High yielding business trusts: A discussion.

I was sorting out my preparation notes for my presentation at Invest X Congress on Saturday and found an article published in Channel NewsAsia which I printed out on 10 June 2014, just 4 days before the event.

I had meant to share this at the event but I totally forgot about it. It was in my folder all along. Growing old and forgetful. I consoled myself by saying that even if I had remembered, I wouldn't have had the time to talk about it. Anyway, I will talk about it in my blog.

The article was about business trusts and it said that "dividend yield payouts are a key factor to consider."

Then, a consultant went on to say "If you want to invest in business trusts, you shouldn't be looking so much at capital gain... your objective is more dividend yield. Prices do come down, but you actually still get your dividend yield.

"As of today, we're looking at some business trusts giving more than 10 per cent yield, of course at higher risk, but if you think that the risk is manageable, it's actually quite attractive at this point in time."




I wrote a few reminders to myself:

1. Dividend payouts are a key factor to consider, not the only factor. Indeed, it is not the only key factor either. Note that they used the indefinite article "a" and not the definite article "the". We have to look at other factors too. For example, how highly geared is the business trust. What kind of debts does it have and how are they structured?

2. When we invest in business trusts or in any asset with an eye to generate income, we should also keep an eye on possible capital gain or loss. It is possible to have our cake and eat it too which is sweet. It is also possible that we could lose a big chunk of our capital even as the investment distributes money regularly to shareholders.




3. If we say that we still get our dividend yield even if prices were to fall, it would be true if we were to base our calculations on our entry prices. Well, we can do this if it matches our motivation for being invested. However, doing this is not useful in helping us to decide whether to buy more or to sell some. We should look at the yield on our investment based on current day prices so that we can manage our capital more efficiently.

4. Does it make sense to invest in a business trust that delivers a constant dividend yield on our cost while its unit price keeps dropping over time? Could it be that we are taking back our own money? So, is the dividend actually a partial return of capital? So, we have to ask if the business trust is becoming less valuable over time? Prices do come down and even if we still get our dividend yield, we have to ask why.




5. When something is riskier to invest in, we should demand a higher yield to compensate for the risk which we are asked to undertake. How do we know if the yield sufficiently compensates for the higher risk? How do we know if the risk is manageable? Is the investment within our circle of competence to make such a call? So, although the consultant says that there are riskier business trusts available that offer more than 10% in dividend yield which is attractive at this point in time, we have to decide if these are suitable for us.

Motivations and methods in investing.

Understand also that what risk is acceptable now might not be acceptable in the future. So, to make things simpler, it might be a good idea to simply to go for investments which have much lower levels of risk and yet deliver decent dividend yields to shareholders.

When we invest for income, we must have certainty of regular distributions. Ideally, the dividend paid out regularly to shareholders should be sustainable and our capital should stay intact. It is about the investment having good fundamentals and it is about us getting in with a margin of safety.

When we read any investment related publication, it is important to do so with a questioning mind. Don't take anything anyone (including me, of course) say at face value.




Related posts:
1. Invest X Congress: Q&A.
2. Rickmers Maritime Trust: 1 for 1 rights.
3. CitySpring Infrastructure Trust: Rights issue.
4. K-Green Trust: A bad investment?
5. High yields: Successes, failures and the in-betweens.
6. HPH Trust: Storm clouds over a safe harbour?
7. Croesus Retail Trust and Perennial China Retail Trust.
8. Portfolio review: Unexpectedly eventful.

Change to become richer. A need or a want?

Much of my writing is geared towards having people making positive changes in their lives. I also blogged about how some people told me that I should have good debt in life and how I have been described by some to have a peasant mentality towards wealth building. Are these people also trying to encourage me to make positive changes in my life?

There are so many types of people in this world all with their own ideas on how things should be. They have their own realities which are very much conditioned by their own beliefs. While it is true that what works for some might not work for others, we do not want to be dismissive. Why? What if it could work for us? We should keep an open mind, shouldn't we?

People often say, "If you don't try, you won't know."

There is a second half to this which is often not said, "Some things, you should not try."

So, we should not blindly adopt ideas and hope that they work for us. Then, how do we know which ideas to try out? There are so many ways to approach this but I feel that "self" is the most important consideration.

Sun Tzu said, "Know thy enemies and know thyself and be victorious in every battle."

