The most logical approach to analysing any investment is to look at the data surrounding the investment. If you are investing in stocks, this would involving looking at the fundamental data like earnings, debt, dividends, cashflow etc. This is what is known as fundamental analysis. If you are new to fundamental analysis or are looking for a more considered approach to fundamental analysis, this article might just help you out.
One of the key problems with investments is often touted as one of it's key advantages, the simplicity of the action. For those of you that trade stocks, you will know how easy it is to execute a buy order, pick a stock, select the quantity and click "buy". Boom, you are the proud owner of a small portion of that company. Even in other investments, like buying a property, agents typically go out of their way to make the process as easy as it is for you to invest. Agents will spend the time to slowly explain the option-to-purchase, lawyers will handle all the other nitty gritty. I believe this is one of the key reasons why most investors do not do well, let me explain...
Imagine for a moment, you are due to make a key presentation to the rest of your company including your bosses. You know your career will definitely be affected by this presentation and so you take many days/weeks to prepare, drawing from all your lessons learnt in school and your entire career's experience to try your best to make the best presentation possible. Our minds correlate difficulty of execution and expected impact with the required amount of preparation. Unfortunately, our minds do not correlate expected reward with the required amount of preparation.
Now, compare that with how we approach investments. Each trade is like one of those presentations, it will affect how much money you are going to make in the future. But because of the ease of executing investments, many of us are not prepared to put in the preparation effort. Instead of having 4 years of formal schooling in a subject, and multiple years of experience executing trades, many people bet their hard earned money on investments they do not understand.
Investing, as with any skill in life, will improve with education, practice and experience. Make no mistake, even though investing is easy, investing successfully is one of the most difficult things to do. The proof is in the pudding, most investors lose money over time. So if you want to succeed in investing and building an alternative income to retire on, you need to put in the effort to learn and gain experience, arguably more effort then you put into learning what you do for your current job. Even then, you are not guaranteed to succeed, but you will have a much better chance then the unprepared.
A different perspective
Another way to look at this is my philosophy that you get paid for what you have already done. Remember your first job? Why did the firm hire you? Because of all the work you have done and the results you have shown since you started school until you graduated. And your pay was likely based on what type of degree you have. The raise you receive for the following year is based on what you did in the year before. If you performed poorly, you will get a small raise or no raise, even though you might go on to do spectacularly the next year. You would only be rewarded for that work the year after that.
Investing is the same thing, the work you put in today to learn and practice investing will only be rewarded much later. Worse still, the feedback loop on investments is much longer and can be confusing. Many investments take years to mature and you will only learn the lessons from any failures many years later. For some investments, even if you do everything wrongly, you will still make money and even if you do everything right, you will still lose money. So at times, it is very difficult for individual investors to hone their craft, because the feedback mechanism is so convoluted. In summary, don't expect an easy learning journey. Be prepared for a long drawn out learning curve. I personally took almost 10 years of practice and part time learning before I was consistently profitable.
I have opined on a whole bunch of problems, what do I think is the best way forward? I still think learning investing for yourself is the best solution. It is the most rewarding option and keeps you in full control, albeit requiring the most effort on your part. Your results will only improve with time as you put more effort and gain more experience. However, I also understand that approach is not for everyone, as some may not have the time or motivation to learn. That does not mean you should miss out on the rewards of investing successfully, but you might have to take a different approach.
So, in order of preference:
Technology in the stock market has improved over the years and new types of instruments have been introduced over time to provide tools for investors to achieve their objectives. If you are new to the stock market, you might be confused by the different instruments available. Do you know the difference between an ETF and an index? How about between a futures and an option? If not, this article might just help you get there.
When starting out on any new thing, people will generally make mistakes that more experienced people will know to avoid. The same goes for investments. However, mistakes for novice investors can be very painful financially, so a good idea would be to learn from the mistakes of others, so that you don't make the same mistake yourself. Find out here what are some of the mistakes to avoid if you are new to the world of investing.
