Friday, July 10, 2009

The Simplest Investment Advice.

If you open up the newspapers, sometimes you see adverts for courses that claim they can teach you to be rich. Many are of dubious value.. Some are harmful because they get you involved in things like options which are highly risky, complex and unpredictable. Some times relatives and friends come to ask me for advice on how to invest. Not wanting to confuse them with complicated concepts like value investing, growth investing, stock picking techniques, balance sheets etc, I give this is simple and has worked for ages:

Invest During Recessions.
Of course there are various details to consider like what to invest in, which part of the recession to start investing and a few caveats. Because the idea is so simple, some people think they can do better if they put in more time, effort and do things in a more sophisticated fashion. I know people who put in a lot of time in their 'investing' like monitoring the stock market all day and end up not doing very well.
But how far can you go with this simple idea? You all know this feller called Li-Ka Shing....aka Superman aka richest man in Hong Kong. Li started out as a manufacturer of plastic flowers ..he was extremely smart, worked really hardworking and extremely competitive but what made him the richest man in Hong Kong is actually no big secret. His modus operandi is always the same during the business cycle. He runs his businesses well but conservatively generating and keeping cash when the economy is booming. When recessions hit and others are hurt by cashflow problems, debt and are forced to shed assets, he becomes a buyer. When the economy recovers he start building up his cash again and when some the assets become overvalued, he sells them off. Of course, he is very shrewd and hires the best people to run his businesses to make the best of the good times and picking the right business to invest is not something that everyone can emulate. However, the basic strategy of investing during recessions requires only discipline to execute.
What to invest in during recessions? Things that will go up when the recession is over. Examples are stocks of blue chip companies, unit trusts etc. Diversification to avoid the bad luck of investing in something that doesn't perform. For newly weds, it is usually better to buy your home during a recession, however, HDB prices did not fall in the current recession so it is unclear what to do this time round - wait or buy?...
Being able to invest during a recession requires some amount preparation. You have to be able to save enough money during the good times - you need enough to buffer against temporary job loss, emergencies, etc. If you expand your financial obligations during the good times taking up a lot of debt, you will be struggling to service the debt during the recession rather than exploiting investment opportunities.
The next question people will ask is which part of the recession should one start investing. It is hard to get the timing perfect but timing is actually not that important as long as you buy after prices have fallen significantly. Some stock investors look for something known as "capitulation"....the point in time when most people think that stocks are a bad investment and just want to get out "surrendering" their stocks at distressed prices. Capitulation is usually associated with widespread fear that things can only get worse so it takes some amount of courage to buy at that point in time. We saw capitulation in Nov 08 & March 09. Capitulation can take prices to a low point but by no means the lowest point during the recession if you had bought at the Nov 08 lows, you would be looking at paper losses in March 09. Stocks might or might not make new lows but that is not that important because when the recovery comes prices usually goes up way above what they were during a recession.
Now a few caveats on this strategy. Although this strategy would have worked in every recession Singapore has gone through, we have to be careful when we use the past to predict the future. There is no "sure-thing" when it comes to investing unless you break the law (insider trading, manipulation). But common sense tells you that you'll be better off buying during recession when prices are lower than during the boomtime when prices are much higher. The only catch is nobody can say for sure when or whether we will be able to recover from this recession - although the global economy has recovered from every recession in the past 100 years. Even if we recover it may take longer than in the past given the severity of the current crisis - nobody can say for sure. The way to hedge this is to split your investments up to invest over a period or to wait for some sign of recovery then hop in. The problem with waiting for clear signs is price of stocks and property can move up significantly before any sign appears. You just cannot eliminate risk when investing ...even if you make the most sensible decisions and apply a strategy that has always worked, you have to accept the possibility of losses.


Anonymous said...

good advise - only thing is that you got to have a time horizon. Some chaps may need to get married in 2 years time, which may be bad news cos, in 2 years, stocks may not pick up and you need to cash out at a lower price :)


Anonymous said...

I think among the richest in Hong Kong, they made it through property business & investment.

