Volatility aka Standard Deviation

 

Normally we will consider 2 important areas when investing in a particular asset :The Risk & Returns of the asset.

When caculating returns,it will be much more straight forward.However when come to risk assumption between 2 different asset ,we have a method which require more work is by caculating the Standard Deviation of a particular asset
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The Standard deviation of a asset shows how risky the asset is in terms of price variations and by comparing the standard deviation of 2 different asset ,it will enable us as an investors to make informed decisions.

Here, i will compare 2 stocks;SPH & M1.

Using current price of SPH at $4.01 & M1 at $2.75 ,we will caculate the returns of these stocks in terms of dividend yield.

SPH :$0.24/$4.01 = 5.99%  (SPH declared $0.24 dividend)
M1:$0.145/$2.75  = 5.27%  (M1 declared $0.145 dividend)

Now,to caculate the Standard deviation of SPH, we can use excel to do the job for us .

I pluck out SPH & M1 closing price for the whole year of 2011from Yahoo finance (Historical Price) and paste it to the excel sheet

First,we find the price gain in percentage of each day by using the done price on 4 Jan minus the price on 3rd Jan and divided by the price on 3rd Jan.

From there we obtained the Daily Standard deviation by applying STDEV formula for all percentage gain from Jan to Dec.

Then caculate the Daily Variance by squaring the result from Daily Standard Deviation. And mutiply Daily Variance by the number of trading days which will get the Annualized Variance.

Square root the result of Annualized Variance and we will get the Standard Deviation of SPH at  13.07% & M1 at 16.50%.

The above result show M1 is more voalite than SPH in terms of price fluctuation and if we compare the returns of these 2 stocks ,i will chose to invest SPH over M1 because not only the returns of SPH is higher than M1,it is less voalite than M1 in terms of price variance. But this does not means we have to chose SPH over M1, if you have the capital it will be wise to split your investment between these 2 stocks.

We can also compare Standard Deviation between any 2 asset class( Gold or bond or a portfoilo of an asset).And by including Gold /Bonds into our investment portfolio ,it will significantly lower the overall risks of our investments as each asset class have different correlation between each other in different economic cycles.

*Vested in SPH*

Property Banking

 

Recently my friend and i had a conversation on investment and he lamented to me how he had lost his hard earned money through investing in stocks which caused him to give up investing in equities.
At the same time ,he shared with me how he got into a property investment club which invest in overseas property market and getting steady returns between 14% to 33%.

I was skeptical and told him that this type of investment is too good to be true and he agreed but he believe in taking risks.

He shared how the club roughly work;
-Investors will join the club and pool the money together.
-They will scoop up properties in countries such as; London, Germany, USA, M'sia and India.
-Due to their large/bulk purchase, they will be quoted a 30% mark down in the asking price.
-They will refurnish the properties and rent it out .
-From there, they can start getting their returns of 2%~3% per month from 6th month onwards by renting out the properties.
-The founder or CEO of the club has close connection with the top politicians in their respective countries they are investing in, hence the club creditability have been very good.

Since he is a seasoned property agent, i believe he had done his risk calculation before diving in. However,the worrying part is that he had invested almost all his saving into this investment which i advised him to get out .

The path of investing is treacherous but filled with reward and self-satisfaction. Prudence is needed as a single wrong decision can destroy our wealth that have been built up over the years.

To invest or to trade.

 

Like many other ppl who trade, the thrill of making huge profits within a short span of time intoxicated me.Somehow is a addiction,like taking drugs,once we get the hang of it ,we cant shake it off.

For a while, i was obsessed in making risky trades and it did reward me well but sometimes i got whack down too.

However it gave me a new perspective on how we should grow our money in a sensible and conservative manner.

I will like to share 2 of my speculative trades here;Genting SP & UPP.

Genting SP,the well known stock for punters.I short(sell first) the stock at $1.77 and cover back (buy back)at $1.74.

A gain of $0.03 gave me a net profit of $2070.45 in a duration of 1 hour and 14 mins.Of course,there are seasoned traders who can earn more than this.Now we move to UPP.

 

 

 

I bought UPP at $0.425 ,hoping it will rally up but it did not.To cut loss ,I sold off at $0.405.

A loss of $0.02 resulted a loss of $2264.21 in a duration of 1 hour.

From above, only one have huge deep pockets to burn,if not the frequent trade  that goes against us will make us go bust very soon.We hear a famous quote from seasoned traders "Cut loss fast & Let profits run".There is truth in it but to execute it is not a easy task and it will need a decent capital to absorb the losses.

