General investing articles archive : Page 24 of 25

Why I Invested in Sasseur REIT

Sasseur REIT has been one of the top-performing REITs so far this year. Here is my thought process behind my decision to invest in it in March this year.

Sasseur REIT has been one of the top-performing Singapore-listed REITs this year, with a year-to-date return of more than 40%.

I invested in Sasseur REIT in March this year at a purchase price of 72 cents per share. Today, the stock trades at around 88 cents. In addition to the capital gain, I have also collected 4.9 Singapore cents in dividend (technically called a distribution but let’s not get nit-picky).

In this article, I will explain my investment thesis for Sasseur REIT and whether I think it is still worth a look at today.

Company description

Sasseur REIT owns four outlet malls in China. The REIT is sponsored by Sasseur Group, a privately-owned outlet mall operator that currently manages and operates nine outlet malls.

The China-based REIT was listed in Singapore on 28 March 2018. Since listing, Sasseur REIT has performed well above expectations. It beat its initial public offering forecast for seven consecutive quarters, both in terms of rental income and distribution to unitholders.

My 5-point framework

Over the years, I have built a five-point framework for investing in REITs. I try to invest in REITs that tick as many of the boxes as possible.

As a quick summary, the REITs I invest in should have (1) a good existing portfolio, (2) capable and honest management, (3) a safe capital structure, (4) a fair and responsible sponsor and (5) a decent valuation.

I will describe my investment thesis for Sasseur REIT using this REIT framework.

1. A good existing portfolio

In my view, Sasseur REIT has an excellent existing portfolio.

To understand the REIT’s portfolio better, we need to appreciate its unique mode of managing the four malls it owns. The REIT effectively outsources the management of the mall to a third party called the entrusted manager.

Favourable entrusted manager agreement

The entrusted manager is responsible for maximising the rental income of the assets. It collects the rent and pays Sasseur REIT an entrusted manager agreement rental income.

This comprises a fixed and a variable component.

There are a few things to like about this arrangement. First, the fixed component ensures a baseline level of rental income that is more or less guaranteed every year. The fixed component will also rise each year.

Second, the variable component gives Sasseur REIT the opportunity to participate in the upside, should tenant sales rise.

Increasing tenant sales

There are a few reasons to believe that tenant sales will increase in the long run. For one, total VIP members (a membership program to reward high-spending customers) have jumped a staggering 70% from the end of 2018 to 30 September 2019. Second, two of the REIT’s malls are still relatively new and should attract more shoppers as they mature.

There are also macro-economic tailwinds. China’s GDP is expected to grow by more than 6% in 2019 and 2020. The GDP growth, in turn, is expected to fuel a rise in the middle-income population in China, which will drive demand for discounted branded goods.

Sasseur REIT’s four malls demonstrated impressive growth in 2019. In total, the four malls generated a 20.9% growth in tenant sales in the first three quarters of 2019.

Positive portfolio characteristics

The occupancy rate at Sasseur REIT’s malls is also very high, averaging at 95.4%. This is a sign that the REIT is able to attract tenants to its malls.

The REIT has deliberately short tenant leases, which give the managers more flexibility to improve the tenant mix and to increase rent in the future.

Potential downsides

There are, however, two downsides to Sasseur REIT’s existing portfolio. First, its four malls are leasehold. The tenures range from 27 to 35 years. Second, the REIT owns only four malls so there is an element of concentration risk. Nevertheless, I think its current portfolio still possesses more pros than cons.

2. A capable and honest management

Sasseur REIT has a relatively short track record as a listed REIT. Despite its short history, I think the way the managers are incentivised gives me confidence that they have minority shareholders at heart.

First, the entrusted manager has shown a good track record of growing the portfolio’s tenant sales. In addition, resultant rent, and consequently distribution per unit, have beaten expectations each and every quarter since the REIT’s listing. I am more inclined to trust managers that underpromise and overdeliver.

Additionally, both the REIT manager and the entrusted manager have incentives that are aligned with shareholders’ interest.

The entrusted manager is paid a base fee that is calculated as the lower of (1) 30% of gross revenue or (2) gross revenue minus EMA Resultant rent (what is paid to Sasseur REIT).

