Mr. Eric Kong, from Aggregate Asset Management, is an advocate of value investing – It examines the science behind investing, and how you can take advantage of value investing to implement a systematic process to reap double digit returns over long horizons.
I like to share this post By David Kuo | December 4, 2013
David Kuo – Director, Motley Fool Singapore
If you went to bed on the last day of 2012 and didn’t wake up again until today, then apart from having overslept badly, you might be forgiven in thinking that the Singapore stock market has been hibernating all that time as well.
On the 31 December 2012, the Straits Times Index stood at 3,167 points. Today it is around 3,190 points – a miniscule rise in the grand scheme of things.
Is that it?
You may well ask if that is all that the stock market has to offer – a handful of points after eleven long months of investing. What a waste of time.
Of course, we mustn’t forget the 3% or so of dividends that has been paid out during that time. But even still, a few crummy points and a 3% dividend yield are not going to make any of us very rich.
It is true that the Singapore market has been largely flat this year. But as we all know, the stock market is no different to any other market. At any moment in time it is made up of buyers and sellers who compete to acquire and dispose of shares.
A flat market would, therefore, imply a distinct dearth of people who want to buy shares and a significant scarcity of those who want to sell their stock.
But that’s ok.
We Fools are long-term investors. We don’t need a high-octane market to get our investing juices flowing. We invest in companies for the long haul. So, just as Warren Buffett doesn’t need a daily quote on his stake in Coca-Cola to validate his financial well-being, we don’t need a rampant stock market to know that Singapore companies are doing well.
But here is something else to consider.
The here and now
Since 1988, the Straits Times Index has been higher 60% of the time five years later. So the market was higher in 1993 compared to 1988; it was higher in 1994 compared to 1989; it was higher in 1995 compared to 1990 and so on.
What’s more, since 1988, the benchmark index has been higher 75% of the time 10 years afterwards. But hold your horses – things are about to get even better.
If you take a 15-year time frame, the stock market has a 90% chance of being higher one and a half decades later. And if you push the investing period out to 20 years, then it is almost a nailed-on certainty that the market could be higher two decades later.
That is what is meant by long-term investing. But the good news doesn’t stop there.
Since 1988, the Straits Times Index has risen from around 999 points to around 3,190 points today. That equates to an annual increase of roughly 5%. Tack on the 3% dividends that you receive annually and you have a total return of about 8% a year.
That may not seem like much. But an 8% total return is really quite decent.
If in 1988 you had regularly invested S$200 a month into a stock market index tracker, you would have seen the investment grow to around S$190,000 after 25 years. If the regular monthly investments had been S$1,000, then the pot would have grown to almost S$1 million.
Schoolboy error
Point is, flat markets don’t remain flat for long. So don’t make the mistake of believing that you need to regularly stir the pot to achieve better returns. That is a schoolboy error made by not only many private investors but by professional investors too.
The principle applies not only to investing through index trackers but also to investing in good quality stocks. You don’t need to churn your portfolio to achieve better returns. Churning is great for making butter but not for making money from shares.
When we invest, we are essentially buying a small stake in a business. If the business does well, then the share price will eventually follow. It really is that simple.
One of the best pieces of advice on investing I have ever heard is to treat the stock market as you would your current account – just keep adding, adding, adding money to it whenever you can afford.
The reason is head-slappingly obvious.
The market has a 60% chance of being higher five years from now; it has a 75% chance of being higher 10 years from now; it has a 90% chance of being higher in 15 years’ time and it is almost certain to be higher in 20 years’ time.
The odds are overwhelmingly in favour of the long-term investor. And that is why we say that it is time in the market that counts, not timing the market.
I don’t worry about interest rates going up. I focus my attention on an elite group of blue-chip, dividend-paying stocks. You see… despite what a lot of folks think… dividend-paying stocks outperform the market whether rates are going up or down…
It’s a common worry that dividend-paying stocks will suffer if interest rates rise. But it’s a myth. Independent financial research firm Ned Davis Research Group found that dividend stocks outperformed non-payers from 1927 to 2011 whenever the Fed raised rates.
