Singapore Stock Market News

I once attended a class where the professor asked us to play a game. It was a pretty simple game on the surface. Everyone was asked to choose a number from 1 to 100. The person who chose a number that is closest to 2/3 of the average number that everybody chose will win the game.

Now how should one choose such that it would maximize one's chances of winning?

Well, first you must determine what is the average of everyone's number choices. There were about 100 students in the class, so assuming everyone randomly chooses a number, probably the average will be close to 50. So 2/3 of 50 will be 33.

But wait a minute. If everyone thinks similarly and chooses 33 then the average will be 33 and 2/3 of the average then becomes 22.

Hey wait a second, if everyone then chooses 22, the 2/3 of the average will then become 2/3 of 22 which will be 15. And so the reasoning goes.

So in the end, I chose one, based on the above logic. Of course, I did not win the game. The real winning number, was somewhere between 22 and 33 (I forgot the actual no.). So what went wrong? And what the hell has it got to do with Beauty Contests and the Stock Markets?

Let's talk about the Beauty Contest first. The great economist John Maynard Keynes came up with this concept to explain the stock market. So this Beauty Contest is also sometimes known as the Keynesian Beauty Contest.

Btw Keynes is a big name in economics, if you don't know him. Shame on you and pls go check him up on Wikipedia.

Anyways during Keynes time, some newspaper in London publishes 100 pretty faces and asks its readers to choose which face would likely be the pretty face that most readers choose.

So there are people who would simply choose who they think are the prettiest. However that's quite unlikely to win bcos we all have different tastes right? Xiang Yun may be your favourite but I like Fann Wong. Ah Beng may like Auntie Zoe and Ah Seng likes Wong Li Lin. (Ok as you can see, I belong to a dinosaur generation and has no clue who are the new stars.)

So some smarter readers will naturally try to guess who they think the general public will choose as the prettiest face. And just like our number game, even more sophisticated readers can even go further, and choose the face that other readers will choose as who they think the general public will choose as the prettiest face. And one can further increase the order of the guessing game.

Ok if you have been reading intently this far, you would have guessed that the stock market works in a similar fashion. Well that is if you want to pick a winning stock tomorrow, or next week or even in the next 6 or 12 mths.

Basically you can throw fundamentals out the window. Technicals may help a bit but what's gonna make you big bucks is to guess what everyone else is thinking and be a step ahead. The winning stock will be one which the market participants think will have the rosiest earnings growth in the near future. It does not necessarily mean that the stock will actually deliver the rosiest earnings. Just what everybody thinks is what it counts

Or it could be the 2nd order: ie the winning stock will be one which sophisticated market particpants think what the general market participants think will have the rosiest future. Today, it means your alternative energy, oil exploration, frontier stocks etc.

It does not make sense to go too high into the order bcos the market cannot be too sophisticated as there will always be some uncles, aunties and amateurs choosing their own favourite pretty face (or their own favourite stock). That's why choosing 1 in the number game will not win.

In the stock market, it means that you shouldn't be buying stocks of a company that provides the core component for a high-end analytical equipment used to detect uranium in some desert, and as you know, uranium is used for nuclear power generation - the hot, sexy story in today's environment. The market is not sophisticated enough to think so far ahead. Even though you may be right and the company may have a genuine investment thesis.

This means that you shouldn't be thinking too far ahead of the market. You should be 1 step ahead but not 3 steps ahead. Well, that is if you want to pick winners in a short time frame: ie from 1 day to 6 to 12 mths.

In summary, the stock market works like the beauty contest in the short term. It's the ultimate guessing game and chances of you getting it right is not high unless you have that flair or talent. But over the long run (ie 5 yrs and above lah), stock prices have to reflect fundamentals: earnings growth, shareholders' return and companies' true intrinsic values. And value investing ensures that you have better chances getting that part right.

Zoe, Fann, Li Lin can be Queens of Caldecott Hill but Mother Theresa, Florence Nightingale, Helen Keller are the real winners in life's beauty contest.

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The 3rd bubble that we will talk about would be Singapore's own property bubble in 1996-1997. This is the most interesting example bcos it is the only 1 in my 3 examples whereby prices have surpassed the previous peak.

However that doesn't mean that investors who invested at the peak did ok. In fact most people will still be under water. But at least, they have much better chance to recover their capital even though their compounded return will still be quite miserable.

