Singapore Investments

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As you've probably noticed, I've started to post less and less in the blog. Why? I've simply got less and less time. Actually, there's nothing much to talk about from the daily fluctuations of the market anyway. I've been reading intensely (as always, since the start of this year) and I've learnt a lot of things. I'm just wondering why I didn't start this intensive reading program of mine earlier, so I can compound the knowledge sooner

I started reading this excellent book, titled the 'Concise guide to Macro Economics' by David A. Moss. The slick black colour attracts me to at first, and after browsing through a couple of pages, I thought this is a must read for everyone who don't have a background in economics.


It's pretty short, hence the title concise. It skipped all the maths/equation parts about economics and zoomed in right to the principle and general understanding of it. It really opened up my eyes. I wondered how I lived my life so far without knowing what's the different between nominal, real GDP, the components of GDP, how depreciating USD to SGD doesn't always mean USD goods are cheaper etc.

Frankly, I've not read through the whole book but the knowledge I got from it already widened my worldview. For example, just now when I was cashing out my ERS, I noticed the dividend rate is given as 3% plus real GDP. Haha, my eyes opened up when I saw 'real GDP'. Books always gave me this feeling that my mental eye can roam further and see deeper.

Of the most important things I've read so far, I realised that the FED isn't the only one who can increase money supply. Banks can do that too. Assume that the bank's reserve ratio is 10%. If I deposited $100 into the bank, based on the reserve ratio, the bank can lend out $90 and have to keep $10 in the bank. Well, if I still have my $100 and someone had $90, then money supply had increased from $100 to $190, an increase of $90. Well, of course, it doesn't just end there. If that someone used it to buy some goods and the person sold the goods for $90 also deposit it into the bank, then the bank can lend out another $81 out, increasing the money supply further.

Okay, this bit is from my knowledge of geometric progression (GP). The amount of money forms a GP with first term as 100 and ratio as 0.90:

100...90...81...72.9...65.61...59.049... and so on ad infinitum

If we assume that everyone downstream puts the money into the same bank and the bank reserve ratio do not change, then taking the sum to infinity of the GP will lead us to $1000. I found that this is exactly the same as the formula quoted:

Money multiplier = 1/(proportion of leakage)

If the reserve ratio is 10%, then leakage is 10%.

Since initially I deposited $100 and the money multiplier is 10, the money supply increased to $1000 (100 x 10), exactly the same as what is calculated by my sum to infinity of a GP. Hence, we can see that banks can also 'print' money by taking deposits and lending out. What is amazing is that this supposedly highly leveraged position is the core business of banks, since they charge interest for the money loaned out. Can you imagine how much interest my $100 can generate for the bank?

If there is no credibility in the bank, people will start to withdraw their money all at once, causing bank runs. This is where other banks or the central banks have to lend money to this particular bank, in order for them to pay the extra $900 generated from my initial $100. If nobody wants to lend to this bank, the bank goes bankrupt.

Besides being amazed by the potential lucrative business in running a bank, I start to see the whole picture of Fed's action. This is no doubt helped by Stupid's excellent insight into L&S behaviour. By printing and injecting more money into the money supply, by making open market purchase into private financial institutions, by lowering the discount rate that FED lends to banks...they are employing all the tools of monetary policy. What's their aim? Definitely not to control inflation. This huge inflow of money will lower short term interest rate, possibly increase long term rates and in turn increase short term rates when inflation sets in. As Stupid mentioned, this inflationary environment is planned so as the assets being writedown will not go down so fast, creating an illusion that the situation is under control. This can happen since the assets are marked down to market value, and thus nominal and not real.

All this from reading just a concise guide to macro economics. Can you imagine how much insight I'll gleam from reading a not so concise guide? As they say, knowledge is power.

For those interested about Singapore Investments in reits

if you are holding on to any highly leveraged reits at the start of a new recession cycle, it could prove fatal to your investment portfolio, forget about that juicy dividend they have been giving in the PAST.

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explanation below

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A Reit, is usually laden with Debt to pay for Pricey Assets purchased during the economic expansion the world enjoyed for the past few years. Any Net Income it gets from this pricey properties are mostly drained away to give their shareholders dividends

so the danger is obvious, There are many Reits that have sprouted up and aggressively expanded during the recent economic boom and like fair weather flowers, how will this highly leveraged Reits react if the value of their properties and their monthly income gets hit by a prolonged economic downturn, something which the world could be facing today.

1)High Debt

- High interest payments

- Debt accumulated by buying optimistically priced assets during a economic boom

- Value of Assets prone to write downs during a downturn

2)Asset value shrinks

-Value of Assets…falls -> Company worth less -> Share price falls in adjustment

-Value of Asset falls, Stipulated ‘Debt : Asset ratio’ becomes unbalanced, might trigger force selling of assets to stay listed.