Interpretation of U.S unemployment rate

U.S had released it's latest unemployment rate at 7.8%.For the past 44 months,this is the first time the figure had reached below 8%.

Though the numbers look nice ,there is a flaw in the caculation.There are 2 main areas to take note when interpretating the unemployment rate.
First,we look at how U.S unemployment rate is calculated.

                      Number of unemployed & had been actively looking for jobs
---------------------------------------------------------------------------------------------------------x 100
Total Labour force(employed & unemployed who had been actively looking for jobs)


1)The figure does not include the number of unemployed people who give up finding jobs after 4 weeks,resulted them to left the labour force thus it will show a lower % in unemployment rate.

2)The figure does not include the number of ppl who are unemployed and are not actively looking for jobs for the past 4 weeks who enter into the labour force.

For point 1 ,we use an example to illustrate:
Total labour force(employed & unemployed who had been actively looking for jobs) = 100million
Number of unemployed & had been actively looking for jobs = 10 million
Unemployment rate = (10 / 100) x 100 = 10%

If the economy is deteriorating ,the number of unemployed who had been actively looking for jobs for the past 4 weeks will give up hope and stop searching for jobs.And assuming the number is 1 million people left the labour forces.
Total labour force(employed & unemployed who had been actively looking for jobs) = 99million
Number of unemployed & had been actively looking for jobs = 9 million

Unemployment rate = (9 / 99 )x 100 = 9.09%

So we will get a lower % in unemployment rate even when the economy is worsening.

For point 2,
If the economy is expanding,the number of unemployed who had not been actively looking for jobs for the past 4 weeks enter into the labour forces to search for jobs is 1 million people.

New Total labour force(employed & unemployed who had been actively looking for jobs) = 101million
Number of unemployed & had been actively looking for jobs = 11 million
Unemployment rate = (11 / 101)  x 100 = 10.89%

An increase in unemployment rate even though the economy is growing!

We can conculde that the caculation of the data did not consider the number of unemployed who have been actively looking for the jobs for the past 4 weeks who left the labour force and who have enter into the labour force thus it will show a conflicting result.

The Fed & ECB strike

Finally both the Fed and ECB have showed hands by" printing money".

ECB new steriod weapon known as Outright Monetary Transaction(OMT) will purchase distressed euro area government bonds(1 yr ~ 3yrs) ,notably Spain and Italy to bring down borrowing cost for these countries so as to buy time for these countries.

The ECB measure will give precious time for these countries to implement it austerity & economic reforms to bring thier economies back on good growth if they pursue it sucessfully.If failed,the consequence will be unthinkable.

For Fed, they created the money digitally known as QE and inject this money into the economy through Fed primary dealers such as Goldman Sachs/Morgan Stanly/JP Morgan/UBS  n etc. However this time the QE is more powerful than the previous 2 as Fed have not set the termination date and will continue to "print money" if the labour market for US does not improve within Fed's expectation.

In a ideal way,the primary dealers could use it to buy/speculate securities (stocks/bond), commodities, currencies ,Oil ,loan the money for new business or existing business thus creating more jobs.With creation of more jobs, people will have income and the desire to spend , creating huge demand for goods and services which lead to increase in hiring of workers and this positive cycle continued which in turn spur the US economy.

However, the Fed's QE will created huge liquidity in the financial world ever seen on earth.For short term effects, we expect rising inflation in Asia since the abundant liquidity will most likely flow into Asia propping up property prices and equities market.

For long term wise,if Fed QE failed which we hope not ,we will witness a crash in our century ,worse than the 2009 GFC, and the transfer of wealth which will lead to the collaspe of the old rich and the rise of the new rich.
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Be caculative in investment returns even is 0.1% difference.

The power of compounding is the greatest wealth multiplier ever exist in this planet.We all know that with the effect of compounding , it can create astonishing great wealth over the time.

Let use an example to illustrate

Mr Tan intend to invest his $10,000 in an investment for 30 years that will generate him a return of  10% p.a .Assuming he reinvested the returns every year.

10,000(1+10%)^30 = $174494.0

So after 30 years,Mr Tan will get $174494.0

Now,Mr Lee intend to invest the same amount of money and for the same duration but the returns he got is 10.1% p.a and assuming he reinvested the returns every year.

10,000 (1+10.1%)^30=$179316.2

Mr Lee reap $4822.2 more than Mr Tan with just a 0.1%  difference in returns.

