact. 

The fact is that having debt in Chinese Yuan for Chinese real estate provides a natural currency hedge. 

I hope that reminding myself about why I avoided investing in EC World REIT has been a useful exercise for you too.

Recently published:
1. UOB: Some fundamental and technical analyses.
2. Why defensive investing is a good idea for most investors?

Related post:
EC World REIT.

Why defensive investing is a good idea for most of us?

If you have been following my blogs, you would be familiar with my reminder to myself that in the current environment, it is probably not a bad idea to be more defensive as investors.

The heightened geopolitical tensions in many parts of the world, sticky inflation, higher for longer interest rates, slowing economic growth and the prospect of economic recession in major economies make for a troubling brew.

I have also said that as a retiree investor for income, it really makes more sense for me to be more defensive and seek out capital preservation options, reducing beta or volatility in my portfolio.

When interest rates were very low, there were people who would borrow money to invest in real estate investment trusts and thought they were actually investing defensively.

Why?

An idea in defensive investing is to invest in assets which deliver stable earnings and meaningful dividends and real estate investment trusts, for the most part, looked like a good fit.

However, these investors who were borrowing money to invest in real estate investment trusts were not investing defensively. 

What they were doing was actually aggressive and would fall in the same class as margin trading and options trading.

If interest rates were to rise rapidly which they did, they could find themselves in a boatload of trouble as the unit prices of real estate investment trusts fell and cost of financing rose.

What they were doing had little difference with borrowing money to invest in Alibaba's common stock.

If the price of the common stock fall below a certain price, the lenders will come knocking which was what happened to some investment "gurus."

I never want to have to deal with such a possibility which is the reason for the word "bread" in "eating crusty bread with ink slowly."

If you are new to my blog and don't understand, I will leave a link to the relevant blog below.

Now, is defensive investing only good for retirees like AK?

I would argue that defensive investing is probably a good idea in varying degrees for people who do not have deep pockets.

For regular folks who still need their earned income, capital preservation should have a place in the overall scheme of things.

For retirees and people who do not have the ability to stomach big financial losses, their investment portfolio should be more defensive than not.

The ability to stomach big financial losses will vary from person to person.

How defensive an investment portfolio should be should have an inverse relationship with the ability to stomach big financial losses, theoretically.

The more able a person is able to take big losses, the less defensive his investment portfolio could be, therefore.

However, I have often seen people who are ill able to take big financial losses adopting very aggressive investing ideas.

I think they should ask themselves if they liked the idea of living next to an active volcano.

Defensive investing is also a good idea for people who are mentally unable to take big financial losses.

Losing sleep because you lost a few thousand dollars in a recent investment?

Well, then, you might want to do more defensive investing.

How do we do defensive investing?

I will not tell anyone what to invest in but I will say this.

As long as we invest with an eye on capital preservation, minimizing the risk of financial losses, we are taking a step towards defensive investing.

Promises of astronomical growth and future returns from businesses which are burning cash do not interest defensive investors.

Thinking of becoming more defensive in your approach to investing now?

If AK can do it, so can you!

Related posts:
1. "Eat crusty bread with ink slowly."
2. Update on saving for income.
3. More in equities or fixed income?
Recently published:
Investing or speculating in properties?

Investing or speculating in SG properties. ABSD nightmare!

Over the years, I have talked to myself about real estate and my philosophy.

With the Additional Buyer Stamp Duties (ABSDs) increased by quite a bit, a reader asked for my thoughts on the property market in Singapore now.

Regular eavesdroppers on AK would be able to guess the response.

My philosophy has not changed.

If we are investing in real estate, just like investing in stocks, we want to invest in an asset that, after expenses, will generate a meaningful income for us.

If we buy real estate thinking that the price of the asset will rise in the next few years and that we would be able to flip it for a profit, that is not investing.

That is speculating.

Usually, I would stop here.

However, for quite a few years now and it has gotten a lot worse, we have people buying real estate in Singapore not to generate any income nor to flip for a profit.

They simply want Singapore properties as a store of wealth because of the strong Singapore Dollar and the politically stable environment.

They are mostly foreigners.

Wow! 

So many ultra rich foreigners!

From which countries?

You ask, you answer.

I am not going there.

I have said before that when we buy a property, we want to ask 2 questions.

