Added $4,000 Yesterday, and US on the Mend (30 Oct 2009)

After two days of falls in Asian markets on Wednesday and Thursday, I added in more to my portfolio yesterday. While psychologically, it is scary to add in more when the market is dropping, I have found that you usually get things cheaper during those times. Today is a pretty good day for markets so far, but I didn’t know how today would turn out when I placed my trades yesterday.

Additions were as follows:

Aberdeen Singapore Equity Fund - $2000
Aberdeen Asian Smaller Companies Fund - $2000

Total: $4000

Yesterday night, US also reported its third quarter GDP results. The US economy grew at a seasonally adjusted 3.5% annualized rate in the third quarter, the first quarter it has recorded positive growth after 4 consecutive quarters of negative growth before. While the road is recovery from here is likely to be a slow one for the US, we can all at least be relieved that it looks like the US economy is turning the corner. Economists are likely to be cautious about rushing in to declare that the recession has ended. It took months before the National Bureau of Economic Research declared that the recession in the US started in December 2007, so they are going to take some time before declaring that the recession is at an end (likely months after it has clearly ended).

The key thing is that one of Asia’s biggest export market, the US, is on the mend. I believe there are big changes involved going forward. Even on the mend, the US consumer is unlikely to go back to its free spending ways any time soon. So, the void will have to be filled up by emerging market consumers, including Asian consumers, which had previously been always been more interested in saving money than spending it.

But even for the stressed out US consumer, the signs of its economy recovering will also allow some of its consumers the confidence to start spending again. After all, its far easier to give into the temptation to spend money than it is to save it. This is why I think it is possible for Asian consumers to step up even as the US consumers take a step back. Just the other day, I was actually contemplating whether I should buy a car after all. (My two kids were growing bigger now). But with COE prices having gone up so much, and ERP charges going up as well, the high cost of owning a car again put me off. But going by the way COE prices have been going up, I am sure many others gave in to the temptation of owning a set of wheels even if I didn’t. So, can the Asian consumer help to fill up the gap left behind in the retreat of the US consumer? I am quite confident the answer is a “Yes!”

Property Asset Bubble? (28 Oct 2009)

Is Asia entering a time when asset bubbles might be forming? It might seem unbelievable. After all, it was barely just over a year ago when the financial crisis in US hit and spread to the rest of the world. But look at the property prices in Singapore and you wouldn’t know we just came from a recession. Home prices have surged, as have demand. 10,000 private residential units were sold in the first seven months of 2009, and this is more than double that of the 4300 sold for the whole of last year.

Prices of HDB flats have surged as well. Prices of resale HDB flats have hit record highs in 3Q2009, with the index at 145.2 in the 3Q2009. Prices of private homes also surged, going up 15.8% in the third quarter alone.

Part of the reason was that Asia, including Singapore was in a different part of the property cycle when the US financial crisis hit last year. US had been coming off a property bull run, one fuelled by cheap home loans and made especially widespread due to the easy availability of subprime loans. So, the crash there was sharp and the US property market may take some time to recover. Yet for Asia, there wasn’t a subprime loan fueled property bubble. In contrast, Asia was still recovering gradually from the property highs of the nineties. Hence, was barely in the early stages of a property bull run before the US financial crisis hit.

Now, with governments all over the world keeping interest rates at rock bottom, the lending costs of buying property are at a low. It doesn’t help that with so much money being printed by governments to stimulate the economy, people are nervous about possible hyperinflation and in light, property would seem even more attractive because it has historically always been resilient to inflation.

Indeed, the three things likely to be resilient to inflation are commodities, property, and stocks. Stocks because companies sell goods and services, so if there is high inflation, they can raise prices as well! For commodities, well, even if inflation is rampant, people need to eat, companies need their raw materials to build their goods. Hence, commodities are resilient to inflation. Finally, for property, everyone needs and wants a roof over their heads. So, good property will always have value which appreciates even as things get more expensive.

However, are we experiencing an asset bubble already? My answer would be “Not yet.” This is crucial. We may be at the early stages of an asset bubble forming, and if no action is taken, there will be a huge bubble, which when it bursts, is going to be very painful, just like all bubbles are painful when they burst (anyone still remember the technology bubble in 1999?). But if Asian governments, including Singapore’s can take early enough action to make sure it doesn’t spin out of control, then we may yet avoid experiencing an asset bubble.