The same can also be said for those in Singapore and maybe including bankers and stock brokers.

But these are not the options or areas the ordinary Joes will or have the capacity to invest in. Even if they try, most will more likely lose rather than make money.

If it were so easy we would see many more millionaires around, right?

Also the recession maybe prolonged and there are peaks and troughs in the value so catching the timing right is maybe a matter of chance rather than skills.

Also during this recession, stocks have recovered a lot from their lows early this year. Property also has not dropped that much or even rising. You think it is good to enter now even though still recession?

LuckySingaporean said...

anon 1:51,

The ordinary person is forced to be an investor and makes a huge investment because he needs a home to live in. So he has to still make at least one big investment decisions.

I'm not sure about property especially HDB which is at an all time high. As for stocks, they are about where they were 4 months ago in Feb. They were only cheaper in the 2 months window of March-April 09. There is no need to pin-point the timing, stocks may go lower or higher from this point in time, but the basic fact is they will be generally higher when recovery comes. Lets put it this way, if you think stocks are high now, where do you think they will be when the recovery comes.

Anonymous said...

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Anonymous said...

Thank you for such a simple yet sensible advice.

What's your take @ the current state of economy, global as well as local? Do you think a great depression is immient? or it can recover rather quickly?

I think it should be bad, but all the news are shouting @ green shoot and that the worst is over. What do you think?

Anonymous said...

There are still bargains galore in the stock market.

I found a stock trading for $4. But the company is worth more. It has no debt debt to equity of 0.01% and $5.20 cash per share in their accounting and a tangible book value of $8.

My only regret was that I didn't buy it when it was $3 a share in March / April as I was loading up on other things.

I hope it remains at these values for a long time so I can load up on the stock.

LuckySingaporean said...


All value investing criterias, such safety margins discount to book etc all occur only recessions.

The market took out some excessive optimism over the green shoots recovery i.e. quick V shape recovery in the last 6 weeks. Market expectations have been moderated to slow recovery or stabilisation. For investors getting in now, they will lose money if the economy deteriorates....make money in the coming months if the recovery gather momentum or break even if things are stable and slow.

In every recession, there is this fear that "things will never come back" and that keeps people from investing. People who make money from stocks or unit trusts are always the minority.

I stick to investing only during recession for my CPF investment account spread out for the last 12 years or so and widely diversified across blue chips and unit trusts for foreign exposure. At the market peak, it was outperforming cash in the CPF by 50%-60% not including dividends. When the market crashed to the lows, it was underperformed cash in CPF for a few months by 10-20%, with the rebound it is equal or slightly better than cash not counting the dividends received. Out of the 12 years, it only underperformed CPF cash for a few month during the current crisis which is the worse in 70 years. Of course, things might get worse and the whole strategy proved faulty and the most conservative people who keep only money in fixed deposit proved to be smart. However, there is no extra return without risk and that will never change.

But conservative fixed deposit stratgey has the very big risk of being eroded by inflation and this is the risk every Singaporean is forced to take with the CPF special accounts + minimum sum scheme. It is a complete myth that fixed low return on CPF is safe because it is not. It is actually the opposite. There is no 30 year period in modern history where fixed bond like investments outperform stocks especially if dividends are included. Locking up CPF money at a low returns is actually highly risky because of the risk of inadequency and inability to beat inflation.

The govt often cites the losses in CPF investment accounts as reason why they lock up the minimum sum. The reason for the losses is investors as individuals tend to buy when stock markets are booming and when stocks go down they panic and sell low. That is why most pension funds in the world are managed by professionals. In Malaysia for the EPF the govt guarantees a minimum return of 3%(?) if the fund manager underperforms but so far they have chalked up 6-7% per annum. In Chile, the national pension fund averaged 9-10% per annum. The Singapore govt is doing something very unusual locking up the CPF at a fixed return. The risk of inadequacy due to inflation is passed on to Singaporeans.

Anonymous said...

Hi Lucky,

I don't know whether it is possible but is there a way for you to invest in index funds? Unit trust charge really high fees.

