If you have not read Part I, please do so for a more complete understanding of what this post on my guiding principles is all about.
Here’s my first 3 Guiding Principles underpining my new investing philosophy.
Before I get brickbats thrown at me from value investors, let me reiterate my belief that it’s definitely possible for a hardworking and savvy investor to beat the market’s return. Cue the sage of Omaha, his legion of super investors from Graham and Doddsville and various successful local investment bloggers.
However, the caveat is that you really need to enjoy prospecting businesses. Even after achieving financial independence or accumulating $10 million, I am pretty sure these successful investors would continue digging company reports and catch up on developments of companies they may be interested to invest in. They simply relish doing that!
For me, instead of putting in tons of hours reading annual reports of companies, I would very much prefer spending time preparing for my lessons, reading or improving my writing.
No annual reports are going to disturb my naps from now on
And this is where index funds or ETFs come in. Here in Singapore, we have the STI ETF listed on the local SGX. If you are interested in the full lowdown on the STI ETF, my friend Alvin from BigFatPurse has written the most comprehensive guide I have seen. Anyway, here are some points on why I believe in the STI ETF.
- The STI is suitable to represent the Singapore stock market because the 30 companies account for ~75% of the total market value of listed companies on SGX. Investing in STI ETF is essentially investing in the future of Singapore.
- As of early 2016, we are officially in a bear market. An individual investor is likely to be much more confident averaging down on a basket of the 30 biggest and baddest companies listed in SGX rather than just one stock. If all 30 companies fail at the same time, there’s probably not much value holding on to a Singapore property or even the Sing dollar.
- That said, Singapore appears to be in a good position as an East-meets-West hub and should benefit from the rising affluence of Asians in the future.
- There have been sufficient literature and statistics to show that most investors, including the fund managers, are not able to beat the index by picking stocks. Since even the professionals who do it full time are having difficulties to beat the index, the chance of a part time investor beating the market should be even lower.
- The irony is that indexing might not work when the majority of investors believe in it. If 99% of investors are passive investors, it would probably pay to be that 1% as arbitrage opportunities could consistently surface. However, judging by the lack of public interest in the STI ETF, we are probably some decades away from that happening.
Solution: STI ETF
Diversify Beyond Singapore
Do you know how many % you are invested in Singapore?
My guess is at least 90% and close to 100%. After all, the house which you live in is probably the biggest asset that you have. And this percentage wouldn’t change if you buy more SGX listed stocks or own multiple properties in Singapore.
If you’re in such a situation, can you then bear to imagine a day when Singapore is not doing as well?
That’s why I am looking at a little bit of geographical diversification as a hedge. Some assets to save my ass in case Singapore goes through a couple of decades like Japan (very small probability, admittedly).
As Singapore is a small and open economy, trade is important and both the performance of its economy and its stock market is heavily influenced by its trading partners.
Therefore, I am not looking at China or ASEAN when I am looking for a simple and smart way to diversify from Singapore. It’s very difficult for Singapore to decouple from these markets.
The EU and United States appear to be credible candidates but my choice is to invest in the United States. This is heavily based on the insights I gleaned and agreed from this book. Here’s a short snippet:
- United States enjoy several geopolitical advantages. First, it is flanked by the two great oceans, the Pacific and the Atlantic Oceans. Most trade is and will continue to be conducted over the sea routes and this will ensure the prosperity of the cities situated both in the West and East . And as the dominant military power in the American continents, there is little fear of an attack.
- And even though the United States contribute an astonishing one-fifth of the world’s GDP, this can be improved further as the country is relatively underpopulated, as compared to China, India or Europe. Even among the developed nations, the population density of “Japan’s is 338, Germany’s is 230 and America’s is only 31”. The American economy still has plenty of room to grow.
- It continues to be an attractive place for talented migrants and remains one of the most innovative countries in the world. Just look at Elon Musk and his various companies! Moreover, a company that succeeds in the United States has a lot more potential to succeed in other regions of the world. They are likely to have the economy of scale to compete against potential rivals from other countries.
Before you shout Vanguard for US stocks, there is this one issue with investing in US stocks through an ETF or an index funds for foreigners like you and me. The dividend withholding tax of 30%, which is definitely not negligible. If you do a simple google on how to avoid or minimize this issue or click on this article, you will realise that Irish-domiciled ETFs or index funds are the way to go. One could halve the dividend withholding tax to 15% using this method.
However, I prefer something even cleaner. Since the tax only applies to dividends, this problem wouldn’t exist if no dividends were issued. Granted, this would pose a cashflow issue. However, I am still earning and saving and if total returns can be higher, I really do not mind having to sell some stocks once in a while as part of a drawdown strategy in the future.
For stocks or funds with a no dividend policy, one would be hard pressed to look beyond Berkshire Hathaway, which has NOT paid out dividends during the past 50 years.
I am relying on the both of you and your eventual successors to match the S&P 500 returns.
Not a BIG ask, right?
Even though I am not looking to beat the Dow Jones Index or the S&P 500, I do think the odds could be in my favour with two of the best money allocators ever at the helm. Paying Buffett and Munger relatively small fees to help me manage my US portfolio seems like a no brainer. And as owner-managers, their interests are aligned with mine. No conflict of interest.
And honestly, Berkshire, which owns 9.5 companies that would be listed on the Fortune 500 were they independent, could likely be more diversified than the STI ETF although it’s just a single stock.
Since I probably can’t afford even 1 Berkshire Hathaway share, the Berkshire Hathaway B share would do for now. It doesn’t make a difference since I have no intention of flying to Omaha to cast a vote.
Solution: Berkshire Hathaway B Shares
Ensure Bearable Volatility
Conventional wisdom dictates that I should have more than 80% of my investments in stocks, since I am 30 years young. However, most people, including yours truly, overestimate our risk tolerance. The worst thing to happen is to buy high and to sell low, when one can’t stomach the DOWNWARD volatility of stocks.
Can you take that much DOWNWARD volatility to stay invested?
I have previously talked about the Permanent Portfolio. One would have achieved a respectable 7% return per annum over the past 15 years by allocating 25% of funds into these 4 asset classes: equities, hard assets, cash and bonds. The theory is that at least one of the four different asset classes will do well in any economic environment, thus largely preserving the value of your portfolio.
I really like this concept. My only bugbear with it is that it is often touted just after a good run from hard assets that boost the permanent portfolio’s return. It was first touted in the 70s, died during the 80s and 90s as hard assets underperformed the stock market. It only resurfaced recently in the past few years due to the surging returns of bullion during the last decade.
I personally do own some silver and gold, but they are more of a component within my emergency funds and as an alternative currency, I do not forsee/believe that the long term returns of hard assets like gold and silver should exceed that of long term bonds. If hard assets go through a similar slump, the returns of the permanent portfolio could be massively underwhelming even against a traditional stock/bond portfolio.
To reduce the volatility of my portfolio, I prefer to cushion stocks with bonds and cash. With the recent introduction of the Singapore Savings Bonds (which I have written about here and here), there might not even be a need for me to take higher risks through corporate bonds.
Solution: A permanent portfolio that is made up of STI ETF, Berkshire Hathaway, SSB and Cash
In the next post, which is also the last part of this series, I will be sharing with you the exact allocation of these 4 instruments that will allow me to hopefully, maintain a decent and respectable return going forward.