Selecting a broker is one of the most important decisions you need to make when starting out on your investment journey. They are the company that will hold all of your trading funds and the efficiency of their systems may determine your level of success in investing. Go here to find out more about what criteria you should use to decide which broker best suits your needs.
If you have spoken with me about the residential property market in Singapore over the past year, I would have opined that it was a bad idea to invest right now. I usually state a couple of reasons but am unable to provide a comprehensive view, given the constraints of casual conversation. Here's my comprehensive set of reasons:
Dropping rental demand and increasing costs
When I first purchased my properties in 2010 and 2011, getting tenants was easy as the government had only just started implementing some laws that made it more difficult for foreigners to come work in Singapore. As the rules got progressively more stringent over the years, it became more and more difficult to find good quality tenants that were willing to pay a good rent. What I was feeling is reflected in the steady increase in vacancy rates from 2010 (~5%) to 2015 (~8%).
Every year, my rental dropped as I renewed the tenancy agreements. To give you an idea of the scale, my first apartment I bought in early 2010 commanded a rental of $2,750 a month. By 2017, this had fallen to $2,200 per month. At the same time, my monthly bank repayments had gone up from $1,290 to $1,638. Throw in property agent fees (1/2 month rent), property tax ($1620), monthly maintenance fees ($282), 1-2 weeks vacancy a year when switching over tenants and the odd repair fee, by 2017 I was only breaking even. Do note, my monthly bank repayments were on my original purchase price of $630,000. I sold it for $765,000 in early 2018, so if I just increased the monthly bank repayments proportionately, the new owner is likely paying about $2,000 a month. This is the best case scenario, as loan limits (% of property price, length of loan) have become more stringent as well. With interest rates on the rise, this equation is only going to get worse.
It is likely that anyone who purchases a new property at today's prices is unable to cover the costs of the property with just the rental alone. So instead of getting a monthly stream of passive income, the owners are effectively getting an additional expenditure. Sure, part of the money goes to paying off the principal amount and is not technically lost, but this is locked up and not usable for other investments unless you refinance your property.
Property cooling measures
The government has consistently maintained that it thinks the property market is over-heated and has taken concrete steps in the form of property market cooling measures each time the property price index shows a continuation of the uptrend. We can fully expect the government to consistently implement more measures to prevent the property market prices from increasing much further.
It is clear that any removal of property cooling measures would be interpreted as a sign that the government is easing it's stance. This would cause the property prices to spike up, as there are many investors waiting in the wings to jump in. The government knows this too, evident from their careful announcement of adjustments to some measures a few years back, so there is almost no chance for the government to remove the cooling measures unless there is a significant drop in property prices across the board.
Possible over supply
This topic has been discussed at length in the local media recently, with several articles like this CNA article and this more recent Today article, pointing to the large existing supply of unsold units and uncompleted units about to come online. According to URA statistics (Q3 2015, Q3 2018), there has been a steady rise in the vacancy rate from 2010 to 2015, but it seems to have been stabilizing in the more recent years, likely due to the impact of the property cooling measures. Even if you are not convinced there will be an oversupply of units, there is certainly no chance of an upside in property prices caused by a shortage of units.
The property cooling measure that makes foreigners pay a flat 20% tax has kept most foreign buyers away, so most of the demand is local organic demand. If you have a look at the vacancy rates, you can clearly see that the vacancy rates for OCR, which is the typical sector for HDB upgraders, is dropping. The vacancy rates for the CCR and RCR, the regions usually purchased by foreginers, is holding steady and increasing respectively.
Buying a unit in the OCR for investment is not the answer either, as locals do not have a strong rental culture. The market for rental demand is dominated by foreigners, which prefer to live in the CCR and RCR, close to their work places. So if you buy a unit in the OCR, you may face less competition when trying to sell the unit a few years down the road, but in the mean time, you are going to have difficulty finding good tenants.