The Singapore property bubble actually started in 93-94 when Asia experienced tremendous boom. In fact, four economies were given a very special name - Asian Tigers (or was it Dragons?) due to their spectacular double digit growth. They are of course, our beloved motherland, Korea, Hong Kong and Taiwan. Even so the rest of the region enjoyed high growth. Singapore properties were snapped up by Malaysians, Indonesians, Taiwanese and closer to 1997, of course, the Hong Kongers, who feared major upheavals following Hong Kong's return to China.

Well that's of course just part of the story. Many many factors came into play and even today we cannot say for sure what caused the spectacular rise and fall of the Little Red Dot's real estate prices.

Besides that foreign demand story, the other factor would of course be the lack of supply of property at that time. Back in the early 90s, HDB was lagging behind the curve (as usual) and cut down on building new flats even though demand for flats remained high as the economy grew. So, young couples were made to wait 4-5 yrs for their flats after they get married. And meanwhile the Govt expects more babies when young couples have to dunno-live-where for 4-5 yrs after getting married.

Also back then, private condos project developments were not built by the truckloads (probably approval wasn't that easily given that HDB's thinking was always about 3 yrs behind). So there was a general lack of supply and huge demand from both foreigners and young married couples. And as they say, the rest is history.

Property prices went through the roof. The highest end luxury stuff was like S$2,000 psf and even prices in undesirable locations like Boon Lay, Hill View also hit S$800-900psf, HDB in Bishan sold for a record $800k or so. There was no general price index that I could find but some charts indicated that if we use 1993 prices as 100, prices in 1997 were 120% or so higher.

After that, again a confluence of factors push prices down by roughly 50% (like HDB building 150,000 new flats in Seng Kang and Punggol when they realized they were wrong to stop building flats 5 yrs ago), only to rebound significantly in 1999 and 2000 and then went into a gradual decline until it bottomed at 2005. Prices at 2005 were 30% below its peak in 1997. Of course, things turned around in 2006 and 2007 with en-bloc, Integrated Resorts, Middle East investors, F1 and the other usual Ra-Ra stuff.

See Chart 1 for the whole history of our roller coaster ride!
http://www.hktdc.com/econforum/sc/sc070301.htm

And so today average prices finally exceeded the peak made in 1997 after 11 years, Well that's kinda good news when comparing to other bubbles, where usually, the previous peak was never surpassed. Nevertheless, if you have bought some of those luxury high end stuff at $2,000 psf, today you might be able to sell at $2,500 psf (that's a big assumption since your property will be 11-yr-old while some other cool stuff are just next door and brand new). So your return will be 25% after 11 yrs which is about 2%pa. Abt the same as fixed deposit today.

Well that's great right considering most other bubbles you usually don't see your capital.

So, moral of the story: Don't ever ever get caught in a bubble!

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The 2nd bubble that we will talk about is the one that is most familiar to many of us. This bubble goes by many names, the dot com bubble, tech bubble, IT bubble etc but I shall call it the TMT bubble (as some in the financial industry calls it). TMT stands for Tech, Media and Telco (I think), and it is named as such bcos these are the sectors that rallied the most during those days in 1999 and 2000.

The index representative of this bubble is, of course, the NASDAQ, where most of the tech stocks are listed. Names like Microsoft, Cisco, Oracle, Amazon, Yahoo! etc. At the peak, NASDAQ was roughly at 5,000+. Again today it trades more than 50% discount of its peak at 2,200+ (though it is a good 100% up from its bottom at 1,100) So again even if you had bought 30% below its peak, you would still be under water today.

It remains to be seen whether the tech stocks will suffer the same fate as Japan, ie never surpassing the previous high. It is now 8 yrs after the bubble bursted, and the NASDAQ has since risen 90% from its low. If it takes another 8 yrs to rise another 90%, this will bring NASDAQ close to 4,200. So perhaps those who bought at 5,000 can actually breakeven after 16 yrs.

Then again, the annual compounded rate of return will be quite bad right? In fact it will be 0% IF it breaks even at 5,000 after 16 long years. If you hold out longer, maybe the return can creep up to 2-3%pa. So in order to reach an average return of 8%pa, perhaps you will have to hold 100 yrs or so.

Moral of the story: don't get caught in a bubble!

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Investing in stocks or real estate or any other asset class is a good thing most of the time. Over time, most "well-known" investable asset classes give a good real rate of return (ie a return that can beat inflation lah). Ok the other caveat here is "well-known" asset classes, ie dont go and invest in wine or art, jewellery etc, chances are you are likely not to see your money again.