That is the power of compounding , and be caculative when seeking the returns of your investment, and the principal apply to borrowing cost too,the lower the better if we borrow money from banks to pay our house or car loans ,a difference of 0.1% can means alot in the long run.

Leveraging - Double edged sword

 

Recently OCBC securities offer tiered interest rates for financing purchase of securities and is a hit on the streets .In short , the more quality stocks you hold ,the lower interest rate we will be charge on the loans.

It is indeed tempting to be lure in as it greatly leverage the limited amount of capital we have.
Leverage is about 3 times our original capital.A simple example will show many could not resist this temptation.

Example:
Mr Tutu had $20k cash and SingTel shares in his CDP.Mr Tutu wish to invest his $20k using the new tiered interest rate.So using SingTel shares as collateral.Mr Tutu leverage his $20k to $60k to buy more SingTel or any Grade 1 stocks with borrowing cost of 3.5% per year.SingTel last closed price is $3.43 which  give dividend yield of 4.61%.

Let do some caculation:
$60k could buy in 17000 Sing Tel shares and each year dividend receive is $0.158 per shares
17000 x $0.158= $2686 per year

Borrowing cost on $40k  @ 3.5% pa(Mr Tutu $20k is not included)
$40k x 3.5% = $1400.

So using payout from SingTel minus off the borrowing costs,we will get:
$2686 - $1400 =$1286.

Sound cool, after paying the interest on $40k ,he stand to gain $1286 per year.If Mr Tutu only use his $20k to buy SingTel shares without leveraging , he could only buy 5800 SingTel shares which payout will earn him $916.4 per year.However, there is no free lunch in this world .OCBC reserves the right to adjust the interest rate on the loans anytime they like.Since the interest rate is so low and it make no logic for OCBC to adjust it downward ,the only way the interest rate will go is up.

For example OCBC suddenly increase it interest rate on the loans from 3.5% to 4.5%

Borrowing cost on $40k @ 4.5% pa
$40k x 4.5%= $1800

So using payout from SingTel minus off the borrowing costs,we will get:
$2686 - $1800 =$886.

Now Mr TuTu is very unhappy because his return is $886 compared to $1286.And worse still it is even lower than his $916.4 if he just use his $20k to invest.

Other risk involved SingTel reduce its dividend payout due to falling profits, the whole game have to re-write.
For example SingTel reduce it dividend payout to $0.13 per share.
 17000 shares x $0.13 = $2210

Borrowing cost remain the same @3.5% per year.
$40k x 3.5% = $1400.

So using payout from SingTel minus off the borrowing costs,we will get:
$2210 - $1400 =$810.

Mr Tutu might have bang his head on to the wall ,now he is getting lower returns than he expected and risk getting lower returns if SingTel lower its dividend payout.If he only use his $20k for investing ,he will get $754.A mere $56 more with increase interest rate risk and lower dividend pay out risk.

I will term this as carry trade rather than dividend strategy as advertised.

Be cautious when doing leveraging as there is no free lunch in this world.

Inflation - Slient killer of Wealth

Inflation is a effect that will reduce a  certain percentage of our money over a certain period of time.When investing ,inflation is a key index to take note of .

For Singapore, our inflation stood from 2.7% - 5.7% .Thus our investment returns should yield more than the inflation rate to preserve our wealth .In the long run,any return that is less than 5% is not helping to grow our wealth .

For simplicity sake , we assume the inflation at 2.7%  for the next 10 years,however this is not the ideal case.

For example, today we pay $10 for watching a movie and with 2.7% inflation rate per year.

After 1 yr, we need to pay $10.027 to watch a movie.

After 5yrs,we need to pay $11.425 to watch a movie.
$10(1+0.027)^5 = $11.425

After 10 yrs , we need to pay $13.05 to watch a movie
$10(1+0.027)^10 = $13.05.

After 20yr , we need to pay $17.04 to watch a movie.
$10(1+0.027)^20 = $17.04.

From above example,i using a inflation rate of 2.7% and with such a low rate we can see how our money is being reduced over time.That is the scary part of inflation ,it is unnoticeable and slowly eroding our wealth .

That is why people tend to complain that things get expensive and coupled with low salary increment , ppl who tend to save will lose out in this game .That is to say ,what we have now does not equal to what we have in the future unless we have zero inflation rate but that is out of this world.Although the movie tickets does not increase every year due to sentiment  and business costs , it will increase at a go after several years.