In essence, the entrusted manager is entitled to the leftover of gross revenue after paying what it owes to Sasseur REIT. However, this amount is capped at 30% of gross revenue. If there is left-over after the base fee and EMA resultant rent is paid to Sasseur REIT, the entrusted manager is then entitled to 60% of the leftover amount as a performance bonus.

From the way the entrusted manager is incentivised, it is clear that it is in the entrusted manager’s interest to try to grow gross revenue for the REIT, which is ultimately also beneficial to the REIT unitholders.

The REIT managers also have a base fee and a performance fee. The REIT managers are only entitled to the performance fee if it achieves distribution per unit (DPU) growth over the previous financial year.

3. A safe capital structure that can be optimised

Sasseur REIT has a gearing ratio of 29.0%, well below the regulatory ceiling of 45%. This gives it the debt headroom to take more loans to invest in new properties.

The REIT’s cost of debt is also manageable at 4.43% (reasonable by China standards). The relatively low interest rates give it an interest coverage of 4.8 times.

I also take heart in the fact that the manager has emphasised that they are going to be using the REIT’s financial muscle prudently. The manager will only look at yield-accretive acquisitions that can benefit unitholders over the long-term.

4. A fair and responsible sponsor

As a first-time REIT sponsor, investors don’t have much information to judge Sasseur Limited.

However, the sponsor has not interfered much in the way that Sasseur REIT has been run. It has not shown that it will treat minority shareholders unfairly.

On top of that, the sponsor also has a lineup of right-of-first-refusal properties in its portfolio that Sasseur REIT can tap on for future acquisitions.

As one of the largest outlet mall operators in China, it also boasts the experience and know-how that Sasseur REIT can use as it seeks to expand its portfolio in the future.

Based on and despite the limited information I have, I am fairly satisfied with the sponsor.

5. A decent valuation

Valuation is the final aspect to consider. Sasseur REIT has seen its share price soar over the past 12 months. It currently sports an annualised distribution yield of 7.4%.

When I bought it earlier this year, the REIT had a yield of 9.8%. Based on the lower yield today, the REIT seems expensive now.

But investors should note that at the time of writing, REITs in Singapore have an average yield of around 6%. This makes Sasseur REIT’s current 7.4% yield look comparatively cheap. As such, it may be that Sasseur REIT was trading at an unfairly low valuation earlier this year, rather than an overly rich price today.

The Good Investors’ Conclusion

Despite the recent run-up in price, Sasseur REIT still looks like an attractive stock to hold. The REIT ticks many of the right boxes and seems primed to continue increasing its distribution per unit.

There are risks to note. The REIT has high concentration risk, currency risk and is highly dependent on economic tailwinds. But despite these risks, I think the REIT’s positive traits and growth potential still give me an excellent risk-reward profile.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Why It’s So Hard To Be a Contrarian Investor

Being greedy when others are fearful is easier said than done. Most investors may say they would do it but few actually practice it.

In the last downturn, how many of us actually had the courage to buy stocks when everyone else was selling? So why is it so hard to act against the grain?

Fundamentals change too

When we think of market downturns, we usually imagine a world where nothing changes except for stock valuations. The reality, however, is nothing like that. Morgan Housel from the Collaborative Fund explains:

“The reason you may embrace ideas and goals you once thought unthinkable during a downturn is because more changes during downturns than just asset prices.”

Take 2008 for example. Stock prices fell hard, but not without reason. The subprime mortgage crisis in the United States developed into a full-blown international banking crisis. Previously sound banks failed, companies went broke and consumer spending plunged.

These are fundamental changes that caused a decline in company earnings, huge layoffs and reduced consumer wealth.

In such times, it is easy to see why investor confidence was sapped.

People need positive reinforcement

Even when we do think differently from the crowd, most of us are not able to act on it. People require positive reinforcement to take action.

For instance, when we are bullish on a stock, we need encouragement from external sources. We seek out positive reinforcement in the mode of brokers’ opinions, analysts reports, or even friend’s approval.

However, in a time when everyone is fearful, positive reinforcement is hard to come by.

Fear is hard to ignore

Emotions also play a huge part in our investment decisions. When we start investing, we often tell ourselves to ignore emotions and to focus on facts. But, unfortunately, it is extremely difficult to tune out emotions completely.