The enbloc fallacy
Are you able to name any industry where the increased cost of production is seen as a sign that the industry will do well? If the cost price of iphones doubled, do you think Apple will do better or worse? The media line that increased enblocs at record prices means that the property market is heating up is pure nonsense and does not stand up to basic scrutiny. However, once you realise that the source of this line of argument are the players in the property market (developers, property agencies, etc.), then it makes sense. They have a vested interest in keeping demand high and are willing to paint a rosy picture even when the facts point otherwise.
To me, the increased enblocs are a sign of overcrowding of desperate developers. What happens to Apple if they can't sell anymore iphones? What happens to a property developer that cannot develop property? You need land spaces to develop property, so the developers are outbidding each other at record prices to get at those land spaces. It is a matter of survival for them, as getting none of the land spaces means that the companies will eventually run out of revenue and fold.
So the developers that have bought the land spaces at record prices will need to sell the units at record prices in the future to cover their costs and be profitable. Given that there is already a large supply of existing unsold units at lower prices, what makes you think buyers will suddenly want to pay record prices? I expect the smaller developers will likely be unable to sell their units and either go bankrupt or be consolidated into larger developers that have large overseas projects (Capitaland) or different lines of business (Wing Tai).
Low rental demand, low property demand, high supply, desperate developers and a government that wants to prevent price increases. So why are property prices still going up? Simple, without a large trigger, developers with large balance sheets and individual owners with a steady salary are able to hold out and keep their prices high in unison. This forces buyers who want/need to buy for whatever reason (HDB upgraders, newly weds, buying to get kids into a nearby school etc.) to pay existing prices, as there is no alternative.
Once a trigger hits though, like a recession, individual owners will lose their jobs and be unable to fund the monthly payments. They will either unload at cheaper prices voluntarily, or the banks will step in and put the properties on auction. This will start the fall in prices. Developers will be forced to unload their existing stock as they are faced with forecasts of lower prices. A glut of supply will flood the market suddenly and prices will crash. The bubble will have burst. This is exactly what happened in 1997 with SARS and it took almost 10 years before prices returned to their 1997 levels.
The global synchronized growth fueled by excessive money printing aka Quantitative Easing in US, EU and Japan will eventually come to an end. This exercise has largely stopped and the US and EU governments are starting to think about reversing some of that. This increases the likelihood of a global recession in the coming few years. This will likely be the trigger for our local recession and crash of the property market.
Will my prediction hold true? Only time will tell.
With a low chance of capital gain, negative dividend rate, and a moderate chance of a large capital loss, the risk-reward ratio of investing in property is just horrible at the moment. There are far better places to put your money to work.
The journey to financial freedom is not an easy one and along the way, we will need the help of various people/services. Many times, it can be difficult to judge if the services offered are to our advantage. Especially with investments, we make decisions now that only have a clear result many months or years down the road.
The future can be unpredictable, but there are a few things we can do now to tip the scales in our favor. One such thing is to make sure that the service providers we use have interests that are aligned with or at least not in conflict with our objectives. Check out these tips on how to figure out if your services providers have your back.
Many years ago, I wanted to buy a watch. I enjoyed the process of searching through watch catalogues, reading about the history of the brands, learning about the quality of the craftsmanship, the impact of the different materials. I eventually settled on a SG$25,000 watch and was really looking forward to buying it.
Just before I made the purchase, I imagined myself putting on the watch, walking around with it, working at my desk with it, taking it off at the end of the day. This made me realise that one thing.... I don't actually like wearing watches. You see, I am right handed and my dad is left handed. I learned how to wear a watch from my dad, so I wore it on my right hand. Every time I settled down to write or type for a long time, I had to take off the watch, because I was wearing it on my dominant hand and it got in the way.
I snapped myself out of it and realized that I was falling into the marketing gimmicks of the watch sellers. Instead of buying a $25,000 watch, I stopped wearing watches altogether.