Dividend-payers returned 2.2% per year, while non-payers returned 1.8% per year. And Ned Davis discovered that dividend-payers beat non-payers when interest rates fell, too. During the study period, dividend-payers returned 10% a year when rates were falling, versus a -2.5% return from non-payers.
The lessons are simple and clear. Famous money managers don’t have all the answers. Calling tops and bottoms and worrying about interest rates is a waste of time when you stick with great dividend-paying stocks… Those investments will keep your money safer while earning you higher returns in periods of both high and low interest rates.
With this in mind are investors reaching the Euphoric Stage as the S&P 500 is nearing old highs and the Dow is hitting new all-time highs?
In dividend growth investing, the dividend growth portfolio is focused on an ever-increasing dividend stream. Price is not the focus. I don’t care about the market fluctuations, I solely want to stay invested in companies that will hopefully allow me to create a flow of income that does not force me to draw from a capital pool, thus moving my focus away from price. This will hopefully also eliminate the emotional aspect of investing. I talk to grandparents and retirees, and they talk about the ups and downs off the market and how their portfolios are effected. I don’t want this to be me.
Also – the great thing about a dividend growth portfolio that focuses on an income stream, is that over time, your total capital appreciation should increase as well. Only well-run, profitable companies can consistently grow earnings and continue growing dividend payments. Price follows earnings over the long haul.
Start young, buy a diversified basket of quality companies with a history of creating an ever increasing yield on cost, and focus on your dividend stream, not price or any arbitrary nest-egg amount.
Then I live on the dividends/income rather than having to sell some of the base assets to generate income. That has to be tough for folks to do in down markets.
Some people think that “It does not make one bit of difference whether you finance retirement from “income” or the sale of assets.”
WRONG!
It makes a huge difference.
There’s a difference between eating the eggs (“income”), and killing the chicken (“sale of assets”).
I am a dividend growth investor. The principal goal of dividend growth investing is simple: To build a reliable, steady stream of rising income.
What is Dividend Growth Investing?
It is a strategy to accumulate dividend growth stocks that provide a growing stream of income from rising dividends. The dividends are then reinvested during your accumulation years to speed up the accumulation process. Then when you retire, you stop reinvesting and simply take the dividends as income.
Depending on how much you have accumulated and other sources of income, you may not have to sell anything to create sufficient retirement income. The income is generated naturally by your investments. Studies show that in most years, the rising dividends grow faster than inflation.
Returns from Stock Investments
There are two—and only two—ways that stocks deliver returns. The historical (decades-long) average 10 to 11 percent annual total return from stocks consists of these two elements: price changes and dividends.
In the stock market, prices change constantly. Prices go both up and down, so the price component of total return can be either positive or negative over a particular time frame.
The second component of stock returns is dividends. As we know, dividends are cash payments made directly to shareholders by corporations, and the market plays no role in the dividend component of total return.
In contrast to price return, which can be positive or negative, the return from dividends is always positive, as dividends cannot drop below zero.
The total return from a stock over any time period is the sum of the two components just described, leading to this most fundamental of equations:
Price Change + Dividends = Total Return
Total return is normally computed on an annual basis.
See this article: Nirvana for Income Investors: Dividend Growth Meets Low Volatility
Over the long-term, dividend growth has proven to lead to strong performance. According to Ned Davis Research, over the past 30 years through 2012, the dividend growers (and initiators) in the S&P 500 have an annualized return of 9.5% compared to 7.2% for dividend payers that didn’t consistently boost their dividends. Stocks in the index that didn’t pay a dividend limped in with a 1.6% annualized gain.
Secular bull and bear markets of S&P 500 from January 1871 to March 2013. With the exception of the very short secular bull market from 1920-1929 these secular periods range from 14-18 years normally.
This means the average person has less than 20 years to save for retirement. And, very importantly that “buying and holding” during the wrong secular cycle can be devastating to retirement and savings goals. Successful investing, over the specific time frame that you have to reach your retirement goals, is mostly dependent on being in the right secular cycle. Currently, despite the current cyclical bull rally, the markets remain contained within a secular bear market period.