In his book The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy, investor James Montier said, “It turns out there are numerous human traits that push us toward conformity and away from individual thinking.”

He explains that neuroscientists have found that when individuals take the road-less-travelled, they experience fear. Fear is there for a reason. It is a defense mechanism that is built to protect us. Acting against our fears, is thus, innately difficult.

As such, it is no wonder that fear plays a big part in our investing decisions. When the stock market is raging, investors have a fear of missing out (FOMO), while the fear of losing money makes people sell in a bear market.

Contrarian Thinking

“ …don’t be led astray by Wall Street’s fashions, illusions and its constant chase after the fast dollar. Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character.”
Benjamin Graham

It is not difficult to see why contrarian investing is so challenging. If it were easy, it wouldn’t be called “contrarian” in the first place. But on the other end of the spectrum, simply being contrarian for the sake of it, is also extremely detrimental. We need to seek the right balance.

For us to be a successful contrarian investor, we need three key characteristics: The ability to digest and analyst facts; individual thinking; and the courage to overcome fear. If you master these three traits, you will likely reap the rewards in the future.

Should You Invest With Robo Advisors?

Robo advisors have grown in popularity in recent years. But before hopping on the bandwagon, here are some things to note about them.

With the improvement in artificial intelligence, it was only a matter of time before robots started managing money. Today, robo advisors are becoming commonplace among retail investors. Even traditional banks such as DBS are beginning to embrace the power of artificial intelligence as a wealth management platform.

But should you trust a “robot” to manage your hard-earned money? With that in mind, I map some of the advantages and downsides of using a robot-assisted wealth management tool.

What really are robo advisors?

Robo advisors are digital platforms that personalise the investor’s portfolio using an algorithmic-driven approach with little human supervision.

The process is really quite simple. Investors register for an account on the robo advisor’s platform. They then answer a few questions that help the robo advisor understand the individual’s financial goals and risk tolerance.

Using an algorithm, the robo advisor then advises the clients on a suitable portfolio for them.

Usually, robo advisors have a fixed list of Exchange Traded Funds (ETFs) or funds that it can choose from to build the client’s portfolio. These funds, in turn, invest in a variety of assets, such as stocks, bonds, or real estate. One thing to note, these funds are actually mostly managed by humans! So robo advisors simply help to allocate your wealth to the funds that it thinks suits your needs and goals.

What are the fees involved?

Robo advisors usually charge just a basic annual advisory fee that is a small percentage of the total assets under management.

For instance, Morgan Stanley’s Access Investing charges a fee of 0.35% per annum, while DBS digiPortfolio charges an annual fee of between 0.75% and 0.85%.

But to be clear, this does not include the fees related to owning shares of mutual funds and exchange-traded funds. I will explain more on this later.

The table below shows the fees charged by the prominent robo advisors in Singapore.

Why invest with robo advisors?

The beauty of robo advisors is that it removes emotional misjudgments and other possible conflicts of interest from the decision-making process.

The robo advisors use a methodological process that is immune to emotion and is not influenced by commission-related fees.

They are also really simple to use. The set up is usually a seamless process and the minimum outlay to invest can be fairly small.

They also offer regular statements that will give investors up-to-date information on how their investments are performing and keep track of all additional cash flows.

In addition, robo advisors can automate the rebalancing of the portfolio for the client. This removes the hassle of actively managing your portfolio and reallocating it manually every few quarters. Importantly, there is also no additional transaction cost for rebalancing, unlike a do-it-yourself portfolio.

Potential pain points

But as with any product, there are also things not to like about robo advisors.

Robo advisors only offer a few different fixed portfolios. It is not possible to deviate from these fixed portfolios. After answering a few questions, the robo advisor will recommend one of the fixed portfolios that they have built. Investors cannot deviate from these fixed portfolios and are not able to access funds that are not offered on the platform.

On top of that, the robo advisor’s advisory fee is an additional cost. As mentioned earlier, investors have to pay the advisory fee, on top of the total expense ratio of the funds that they invest in through the robo advisor.

Although the robo advisory fee is usually less than a percentage point, it quickly adds up over the years.

