Motivations and methods in investing (UPDATED August 2018).

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.

Source: edwardjones.com

..




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.

SPH or SPH REIT?

Some people are surprised to learn that I am not all that interested in SPH REIT. Instead, I am more interested in SPH. Why is this so?

I do not think SPH REIT particularly attractive with an estimated distribution yield of about 5.6% although a gearing level of about 30% is comfortable. A yield of about 6% without a higher gearing level would be what is needed to attract me. Otherwise, I think I am better off increasing my investment in SPH.

Simplistically, if I could get a 5% dividend yield by being a shareholder of SPH which will also see its gearing level drop to almost zero with a bigger cash hoard after setting up SPH REIT, why would I still be interested in the REIT?

OK, before I go on, I must say that I am speaking from the point of view of someone who already has a substantial exposure to S-REITs. For someone who has no exposure to S-REITs yet, SPH REIT's IPO does seem like a decent enough proposition.

Some quick calculations show that SPH will see a slight decline in its income by having its ownership of the two malls diluted. So, logically, we would see a decline in its annual dividends paid to shareholders as well, everything else remaining equal. Proportionally, instead of 24c DPS, we could see 21c DPS in future.

In the recent market weakness, I bought more shares of SPH. Assuming an average price of $4.20 a share, a 21c dividend represents a 5% yield. On top of this, the management has promised an 18c special dividend because of the REIT's IPO. This is an additional 4.28% return.

My purchases last month were the highest prices I have ever paid for SPH's stock. Prior purchases were made at between $2.86 and $3.55 a share. However, believing that the management has unlocked value for SPH shareholders in this latest exercise, I am willing to pay reasonably higher prices for the company's stock.

Technically, a pull back could see SPH's share price retreating to test support at $4.22 while any further rise in price could meet with resistance at $4.39. Fellow SPH shareholders want to approach this cautiously since the stock is spotting a downtrend and we don't want to be caught buying at resistance.

Related posts:
1. Which stocks have I been accumulating in June 2013?
2. SPH: A REIT investment.
3. SPH: Better investment than retail S-REITs?