We might have also heard the saying, "We are our greatest enemy." So, knowing thyself is more important than knowing thy enemies.

At the very basic level, we have to question our ability to see something through. This is, however, not enough. We also have to question whether we have the temperament to make an idea work for us. If we do not have the right temperament, it would be hard to have a strong will.

So, for example, I keep saying that one should take risk to protect and grow one's wealth but should a risk averse person do this? His temperament is clearly against this. Even if he had the ability to do this, he might not have the will to do so. He would worry too much and could suffer from anxiety.

Now, I have a preference not to have debt in my life, given a choice. I like the peace of mind that comes from being debt free.

To anyone who is thinking of taking on more risk, a pertinent question to ask is, therefore, how much risk would our temperament allow us to take on comfortably. Then, ask if we are willing to push beyond the limits of our comfort zones.

All of us would like to be comfortable in life. Is there any reasonable person who would rather be uncomfortable? However, sometimes, we cannot afford the comfort and that is when we would have to go out of our comfort zones. Sometimes, we are forced to make changes.

So, some need to change to become richer while some do not need to change to become richer although they might want to change to become richer. To change or not to change? This could be a question of necessity for some and a question of desire for others.

Related posts:
1. Good debt is always good?
2. To be a happy peasant.
3. Money making.
4. Three point turn.
5. A good cat.

Want to be wealthier without higher risk?

More than a year ago, I wrote about a conversation I had with someone who was worried about the effects of inflation on his personal wealth. By chance, I met him over the weekend and we spoke briefly. He lamented that he did not listen to me as he could not come to terms with the idea that to protect his wealth, he had to take risk.

This reminds me of a saying in Hokkien I heard recently:
Afraid that grasping too loosely might let the bird fly away and that grasping too tightly might kill the bird.

So, fearing the wealth destructive effects of higher inflation, he wants higher returns from investments that have higher risk but the problem is that he cannot accept the higher risk!

If not for the fact that he looked so serious and troubled, I would have made a joke out of it.

This person is very careful with his money. Perhaps, too careful. Well, he has a family to care for and with young kids, I suppose he is right to fear risk. If there should be an investment that would offer him high returns with near zero risk, I am sure he would have jumped on it, but is there such a thing?

Anyway, I did not know what to say to make him feel better and after making some small talk, I bid him farewell. Would you know what to say to make someone feel better in such a situation?

Some people are just ill disposed to risk taking. Live and let live, I guess.

The paradox is that he is actually already taking risk by leaving his money in his bank account in the current low interest rate, high inflation environment and he is definitely not growing any wealthier.

Related post:
To protect our wealth, we have to take risk.

Risks, risks and risks.

This blog post is in response to a comment by a reader, Temperament: click here.

Hi Temperament,

With my limited knowledge of trading, I know that true blue traders must be emotionless. They cannot fall in love with anything. They should not hate anything either. They do what the charts tell them to do, when to long, when to short, when to take profit and when to cut loss. So, I don't think they truly hedge. Hedging to traders could mean having a looser cut loss so as not to be whipsawed, perhaps.

As for risk management, I am a poor example. By conventional wisdom, we should not have more than 10% (some would say 5%) of our money in any one counter. For me, I allow up to 40% of my money in a single counter sometimes.

For sure, we can and should reduce risks in investments but it is impossible to eliminate risks.

It is very interesting how some seasoned investors would tell me that what I do is very risky, having 40% of my money in a single counter but if they only invest in Singapore equities, they are also exposed to a single country risk and a single asset risk to boot. Are they truly diversifying and reducing risk by having only 5% of their money in any one counter?

Apparently, we have to diversify across asset classes and go global to truly manage risk. How many of us mass market retail investors can do that?

So, there are risks on different levels. What about unit trusts? There would be advocates of unit trusts which are supposedly less risky. Perhaps this makes the lower returns justifiable? OK, I am being cheeky here.

Some would then argue that if we know Asia is where growth is and if we believe in Singapore, why bother with other markets? I shall leave that question open.

At the end of the day, how much risk are we able to stomach depends on the individual. We just have to be better at what we do. If we can thrive in a higher risk environment with higher rewards, that is not such a bad thing, is it?

Risks and rewards: TA and FA.

In an article in Investor's Business Daily on 7 Jan 09, Alan R. Elliot wrote:

"One of the most common mistakes among investors young and old: never bothering to learn to read charts. Yet the price and volume action shown on charts is a critical tool."




