Thursday, December 31, 2009

Bored old man on a new year's eve

New year's eve, I'm back home at 9 pm already. Let all the hot gals and hunks cheong their heads off while I'm back home, nice and comfy typing an article. Haha, getting old I suppose, but I never really like the crowds and the cacophony that follows in such a countdown event. If you spot me in such events, most likely you've got the wrong person.

As I was walking home, I was thinking about the problems related to using dividend yielding stocks as a passive stream of income.

These are the things I think are worth thinking about:

1. Longevity of the passive income stream.

I think this is the most important thing when buying divy stocks like the one I had, CIT. It can give you 10% or 15% per annum, but how long can it last? Don't give me the bull about defensive stocks either because in a bear market, nothing is defensive and in an accounting fraud, nothing is immune. I'm just thinking that if I have to bank my passive income on a bunch of diversified stocks yielding good dividends, I'm not going to sleep soundly at night. I mean really really soundly.

2. Massively, unforeseeable losses

As you can see, I'm a kiasu and kiasee person. The point of having a passive income is that one day I can stop work when I want to. Hence, the security of my capital and the passive income stream is very important to me. Hey, I have to rely on this to offset my expenses, of course I'm worried! I'm just thinking that what if in one bad investment, years of dividend accrued over the years are destroyed in one shot? I mean I can collect 60+ per lot of CIT for years then suddenly CIT is gone ... I might be just lucky enough to recoup my capital and breakeven, but so long for my passive income. Ya, I know diversification can reduce the risk...still..

3. Account size issue

I've an expense of around $2000, which includes all everything from insurance to pocketmoney for parents and the occasional gadget budget. To cover that every month from dividends, I need to have nearly 500k if I get a yield of 5% per annum. I know if I project at 10% per annum, I can just use a capital of 250k, but guess what, I'm no investment guru.

I think that firstly the capital amount is really a lot. Secondly, I think that if you can save 500k to put into stock, perhaps whatever ways you take to get that initial 500k might be a better shot than to buy divy yielding stocks.

4. Short-terminism on a long term goal

It's an irony that while having passive income stream is to have a long term goal of being financially free, being too concentrated on acquiring passive income through divy yielding stocks might actually hinder that goal. Let me explain.

Let us say that I wanted to increase my passive income this coming year by $2400. In the process of streamlining this goal into achievable monthly targets, I set myself to increase my passive income per month by $200. So I buy enough stocks to get that extra $200 dividends per month. What if the economy is not doing well, what if the stock market is toppish? Do I still average up/down?

The goal of having passive income is worthy enough, but I'm worried about being too fixated on that that it defeats the bigger picture.

Talk talk talk, so what's the solution?

Don't stone me, I've no solutions. I want to concentrate on building capital first before talking about building secure passive income streams. You know what, I'll just bloody hell love the job that I'm doing, which I don't mind doing for the rest of my life (but at a different pace, an important distinction here), save hard, invest the proceeds and watch it like a hawk. Most importantly, don't forget to reward yourself here and then because ultimately, you only have one life.

Have yourself a happy new year :)

Friday, December 25, 2009

Christmas day's reflections

The more I stay in the market, the more I realised that being calm and steady is the only way to win consistently. I've dealt with higher volatile instruments before and the conclusion is that you don't want to be too happy when you win and too sad when you lose. In the short run, what you see is the variability of your system, not the returns. A short run of good wins will be interrupted by a short run of bad losses.

Since today is Hohoho day, I use the opportunity to hammer in some reminders for myself with regards to my love-hate-relationship with the market. Not in any particular order of importance,

1. Be zen. Treat both your wins and your losses with equanimity.

For the boh tak chek, equanimity describes the unattached awareness of one's experience as a result of perceiving the impermanence of momentary reality. It is a peace of mind and abiding calmness that cannot be shaken by any grade of both fortunate circumstance and unfortunate one.

2. Spend some of your winnings.

I think it's important to buy yourself something nice, to close in the winning. Money is just a means, not the end, so I think it's important not to accumulate money but to do something worthwhile with the money. In your death bed, I don't think that you'll worry about not making more money. Converting money into nice memories is what I'll do.