This doesn’t mean property prices shouldn’t rise. Over the long term, all prices generally go up. Governments agree that low to moderate inflation is fine, its high inflation they don’t want. But in a bubble situation, prices do not reflect fundamentals or demand at all. Everyone is just jumping in because they want to make a quick buck and everyone thinks they can get out in time before the party ends.

Asia’s stronger economic growth and general land scarcity means that property will always be in demand. But there is a reasonable price to pay for anything, and during bubbles, prices are pushed up well beyond reasonable levels. We are not in an asset bubble yet. But the ingredients are all there. Low interest rates, ample supply of money in the system, a recovering economy, increased demand, limited supply. Whether we end up like US will depend a lot on how our government can manage the current surge in property prices. In the meantime, if you already have property, let it ride the current surge. But if you don’t, then don’t chase after the property market. The higher property prices surge in the short term, the greater the danger of a bubble forming. And if government steps in now to rein in the excess as a pre-emptive measure, that would also put some brakes on the surging property market. So either way, there is no necessity to chase after the property market.

Just Put in Another $5000, it’s a Good Time to Invest (21 Oct 2009)

I just invested $5,000 more today. It was placed in the following funds.

ING RF Emerging Markets Debt HC EUR - $1,500
FLF Equity Europe Emerging EUR - $1,500
Legg Mason SEA Special Situations - $2,000

Firstly, the current market situation is that stock markets have obviously risen, but many investors are caught on the sidelines, or sold out too early. Many are very wary of going in at current prices, and wondering if it will come down. There are no obvious signs that the market is going either direction in the short term, hence all the uncertainty.

What I do know is that I am far more patient then the market, which tends to have a very limited short term outlook. Things are now slowly and surely getting better around the world. It just won’t be defined by any one single event where you wake up and suddenly, it seems like the recession is “over” and we are in boom times. If the market looks expensive now just because it has risen 50% over the last 6 months, you could fast forward 1 year and you might again in hindsight say it was still cheap now. But because no one has a confirmed crystal ball, hence there remains so much uncertainty. But for a unit trust investor like me, where I am not so concerned about the short term fluctuations, I would still “dare” to buy now.

In addition, valuations are not demanding. Forward 2010 valuations for most Asian markets are below 15 times PE, which is very reasonable, and that’s for US and Europe as well. The year 2009 is a very low base for many companies, since most were still doing badly in the first and second quarter. So, next year’s numbers are almost certainly going to look better compared to this year’s numbers.

As always, a portion of the money was invested into bond funds. The minimum subsequent investment for the ING Emerging Market Bond fund is higher than $1,000, hence I put in $1500.

The investment into Europe was because I have too much exposure into Asia, so even though I continue to like it, if I don’t add to other regions outside of Asia occasionally, soon I will be even more heavily tilted towards Asia. Its hard to practice what you preach yourself, so, yes, despite all the diversification benefits and strategies that I always talk about, I am sometimes guilty of not following strictly to them myself either. Hence from my portfolio, one can see that I am obviously overweight Asia in a big way, and probably more than is healthy.

The addition into Legg Mason SEA Special Situations fund reflects again my bullishness for Asia. I find the fund a good counterpart to the Aberdeen Pacific Equity fund, which is more value driven. This fund is more aggressive (its performance is more volatile), but it can really move up when the market runs. And from my perspective, we are in a rising tide. So, it’s a matter of time.

One day within the next few months, for no particular reason, the market will move upwards decisively over a period of time. This is because as people leave the year 2009 behind and start to focus on 2010, they will start to feel more optimistic, and many will realise that things are actually looking much more positive. Analysts will be revising earnings for 2010 upwards into the new year, and suddenly, without any particular event, the market will move upwards further.

It doesn’t seem like it now, but that is precisely why we should invest now. Investing when the whole world including your next door neighbor is screaming buy is not the way to go. But investing when most people are uncertain, are still waiting, that is how I plan to make money.