Is it right for you?

Ultimately, the fewer potential conflicts of interest and the fee-based structures make robo advisors a robust wealth management tool that has the client’s interest at the forefront.

However, they still have their limitations. If you want a more personalised portfolio, the limited number of portfolio constructions in a robo advisor platform may not be sufficient.

Many of the robo advisors also only offer ETFs on their platform. As a result, it may not be useful for investors who want exposure to more aggressively-managed active funds, which have the potential for higher returns.

All things considered, I believe investors who want a simple stress-free passive investment strategy can consider using robo advisors. More savvy investors who are willing to do some research on funds should have a more hands-on approach to save costs and gain access to better-performing funds in the market.

Why I Invest Only in Stocks

Most Financial advisors prescribe diversifying into multiple asset classes. However, I invest solely in stocks. Here’s why.

Professional financial advisors prescribe diversifying one’s investment portfolio across multiple asset classes. This means spreading your investments into each of the four major asset classes- stocks, bonds, real estate, and commodities. In theory, this helps to smoothen returns and reduces the “risk” in the portfolio.

So having a portfolio that is composed entirely of stocks is unconventional, to say the least. However, before you close this article and call me a nut job, let me explain the reasoning behind my asset-allocation strategy.

Stocks: the best-performing asset class

Stocks are unlike any asset class. Eddy Elfenbein, portfolio manager of the AdvisorShares Focused Equity ETF, explains in his blog:

“All other assets are things. They just sit there. If you buy some gold and leave it alone, in 50 years it will still be there, just sitting there. There are income-producing assets like bonds and real estate, which makes them a little better than commodities. But still, they’re just things. They can neither think nor create.

Equity, on the other hand, is wholly different. It’s a legal entity by which people can come together and employ said assets to make goods and services for people… The business works to make a profit, and it keeps investing those profits in the business to make still more profits.”

When you invest in stocks, you are really investing in the power of human ingenuity.

It is, therefore, not surprising to note that over the long term, stocks are by far the top-performing asset class. In fact, according to data from the University of Chicago, in the 100 years from 1915 to 2014, stocks had an average real return (after removing inflation) of 8.3% per year, while bonds returned just 1.1% per year. A $1000 investment in bonds in 1915 would have a “real worth” of $2,992 in 2014, while $1000 invested in stocks would have been worth $2,301,134.

Other studies also consistently show that over the long-term stocks always come up on top, followed by bonds, real estate, and commodities.

The power of time

But performance alone is not the only reason to invest solely in stocks. I also need to be able to ride out the inevitable market swings in the stock market. Thankfully, I have time on my side. As a young investor, I have the holding power to see out the downturns of the market. I do not foresee needing the money from my investments anytime soon, nor do I depend on cash flow from my investments.

On top of that, my investment objective is really to grow my retirement fund as fast as possible, rather than simply preserving wealth. This makes stocks the ideal investment asset for me.

I can also still be sufficiently-diversified even if I solely invest in stocks. Investing in a range of different companies that operate in different geographies and sectors help to diversify my risk. I can even gain exposure to real estate, by investing in real estate investment trusts (REITs), which are also traded on stock markets.

Building your portfolio

Legendary investor, Peter Lynch, once said, “Gentlemen who prefer bonds don’t know what they’re missing.”

If you are a young investor and have a long investment horizon like I do, having a more aggressive investment portfolio might be the right way to go. However, investing solely in stocks does come with caveats. Investors need to be able to stomach inevitable market swings and steep drawdowns. Having a disciplined long-term approach and sticking to your principles is key to success in the market.

Over the long-term, I take heart that despite the volatile nature of stocks, if history is anything to go by, my stock-heavy portfolio will likely provide better returns than if I diversify across multiple other asset classes.

Can Factor-Based Investing Outperform The Market?

Factor-based investing is an approach that involves investing in stocks that exhibit a few or just one particular characteristic.

These characteristics could be value, quality, or size “factors” to name a few. For example, an investment approach based on the value factor will involve investing in stocks that trade at a relative discount to their peers, be it on a low price-to-earnings (PE) or price-to-book (PB) ratio.

Does factor-investing work?