Sometimes we watch from the news that NTUC  will not increase the price of essential goods such as rice/cooking oil to absorb inflation for lower /middle income families.Sound great but an entity like NTUC who have large number of retail stores across SG , to increase price every year is not cost productive as price tags and IT system need to re-entry which will costs further more  and taking people sentiment in consideration ,will we be happy if we see the price of our daily usage goods increase every year?

That is why they will rather increase  the price at one go but after several years later .

Compounding -The secret to Wealth Creation

I will like to share with you guys about Compounding which is vital in growing our wealth in this difficult yet opportunistic period.

Before we proceed further , it is strongly advisable to have spare cash for any contingency that might arise during the stages of our life as it will ultimately affect our decision in our investment and our investment horizon should be at least 5 years or more to witness the effects of Compounding.

The formula for calculation as follow :
R = P (1 + IR) ^ T
R=Return
P=Principal
IR=Interest  rate
T= Time

For example , we have $12,000 for investment and will like to invest in equity (SPH). At current price $3.90 ,its dividend yield is 6. 15%.
1 shares of SPH  is at $3.90.
1 lot = 1 000 shares
1000 shares x 3.90 = $3900 + (GST/brokerage fee/other fee)

For 1 year return:
$12,000 ( 1 + 0.0615)^ 1 = $12,738.
Approximately  return of $738 for 1 year.

For 5 years return, and assuming we reinvest the dividends:
$12,000(1+0.0615)^5=$16,173
Approximately  return of $4173 for 5 year.

For 10 years return,and assuming we reinvest the dividends:
$12,000(1 + 0.0615)^10=$21,796
Approximately  return of $9796 for 10 year.

For 20 years return , and assuming we reinvest the dividends:
$12,000 (1+0.0615)^20=$39,590.
Approximately  return of $27,590 for 20 year.

Above is an example , the dividend yield will fluctuate if the Company is earning less profit and cut back on it's dividend payout.For defensive stock like SPH and telecom stocks such as SingTel/Starhub/M1 ,their earning are quite predictable and thus conservative investors will just buy and hold it for dividends.Price of the shares do fluctuate during bearish period(bad times) and bullish period (good times)that is why we should have a longer horizon to ride out the the volatility .But shares of defensive stocks tend to remain in a certain price region due to it's nature and any dip in price provide a opportunity to accumulate.

We can conclude from the above by reinvesting and starting to invest in our early age will have a significant impact on our return.Imagine if we left the $12,000 in saving account with less than 1% interest rate ,the money will grow at a slower rate provided no inflation (impossible scenario).With inflation , our wealth will slowly eroded as our purchasing power drop as time pass by.That is why our government set up Temasek and GIC to preserve and to grow our wealth.

Plant the seed of wealth

The fundamentals towards having a residual income is through a discipline approach;  Saving ,Spending & Investing.(SSI).

With conscious spending ,it will ensure surplus of cash been  left over to deploy for investment.

With inflation raging at a low to high range from 2% ~ 5% onwards, our saving is being slowly eroded as our purchasing power keep lower  year after year.(Banks saving account interest rate is pathetically low).

To preserve and grow our wealth, investing is a must but come with careful planning of budget.

To start with , have a book stand ready to record  all the expense and earning and at the end of the month, review and determine which expense should be cut or forsake to have a better cashflow at month end.To do this ,great discipline is needed,it may be tough for a start ,once used to it,it will soon be a habit.

Ideally the money we earn should be more than enough to cover our expense and should have some decent cash left over for investment.The surplus shall formed the backbone of our wealth building process ,no matter how small it may look,every cents counts.

Example of a Mr A Expense :

Income:
Salary : $3000

Essential Spending:
Transport:$300
House loans:$1000
Uilities:$200
Food:$500

Non- Essential Spending:
Entertainmet:$500
==================
Cash flow :+ $500

From the above example ,Mr A could save $500 per month ,and these surplus could use for investment when he managed to save after a year.Mr A could save more if he want to cut down his spending on entertainment

Renting out a flat or buying blue chips companies for high yield dividend is one of the many ways to earn passive income .

The portfolio should ideally target for long term horizon and be balanced in growth and defensive sector.

The rule of 72 is the most important number to calculate how many years it will takes to double our investment .

For example: we invest $10,000 in a Company which pay dividend yield of 6% pa for 5 yrs.
Assuming the returns after each year are reinvested and % yield remain the same.
Using rule of 72:
72 divide by 6 = 12 years.
it will take approx 12 years to double our money from $10,000 to $20,000.

So it very important that we start saving/ investing as early as possible and most people can achevie it with discipline.