All that Glitters is not always Gold (16 Oct 2009)

Gold prices are now at 1050 USD per ounce. Ten years ago, in 1999, they were 288 USD per ounce. That’s a rise of 264% which works out to an annualized increase of 13.8% per year. This is far better than what the US stock market did. So, should we all be rushing into gold now? To be honest, I am cautious.

I am far more positive on equities than I am on gold. But firstly, here’s why gold is going through the roof. People are moving into gold right now because the US dollar is falling, and there is a fair amount of worry that it will crash. And the reasoning is that in a huge crash for the USD, then the only good of store of value would be gold. It also helps that a group of investors believe that there will be hyperinflation, and in that scenario, paper money will also see its value shrink while gold will not.

Now, here’s the reason why I am cautious, if you look at this history of actual gold prices, it is not an asset class for the faint hearted.

I ran some numbers. On a calendar year basis, over the last 88 years up till the year 2008, Gold had 44 positive years, 11 years of 0% returns, and another 33 years of negative returns. In percentage terms, this means that 50% of the years were positive, 12.5% of the years were absolutely flat, and 37.5% of the years were negative. It should also be noteworthy that including this year, gold has been on a 9 year bull run. The last time gold had a bull run similar to its current one, was in the seventies. Gold went from 35 USD per ounce in 1970 to 589 USD per ounce by 1980 (It hit a high of around 850 USD at its peak on 21 January 1980). After that, it fell all the way back down to ranges at 280 USD over the next 20 years before it started on its current bull run again.

The thing is, the asset class can go absolutely nowhere for 20 years! And this is not an isolated trend. From 1935 to 1967, gold price went absolutely nowhere! That is 32 years! I am all for long term investing, but 32 years of an investment going absolutely nowhere would be terrible even by long term investing standards.

When gold surges, it can charge up substantially over a few years, and after that, it could be a multi decade wait in the doldrums for its next bull run. This makes it extremely scary to hold as a main investment strategy. This is one of the main reasons why I hold a precious metals fund instead of just gold, and even my precious metals fund, which is up 33% since I bought it, is barely 1.6% of my total portfolio. It is more to hedge to a certain extent against hyperinflation and USD crashing rather than a main strategy.

The key thing is, I believe a recovery is in the works, and with that, company earnings will improve as the global economy gets back on its feet. Hence, I am bullish equities. However, what is gold? It is mainly a store of value. Its practical uses as jewelry is definitely not the reason why it should be surging to over 1000 USD per ounce. If people didn’t believe in gold as a store of value, its price would plummet. So, unlike companies, which are striving to improve their productivities, and have the leeway to adjust prices, go into new business, etc, gold is just gold. Its not even essential like oil, or rice, or bread. People can choose not to use gold as a store of value, and they won’t be any worse off, unlike how if people didn’t want to use oil, then everyone would have to stop driving, and all the machinery in the world would stop.

So, while I acknowledge that gold has had a tremendous run so far, I am cautious on it. I actually have a precious metals fund that would continue to go up if gold price continues to move up, but I am not betting the farm on this. The history of this asset class over the last 88 years makes it a scary one to hold. So, I would only have it in my portfolio as a form of hedging. If you want to make big bets on this yellow metal, then be prepared to be very nimble, because when the party ends on this, it could be a very long time, and I am talking about decades here before the next gold bull run revisits again! So, if you happen to be the last one holding on to gold assets when this gold bull run ends, its going to be very painful.

How much things actually cost - Part 2

This is the continuation on my previous posting of how much things actually cost. In short, we can calculate how things actually cost by considering their cost over the time in which we would effectively use them instead of just their upfront number. For example, a pair of movie tickets plus a popcorn combo for two costs $30 on a weekend. So, if we take a 2 hour movie, that works out to $15 per hour. That cup of coffee? (Its water, so let’s assume it gets digested in 2 hour). A Starbucks coffee would cost $3.5 an hour, while your kopitiam coffee would only cost $0.75 an hour. A restaurant meal costing $30 would work out to $5 per hour assuming you took 6 hours to digest the food.

Let’s touch on something close to people’s hearts here – housing. This is iffy because you can sell your house again subsequently, so many people do not see it as necessarily a cost. But for someone who is renting. Say you spend $3,000 per month renting a place. At most you would spend only 12 hours a day at your house. Rest of the time, you would be outside. So, on a per hour basis, it would cost (3000 divided by 12x30) = $8 per hour. This of course, doesn’t include things like your PUB bill, and cost of furniture and stuff.

