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Invest for income and ignore the two Ms.

Thursday, October 15, 2015

Who are the two Ms?

An email from a reader says...

Hi AK,


I followed you and bought XXX because I want to have passive income. 

The price is now down. 

I don't blame you. 





I made the decision to follow you. 

However, I worried and I got more worried after talking to someone in a forum. 

He said I am just taking back my own money when I get the dividend now. 

Can you talk to yourself on this? Thank you.

YLF





It is a journey.


AK says...

Hi YLF,


I gave some thought on how to answer your question. 

Hmmm, let me tell you a story of two investors, A and B.

A and B decided to invest in XXX because they liked the business and XXX also paid a good dividend. 

A few months later, XXX's stock declined in price. 





The business had not changed and, in all likelihood, it would still pay the same dividend.

A said that he had lost money and that when XXX paid him dividend, it was like taking back his own money. 

When he got the chance to break even, he sold and was happy.

B said that a lower stock price meant that he could increase his investment in XXX for a higher dividend yield because nothing else had changed. 

He was quite happy and bought more of XXX's stock.

As XXX's business was still chugging along nicely over time, B continued to receive meaningful dividends year after year even as the stock price went up and down over time. 


B was quite happy.

A became sad again.

Best wishes,
AK





There might be cases when a dividend is a return of capital. 

We can tell when we look at the financial statements if that is the case. 

In such an instance, we could say that we would be taking back our own money when paid the dividend. 

However, to say that we are taking back our own money when we receive dividend from a company because its stock price has declined from our entry price is either mischievous (if the person is in the know) or misguided (if the person is not in the know). 

The two Ms revealed.





Prices go down and prices go up. 

It is normal.


If we are investing in a good business with money we do not need for anything else and if the business pays regular dividends, we can hold forever.

If we can hold forever, short term movement in prices doesn't mean anything.

As investors, we should have the stomach for some volatility or else the stock market is a bad place for our money.





"Our favourite holding period is forever."
Warren Buffett


Related post:
1.
Does AK have anything uplifting to say?
2. "Patience is sometimes the hardest part..."
3. How to save 100% of your pay?

Delaying gratification and getting stuff we want for free.

Wednesday, October 14, 2015





What does the word "resist" mean?

I have mentioned delaying gratification and the pluses of doing so. Well, you know, here and there.

This is taken from a longer email by a reader:

"My girlfriend saves money so that she can go travelling. I tried suggesting we should save money to invests for passive income but she argues that now if we don't travel now, in the future we wont have time and money after being married and have kids."





Alamak! Domestic squabble alert!


I actually said:

"I don't know how to answer your question regarding your disagreement with your girlfriend. The coldest thing I could say is to find a partner who shares your goals and beliefs. Yikes. You really have to sort this out yourself."



I am terrible, I know.

Bad AK! Bad AK!







I like sharing the story about how Jim Rogers convinced his first wife when they were newly weds not to use her savings to buy a sofa she liked. 

They could still use their old sofa. 

They later got the sofa for "free", using money generated by her savings which he invested. 

Nice!

Wouldn't it be better if we were able to use money generated by our investments to pay for stuff we want (overseas holidays included) instead of using money we had saved from our earned income?






I have also shared my own story about how dividends from my investment in ST Engineering paid for my annual holidays to Japan for a few years in a row. 

I remember telling my dad this when we were on the bus to the airport at the end of a holiday in Osaka. 

He smiled indulgently. I didn't think he believed me then.

Anyway, the sooner we realise the benefit of delaying gratification and the sooner we start investing for a more secure future, the better.





Do you believe me?

Related posts:
1. Two questions which help build wealth.
2. The mystical art of wealth accumulation.
"
Cookie Monster learns a lesson.




Perennial's 3 year 4.65% bond: Good enough to buy?

Tuesday, October 13, 2015

A fellow blogger compared the 4.65% coupon offered with what we could get if we were to park our money in the Singapore Savings Bond (which is risk free) for 10 years.

Holding the SSB for 10 years would get us a yield of about 2.8% p.a. I have left a comment that, to be accurate, we should compare the coupon with what we could get in the SSB for 3 years.