But index funds are much better. If you can buy vanguard index funds through your CPF, you should do it. I highly recommend it.

I have a retirement account in the US known as a Roth IRA where I had been buying mutual funds.

Stocks is for my value investing hobby which is a separate account.

Some time ago, I discovered the high annual fees of 1.5% in my mutual fund and decided to switch to an index fund with a fee of only 0.15%. Over the long term, the fees really add up.

I think you may already know about John Bogle's criticism of these high fees.

LuckySingaporean said...


I bought mine from dollardex and I'm aware of the impact of a 1.5% annual fees for the long term. Thst is why I prefer to buy blue chips and build the portforlio myself - if you keep it for 2 decades, you pay commission once and that is more than covered by the first dividends you get.

The reason why I bought unit trusts via dollardex and accepted the 1-1.5% fee is only because I bought mostly unit trust for emerging markets, the higher risks and higher potential returns/losses overwhelms the 1.5%

I always thought the govt made a bad move when it didn't negotiate down the unit trust annual fees when they allowed the CPF for unit trust investments. Given the billions released, the govt could have negotiated the fees down to 0.1% and fund managers will still be willing to take the business given the size. In the end, the Singapore banks made off with millions in fees and CPF got paltry returns ....many were burnt because the fund managers love to market new funds during the boom time.,,and the like to launch hot funds e.g. tech oriented funds during bubble.

I don't know why the govt just can't get this simple thing done right. It is so frustrating as a singaporean waiting for ministers who are paid millions to fix this for so many years. The thing is other countries can do it and they don't want to reform the CPF in the right direction. In the meantime, they tweak it with all sorts of schemes....

Anonymous said...

I agree that the reason why Singaporeans get burned sometimes is because there are not a lot of investment options available in the country.

So people end up taking risky derivatives position to get a paltry 5%.

I also wish the Singapore government issue inflation protected bonds like they do in the US. I am a great fan of this safe form of investment.

Anonymous said...

Investment is how an individual handle risk. High risk will give you high return and vice versa. Yet too excess risk might hurt one investment. So it is an individual choice how how much risk s/he willing to take.

In this game, there is also a factor called inflation. If one take too low a risk because s/he is a peaceful person, s/he might also lose the game if inflation erode the value. Well that factor will relate to the governent policies.

Singapore HDB pricing is high, perhap to conserve the singapore dollar value, so that singapore will not face the dilemna US is in.

But is it a good policy? The singapore government always advocate market force. So where is the market force?

Singapore is in recession, there are a lot of umemployments. More people are applying for the SPURs program. The wage is lowering, more FT coming in and more local are moving out. To me, it is a really chaotic situation we are in. Yet the basic element of a fruitful living, that is a shelter over head is becoming more and more expensive. Already out of touch for a wage lowering population.

Do you all think this policy is healthy for country and its citizen?

Anonymous said...

Mathematically speaking (if you like), as long as the overall population and consumers are expanding, it is healthy. If the citizens can adjust to that (wear their smiles to welcome the FT saviours), it is a bonus.

Anonymous said...

The current global crisis is squeezing the hard earned savings of the prudent individual. There are very little alternatives to earn decent enough yields and hence the popularity of these so called explosion of courses to help you live freely. You would thought that cash is king, but it is not. With potential inflation on the horizon, my personal challenge is how to protect whatever I have, and not to try to grow my wealth through investing. My personal opinion is the global economy is fraught with difficulties ahead and as you suggested, investing in bad times may be the best approach, but the question begs... are we already in bad times?

Not so, as one of your previous article highlighted the not so apparent recession that we are suppose to be in.

Anonymous said...

Hi Lucky

It is always difficult to go against the herd instinct in investing during recession. It is easier for those who have spare cash, so to speak, like they have few $millions and then take out a few $100Ks to invest during recession. That would be easier and that's probably why the rich gets richer as some people say.

Anyway, what constitutes a recession? Right now for instance, as we have discussed over your several last articles, people are wondering is there a recession.