Just some ballpark no.s to play with, historically these asset classes have been able to generate these returns (nominal not real and they also include dividend or other forms of yield, real return will be these no.s - inflation rate)

Stocks 10%pa
Real Estate 12%pa
Private Equity 15%pa
Bonds 5%pa
Commodities 8%pa

However, as we all know, these are historical AVERAGE returns, There is no guarantee that the future will be like the past. It may not be possible for us to enjoy these returns going into the future. In fact if you had invested at the wrong time, there is a chance that you will never get close to these rate of returns.

Of course the wrong time willl be ********drumrolls******** investing at the peak of some bubble. I shall highlight three real life examples on how investing at the peak of some bubble will make sure that you will earn a meagre return over a long period of time.

The first bubble that we are going to introduce here is probably the biggest bubble in recent history (yes even bigger than the dot com bubble) in terms of magnitude. There are two asset classes involved: real estate and stock market (as usual btw) and sadly these asset classes never ever recover close to its peak even after 19 long years.

Yes this is the Japanese bubble which ended in 1990 when everything collapsed. At the peak of the bubble, the Nikkei was close to 40,000 and real estate prices in Tokyo reached close to USD 140,000 psf. (Okay so Singapore is not so bad lah, only SGD 3,000+ psf this time round, we are about 2 more digits away).

Today the Nikkei stock index hovers around 13,000 levels and Tokyo real estate prices are on par with Singapore's SGD 3,000+ psf. A lot of Japanese that invested in real estate near the peak had to finance their mortgage with maturities stretching 2 lifetimes ie the sons have to continue to pay the father's mortgage.

Imagine if you have bought stocks or real estate even at 30% below its peak level, you will still not see your capital today, and the sad truth is, perhaps you will never ever see your capital again.

As for the stock market, the Nikkei declined steadily over the next 13 yrs after it cracked in 1990 and eventually reached a bottom at around 8,000 in 2003. So even if you DCA all the way down, you may not have broken even today. Subsequently, it rebounded to 18,000 before declining back to 13,000 today.

Moral of the story: Don't get caught in a bubble, but easier said than done right?

To be continued...

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Value investors rejoice when the markets go into correction mode. Bcos that means they can pick up good businesses at bargain prices. Logically and intuitively, this makes perfect sense, but somehow our ape-evolved brains are not wired to think that way.

When the markets have rallied for some time and it goes down, we panic. When they subsequently rebound, we curse and swear that why didn't we buy more during the correction. And when the markets go into correction mode for 3 years, we get totally not interested in the markets. Many don't ever return to invest, even though it's the best chance they got against inflation.

So some have come up with a method to counter this flaw and help us invest wiser. It's called Dollar Cost Averaging or DCA for short. It simply means that you put the same amt of money to buy stocks/UT/index funds etc at fixed time periods.

The logic is that although you lose money when the markets go down, bcos you put the same amt again after it has declined, you buy more of the stock/UT/index fund, and over time, since all markets will rise, you will earn the market average return of 8-10%.

However, one must be wary that it's also detrimental if you cut it too thinly ie if you DCA every mth, you end up paying a lot of commission bcos sometimes for UT there is a sales charge for every transaction, and for stocks the bid-ask or the $20 transaction cost kills you. This is what brokers will recommend bcos it generates more commission dollars, so beware!

I have 2 recommendation to improve on DCA that I hope will help most pple.

1) This is just reiteration. Don't cut it too thinly, ie maybe at least once a year and buy more at one go, like maybe roughly $10k at one go. Imagine if you DCA every mth at $1k. You pay 2% sales charge, or you pay $20 on transaction at the brokerage, which is also 2%, you are giving the return away, investment earn only 8%pa on average. So it has to be a huge amt to offset these costs. At $10k, the $20 becomes 0.2% + some bid-ask which ends up maybe like 0.8% or something. Alas, for UT or funds that charge 2%, too bad, $10k you still pay 2%. So avoid funds with huge sales charge.

2) Buy more when the markets are down. Instead of DCA-ing the same amt. You can buy more when markets are down ie. in 2000 you really DCA a minimum amt, 2001 you increase your DCA to 120%, 2002 to 140% of original, 2003 another increment etc. Of course, on hindsight, that's easy. We knew what happened already. How about now? Do you increase your DCA amt next year if the markets are down? Chances are if it goes down in 2008 it's gonna go down in 2009 as well right? But I guess one simply has to strengthen the will to increase DCA when the markets are down and lighten up when the markets are rally. That way, it will enhance return and help you hit 8-10%pa over the long run.

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