If we truly want to win the long term investment game we have to learn to behave differently. Instead of jumping into, and out of, our relationship with the market – we need to develop an understanding that the equity markets are not “long term relationship” material. That puts us into a position to manage our exposure to the markets accordingly.
A relationship built on the proper understanding of the risk, how to manage those risks, and keeping expectations in line with reality are key to attaining your investment goals. When the markets are being friendly we can enjoy their company – but we do not have to fall in love with them.
Our job, as investors, is to deploy cash into the best opportunities available, at any given time, which will inure to our benefit within our specific time frame. If there are no opportunities currently available – cash is the best place to be.
It is absolutely true that you will miss out on some of the highs, however, you will also miss a bulk of the lows. However, missed opportunities are much easier to replace than lost capital. The one thing that can never be regained is the time lost along the way.
This article below appeared in The Straits Times 12 March 2013 (see the Wealth Report 2013)
Singapore ‘set to be No. 2 wealth centre in the world’
It will overtake NY in 10 years; London remains No. 1, says report
By Cheryl Ong
SINGAPORE will not only continue to be a favourite investment destination
for rich folk but will become one of the world’s top two wealth centres,
according to a new report.
It found that Singapore will move up from its third ranking now to surpass
New York and take the number two position within 10 years. London is
expected to hold the number one spot.
“Singapore’s growing importance as a global city bodes well for its
development as Asia’s wealth management hub,” said Mr Renato de Guzman,
chief executive of Bank of Singapore, which compiled the report with
property consultancy Knight Frank.
“Our clients have often cited Singapore’s political and economic stability
and well-regulated financial sector as key factors that make it an
attractive investment decision.”
Knight Frank director and research head Png Poh Soon added: “The 10-year
forecast affirms our place in the global scene in the future as a city of
choice for [high net worth individuals].”
The firm also forecasts that the number of such wealthy people here will
increase by 40 per cent within 10 years.
It noted that European wealth centres have weakened since last year’s
survey. “Paris drops to ninth place in the popular vote and Berlin falls out
of the top 10 altogether,” the report said.
“Once again, Singapore has had a very strong year, eclipsing Paris and even
Hong Kong, which it has previously lagged.”
A separate Knight Frank survey of 400 private bankers around the world
placed Singapore in sixth place out of 40 cities considered important to
wealthy investors.
The survey was based on a indicators such as economic activity, political
power, quality of life and knowledge and influence.
Mr Poh also noted that property will continue to feature strongly in the
investment portfolios of the rich. “As prices of prime homes stabilise, we
believe Singapore homes will be a good long-term investment as high net
worth individuals continue to favour Singapore as a global city of choice.”
He added that the increased taxes for pricey real estate unveiled in the
Budget will not deter investment from the rich. “I think this is something
more of a slight dent in their wealth, it’s probably not going to be a big
issue.”
Investors are individuals and cannot be emotionless beings when they are faced with the volatile swings in the markets. I came across this chart below from Streettalk Live. The breakups, and makeups, with the markets are clearly shown in the chart below. It shows the emotional cycle that investors go through with the markets.
It makes a “buy and hold” strategy rather difficult to stick to. One way to address such kind of market volatility is by a dollar cost averaging strategy. Dollar Cost Averaging is a strategy in which an investor places a fixed dollar amount (or indeed any other currency) into a given investment such as a unit trust, on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets. As a result, when the price of a given investment rises, the investor will be able to purchase fewer units. When the price declines, the investor will be able to purchase more units.
Bollinger Bands measure the most likely trading range for a stock or index, given the most probable level of volatility. When an index trades above its upper Bollinger Band, it’s in an extremely overbought situation and is vulnerable to a reversal lower…
Note the S&P 500 Index plotted against its Bollinger Bands. The red circles on the chart show the five times in the past year when the S&P 500 closed above its upper Bollinger Band. In all four previous occasions, the S&P 500 fell back down toward its lower Bollinger Band over the next month. A similar move this time around could lead to a drop of around 40-60 points in the S&P 500 – if only to relieve the extreme overbought condition.
Blogging My Stock Investments 