Time Tested Advice

I read this recently and think it will be really useful to reinforce them from time to time when things get overly optimistic.

1. Have a Plan
The old cliché is true. Nobody plans to fail, but many fail to plan. Having a comprehensive financial plan in place, understanding your goals, and proactively managing your investments are never bad ideas.


2. Have a Cash Cushion
The emergency fund is always a classic fashion. Like an insurance policy, you hope you never need to use it, but if you do, its there when you need it.


3. Live Below Your Means
If you make a habit of spending less that you earn, it will be much easier to survive if your earnings decline. Losing your job is never fun, but losing your house and car too make the situation significantly worse.


4. Nothing is Risk Free
Even money market funds can be problematic. Don't even put money in an investment, even it is being sold to you by your best friend, with the idea that there is no way you can lose money. Bernie Madoff's friends learned that lesson the hard way.


5. Nothing Rises Forever
From the S&P 500 to real estate prices, this little truism has proven itself over and over again. If there was ever a safe bet, this is it.


6. If it Sounds Too Good to be True, it is
Hope and greed cause investors do put their faith in the strangest things. Apply common sense before handing over your money.

Share Buyback or Dividends?

When a company you have invested have excess free cash flow, do you prefer that they use the excess cash to buyback shares from the market or give them out as special dividend?This is especially true in the case when good investment opportunities are not readily available.

The way I see it, engaging in share buyback reduces the amount of outstanding share in the market and hence will lead to an increase in eps. However, there is a danger that this may be used to mask a stagnant performance by dressing up the eps by the management. In addition, it is possible that the company could have given out substantial share options to employees earlier at a lower price. ( Singpost given out 800K share options at $1.02 in Jan. It then subsequently does a share buyback of around 10M shares at around 1.12/1.13 about 2 months ago). It is able to do so probably by taking advantage of the low interest rate for debt by raising $200M in Fixed Rate Notes which bear an interest of 3.5% per annum). I am of the opinion that the recent improvement in singpost share price has less to do with any significant improvement in business outlook than to mere finance rejiggering.

By giving out special dividends, it basically return the excess cash to to shareholders an let them decide what to do with it.

As a retail investor, I prefer special dividend anytime as I can decide what to do with it.

Reality Check on Stocks

Since 1929, 46% of the S&P 500 index's annualized total return has come from dividends, according to some studies done in the US.

You may think that because the company with the lower dividend payout ratio will have more to invest in its future. That should translate into a faster earnings growth rate, which in turn should eventually result in greater price appreciation for the company's stock. However, this is not often necessarily so.

When searching the empirical record for evidence that companies with lower dividend payout ratios have higher earnings growth rates, some researchers have come up empty.

So, if you based on entire portfolio on trying to hit the 10, 20 or even higher multibaggers, this is akin to gambling. More often than not, these are going to be smaller companies where a single mistake in execution will take your investment in them several years backwards. No doubt, it is possible for some of them to make it, but it should be wise to only assign a fraction of your portfolio to look out for these opportunities.

For the rest of your portfolio, try to compound your wealth over time. I find this to be the more realistic strategy. Afterall, stocks only gain in value because of the underlying earnings that get accumulated over time.

First REIT

Just receive news that one of the Reit that I am invested (First REIT) is in the process of acquiring two additional healthcare properties in Indonesia. It is intended that both the properties will be leased by First REIT to the Sponsor under long term master lease agreements.

They are exploring the options to raise funds for the acquisition. I am watching with interest as to how do they want to raise funds eg through equity (rights, private placement) or debt (bonds, long term loans).

First REIT current gearing is not that high relative to other Reits at around 16%.

Dividends Safety

As a DIY value investor, I view dividends from the stocks that I owned very seriously. They are the portion of my passive income that I expect to come in automatically into my account regardless of the daily fluctuation in stock prices. Moreover, I would definitely prefer that those dividends be maintained even though the general economy may be going through a difficult period of stress and are sustainable over a long period.

To ensure that the dividends are "safe" and will not be cut at the slightest sign of volatility, I look for the following:-

1) Dividend payout ratio. For a growth oriented company, I would expect the dividend payout ratio not to exceed 60%. However, for the Reits and infrastructure trust that I invest, it can be higher provided I am convince that the businesses are stable and back by long term contracts or are in providing some essential critical services with high barrier of entry.

2) Earnings in a economic downturn. Ask if the company cut dividends in an economic downturn will give you a clue into the sustainability of those dividends.

3) Debt to Equity Ratio. If the company has a high proportion of debt, than a lot of the earnings will be utilised to make interest payments, making it more uncertain that dividends can be sustained when economic environment changes.

4) Extremely high dividends yields. As usual, worry when things look to good to be true. Usually, these are cases where the company stock price has fallen dramatically due to worsening outlook.

Dividends for Sept

I receive in excess of $11K dividends this month from the following:-

StarHub
SGS Bonds
SBS Transit
MiiF
UOB Preference Shares
OCBC Preference Shares
CitySpring

Also, I divested MiiF (it was a tactical buy by me anyway), and reinvested into
StarHill Global and LMIR. I am willing to take some small bet on Indonesia given its large domestic economy which was hardly scathed by the 2008/2009 crisis. Also, the next Presidential elections is in 2014, so the political landscape should be clear till then. For StarHill Global, I view it as one of the more reasonable Reit to invest at this stage where it is still trading at substantial discount to NAV.

I made a capital gain of around $2K from my Miif divestment on top of the $600 dividend received this month.

The right time to buy value stock

The best time to buy value stocks is when nobody else wants them. If everyone "knows" that they are producing the next big thing, changing the world and so on, the shares are not going to be cheap.Value stock are usually not the ones grabbing the headlines for their outstanding performance or joining the ranks on the 52-week high lists.

The real excitement come from the extra 2% to 3% a year returns, multiplied over a lifetime of investing, that make you the substantial piles of cash down the line. For some people, this approach is often too boring.

Too often, most people think that to make money in stocks, you will need some luck. But more importantly, you will need a lot of time for the force of compounding to work to its fullest impact. If you start young at around 25, you will have 30 years of time to work for you until you reached 55.