1. It is not just a question of affordability but we should also ask if it is value for money.

2. Do we have deep pockets for if things go wrong and many things could go wrong.

However, to these very rich people, these two questions are most probably irrelevant.

So what if the properties don't make money or if they should even lose money?

If the ultra rich are able to protect a big fraction of their wealth, they would still be very rich and that could be more than enough for them.

For the rest of us, we really have to stay grounded and not be swept away by barbers telling us we need to have more frequent haircuts even if we are  going bald.

Now, for those who bought properties in Singapore recently thinking they could flip them a few years later at higher prices, the much higher ABSDs announced might have turned those dreams into nightmares.

The government of Singapore wants properties to be sold mostly to genuine owner occupiers because housing affordability is a big issue.

Singapore welcomes foreign direct investment but we do not want foreign direct speculation.

Hence, the recent strengthening of property cooling measures.

For those of us who are still thinking of investing in properties for passive income in Singapore in spite of the ABSDs, I would go back to those 2 questions I said we should be asking.

Cannot remember?

Scroll up and take a screenshot.

Nightmares do not discriminate between speculators and investors.

This is a fact.

Pay a price too high and we could have a high price to pay in future.

Anyone who is not ultra rich but wants to be a real estate investor in Singapore might want to read the related posts below.

Related posts:
1. Condo investment has been a drag.
2. This condo has also been a drag.
3. Investment philosophy and properties.
4. Two questions we should ask.
5. Affordability and value for money.

IREIT secures 15 year lease for Darmstadt campus.

This will be a very quick update on IREIT Global.

When I blogged about IREIT Global in February, I said I wasn't doing a Chicken Little because the vacant asset in Darmstadt would be progressively filled.

I also said that rental escalation was likely to continue as inflation remained elevated in Europe which would lead to higher asking rents as rents were linked to CPI.

The latest news from the management of IREIT Global is that 25% of Darmstadt Campus has been leased to a German federal government body.

The lease has rent secured at the prevailing market rate and it starts on the 1st of June and will last for 15 years.

Yes, 15 years.

This development is encouraging.

I believe that IREIT Global's management is competent and that the REIT owns quality assets which are very desirable.

Regular long time readers might remember that I also like the fact that IREIT Global's sponsors own approximately 50% of the REIT's units which means they have plenty of skin in the game.

Although this latest development is very good news, 75% of the asset in Darmstadt still needs to be filled.

So, I remind myself there is no hurry to increase my investment in the REIT as we are not out of the woods yet.

I will wait and see while my war chest continues to be refilled by incoming dividends.

Recently published:
1. Update on plan to save for income.
2. Tesla's results and valuation.
Related posts:
1. IREIT Global: EUR 1.28c DPU.
2. 1Q 2023 passive income.

Tesla's results and valuation. What is a fair price to pay?

This is going to be a blog for me to organize some scattered thoughts and to deposit them in my Pensieve.

I am mostly an investor for income with an eye on value.

So, I did not pay much attention to high tech stocks which were mostly classified as high growth stocks at the same time.

The eye watering PE ratios were just too off putting.

Of course, in the years when interest rates were almost zero, investors who were looking for higher returns were more forgiving.

So, growth stocks took off and eye watering PE ratios became eye popping.

Now that cash is no longer trash, investors are more demanding. 

Investors want to see profits and not just promises of future profits.

This has led to the decline in the stock prices of high tech stocks.

However, if we are still interested in investing in high tech businesses because many of them are arguably going to be even more important in the future, then, we want to look at the numbers of individual businesses.

We should not let the thinking or feeling of Mr. Market to guide our decisions.

Last night, I produced a YouTube video on Tesla and said that it was a strange animal.

Today, I woke up to see that Tesla's stock price has declined from US$181 to US$163 which is a significant 10% drop in just one day.

If you don't follow me on YouTube, you might want to watch the video here.

Anyway, in the video, I said that, from the latest quarterly report, it looked as if Tesla was no longer a growth stock.

Tesla isn't a value stock either. 

Tesla's stock price has plenty of room to fall before it becomes a value stock.

Tesla doesn't pay a dividend and, so, investors are not paid to wait for things to improve.

In the video, one thing I did not mention was what price I thought Tesla's stock should be trading at.

Tesla's PE ratio was around 50x when I looked last night. 

It should be around 45x today after its stock price declined.

This is still a very high PE ratio and suggests that Mr. Market is still pricing Tesla like a growth stock.