The idea behind factor-based investing is that the factors that shape the investing approach should be highly correlated with positive investment returns. For instance, back-testing has shown that stocks that exhibit a low PE ratio have over the long-run outperformed the broader market.

Therefore, exposing your portfolio to stocks that exhibit these characteristics will, in theory, reward you over time.

Sieving the wheat from the chaff

But not all factor-based investing works. Choosing the right factor to invest in plays a huge part in your success.

Andrew Ang, BlackRock’s head of Factor Investing Strategies, explained in a recent article that investors need to be able to distinguish between factors that are simply “passing fads” and those that are “fundamentally-based.” He explained two criteria he uses to make the distinction:

Economic rationale

The factor should have an economic rationale for its return premium. In the world of Big data, it is easy to find coincidental correlations between a factor and returns. However, many of these correlations are due to chance.

By focusing on factors that have economic rationale which drives their outperformance, we can be certain that there is a legitimate and very real reason behind the correlation between performance and the factor.

Decades of data

For the retail investor, it is difficult to gather enough information to backtest a particular factor over decades or even longer. However, funds with access to big data, are able to use the information to see if a factor has a long-term correlation with performance.

Using factor-based investing

If you are thinking of using a factor-based approach for your investment portfolio, there are a few things to take note of.

First, define your investment goal and identify factors that can help you achieve your goals.

Second, not all stocks that exhibit a particular factor will produce similar returns. The correlation between factors and returns is based on a large amount of data comprising thousands of companies. As such, your portfolio needs to be heavily diversified in many companies that exhibit that factor.

Combining factors into a solid investing framework

There is good evidence that factor-based investing has worked well in the past.

However, investors need to identify the factors that are the most correlated with positive returns. It may also be useful to combine certain “style” factors together into a more robust investment framework. An investment framework can help you focus your portfolio on stocks that are even more likely to do well over the long-term.

The ETF Checklist: 8 Key Points To Avoid The Pitfalls

Not every exchange-traded fund, or ETF, is built the same. Some can be dangerous. We can avoid th common pitfalls if we know where to look.

Exchange-traded funds, or ETFs, are rising in popularity. According to ETF.com, assets under management by US ETFs crossed the US$4 trillion mark earlier this year. That’s huge, to say the least.

It’s not hard to see why the investment vehicle is appealing. You can get wide diversification instantly with most ETFs. Expense ratios are typically low as well, enabling you to keep most of the returns generated.

But not all ETFs are the same. Before you invest in any ETF, you may want to take note of these eight key points.

1. What is an ETF

An ETF is a fund that is traded on a stock exchange, and it can be bought and sold just like any other stock on a stock exchange. An ETF can invest in all kinds of shares depending on the purpose of the fund, and there are many ETFs that aim to track the performance of a stock market index.

Singapore’s main stock market index is the Straits Times Index. There are two ETFs that track its performance, namely, the SPDR Straits Times Index ETF, and the Nikko AM Singapore STI ETF.

2. Mind the gap

The gap between a positive macro-economic trend and stock price returns can be a mile wide.

For example, gold was worth A$620 per ounce at the end of September 2005 and the price climbed by 10% annually for nearly 10 years to reach A$1,550 per ounce on 15 September 2015. But an index of gold mining stocks in Australia’s market, the S&P / ASX All Ordinaries Gold Index, fell by 4% per year from 3,372 points to 2,245 in the same timeframe.

In another example, you can refer to the chart below on the disparity between the stock market returns and economic growth for China and Mexico from 1992 to 2013. Despite stunning 15% annual GDP growth in that period for China, Chinese stocks actually fell by 2% per year. Mexico on the other hand, saw its stocks gain 18% annually, despite its economy growing at a pedestrian rate of just 2% per year.

So when finding themes to invest in via ETFs, make sure that the macro-economic theme you’re betting on can translate into commensurate stock market gains.

3. Replication method

ETFs can mimic the performance of a stock market index through two broad ways: Synthetic replication, or direct replication.

Synthetic replication involves the use of derivatives without directly investing in the underlying assets. It is the less ideal way to build an index-tracking ETF, in my view, because there is more complexity involved and hence a higher risk that a large proportion of the underlying index’s performance can’t be captured.