Take a couch. Say you spent $3000 to buy a really expensive, nice sofa set. Give it 5 years usage, and assume you are a real TV buff, so you spend 3 hours watching TV every day (wow!). So, that sofa cost you 3000 divided by (3x365x5) = $0.55 per hour. Hey, its not that bad if you are a TV buff. Of course, if you are the type that buys a $3000 sofa set, but hardly use it at all because you watch TV in your bed. So, it gets used maybe 1 hour a week? Then your sofa set actually costs you 3000 divided by (1x56x5) = $10.71 per hour. That’s much more expensive now. Note that this is why I am willing to spend money buying an expensive nice bed, because we use the bed a lot. Even if it’s a $3,000 bed. If it lasts for 5 years, and we sleep on it an average of 8 hours a day, then its per hour usage is $3000 divided by (5x365x10) = $0.16, which is cheap! So, buy a good bed!

The same principle can be applied to electronic equipment like computers, handphones and TVs. So, if you spend 1 hour per day watching TV, then a $3000 TV set that lasts for 3 years would work out to 3000 divided by (365x3) = $2.74 per hour. If you spend 2 hours or even 3 hours a day paying computer games after work, then even if you spend $6000 on a top of the line computer that lasts for just 2 years, it would be only 6000 divided by (3x365x2) = 2.74 per hour only.

How about things like assessories? Again, it all depends on how often you use them. A diamond ring may cost a lot, but if the girl is so happy she wears it every day to work or play for the next 5 years (before she switches to another). Then, even if it costs $10,000, it would only work out to 10,000 divided by (300x10x5) = $0.66 per hour. Yes, you saw that right. It costs less than a cup of starbucks coffee. Of course, this is provided she wears it that often. If you are the hapless guy who sent even $10,000 on a diamond ring, and you gal only wore it a few times and then, kept it in her safe deposit box, then it would work out to say 10000 divided by (10x10) = $100 per hour! Now, that would be horrendously expensive. Of course, being a guy who actually did buy an engagement ring for my wife, I would advise that all guys do that regardless of how often they wear that ring after that. Because marriage is for life, and you wouldn’t want your wife to be mad at you for not buying her an engagement ring (even if she doesn’t wear it often).

Another common assesory, the watch, is actually pretty cheap too because we wear it so often. If you spend $5,000 buying an expensive branded watch, but you were willing to wear just that one watch for the next 10 years, to work and to play, again it would be cheap on a per hour basis, just $0.33 per hour. Of course, if you are going to end up wearing it just once each week for just 1 year before it starts to collect dust in the cupboard, then it would cost 5000 divided by 56x10 = $8.90 per hour. The worst would be if you wore it once, didn’t like the look, and never wear it again! Then, it would cost an astonishing $500 per hour! Of course, you could also buy a $100 watch and wear it for 5 years, and that would only cost $0.0054 per hour! In a similar vein, buying a $100 for a friend whom you know never ever wear watches, is a waste of money even if its $100.

How much do trips cost? Again, they can be calculated using this method. My honeymoon vacation was to Maldives, and cost nearly $10,000 for just six days or so. So, it cost $10000 divided by (6x24) = $69.44 per hour. This is obviously very expensive, which is why people can’t exactly afford to do nothing but travel all the time on holidays. Cheap trips though can be both fun, and very reasonable on the pocket. A $500 weekend trip to somewhere near, would only work out to 500 divided 3x24 = $6.94 per hour.

Ultimately, though this is just another way of looking at the cost of things, and doesn’t factor in the intangible benefit or enjoyment from things. I must emphasize that I am not encouraging people to do nothing but to scrimp and not spend any more at all. Life is going to be very tedious and boring if its all about saving and you don’t get to enjoy yourself at all. However, as with all things, things can be enjoyed in moderation. Is your enjoyment from sitting on a $3000 sofa set that much more than sitting on a $800 one? Only you can decide on that. Things that get a lot of usage are actually very cheap. So, that watch or assessory might actually work out to be really cheap if you wear it all the time. Take my wedding ring for example. It cost under $300 and is probably the cheapest assessory I ever bought on a per hour basis. This is because I have worn mine since I put it on and have never taken it off since, even in my sleep. So, as of now, I have worn it for 5 years and 7 months, or 2035 hours. So, it works out to just $0.147 per hour and its getting cheaper by the minute! On the other hand, I have realized that buying diamond rings for my wife is an extremely expensive affair because she hardly ever wears them. But diamond earrings are alright because she wears them all the time!

