Investment lessons over lunch

(2011-11-19 00:20:28) 下一個

Straits Times: Sat, Nov 19

I AM fortunate in the sense that occasionally I get invited by some really savvy retail investors to their informal gatherings. I usually glean a lot of wisdom, insights and inspiration from such sessions.

Two weeks back, I was invited to lunch with a full-time investor and his friends. Amongst them were business owners, investment and real estate professionals. The group talked about their investment philosophies, their views of the market, and what they are doing now.

One man was very generous in sharing the lessons he learnt in his investment journey. He used to work as a chief trader in a foreign bank trading instruments such as money market products and swaps. He left the bank many years back because he felt that he could do much better on his own than in the bank.

Since then, he has bought and sold private businesses, properties, equities, among other things. He is still running a few businesses on a small scale (because he doesn't believe in doing anything big), and at the same time he is also managing his own investments.

In the initial years, he lost a fair amount of money in his investments in private businesses. 'But I learnt so much in the process.'

The first million

Getting to the first $1 million, he said, usually takes the longest time. After that, the wealth can grow pretty fast if one is able to grab the right opportunities.

From the conversations, it seems that he - let's call him Mr A - made a few astute bets on the Singapore property market. In late 2006, he started to pick up units in Pearl Bank Apartments in Outram. That was when the en bloc fever was hotting up, and news emerged that the owners of the iconic development were exploring collective sale as an option.

He picked up four units of various sizes between November 2006 and September 2007. And he exited all his trades in September and October 2007. For the first unit he paid $645,000 and sold it for $1.5 million. Another he bought at $788,000 and sold at $1.88 million.

He felt that the en bloc price demanded was too high, and decided to sell his units as quickly as possible. So he told the real estate agents who specialised in that project at that time to bring any potential buyers to him first. He'd pay them a commission of 1.5 per cent, instead of the normal one per cent. As such, he was able to offload all four units in a short time.

True enough, the en bloc sale in 2007 fell through. So did the one in 2008. Earlier this year, the owners of the ageing development put the building up for sale again. Still, they failed to find a buyer.

Another lucrative deal Mr A managed to complete around the same time was of a landed property in Upper Bukit Timah. He paid some $500,000 for the property, tore it down and rebuilt it at a cost of $1 million. He sold the property which has a lease of just 38 years left for $3.8 million.

Like many investors, Mr A subscribes to Warren Buffett's rules when it comes to investing. Mr Buffett has two famous rules: Rule 1, Don't lose money. Rule 2, Don't forget Rule No 1.

Exit strategy

Mr A has another rule. Always decide on your exit strategy right from the outset. 'I'd do that when I go to a new place, say a hotel, as well. I'd check out where all the exits are so that I know what to do when anything happens. In other words, I don't have to frantically look for an exit in a panicky state,' he said.

Mr A shared a story of a friend who came to him for advice. This friend had bought into a warrant, whose price had plunged from 20 cents to seven cents. The friend asked what he should do with his holding. Mr A advised him to sell and take back whatever cash he could. There was a high likelihood the warrant would become worthless, he reckoned.

The friend managed to get back $50,000 in cash. Again, he asked Mr A what he should do with the money. Coincidentally, Mr A was looking at Novena Holdings at that time. It was the time when Oei Hong Leong offloaded his holdings in Novena amid his lawsuit against Citigroup. Mr Oei had alleged that Citi had misled him into losing some $1 billion from foreign exchange and United States Treasury bond transactions.

Mr Oei sold Novena at eight cents a share, compared with the 21 cents each that he had paid for them. As one of Mr A's strategies is to track the transactions of major league smart investors, he suggested that his friend might want to take a look at Novena. 'What? Buy this stock when Oei Hong Leong is selling?' his friend asked. Mr A answered: 'He didn't want to sell. He was forced to sell.' So the friend got in, and fortunately for him, Novena doubled in the next nine months. He advised his friend to take his profits.

Since then, Novena has changed its name to Viking. Although Mr A advised his friend to exit the counter, he himself held on. Today, Viking trades at about 10 cents a share, and Mr A is sitting on a paper loss of some $400,000. But he said he is keeping faith in the stock.

Having caught the property market in one of the major bull runs, Mr A is of the view that the next money to be made is in the equity market.

He said he is still raising cash, and is waiting for an opportune time to get into the market. He deployed 10 per cent of his cash hoard into the market in early October, but after seeing the sharp rebound in the market despite the fact that there was no fundamental change in outlook, he cashed out again.

He said he learnt from the last crisis. Then, he was adamant that he would only put all his cash to work when the Straits Times Index fell to 1,250 points. It never did, and so only 10 per cent of his cash managed to ride the market up in 2009. This time round, he said he would gradually deploy his cash at a 'low enough' level.

Sitting on cash

Another investor in the group, Mr B, managed to catch the bottom in the last crisis, when the STI hit 1,500 points. Then, convinced that equities were just too cheap, he mortgaged his properties, paying an interest rate of 2 per cent, and plonked the entire sum into Reits, which were yielding 10-plus per cent at that time.

He has since exited the market completely and is sitting on cash. In addition, he has raised additional cash from banks using his three properties as a pledge. This time, he is paying an even lower rate of 1.5 per cent. And he is looking to get into the market when the STI falls to 2,500 points. Again, he is intending to put his money in Reits which own prime properties.

The group however noted that over-leveraging can wipe out an investor. But they acknowledged the relative soundness of Mr B's strategy of raising cash from his real estate at a cheap rate, and deploying it into the stock market during a crash. This is a far smarter move than taking up share margin financing during a bull market.

On the macro front, the investment professional in the group said there is one trend that is playing out, and that is the world economic growth is slowing. Corporate earnings will be downgraded, and equities will continue to be derated. During this period too, the markets may intermittently be shaken by the panic caused by the crisis in Europe. He is advising his clients to keep their cash, but to get ready to put it to work over a six-month period next year.

Tremendous liquidity

While the group agreed that there isn't yet any real solution to the euro crisis - Greece leaving the eurozone may be one solution although that may cause upheavals in the market in the short term - the fact is there is tremendous amount of liquidity on the sidelines. These funds would be very eager to get back into the market, and so the rebound in equities, when it comes, might be very sharp.

As the conversations wound down, Mr B reminded the group not to forget to appreciate life even as they busy themselves with work. One of his friends just passed away from a heart attack. The key, agreed everyone, is to maintain a balanced life.

The lunch ended on a very heartening note when the group talked about the pro-bono work they are doing in their various communities. One said that a private investor, who was single, left behind $13 million when he passed away to his community development association. The instruction was that the capital cannot be touched for a certain number of years, and only the dividends can be used to pay for the education of needy kids.

Another investor is working with volunteers to make monthly visits to low-income families and coach them on their budgeting. Yet another runs a childcare for the low-income group.

All lament the lack of volunteers in their organisations, but admitted that getting funds might not be that big an issue. My contribution to the conversation: Perhaps they should seriously consider employing full-time staff to run some of these programmes. I'm sure the programmes will be better administered as a result, and more help will reach those who really need it.

  • The writer is a CFA charterholder
    Source: Business Times
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