Direct replication has two sub-categories: (a) Representative sampling, where the ETF holds only a sample of the stocks within an index; and (b) full replication, which involves an ETF buying the same stocks in nearly identical proportions as the weights of all the stocks that make up an index.

You should try to invest in ETFs that use full replication if possible.

4. Reputation matters

Look for an ETF that is managed by a reputable fund management company. Vanguard, SPDR, iSHAREs, and Blackrock are just some examples of reputable ETF managers.

5. Track record

An ETF should ideally have a listing history of at least a few years, so that we can see how the ETF has actually done, instead of relying on the performance of the underlying index.

6. Watch your costs

The expense ratio (essentially all of the fees that you have to pay to the ETF’s manager and service providers) should be low. There’s no iron-clad rule on what “low” is, but I think anything less than 0.3% for the expense ratio deserves a thumbs-up.

Having a low expense ratio puts an ETF on the right side of the trend of investment dollars flowing toward low-cost index-tracking funds. This lowers the risk of an ETF’s manager closing the ETF down for commercial reasons.

7. The assets that are managed

An ETF’s assets under management (AUM) should be high – ideally more than US$1 billion. Having sizable AUM would also lower the chance that an ETF will close in the future. It’s not uncommon for ETFs to close. When a closure happens, it creates hassle on our part to find new ETFs to invest in.

8. Performance tracking

Lastly, you should look for a low tracking error. An ETF’s returns should closely match the returns of its underlying index. If the tracking error has been high in the past, there’s a higher chance that the ETF can’t adequately capture the performance of its underlying index in the future.

Timeless Investing Lessons From UK’s Best-Performing Fund

Established in 2010, Fundsmith is the largest mutual fund in the United Kingdom with £18bn assets under management.

Led by its founder, Terry Smith, the fund has more than doubled the market since its inception nine years ago. Investors who invested with Fundsmith from the get-go have earned a total return of 353.2%, or an annualised return of 18.3%, as of 31 October 2019. Comparatively, global equities in general “only” returned a cumulative total of 171.1% over the same time frame, or 11.7% annualised.

Its impressive performance makes FundSmith the number one performing fund in the UK. From its inception to the end of 2018, Fundsmith had a cumulative margin of 13% over the second-best fund and 188% over the average for the sector, which delivered a market-lagging 81.9% cumulative return.

Although I am not invested in the fund, I am extremely impressed by the way Fundsmith is managed. Terry Smith’s annual letter to shareholders is also filled with insightful comments and timeless lessons that we can apply in our own investing. With that, here are some of the key takeaways from Fund Smith’s latest annual report.

Stop trying to time the market!

We are all too familiar with market commentators warning of an impending bear market. Smith says:

“I can now trace back six years of market commentary that has warned that shares of the sort we invest in, our strategy and our Fund would underperform.

During that time the Fund has risen in value by over 185%. The fact that you would have forgone this gain if you had followed their advice will, of course, be forgotten by them if, or when, their predictions pay off for a period. I suggest you don’t forget it.”

Legendary investor Peter Lynch once said that “far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”

If you find yourself worried that the bull market has run its course, it will be wise to remember these words of advice.

Growth versus Value

Fundsmith’s investment strategy involves buying and holding fast-growing companies. This strategy has outperformed value investing over the last decade. However, with growth stocks reaching rich valuations, some market commentators believe that value investing may come back in favour.

In his annual shareholder letter, Smith outlines two main handicaps he sees in the value investing strategy:

“One is that whilst the value investor waits for the event(s) which will crystallise a rise in the share price to the intrinsic value that has been identified, the company is unlikely to be compounding in value in the same way as the stocks we seek. In fact, it is quite likely to be destroying value.

Moreover, it is a much more active strategy. Even when the value investor succeeds in reaping gains from a rise in the share price to reflect the intrinsic value he identified, he or she needs to find a replacement value stock, and as events of the past few years have demonstrated, this is far from easy. Moreover, this activity has a transaction cost.”

Let time work its magic

FundSmith has a simple three-step investment strategy: (1) Buy good companies, (2) Don’t overpay, and (3) Do nothing.