Walk around in the city, okay lets visit Raffles City basement where there are scores of restaurants which are packed even on weekdays. Recession?

Recession did'nt looked like that before. I remember in 1988 when there was a recession I took my kids to Suntec City area and the place was very deserted and felt miserable to say the least. Wished we had stayed home. That's what recession looked and felt like.

Okay I understand we are talking about the stockmarket mostly. So how do we tell the downturn has bottomed? How long is the U-curve gonna stretch?

Or say contrariwise, some say when the stock market is at the apex or at the end of a bull run, sell. But when is the apex or the tail-end of it? If the experts do not know, then who knows?

As far as this is concerned, everybody is guessing most of the time. That's the problem.

As you said, we should not take the past to predict the future. On this point, I think from now the bull run of the 2001 to 2007 roughly, might not be repeated with the same force. Why?

Because the financial institutions in the West had undergone a very drastic restructuring, many of them have vanished from the scene.

Furthermore the Obama administration is going to regulate speculation on oil prices. With that other similar regulation applying to other commodities and equities might also come into being.

In other words, the speculation that had driven the global stockmarkets crazy might become more toned down when they recover.

On the whole I think this is better for everyone because volatility is always a bad thing for serious investors who hope to put their money in and get say slightly more than fixed deposits.

The days of 30-40% profit investing in emerging economies like China and India may never return.

But of course like everyone else, what I just said is also speculative. There are too many forces impinging on the stock markets for anyone to make a completely accurate prediction.

Anonymous said...

There is a real-world joke I came across during a big investment seminar. Someone from the audience asked what happened to the prediction made by one of the investment experts a year earlier that the STI would hit 3000 by the end of that year.

The answer: he will be revising his outlook.

In the meantime those who believe in his prediction may have lost much money investing.

When experts are wrong, they say they will revise their rating & assessment of the fund, index etc. Period.

But when they told you how good a particular fund was, they backed it all up with all kinds of statistics.

But if you look closer at the portfoliios that the fund managers are telling you to invest in, they may have been into them for years but they never sounded you out. Now they have almost peaked, and they say please come in.

They are no different from the bankers that sell you crap and then vanished with their commissions.

I am not saying there is no value in the equities, just that you will be better off taking a broad assessment of them based on general economic sentiments and trends.

Know what the so-called experts are saying but know that they are there to make big money that goes beyond just making a few percent commission from the buy and sell by investors.

One could expect they are also investing in their funds they are managing through proxies because legally most investment firms have policies to prevent their investment managers from personally investing them.

Anonymous said...

If you do not know what you're doing, please stick to a diversified basket of mutual funds or ETFs.

If you would like to "cherry-pick" funds, please note that you're not supposed to pick the ones that "you" like. You're supposed to pick the ones that "millions of other investors" like. Do you realise how incredibly difficult it is to predict the behaviour of so many other individuals?

Anonymous said...

To Anon at 2:04 PM who wrote "Recession did'nt looked like that before. I remember in 1988 when there was a recession I took my kids to Suntec City area and the place was very deserted and felt miserable to say the least. .."

Back then we didn't have to pay our ministers & their cronies million dollar salaries ! Look they are so rich now, French cooking classes is no problem !

Back then the floodgates to Foreign Trash was not opened so widely. The gates are not even in existence now, any tom, dick and harry can migrate to SIllypore !!

Anonymous said...

To Anon 1.45pm: "good advise - only thing is that you got to have a time horizon. Some chaps may need to get married in 2 years time, which may be bad news cos, in 2 years, stocks may not pick up and you need to cash out at a lower price :)"

i think that the amount (wedding funds etc) must be set aside as a buffer for the anticipated need and not be invested at all. to be safe, look 5 years ahead so that if at the end of that period the invested funds need to be liquidated at a loss, it cant be helped becos you have made a calculated call and done your best. all investments are risky, that element cant be eliminated.

in real life, people dun practice money management as much. instead it is common to find investors gearing and leveraging on their calls, the reason many investors fail.

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This can't work as a matter of fact, that is exactly what I believe.