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How to Invest Right and Sleep Well at Night

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Alvin Chow Yong Han

on 24 March 2013

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Transcript of How to Invest Right and Sleep Well at Night

Find an investment strategy that suits your time, capital, purpose and personality
Adopt a kung fu style that suits you! Good for investors with low tolerance for drawdowns
Good for investors who do not want to spend too much effort and time
Very good risk adjusted returns
Stable in all economic conditions Permanent Portfolio STI ETF : 1 lot = S$3,000
GLD : 1 lot = S$2,000
SGS Bond : Min = S$1,000

S$6,000 for each asset component
S$24,000 minimum to set up Permanent Portfolio How much do I need to start Permanent Portfolio? Permanent
Portfolio Difficult to value a company even at current state
No analysts can agree on the right value of a company
Forecasting future value will be erroneous
In order to reap a return significant to your net worth, you have to put on a big position, which increases your risk at the same time Investing in the next BIG thing Uncertainty REITs with 0 to 30% discount to NAV on 9 Mar 12 vs prices on 31 Dec 12:

AIMS AMP Capital: +57% (from $1.075 to $1.685)
CapitaComm: +40% (from $1.2 to $1.685)
MapleTree Comm: +40% (from $0.87 to $1.22)
Cambridge: +29% (from$0.525 to $0.675)
Ascott REIT: +27% (from $1.075 to $1.36)
Sabana REIT: +23% (from $0.93 to $1.14)
Average: +36% REITs 11 Jan 13 – Japan’s cabinet approved on Friday 10.3 trillion yen ($116.8 billion) of stimulus spending in a bid to pursue Prime Minister Shinzo Abe's ambitious agenda to spur growth and beat deflation. Japan's spending STI 2012 returns
+19.7% gain or
+23.5% with dividends

Top sectors
Real Estate Holdings & Development (+56.0%)
Financials (+36.8%)
Worst sectors
Consumer Goods (-17.5%)
Health Care (-4.1%) Review of 2012 NO ONE can predict the future

You cannot control the direction of the market

You can only control the price you pay and sell Alvin Chow How to Invest Right and
Sleep Well at Night Implementing Permanent Portfolio
in Singapore STI ETF Buffett: “Well, I've always felt it's too hard in the auto industry to predict who the winners are going to be. There were 2,000 auto companies established in the United States in the 20th century and what have we got left, you know, a couple. So it's very hard to pick — to pick winners. I don't — there will be a big auto industry five, 10, 20 years from now that we will be selling lots of cars, I just don't know whose cars they're going to be...”

3D Manufacturing? Can you pick the next Coca Cola? Losses are 3 times more painful than gains
DEMAND higher returns for potential losses
Sell winners and keep losers
"paper losses"

Sell only when it is psychologically painful to hold onto massive losses

Become risk averse and "Flight to safety" Drawdowns Source: Wall Street Journal In 2008 Financial Crisis...
Average investors losses amount to $39 billion
mutual fund investors bought when S&P 500 is at an average of 1,434
Close to high of 1,565
If investors had invested at random times instead, their average purchase price would have been 1,171 TrimTabs Research No sign of euphoria (yet)
Not enough people in the market (SGX: Securities Turnover Declined 12% In 2012)
Most people into properties and stocks are overlooked
Price vs Valuation still fair
US, EU, China and Japan are printing and spending
SG Govt creating resistance in property market
Money may flow from properties (high resistance) to stocks (low resistance) Outlook REITs trading above NAV on 9 Mar 12 vs prices on 31 Dec 12:

FrasersCT: +33% (from $1.505 to $2)
First REIT: +28% (from $0.825 to $1.06)
MapleTree Log: +25% (from $0.915 to $1.145)
MapleTree Ind: +21% (from $1.125 to $1.36)
Cache Log: +20% (from $1.02 to $1.24)
Ascendas: +17% (from $2.03 to $2.37)
CapitaMall: +17% (from $1.825 to $2.13)
Average: +23% REITs REITs with more than 30% discount to Net Asset Value (NAV) on 9 Mar 12 vs prices on 31 Dec 12:

Fortune REIT: +61% (from $3.95 to $6.37)
FrasersComm: +60% (from $0.825 to $1.32)
Keppel REIT: +39% (from $0.935 to $1.295)
Suntec REIT:  +37% (from $1.22 to $1.675)
Saizen REIT: +27% (from $0.142 to $0.181)
Starhill Global: +27% (from $0.62 to $0.785)
LippoMalls: +24% (from $0.395 to $0.49)
Average: +39% REITs 6 Sep 12 - ECB Plan Pledge Unlimited, Sterilized Bond-Buying
To sterilize the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the program has a neutral impact on the money supply. ECB Unlimited
Bond Buying 13 Sep 12 - Federal Reserve launches QE3
The policy, known as quantitative easing and often abbreviated as QE3, entails buying $40 billion in mortgage-backed securities each month.  Japan: Nikkei – 25
UK: FTSE 100 – 18
Germany: DAX – 15
US: S&P 500 – 15
US: DJIA – 14
China: CSI 300 – 13
Hong Kong: HSI – 11
Singapore: STI – 11 PE Ratios of Indices Source: Film School Rejects … is there a best style? Kung Fu has many styles… Water (Money) Cycle Source: Rick Ferri 5 yr annualised returns Most funds cannot beat the index Best Performers
CapitaMalls Asia (+72.1%)
CapitaLand (+67.4%)
Global Logistics Properties (+58.4%)
Fraser and Neave (+55.8%)
Hong Kong Land (+54.4%)

Worst Performers
Wilmar International (-33.0%)
Olam International (-26.8%)
Genting Singapore (-8.9%)
Golden Agri Resources (-8.4%)
Jardine Cycle & Carriage (-0.3%) STI Stocks in 2012 Greed causes you to be optimistic and willing to pay above value
Fear causes you to be pessimistic and willing to sell below value KIASU/
BUY HIGH 3 down years in 40-year period
1981: -4.1%
1994: -2.6%
2008: -0.7% Compounded annual returns of 9.7% from 1971 ($10,000) to 2011 ($405,756.14)
Or double your money every 7 years Components
Stocks : Total Stock Market index
Bonds : Treasury 20+ year long term bonds
Cash : Treasury 1-2 year notes
Gold : Gold bullion Permanent Portfolio Performance REWARD RISK KIASEE/
SELL LOW Risk-averse ("guaranteed" as a trigger)
Fixed Deposits
0.65% per year for 3 years
Capital & Returns Guaranteed
Absolute gain = $1,962.70 or 2%
Why not Singapore Government Bonds?
1.125% per year for 3 years at $103/bond (or 1.1% based on $103)
Capital & Returns Guaranteed
Absolute gain = $3,273.75 or 3.3% Fixed Deposits vs Bonds 0.65% per year for 3 years
Capital Guaranteed upon maturity
Absolute gain = $1,962.70 or 2% after 3 years Fixed Deposit Risk-averse ("guaranteed capital" as a trigger)
Pseudocertainty effect (non-guaranteed return to oversell potential profits)
Endowment (5 years)
1.02% guaranteed and 2.01% non-guaranteed
Capital guaranteed
125% death and permanent disability insured
Max absolute gain = $16,105 or 16%
SGS Bonds (5 years)
4% per year until 2018, priced at $120 per bond (or 3.3% based on $120)
Capital and returns guaranteed
Absolute gain = $16,600 or 16% Endowment vs Bonds Fixed Deposit at 0.65% per year for 3 years
Endowment policy with death benefit at 1-3% per year for 5 years
Buy gold with interest payment at 2.5% every month or 30% per year
Stocks IPO: Mobile Financial Network Technology Company with potential 500% gain If you have $100,000… which of the following will you invest in? Mobile Technology redefined the way we lived
A new international currency traded over mobile network
world’s largest mobile money network consisting of 560,000 agents across 204 countries in 4500 cities worldwide
withdraw cash from ATM machines and make purchases at millions of VISA and MasterCard merchant locations worldwide using a Debit Card
using your mobile number and password to manage, transfer, request, make and borrow money
IPO on the Australian Securities Exchange
pre-IPO price equivalent to a 5x discount to the IPO price Purchase a kilobar of gold for $96,000
Get 2.5% interest payment per month or $2,400 per month
Option to sell back at the same price after 1 month or 3 months 1.02% guaranteed returns
Additional 2.01% non-guaranteed returns
Capital guaranteed
Insurance: 125% death and permanent disability
Absolute gain = $16,105 or 16% after 5 years If you have $100,000… which of the following will you invest in? Genneva Gold New international mobile currency
Fine wine with high steady returns
Gold that pays interest
European stock IPO Too good to be true… How did stocks perform in 2012? STI year-on-year changes Governments creating liquidity FED's QE3 REITs
Run Endowment Plan Gold Investment Scheme Mobile Financial Network Company The best investment for the
retail investor... A poor fighter is due to poor skills or a lousy kung fu style? Deflation Recession Inflation Prosperity Gold Bonds Stocks Gold Bonds Stocks Stocks Bonds Gold Nikkei - the Lost Decade and counting... 1990-2012: lost av 5% per year,
worst drawdown = -70% Japan Permanent Portfolio 1992-2012: Gained 2.95% per year
Worst drawdown = -24% About Me Retail Investor who experienced the last financial crisis Trading? FA? TA? Common Sense?
What works in the market? Fascinated about - $ grows $ Today's Scope Where are we in the stock market?
Problem: Investors' behaviour
Solution: Permanent Portfolio