3. Enjoy the little things in life

Hey, market is not everything. Spend time with your friends and loved ones. Take time off the market, enjoy reading a book and playing some games. You'll be surprised how getting away from the market for a week or so can let you see things from a different perspective. I learnt this from the movie, zombieland-> Rule no. 32

4. Don't be too harsh on yourself

I missed DBS in March when it's 6++ and now it's 14++. I missed selling swiber at 3++ and now it's 0.9++. Ya, I suck in this game, but I'm learning along. I missed some good moves and ride on a couple of bad ones but look, I'm still here chatting with superfriends in the cbox and having great power lunches with them. While everyone should treat the stock market seriously like it's a side business, but take it easy on yourself if you missed the good moves and somehow caught all the bad ones.

Bad luck don't go on forever - so does good luck.

Have yourself a merry christmas :)

Friday, December 18, 2009

A friend and his guru friends

I heard this story from a friend of a friend. He was walking along Raffles city, on the way to run some errand when his broker texted him, saying that NOL is a good buy because of some news or some reports. Whether it's actual news or just rumors is not important, it's sufficient to know that there are some catalyst to trigger the price and he promptly told his broker to buy 10 lots of it.

After he crossed a road, he met his friend, who is known to be a guru at technical analysis (TA). This TA guru told him that NOL broke out of range, and the macd lines are going to cross over. Yesterday's candlestick shows a bullish engulfing pattern, with the volume being at least 20% higher than the average volume for the past few weeks. This, the guru told him, is a good sign to buy more. Our hero in this story, let's call him Joe, called up his broker again to buy up another 10 lots on hearing this very positive review of NOL's charts. He is going to make some money!

As Joe walked along the sidewalk, he met another friend of his, who is well known to be a successful investor. Joe proudly mentioned that he is now a part owner of NOL, having bought a few lots of NOL today. Joe recommended that his friend should buy up NOL too because the price will run up soon. This investing guru friend shook his head and said that he would never buy NOL. NOL had a rather bad quarter, with poor balance sheet and cash flow problems. The PE ratio is 50% higher than the average PE and no way is he going to invest money into a company like this. This guru mentioned a whole lot of other alphabets and greeks that Joe do not understand at all, but he believed that his successful investing friend is correct in his view point. After saying goodbye, Joe was so ominous of NOL that he called his broker to sell all 20 lots of it.

Joe, still sore over his losses, was contemplating giving up the market entirely. This is when he caught a glimpse of another of his friend (it's raining friends today, it seems). This friend is an expert in unit trusts and he made quite a killing investing in funds he bought over at fund supermart. Joe's friend, ever a believer in the random nature of market, believes that the best way is to buy a diversified portfolio of low cost funds and keep it for the long term. Joe, convinced that this should be the way to go, called his broker and bought a few funds that his friend recommended, one of which is the STI ETF (exchange traded funds).

I don't think Joe realised that the STI etf that he just bought also contained NOL as part of the component stocks.

Is there a little Joe inside us? There are plenty of experts and talking heads out there dishing out free advice that works very well for them and possibly for you. You should reflect and think for yourself. Nobody knows you better than yourself.

(A parallel post of mine - The father, the son and the donkey)

Sunday, December 13, 2009

An uncertain world and its asymmetrical payoffs

I read a silly post about critical illness. That person commented that there's no need to get critical illness coverage because the probability of claiming such things are very low, to the tune of 5% during their working life. A hospitalization and surgery plan (H&S) is enough. I disagree fully with the comment that having a low probability of claim means that there is no need to cover for it. I shall not comment on whether a H&S plan is sufficient.

The comments made me wonder if people are confused with the probability and the payoffs. The consequence of an event happening are often more important than the probability of occurrence.

Let's play a very sick game of russian roulette. Inside the chamber, there are 6 slots with only 1 live bullet. If you press the barrel against your temple and squeeze the trigger, you'll immediately be given $5 million SGD if you survive. The probability of getting the bullet is 1/6 and you have 5/6 chance of getting the $5 million SGD. Would you play?