However, for a more accurate picture, we should look at the PE to growth (PEG) ratio since Tesla is supposed to be a growth stock.

In Tesla's latest quarterly results, they reported a 24% growth in revenue but a 24% decline in earnings.

A PEG ratio of 1.0 suggests that a stock is fairly valued and a ratio of below 1.0 suggests that a stock is undervalued.

So, with a PE ratio of 45x, to make a strong case to value Tesla like a growth stock today, Tesla should be growing its earnings yearly by 45%.

Of course, this is if we want to see a PEG ratio of 1.0.

If we were to think that a PEG ratio of 1.5 is reasonable which means putting Tesla on par with some Japanese car manufacturers, then, a 30% growth in its earnings would be sufficient with a PE ratio of 45x.

Aggressive price cutting to defend market share is hurting earnings and it looks like there will be more price cuts to come, according to Elon Musk.

It would take a very optimistic investor to think that Tesla would be able to grow earnings this year by 45% or even 30%.

Call me pessimistic but it would be quite amazing if Tesla should even be able to report zero earnings growth this year which is less bad than the negative earnings growth it saw in the first three months of the year.

As Tesla does not pay any dividends, Tesla's investors should have deep pockets too as they are not being paid to wait.

Optimism does not bring home the bacon.

If Tesla's earnings continue to decline which looks very likely at this point in time, then, its stock price should have more room to fall.

Tesla's investors should not be using borrowed money to buy more stocks of Tesla, to be prudent.

Margin should be avoided like the plague or margin calls could come knocking on the door.

Oh, I did not say what price I think Tesla's stock should be trading at?

Tesla has a cult following and cultists are fanatical by nature.

They probably don't care about the fundamentals.

So, although I think Tesla's stock should be trading at a much lower price than where it is at today, really, your guess is as good as mine.

All I will say is that if we are rational investors, we want to invest when valuation is more reasonable.

If Tesla is unable to deliver any earnings growth this year, then, its PE ratio has to be a lot lower in order to make it a more attractive investment.

The S&P 500 has a PE ratio of about 23x which isn't cheap either but it could be where Tesla's common stock has to be if it does not deliver any respectable earnings growth.

This would see the price of its common stock at 50% of where it is at today or about US$80.00 per share, all else being equal.

Are rose tinted glasses still in fashion?

Recently published:
More in equities or fixed income?

Related post:
Is there hope for Chinese tech?

More in equities or fixed income? Update on my health.

This started out as a reply to a reader's comment but it got pretty long.

I also feel that there are things which many people might want to eavesdrop on.

So, the reply is here as a blog.

Hi yuhui,

I like your phrase "super bloomers" more than "late bloomers."

Before I continue, I want to caution you about having only one meal a day which is the most extreme form of intermittent fasting.

I tried that for a few months last year and lost so much weight that my mom got worried. 

She told me I looked like Chew Chor Meng who was quite ill.

When I met Kenji and Victor, my friends from The Fifth Person, about 6 months ago, they were shocked by how thin I was.

Anyway, I have since gone back to having at least 2 meals a day, eating within a window of 6 to 8 hours each day.

So, I am still doing intermittent fasting but a less extreme form.

I have recovered from being borderline underweight, putting on 5 kgs in the last few months.

Anyway, please be cautious because it is very hard to get sufficient nutrition for a regular person by having only one meal a day.

As for what I have done in the stock market, I did nothing in April.

In January, I bought back some stock of ComfortDelgro.

In February, I sold my investment in SATS.

In March, I bought some stock of OCBC.

I have been mostly focused on increasing exposure to fixed income in the last few months.

The question is whether someone who doesn't have as much exposure to equities should be deploying more funds into equities or fixed income at this point?

To help with the decision making process, look at the prevailing risk free rates.

Please bear in mind that this is only one of many possible considerations and it is just a starting point.

If we have an investment horizon of 10 years, an idea could be to compare the 10 year average yield of the Singapore Savings Bond with the estimated returns from investing in a business.

The risk free rate is around 3% per annum.

So, if we were to invest in a business which is not risk free, we would demand a higher return.

Investing in Singapore's banks is not risk free but they are relatively safe compared to Centurion Corporation, for example.

Therefore, a sustainable 5% dividend yield from the banks would be more acceptable than a 5% dividend yield from Centurion Corporation which has a much weaker balance sheet and less robust asset quality.