Of course, the bonds are not strictly comparable since the SSB is really AAA rated as the borrower is the Singapore Government while PREH does not have a rating.

The question, then, is whether the coupon offered by PREH's bond compensates us for the risk we have been asked to assume as money lenders.





Perhaps, it would be better to compare this with another corporate bond. If we were to compare this offer with another corporate bond, we could compare this with the 7 years bond issued by Frasers Centrepoint Limited (FCL) earlier this year.

FCL's bond has a coupon of 3.65%. This offer by PREH is for a much shorter 3 years and has a coupon of 4.65%. If FCL were to shorten the holding period from 7 to 3 years, their coupon would probably have been much lower.


I have received several messages from readers asking if I think this bond by PREH is a good buy. Regular readers know that I won't answer such a question with a "yes" or "no".

I will say that a 4.65% coupon for a much shorter 3 years compared to FCL's 7 year bond which has a lower 3.65% coupon helps to compensate for the risk which I identified in an earlier blog post regarding PREH.

Related post:
1.
FCL's 7 year 3.65% bond.
2. PREH: A nibble?
3. Singapore Savings Bond: Good or not?

The public offer will open for subscription at 9am on Tuesday and will close at 9am on Oct 21.

Use fixed deposits for emergency fund and war chest. (With a section on OCBC 360, UOB ONE and CIMB savings a/c.)

Monday, October 12, 2015

In a few blog posts and comments, I have mentioned how I like to park emergency funds and a portion of my war chest in fixed deposits. 

Fixed deposits offer higher interest rates than savings accounts and are liquid enough to be considered near money.

I have been asked before how I go about doing it and although I am pretty sure I have mentioned it before in my blog, I am not sure if I have done it clearly. 

Anyway, I guess I shall try to do a better job in this blog post.





EMERGENCY FUNDS

For emergency funds, first, we have to determine how much we need to have in order to maintain the lifestyle we currently have in the event that our income stream disappears. 

Then, set aside this money. (For my thoughts on how to determine how much we should put aside, please see related post no. 1 at the end of the blog post.)

If we have determined that $50,000 is what we need in our emergency fund, then, look for the best fixed deposit deals out there. 





Check what are the minimum amounts required by the different banks to qualify for special interest rates. 

If the minimum amount required is $25,000, then, split the $50,000 into two portions. 

In the event of an emergency, we could opt to break only one fixed deposit while the other fixed deposit continues to earn higher interest, for example.

Also, as interest rates are expected to rise in future, try not to lock the money in a fixed deposit for longer than 12 months unless the offer is compelling. 








What is compelling? 

Well, interest rates are expected by some experts to go up by another 0.5% or 0.75% by end of next year. 

So, we could use that as a guide as to how much more a 24 months fixed deposit should pay. 

For sure, otherwise, I wouldn't go for 24 months or 36 months fixed deposits.

Don't restrict ourselves to what is being offered by the three local banks. 


Often, the foreign banks offer higher interest rates for fixed deposits. 

If we can get relatively attractive interest rates for a 6 months or 9 months placement at these banks, why not?





WAR CHEST

What about money in our war chest?

I believe I mentioned before how I use the concept of laddering with fixed deposits. 

This is especially pertinent for the money in my war chest. 

The basic idea is to have one or two fixed deposits maturing every other month or so. 

This is to ensure that I will have more funds available regularly, more funds from maturing fixed deposits that will add to my regular income, passive or not.

These are funds which I could use to invest in opportunities if they presented themselves. 

Otherwise, the funds and regular income, if any, go into a new fixed deposit or two.







For example, I had two fixed deposits which matured earlier this month. 

I had thought to keep the money close to me in case the stock market should continue its decline from August. 

As the stock market seems to be recovering nicely, I decided to lock away some of the money in two new fixed deposits last weekend, one maturing in April 2016 and another one in July 2016.

Right now, I have 7 fixed deposits and they are maturing in December 2015, April 2016 (2x), May 2016, June 2016, July 2016 and November 2016. 