- Value of Asset falls, may have to issue new shares and dilute the shareholdings of already suffering shareholders. or in the event of a sale, company is very likely to be selling off assets at a loss.

3)Income shrinks

-Dividends falls -> Yield falls -> Share price falls in adjustment

-Might have difficulty meeting interest payments while maintaining a good dividend

-Difficulty in rising new capital may pose problems to this capital intensive companies

This debt-laden, cash-drained entities will have to deal with falling income, falling asset values, steady or increasing interest rates and keeping within stipulated agreements. of course, this is assuming that we will experience a worsening in the current economic situation

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There is Hope in the sense that Merger & Acquisition may provide life to the Reit market but before anyone goes looking for reits trading below their nav, Bear in mind that their current estimated net asset value is a poor reflection of the future asset value in a prolonged downturn.

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Singapore Investments

In Singapore, many Reits have been popping out over the past 2 years. They are mainly in the prime retail, prime commercial, prime hospitality, industrial and healthcare sectors

so far we have only 1 reit that focuses on suburban retail properties, zero that focuses on the non-prime commercial sector and zero that focuses on the mid-range to budget hospitality sector.

Listed on the Singapore stock exchange, are also Several Reits that invest around Asia, such as India, Indonesia, Hong Kong, Malaysia, China and Japan

There are strict regulations in place to safeguard investors interest, we have the privilege of being a investor friendly hub, from which retail investors may safely invest in other countries

This is a time for the world's value investors to rejoice. Our hero, Warren Buffett has become the world's richest man, overtaking Bill Gates, Founder of Unpopular Vista and Insecure Windows and Carlos Slim, Monopoly Tyrant oops Tycoon of Mexico. Of course, Lady Luck has got a lot to do with this, here are a few facts to support the thesis:1) Microsoft has eaten full full and got nothing better to do, so decided to launch a bid for Yahoo! which aggrevated a lot of investors bcos it's quite a stupid move given that Yahoo! is like yesterday's darling (ie like Demi Moore or Alicia Silverstone, does anybody remember them anyways?). Hence Bill Gates lost like 20% of his net worth in a couple of days and got relegated to No.2. Or was it No.3? 2) Thanks to the sub-prime crisis, investors are desperately looking for safe haven to park their money to hide away from the storm, and where's a better to place than to hide with the Guru? So Berkshire stock rallied like nobody's business and our hero became No.1. So that's that, fellow value investors buck up and follow your idol and the road to riches will be short ride. Er, wait a minute, although this blogger believes that value investing is a good way to help you grow your wealth, there are a few things that Buffett can do while most of us cannot. So the road ahead is always not that short I'm afraid. The philosophy is important, but it may not reach the same destination depending on the execution. Here's a few tricks that Buffett can use but we cannot: 1) Buffett can buy over whole co.s and ask mgmt to pay out excess cash to Berkshire. This is a very powerful tool as we all know that mgmt simply cannot be trusted to handle shareholders' money. We have seen so many examples of good co.s generating good cashflow only to see it squandered away on useless ventures. I think the most aped example would be Microsoft. Bill Gates must be cursing Steve Ballmer to death now for doing the Yahoo? deal. Shareholders are so much better off if Microsoft just generate cash and return them to shareholders. Well this trick is something that you and I cannot do. But it is a good philosophy to bear in mind and remember to apply this, if it is ever applicable in our lives. I guess one example would be property. If you are holding a property that can generate rental yield of 15%. I guess you should never sell this property unless it's like a super real estate bubble in which your property will fetch as much price as the whole of Bintan or something. Except for that scenario, you should never sell something that gives you 15% yield bcos in 6 yrs you get back your principal and the ppty will continue to generate 15% per yr for as long as you own the property! 2) Buffett's investment actions follow the self-fulfilling prophecy. There are websites, blogs, analysts, TV programs, cell groups following Buffett's every investment moves and hence whenever Berkshire makes a move, a lot of people will simply charge and buy with the Sage of Omaha. So is it a wonder why whatever Berkshire buys always goes up? Of course, this is also due to Berkshire's brand name. ie whenever Berkshire buys something, it is a stamp of recognition that the stock or investment is undervalued and money is to be made. In other words, at a certain stage when a famous investor or fund manager becomes so successful, his success will simply feed onto itself bcos a lot mindless followers will simply support him and validate his investment decisions. Again this is something that we cannot do, yet. You see, this blog will become a sensation in time and start recommending stocks which will then send its own army of mindless followers to buy and the early birds here will reap the rewards. Haha fat dream right? Well hope is a good thing, and all good things never die. (taken fr Shawshank Redemption by Stephen King) So keep hoping! Investment advice, CFA tuition, stock analysis, value investing, financial statement, financial ratios, earnings drivers, SWOT analysis, secular trends, stock screens