I almost fell into the trap of buying something that I totally did not need or even want to use. Want to know how to prevent this from happening to you? Try this new tip on getting value for the price you paid.
Most people think successful investing means getting high returns. This is certainly incorrect, as there have been many investors with fantastic returns in the short run that suddenly go bankrupt due to an unforeseen event. The key to successful investing is actually survival. You will need to survive through the bad years, so that you can make high returns in the good years.
One way of protecting your capital and surviving the game is to allocate your wealth across different investing instruments. Find out more on how to do so here.
I consider myself very lucky, as I used to put almost all my money into property. At one point, almost 90% of my wealth was invested into 3 condominium units. If the market had crashed during those times, I would have lost everything. These days I have split up my investments into various instruments and can weather most storms. For the example, the twin market corrections of Feb 2018 and Oct 2018 caused me to lose quite a bit in my derivatives investments, but my overall wealth was not significantly affected. If I had been as gung-ho as my younger years, I might have needed to start looking for a new job. Due to proper capital allocation, I survived and can continue to live my current lifestyle.
I was attending a paid seminar this weekend and was seated among a crowd of around 200. During the seminar, the organizer started up-selling us a new program that included a trip overseas at a price tag of $5,000. The lady to my right struck up a conversation and after some niceties, started pondering out loud whether the new program was worth the price.
Lady: Not sure if the program is going to be worth it. Are they going to provide more one-on-one service? Cause right now the seminar is so full of people, I can't really even ask questions.
Me: They said they were going to limit the number of people to 15, plus they have a team of 6 going, so it sounds like it will be a lot more focused.
Lady: hmm...yeah... still not sure if the places they are going to bring us is worth it. Maybe my friend wants to go too.
Me: Oh, you are attending this with your friend?
Lady: Yeah, the lady that was sitting beside me was my friend.
Me: Oh, then why not pool your resources, just one of you go, then come back and teach the other one what you learnt on the trip?
Lady: *Looking taken aback* Huh! I can afford to pay the full fees, don't need her to sponsor me. *Turns away*
I was pondering about the lady's reaction, so related the story to my wife. She said that the lady had taken the comment personally and taken offence, which makes perfect sense. It seems the lady was sensitive about being perceived as being unable to afford the trip, so much so that a suggestion to save money was construed as an insult.
The thing is, people are only sensitive about things that bother them. A thin person would never be insulted if someone shared a way to lose weight with him. A person that is happy in his marriage would never feel slighted if someone shared a way to make his marriage happier. Those people are confident about that particular aspect of their lives. Similarly, a wealthy person would never feel insulted if someone shared a money saving tip. So counter-intuitively, this lady's negative reaction to my comment makes me think that she might actually struggle to afford the trip.
I remember a few years ago, I was going to attend another paid seminar for SG$5,000. However, I understood that the organizer also held similar seminars in Malaysia. So I went to the organizer and presented my name card, which had a Malaysian office address on it, and asked if I could attend the same course in Kuala Lumpur instead. He allowed me to and instead of paying SG$5,000, i paid MYR5,000 instead. Including air fare and hotel fees, I ended up saving about 50% off the Singapore price. If I was less confident about my financial status, I might be worried that others might think that I was being cheap. "What if others find out, so sia suay (embarrassing)". Luckily I was stable financially by then and did not care what others might think.
The sad thing is, she might go on to pay for the full trip herself just to prove to herself and anyone she thinks is watching that she is "ok". So her pride in the matter would actually make her poorer, further delaying the point where her last statement would become true.
If you want to be rich, you have to start thinking like one. A rich person understands the value of wealth and would welcome any method to save/earn money. A rich person doesn't care about the opinions of others, especially if those opinions leads him/her to some frivolous expenditure or poor investment. A rich person is proud as well, but about the right things. In this way, a person who thinks like a rich person stays/gets rich and person who thinks like a poor person stays/becomes poor.