The chance that I might have to prematurely terminate one or a few of these fixed deposits still exists, of course, but with laddering, staggering the maturity dates, I hope I wouldn't have to. 

I would like to have my cake and eat it too. Who doesn't?





OCBC 360, UOB ONE & CIMB

I hope I do not have to prematurely terminate any of my fixed deposits and the likelihood is reduced by the good size float I maintain in OCBC 360, UOB ONE and CIMB savings accounts, all of which offer higher interest rates for our savings without any lock up period.



However, these accounts only pay higher interest rates on savings provided that certain conditions are met. 

The amounts that could benefit from higher interest rates are also capped at $60K for OCBC 360 and $50K for UOB ONE.

For people who have more than $110K in savings or who are unable or unwilling to jump through hoops to get the higher interest rates, they might want to consider making good use of fixed deposits since CIMB only pays 0.8% in interest although their latest offer, the CIMB Fast Saver, offers 1% in interest for the first $50K in savings and 0.6% for anything above that.






I want to conclude by saying that for those of us who are less disciplined, even if we had $110K or less in savings, it would make sense to park our emergency fund (and even our war chest) in fixed deposits and not in OCBC 360 or UOB ONE. Why?

Well, after all, money in fixed deposits is slightly farther away compared to money in a savings account. Fixed deposits have locks.

Related posts:

1. How much should we have in emergency fund?
2. A special chest for emergency fund.
3. Getting paid more while waiting for opportunities.
4. UOB ONE or (new) OCBC 360?
(BOC's offer and updated OCBC 360 included.)
5. Standard Chartered Bank Bonus Saver?
(Added in July 2017.)

Goh Eng Yeow's anguish over his paper losses etc.

Sunday, October 11, 2015


AK is an accredited kay poh and is always looking around. 

If we train ourselves to be more observant and to be more aware of our environment, we might learn something or find something which might benefit us now or in the future (either by participating or avoiding). As investors, it could be a good idea to be a kay poh.

Today, I visited a mall that I have a stake in through my investment in a listed company. I saw a good crowd in the late morning and that made me happy. Did I hear SPH?

I bought myself a curry puff at an Old Chang Kee kiosk and I had to queue. A lady in front of me bought all the fried chicken wings available despite a recent price increase of 10c per wing. I had to wait quite a while for my turn but I was happy.

I went to a bank to place a fixed deposit and I saw that they had an air purifier. So, I chose the seat that was the closest to the machine while waiting to be served. A bit noisier but the air was probably better. 





Alamak, AK is so kiasu and kiasi. Yah lor. Regular readers know that I have two air purifiers at home and that they are on almost 24 hours a day. It is always good to be prepared. Prevention is better than cure, isn't it?

This leads me to another idea about how we should always be prepared, whether we are investors or not. I have a friend who was looking high and low for an air purifier when the haze was at its worst recently. 

Despite my advice a few years ago that he should get an air purifier for his home, my friend didn't get one. He said the haze wasn't that bad. This time round, his parents developed respiratory issues due to the haze.

As investors, we probably get the best deals when the market is not interested. When everyone is interested in buying a stock, it is hard to get a good deal. Well, when everyone was interested in getting an air purifier, it became harder to get our hands on one. Same, same but different.

So, since the haze is an annual event, why not be prepared for it? If only price movement in the stock market is just as predictable.

As investors, we want to be prepared too. We want to make sure we have a war chest ready and that we have a shopping list ready. We don't know if a crash is going to happen but if it should happen, we should know what to do and make fast decisions. 

We must be prepared to seize opportunities or be prepared to lose out on opportunities.

While waiting for my turn at the bank, I read an article by Goh Eng Yeow in the papers and I would like to highlight these few paragraphs:




As investors for income, if we have invested in good companies, even badly timed entries should eventually turn out well. 

The fluctuations in prices should not affect us much if we have been eating bread with ink slowly (see related post no. 3).

So, how's your Sunday? 

Told you AK is kaypoh. ;p

Related posts:
1. Protect ourselves from the haze.
2. Tea with Solace: Common sense investing.
3. How to have peace of mind as investors?
4. Feeling depressed about paper losses?


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