The long and short of TA is to determine resistance and supports as the basic idea is that we should sell at resistance and buy at supports. This is in conjunction with trend analysis. For example, if the trend is up, everytime the price falls to support, generally, it's good to accumulate.

Then, we want to look out for chart patterns which might hint of trend continuation or a trend reversal. In TA, it is always important to seek confirmation in the following session after a signal, either bearish or bullish, manifests itself.

I know of people who have paid thousands of dollars to take up courses in TA and I can't possibly do justice to the subject here with a short post. Investopedia is a very good free online resource and I've provided a link in a box labelled "RESOURCES" here in my blog.




In the same article, Alan went on further to say that "other investors suffer from the opposite weakness: not knowing how to analyze fundamentals. That is, they don't know what to make of sales, earnings, margins and other financial data. So, if there are areas of financial reporting you haven't gotten your arms around, make 2010 the year you master them."

If a person bought some stock without any knowledge of fundamental analysis (FA), he could make some money depending on TA as he trades the psychology of the market.

If a person has no knowledge of TA, he could also make some money gunning for undervalued stocks.

If a person has no knowledge of either, he is going in with 100% risk. If a person has knowledge of both TA and FA, his risk is not 0% but it is much reduced.




What about depending on professional analysts, you may ask? My answer is to do your own research. This gives you confidence in your decision and allows you to hold with conviction.

If an analyst says "BUY", use that as a starting point and go look through past financial reports and announcements made by the company. Compare with peers in the same sector. Look at the macroeconomic and geopolitical conditions. Consider financial or any other trends which might have an impact.

Then, decide if the company is fundamentally sound and if the prospects are good. If you have a green light, use TA to determine a fair entry point. I must have mentioned this a few times before and it sounds really quite simple. Of course, it's not. It entails some hard work.




So, if you have yet to learn FA and/or TA, it's time to hit the books. You will find it all worthwhile.

Related posts:
1. Rich Dad, Poor Dad: 2 are better than 1.
2. Recommended books for FA and TA.
3. 5 rules for successful stock investing.
4. Secrets of Millionaire Investors.
5. Little Book of Value Investing.

Bungee jumping, anyone?

Under normal circumstances, if we were given a choice to stay safely on land or to jump off a bridge, I think we would choose to stay on land. If we were guaranteed safety if we were to jump off a bridge and collect an experience of a lifetime, would we do it? Many still wouldn't or else bungee jumping would become a very common pastime.

Last night, I had dinner with a few friends and as usual, we talked about investments as well. We all have friends who are very risk averse and would rather leave their money in the banks and collect 0.125% interest p.a. Some are "smarter" and leave their money in one year fixed deposits and collect 0.7% interest p.a. Now, we are talking about people with excess cash, beyond what they need in the event of unemployment over a period of 6 months. They are safely on land or so they think.

The threat of wealth erosion by inflation is very real and leaving our hard earned money in bank accounts to collect <1% p.a. isn't the wisest thing to do. The Monetary Authority of Singapore lifted its 2010 inflation forecast to between 2.5 and 3.5% on 19 Nov 2009. Land we were standing on which seemed firm just now might quickly become quicksand. Jim Rogers says that the worst thing to be in now is cash. It's perhaps an exaggeration but I think we get the idea.

There are many financial instruments which would "guarantee" higher returns but few would provide the liquidity which the stock market has. All financial instruments carry an element of risk to varying degrees. Make no mistake, the stock market has plenty of risks but it also has ample rewards for those who are equipped properly to traverse the difficult terrain. Having the right skills and, dare I say, right companions would make the journey a smoother one. Ultimately, do our due diligence and make our own decisions. We have no one to blame for our failures but ourselves.

There are many reasons why people would not venture into the stock market. Fear of losing money is probably the main reason. Not everyone has the mental strength to overcome this fear to move their money out of their "risk free" savings accounts into the stock market. We have friends who say they "cannot lose a single cent" and that they "would lose sleep at night if they have money in the stock market". It would be better to leave them be. Till this day, I have not had the good fortune of knowing anyone who had only made money in the stock market and did not lose a single cent. People who ask for 100% safety for their money (in nominal value) would have to settle for <1% annual yield.
Things Singaporean: SRS, CPF-OA and CPF-SA.