Not Financial Advice
Historical results may or may not indicate future performance Golden Question... Why do most people lose money in the stock market? Can you take the Roller Coaster Ride BUY LOW &
SELL HIGH An ex-presidential candidate, Harry Browne, devised this portfolio in 1981 with his associates
Previously a financial advisor Permanent Portfolio Gold Stocks are expensive now, can we buy the gold and bonds first? Bonds Stocks Cash Permanent Portfolio External Internal What you see:
Market, Method, Asset What you don't see:
Effort Do you want to be an entrepreneur?
Why not? MAS Investors' Alert List http://www.mas.gov.sg/IAL.aspx?sc_p=T
Watch tv
Spend time with kids or family
Enjoy good food
Pursue hobby
Conduct investment research 1,400 3,800 As at 22 Mar 13 As at 8 Mar 13 To get rich?
To get an income?

What drives you?

The stronger your ‘why’, the higher chance you will succeed in investing/trading Purpose Adventurous vs Conservative
Agitation vs Patience
Inconsistent vs Disciplined
Careful vs Careless
Big Picture vs Detail
Dependent vs Independent
Rebellious vs Respectful Personality Do you have a full time job?
Free time? Time Effort Reduce Volatility New STI Constituents on 18 Mar 13 Singapore Government Bonds (SGS Bonds) List on SGX from 8 Jul 2011 onwards
Buy and sell like stocks through brokers
Buy the bond with furthest maturity date
Price movements more volatile
Bonds for capital gain and not for coupon payments
More information on SGX and www.sgs.gov.sg How well did Singapore Permanent Portfolio perform? PP can protect you against fear, but not against greed... Frequently
Questions How often do I need to monitor the portfolio? Need to re-balance the portfolio when any of the asset class goes to 35% or 15% of the total portfolio size
Or, re-balance annually Can I replace government bonds with corporate bonds? No
During a stock market crash, corporate bonds are deemed equally risky and investors flight to government bonds for safety knowing what you do not want gives you focus...
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