Priced for Perfection

Priced for Perfection

October and November passed by in a blink of an eye due to increased work responsibilities. There were many weeks whereby I ended the day mentally drained. Making the decision to blog on a monthly basis is the correct move. I can focus more on portfolio allocation decisions and record tracking in this blog, and granular analysis and peer feedback of the thesis of individual stocks in that financial community.

Making Macroeconomic forecasts is not my forte. As countless shrewd fund managers and economists continually made predictions and yet again missed out on the important boom / bust periods, I am wary that I will fall into the same trap. Nonetheless, portfolio allocation decisions based on risk-reward analysis is still pertinent for the purpose of value investing. The 8-10 years macroeconomic cycle is on its late periods, and there is considerable risks, leverage and fiscal deficits incurred by the governments (sovereign debt, US debt ceiling) as well as the corporate side (Leveraged Unicorns, Leveraged We-work, Money losing technology companies chasing reckless growth in China, Leveraged PE funds, Questionable and leveraged Vision Fund).

The low interest rate environment is great for stocks, but it also encouraged reckless risk seeking behavior among investors scampering for slightly higher returns, whose funds are allocated to <visionary> leaders, whom has incredible storytelling prowess and showmanship but no record to show for it. Any uptick on the cost of debt could lead to large defaults and spillover effects in these large and highly leveraged organizations.

When there is limited upside on richly valued securities, not supported by robust economic data and profitability of underlying companies, it is definitely a cause of concern. Value investing involves leaving the party while the others are getting drunk / ahead of themselves and making foolish decisions. There is a high likelihood that I will be missing up on some returns, but I have to live with this decision. As a non-professional investor, I am free to look stupid,  make contrarian bets and not follow the herd, or compare results on a short term basis.

Actions Taken for the month of November
1) I went through the local banks quarterly earnings and noted their increased risk aversion as well as building up of loan loss reserve ratios. Acknowledging the local bankers as shrewd observers of the credit market, I value their judgement on their bottom line quite seriously. It is interesting that the loan loss provision allowance can vary greatly among the banks, possibly due to the different loan portfolio and aggressive / defensive accounting treatment. As the STI ETF has a large constituents of REITS which are richly valued, and banks which are taking a more conservative stance, I will be liquidating part of my STI ETF position to build up my cash position.









2) I liquidated my entire STI ETF position in my Maybank Account. As Maybank discontinued its Dollar Cost Average program and has a promotional rate for liquidating odd lots, I sold them off at approx SGD3.291 to reduce my overall equity exposure. My remaining positions is in my POEMS account as I am still overall positive on long term thesis on the STI ETF.

3) I am quite optimistic on my other stock picks so far and have no plans on liquidating the others at the current moment. The low interest rate environment is still great for stocks, especially if they have good financial strength and legroom to grow. If there is a pertinent need to generate more cash, I could look into my OCBC position which has odd lots. The entire position can be liquidated before the end of this year.

4) I have made a CPF RA top-up for my parents for the purpose of filial piety as well as to manage my income tax liabilities. Considering the fact that I am quite young, topping up my SA has considerable sovereign and policy risk and is ultimately irreversible. I am uncertain that the CPF has sufficient safeguards to continue its promotional <Propped up> interest rates, maintain its stance of the retirement age <Redemption period> or pay-up the pension liabilities 50 years down the road.

Topping up my parents RA is much lower risk as the payback period via CPF Life is considerably shorter, and there is bonus interest rates up until 2020. Generally, I am making an allocation that has a lower overall risk and a better rate of return for my family.

 5) Warchest Allocation is surprisingly complex. I am not quite ready to employ a fully vested approach and take the full blunt of the vicissitudes of the market. My initial plan following conventional portfolio allocation theory, is to allocate my war-chest into liquid cash, Fixed deposits and bonds  and alternatives <Portfolio insurance such as commodities and gold> . However, some issues surfaced.


Interest Rate Fluctuation
Contrary to academic theory, the central banks of the present is taking an increasingly hands on and interventionist approach to manage interest rates and repo rates in order to influence the economy. This is in sharp contradictions with the Monetarist beliefs in the late 1980s, whereby central bankers are very cautious on utilizing the levers of monetary policy. I can never be sure that interest rates next month will be artificially maintained or propped up once the Fed had their meeting from 11-12 Dec. It is hard to decide whether to lock in the ICBC Online promotional rate now or wait for the next month to bet on higher rates.



Maturity mismatch (Opportunity cost of readily deploy-able capital)
I can never be sure whether a market correction will occur next day, the next month, the next year, or maybe for the next few years. There is potential increased tax loss harvesting in the US market which may lead to increased volatility, and STI index historically has followed the performance of US index closely. There is also considerable economic risks in the Chinese, US, EUR, and even India markets and once I locked into Fixed Deposits, I may not be able to liquidate it timely to capitalize on opportunities. The current SSB interest rates are relatively unattractive, but if push comes to shove, I might seriously consider it if my warchest builds up to significant levels.

Immature Bond market
Singapore has a non-existent bond market and is incredibly illiquid. The closest liquid asset is a bond ETF. As my primary concern is to hedge against the likelihood of corporate default risk, the high grade corporate ETF seems to be a logical choice. However, a Bond ETF is still vulnerable to market sentiment. It is possible that in a stock crash as what was exhibited in 2009, the Bond ETF may not exhibit 0 Beta or negative Beta and fall in line, making it a poor store of value in market volatility. 

Correlation of Alternative Assets
Cryptocurrency has been an subject of interest as alternative assets in recent years. I am not quite ready to dive into this <collectible?> until there is certain signs people are willing to buy it for the value it brings to them rather than speculative tendencies.

REITs which are once considered as alternative assets ( in the CFA text) has noticeably shown stock like tendencies. As interest rates dropped, people piled up on it believing that the cost of borrowing dropped and it can continually maintain its upward rental escalation regardless of economic conditions. The yield of high grade REITS has dropped signifying its fair valuation, and many are diving into speculative endeavors in REITS even as upward rental revision is uncertain. The recent rights issue is probably the waking up call to new investors, that there is no miracle pill for investments and cash infusions are necessary for a REIT to grow its property portfolio and yet maintain a high payout ratio.

Gold is a difficult area to navigate. Physical gold is the purest hedge as there is little risk of counter-party default, compare to gold ETF and Gold certificates. However, there is maintenance cost associated with vault safekeeping and I am unfamiliar on how to best execute on this.

Conclusion
Despite learning a lot on investing methodologies and philosophies for the past three years, each curve-ball thrown by evolving economic data and complex financial environment brings up new questions. It is clear that a pure academic approach on visualizing the investment and finance space is sorely lacking. To a man with a hammer, everything looks like a nail. Blind knowledge without contextual wisdom to apply in the appropriate setting, can simply boost your confidence levels without arriving any closer to the truth, and even perform worse than the know-nothing investor.

Despite studying CAPM and multi factor models, it is clear that the investment performance of those factors has been challenged. Concepts such like small cap premiums does not necessary translate well to different markets. Least to say the effectiveness of DDM / DCF  models in negative interest rate environments, and Gorgon constant growth models in declining companies such as General Electric and Kraft Heinz. It is important to stay intellectually honest and humble when navigating a rapidly evolving landscape, and seek effective risk management tools to navigate the challenges ahead.

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