I would not, unless there's no more meaning in my life. Though the probability of a payoff is good, the result of having a bullet running through my brain is so disastrous that the low probability is of no consequence to me. Probability works for past statistic over a large sample size, so if there are 600 alternate realities of you squeezing the trigger, approximately 500 such 'you' will get the $5 million and approximately 100 of 'you' will be lying on the floor. Even then, it's approximately. But before it happens, there's no way to know if you're going to lie on the floor or be jumping for joy over your windfall.

It is often said that in the long term, the probability of stocks beating any kind of instrument is very high. Statistics are given, charts are shown. I heard of people using these long term investments as a nest egg for their retirement (it's happening in US now) and I wonder if these 'long term investors' ever thought what happens if in the long term, the investments don't work out. Will they be able to ride out the consequences?

I keep hearing this "In the past, 9 out of 10 times, blah blah blah happened, so you can be assured that blah blah blah will work out fine for you". My bullshit sensor will start to ring. My mind will start to wander - what happens if blah blah blah that is so highly likely to happen didn't actually happen.

I still think that in an uncertain world, the consequence of an event happening is more important that the probability of occurrence. Screw probability and its illusion of certainty under uncertainty.

Monday, December 07, 2009

The blind men and the elephant

This is probably one of the strongest post I'd made on the TA vs FA topic. If you feel offended, I'm sorry.

When I started out in the market, I had no clues what is FA (fundamental analysis) and TA (technical analysis). I basically just buy based on broker's reports and hearsay. I remember scanning through CNA forum everyday to pick out those hot counters that people are punting on. Eventually I noticed that the top 30 volume in sgx are these weird little counters that looked like this: STI2750SGAeCW100128 and their % changes each day are superb. I started buying and selling these and eventually started out on TA so that I can understand better the movements of these warrants (notice the order that I learnt TA).

So I started on TA, work out alright and not as magical as I thought. You know, when you just started on TA, I'm looking out for the magic parameters, the magic indicators so that if I knew what those were, I could predict the market. I didn't realise that TA is just a way to see the market. There's no magic parameters and magic indicators to make big bucks. I gave up on it after some time when someone introduced me to value investing.

Hey, I know nuts about finance. I took an accounting module which I had no memory of having done before. I had to start from scratch. I started reading up on accounting and on general principles of investing. Again, I was looking out for some magic ratios to calculate the intrinsic value. Why am I looking for the intrinsic value? So that I can see if the price is below value and above value. Buy below value and sell above it, isn't it what this is all about?

There is no magic formula, no magic ratios to compute that illusive intrinsic value. You can easily be fooled by value, if you ask me. Can charts show you where the prices will be, 100%? Of course not. How about 50%? I don't know. In real life, the uncertainty is unknown and the probability undefined, so it might be for the best that we don't kid ourselves with the certainty and assurance of mathematics. Can you ascribe a certainty as to whether a fundamentally sound company will work out fine 30 years down the road too? We do what we can and hope for the best.

A trader can be conservative and an investor can be risky. The general literature seems to ascribe the fact that investors are safe. As long as you are a "long term investor" (you've no idea how much I'll cringe when I hear those words), you'll make money in the "long run". Nothing is further from the truth. The truth is, it depends on many things.

What I'm really trying to say here is that I've stopped trying to figure out where the next bagger is, where the next hot counter is and whether this school is better or that school is better. I'm in the market to make my returns better than safer instruments out there and I'm under no illusion that I'm doing this for any other reasons. I'm willing to try it out for myself to see if something works for me or not.

Personally, I like doing a bit of charting and a bit of analysing. A bit more of charting these days. I try my best not to be one of the blind men who tried to feel the elephant. The best trader I've seen tries to find out if the company is doing well now and in the future. The best investor I've seen tries to see if there is a bad signal in the charts before buying.

Whichever paths you take, I wish you well in the market. As my friend Panzer would said, be well and prosper. I couldn't agree with him more .