Safety Bubble?

Two articles in today’s Straits Times caught my eye. One was “Reits look like good bets to yield-hungry investors” and the other was “GIC more cautious in going for higher returns“. Both talked about a “bubbly” situation.

The first article touched on the FTSE ST REITs Index outperforming the Straits Times Index by 4% since January. It also touched on this term called a “safety bubble” where investors are “wanting yield and earnings visibility in the shares they buy – and this has caused a run-up in sectors such as Reits.”

In the second article, Government of Singapore Investment Corporation (GIC) is “more cautious about seeking higher returns as yields remain low ahead of the “end game” in the next five to 10 years.” Borrowing costs are low and therefore, investors are seeking higher-yield assets. Bill Gross, who is running the world’s biggest bond fund at Pacific Investment Management Co., said that, “We see bubbles everywhere. As long as the Fed, and the Bank of Japan and other central banks keep writing checks and don’t withdraw, then the bubble can be supported.”

The two articles tie back to my previous blog post on “Are SGX-listed REITs in a Bubble?“. The REITs Index is going higher and the valuation of REITs are increasing in tandem. This article from Fundsupermart makes a good read to tie up my thoughts.

Investors have to be cautious going forward amid this low-interest rate and rising asset prices. It’s better to be safe than sorry!

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The Importance of Checklists

Atul Gawande wrote an article called “The Checklist” and it makes an interesting read. In it, he discusses how checklists have helped bring down the rate of infection in Intensive Care Units (ICUs) tremendously. The checklist can be as simple as a five step process. Doctors are to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. As a result of the checklist, the ten-day line-infection rate went from eleven per cent to zero!

Checklists have not really taken off in the medical sector but checklists are being used extensively in the aviation industry. Pilots use it. Aircraft engineers use it. Quality specialists use it. The list goes on. Usage of checklists ensure that errors are reduced and decision-making vastly improves as a result. By using a checklist, it does not make the individual less competent as many believe so. Our memory sometimes can fail us at the most crucial point and that is when a checklist comes in handy. Even the most experienced crew member can forget certain things in a particular situation.

How is the usage of checklists related to investing? Charlie Munger, the partner of Warren Buffett, is a huge advocate of using checklists. He has said in his book, Poor Charlie’s Almanack, that “effective checklists minimizes errors and omissions”. There’s an investment book entitled “The Investment Checklist: The Art of In-Depth Research” by Michael Shearn that is dedicated entirely to value investing using checklists. In investing, usage of checklists help to keep emotions in check. Emotional stability is extremely paramount to investment success. Emotions can take over cognition without us realising it. When our company’s stock price falls, we can take out a checklist that we have prepared to see if the panic we are feeling is warranted for.

Personally, I use a four-page checklist before I invest in any businesses. Usage of such a checklist ensures that I do not omit important steps that may impact the sound analysis of the business. Do come up with your own investment checklist and see how that improves your investments. A simple five-step checklist has helped to bring down infection rates in ICUs tremendously and I’m sure an investment checklist will help you too!

Rising HDB Prices In Singapore

Many Singaporeans are lamenting that the property prices, especially that of government-subsidised Housing Development Board (HDB) properties, have gone up exorbitantly. Looking at iProperty’s HDB Singapore website, a 5-room flat in Kim Tian area goes for $780,000. Just 10 years ago, in 2003, the same property can be bought for around $360,000. For a couple to buy a property of $360,000 now, one has to look at non-mature estates like Punggol and Sengkang. These areas are really far away from city and if one doesn’t drive, it will take around an hour or more to commute into the city area. Couple that with rising car prices, getting a car for easier commuting is out of the question. This is a worrying trend for young people who are about to start a family.

Will rising flat prices and car prices be the new norm for Singapore? Only time will tell. Till then, I guess we can only invest in ourselves instead of doing what most Singaporeans love to do, complain. What do I mean by investing in ourselves? It means amassing the knowledge needed to protect ourselves from rising prices. Someone can take away your physical possessions but no one can take away your knowledge. One way to protect ourselves is investing itself. Investing in stocks has proven to be the long-term hedge to rising prices. The Straits Times Index (STI) has returned around 13.62% per annum from 2003 to 2013. To put things into perspective, during the same period, the Kim Tian flat mentioned above has risen only 8% per annum. By investing and not just relying on our salary, we can counter the rising prices of goods in Singapore.

Therefore, instead of undertaking our favourite pastime of complaining, we should take things into our own hands and invest for our future. We cannot control the rising flat and car prices but we can control one thing – the amount of knowledge we want to amass to protect ourselves.

Book Review – “The Outsiders”

“The Outsiders” is another book recommended by Warren Buffett in his 2012 Shareholder’s Letter on top of “Investing Between The Lines”. In the letter, he comments, “The Outsiders, by William Thorndike, Jr., is an outstanding book about CEOs who excelled at capital allocation. It has an insightful chapter on our director, Tom Murphy, overall the best business manager I’ve ever met.” Buffett, being as modest as always, declines to say that he has been featured in the book as well.

The book is about how eight CEOs went against the norm and created enormous success, both for the company and the shareholders. The CEOs are quipped as “outsiders ” by the author as they are unassuming and do not pander to Wall Street’s expectations. These CEOs consistently achieved extraordinary results by constantly zigging while their peers zagged. If you think Jack Welch was an extraordinary CEO, you have not met or read about these eight individuals (except the 8th guy, I think). They are:

  1. Tom Murphy from Capital Cities
  2. Henry Singleton from Teledyne
  3. Bill Anders from General Dynamics
  4. John Malone from TCI
  5. Katharine Graham from The Washington Post
  6. Bill Stiritz from Ralston Rurina
  7. Dick Smith from General Cinema
  8. Warren Buffett from You-Know-Where

These CEOs followed a virtually identical blueprint for success. They were against paying dividends as they are tax-inefficient due to double taxation at both corporate and individual levels (in the US),  made disciplined acquisitions, used leverage selectively, bought back a lot of their shares, ran decentralised organisations and focused very much on cash flow instead of earnings. However, the blueprint is not a strict formula to be followed. For example, it may not be wise to buy back shares when the company is overvalued. The right capital allocation decision varies according to the situation at any given point in time.

Do read this book to find out more. I certainly enjoyed reading this book and I am sure you will too.