How Much Things Actually Cost - Part 1 (5 Oct 2009)

Back from my vacation! It cost a lot, but was fun and a good chance to get away from everything and just relax. But now that I am back, I would touch on something which is common to everyone everyday.

When ever we buy something, we often just look at the price. If this shirt cost $30, then that is all there is to it. But there is actually a slightly different way to look at this which I have thought about before. So, today, I will explore that way. Please note of course that this is a purely monetary method of looking at the cost of an item, and does not factor in how much personal satisfaction you get from using it, which can’t really be counted by money.

This method is to take the cost, add any repair maintenance that will ever be incurred, and divide the total figure by the number of hours you are actually going to use this item. For items like food, we can put a more arbitrary 6 hours to it, since its likely that it would all be fully digested by then.

So, let’s take that $30 shirt again. If I estimate that I am going to wear it to work once every two weeks for the next 2 years before I get tired of it (or expand such that I can’t wear it anymore!). And I normally wear it for ten hours on the days I do wear it to work. Then it would work out to 30 divided by (28x2x10) hours or $0.053 per hour of use. Obviously, this is very little. It also means that if I go for a slightly more expensive $50 shirt, it would still work out to a relatively small amount of $0.089 per hour.

However, if it’s a $50 casual shirt which I bought, which I ended up wearing just once, and I never wear it again after that. Then, this shirt would have cost far more. Assuming I wear it for even a full $10 on that day. Then it would work out to $5 per hour. Notice how much more expensive this now becomes compared to even a $50 working shirt. So, if you are the type that loves to buy new clothes, and end up wearing them just once, or worse, never at all! Its definitely not a very good deal.

Let’s look at something more complicated, like a car. There are all sorts of makes but let’s not take something too expensive. So, a 1.5 litre sedan.

Downpayment - $18,000, assuming use full 10 years, so $1,800 per year.
Monthly car loan installment payment -  $560 per month or 6720 per year.
Insurance - $1400 per year
Carpark – $65 per month, or $780 per year
Parking – $30 per month or $360 per year
Petrol – $300 per month or $3600 per year
Road tax – $700 per year
Maintenance – $250 per servicing, so $750 per year
Miscellaneous – $500 (accessories, car wash, replace parts).
Total – $16,110 per year.

Assuming you spend 1.5 hours on the road every day driving to work, etc. Then each year, you would spend 547.5 hours using your car. So, the cost per hour of a 1.5 litre car is ($16,110 divided by 547.5) = $29.42 per hour. Definitely not cheap. In comparision, most MRT trips won’t cost you over $2 per hour. And we are talking about a relatively cheap 1.5 litre car. Cars which are 1.8 litres and above are all much more expensive wither its maintenance, road tax, petrol, monthly payments. So, its all adds up.

We need to balance this with the amount we earn per hour as well. So, take your monthly pay, divide it by the number of hours you work per month. Let’s assume we work 8 hours a day, 20 days a month. (yes, some of us work longer, but let’s start with this). This works out to 160 hours per month. Here’s a table showing how much you earn per hour based on different salaries per month,

Monthly Salary	Amount earned per hour
$2000	$12.50 per hour
$4000	$25 per hour
$6000	$$37.5 per hour
$10000	$65.50 per hour
$15000	$93.75 per hour

So, now that we have this, you can look back and assess how expensive are the things you are spending money on relative to your earning power. If something costs $1 to $5, its probably either very frequently used, or its cheap. If it costs $10 an hour, its still affordable, but don’t buy or use too much of these things. And if something costs $30 or $70 an hour, then you either use these only once in a long while (like an expensive trip), or you better think long and hard before buying it (like an expensive luxury sedan). And as can be seen, cars are expensive!

I will touch on more daily examples like food, entertainment, and a favorite topic currently for many – property in my next blog update.