A 5% dividend yield from ComfortDelgro is acceptable because they have a very strong balance sheet and, therefore, should be relatively safe.

A 5% distribution yield from a REIT which is highly geared is, in my opinion, undesirable, because a REIT distributes at least 90% of its income to investors.

If by distributing 90% of its income to investors, a REIT is only able to eke out a 5% distribution yield, to me, it is not an attractive investment, especially in today's high interest rate environment.

If I must invest in REITs, for a start, I would look for those with relatively low gearing, a high interest cover ratio and a distribution yield of 7% or more in order to be competitive.

The final mix of equities and fixed income we have in our portfolio will depend on what we believe is right for us.

We can only hope to be approximately right and by using some common sense, we should be able to avoid being absolutely wrong.

"What we do is not beyond anyone else’s competence." - Warren Buffett

This isn't an exact science.

If AK can do it, so can you!

Update on Evening with AK and friends 2023:

A few tickets left. Ticketing: HERE.

References:
1. Retirement adequacy for late bloomers.
2. Saving for income: SSB and T-bill.
3. Building investment in OCBC.
4. 1Q 2023 passive income.

Recession could hit Singapore. Do what Buffett and AK say?

Warren Buffett famously said to investors the following.

"Don't worry about economic predictions."

In his opinion, 

"... it really doesn't make any difference in what I do today in terms of buying stocks or buying businesses what those numbers tell me. 

"They're interesting, but they're not guides to me. 

"If we buy a business, we're going to hold it forever. 

"So we're going to have good years, bad years, in between years, maybe a disastrous year some year."

Now, this perspective is very interesting and also instructive.

It should be interesting to all investors.

However, it is only instructive to certain investors.

Who are these certain investors?

Investors whose circumstances are similar to Warren Buffett's, of course.

Not everyone has money gushing in regularly and, definitely, not everyone has more money than they would ever need.

We do not have the resources that Warren Buffett and Charlie Munger have.

When we read such opinions, therefore, we have to think of our own circumstances.

For most of us, paying attention to the early signs of where the economy might be headed is not a bad idea.

In a YouTube video I recently produced, I said that the Monetary Authority of Singapore is worried about the economy and if they are worried, we should be worried too.

Singapore's economy is slowing down fast and it is likely to get worse as many major economies seem to be heading for a recession.

So, the Monetary Authority of Singapore has decided to put fighting inflation on the back burner and not to tighten in a move that is expected to help support the economy.

Most people still need their earned income and they should worry about possible retrenchment.

Indeed, massive layoffs started in the tech sector and if a recession hits, other sectors would most likely also be impacted.

Only iron rice bowls will be safe.

What to do?

If we do not have an emergency fund, we should really start one.

If we have an emergency fund already, do a review and see if it is still adequate.

Even if we have passive income, we should have an emergency fund because passive income could dry up.

Whenever I recall how my interest income and dividends reduced during the COVID 19 pandemic, I get PTSD.

If we are fully invested in equities, we might want to start building a war chest.

If we already have a war chest but it is somewhat empty like mine, try to fill it up.

There are so many things that could go wrong in the next few months.

Geopolitics in many places could worsen.

The banking crisis really isn't over yet and, in a recent interview, Warren Buffett said so too.

Depositors will not lose money but investors will lose money because they made bad investments.

I am very "kiasu" but, given the uncertainties, I am more "kiasi."

I tell myself that I want to do a better job of preserving capital and having more cash really isn't a bad thing.

This is especially when the front end of the yield curve stays elevated.

A risk free return of 3.65% to 3.85% p.a. with zero volatility is very decent.

It isn't a bad idea to be more defensive, especially if it gives me peace of mind.

I said this to a reader in the comments section recently:

"Being substantially invested in equities already, I am more likely to regret not having resources in a bear market than not having invested more to benefit from a bull market, if it should happen."

At this point, it is important to remind anyone who is eavesdropping on me that all of us have different circumstances.

So, just like how we shouldn't accept what Warren Buffett says as being instructive for everybody, we should not accept what AK says unquestioningly as well.

We are also wired differently and will have our own beliefs.

Do the right things and the right things will happen for us.

If AK can do it, so can you!

Recently published:
T-bill ladder completing.
References:
1. Fixed income strategy.
2. Survivability and opportunity.