While some actively managed fund managers may scoff at the idea of the third point, it is actually one of the key reasons why Fundsmith has done so well since its inception. Smith explains:

“Minimising portfolio turnover remains one of our objectives and this was again achieved with a portfolio turnover of 13.4% during the period. This is the highest level of annual turnover which we have undertaken to date, but it is still tiny in comparison with most funds.”

He adds:

“Why is this important? It helps to minimise costs and minimising the costs of investment is a vital contribution to achieving a satisfactory outcome as an investor.”

The low portfolio turnover ratio resulted in FundSmith having by far the lowest transaction costs among the 15 largest active equity funds in the UK.

In fact, Smith attached a table of the returns of the 15 funds over a 3-year and 5-year period and compared them to their transaction costs. There was, unsurprisingly, a strong correlation between funds with lower transaction costs and higher returns (With FundSmith sitting at the top of the pile).

Final Thoughts

Terry Smith has become one of the most successful fund managers of his generation. He has even been compared to the legendary Warren Buffett. From his investing principles above, it is easy to see why Smith has found so much success in an industry that has traditionally underperformed low-cost index funds. His guiding investment principals can also help retail investors invest better. If you want to read more of Terry Smith’s letters to shareholders, you can head here.

Taming Our Ego When Investing

Preventing ego from getting into our heads is of utmost importance. Without ego, we can invest in a safer manner by not falling prey to overconfidence.

In his book Open Heart, Open Mind, the Tibetan Buddisht educator Tsoknyi Rinpoche recounted a conversation he had with his late father, Tulku Urgyen Rinpoche.

The younger Rinpoche was about to visit the US for the first time to deliver teachings on Buddhism. He wanted advice from his father on how he should approach educating a new audience. Tulku Urgyen Rinpoche responded:

“Don’t let the praise go to your head. People will compliment you. They’ll say how great you are, how wonderful your teachings are… Whatever compliments your students give you have nothing to do with you… How you teach is not important. What you teach is.”

The elder Rinpoche also said that he had observed many Buddhist teachers develop a mistaken notion – that they are special because their ways of imparting Buddhist lessons are popular with students. Tulku Urgyen Rinpoche gently reminded his son: “What’s really special, is the teaching itself.”

The investing analogy

If we invest soundly in the stock market with a long-term, business-focused mindset, it’s likelier than not that investing success will knock on our doors. When we taste success, it’s easy for ego to enter the picture. We may look into the mirror often and proclaim, “I’m a special investor!”

But the entrance of ego plants the seeds of failure. My friend, the fund manager Goh Tee Leng, recently wrote in his website Investing Nook that Pride, or Ego, is one of the seven sins of investing.

If we have done well in investing using the underlying framework that stocks represent a piece of a business and that the value of the stock is a reflection of the value of the underlying business, we’re not special. This framework was already fleshed out thoroughly by Benjamin Graham 85 years ago in his 1934 book, the first edition of Security Analysis. We may each have our own unique interpretations and applications of Graham’s then-groundbreaking ideas. But what’s really special, is the framework itself.

Conclusion

Preventing ego from getting into our heads is of utmost importance. Without ego, we can invest in a safer manner. That’s because we won’t fall prey to overconfidence. When overconfident, we think we know more than we actually do, and we may end up doing risky things, such as borrowing to invest or overly concentrating our portfolios.

This post will serve as a constant reminder to myself, a barrier that keeps my ego at the door. I hope it can serve the same purpose for you too.

Can We Really Do Good While Investing?

Here’s how investors can make the world a better place through good investing decisions.

Are we really able to do good while investing?

This question irked me at the time I was thinking of making a career switch to investing. I wanted a career that was both fulfilling and enabled me to make a difference to the world at the same time.

Thankfully, through further reading, I can say the answer to that question is an emphatic yes.

As investors, we are a small cog in the financial markets that help make the world a better place.

Every drop counts

So how do we do good when we invest? Well, let’s start at the very beginning.

When a start-up that is looking to improve the world develops an idea, it needs funding. Venture capitalists help to fund these ideas.

In turn, these venture capitalists invest because they know that there is a stable public market system behind them.

Along the way, these startups enrich the lives of numerous stakeholders, including employees, customers, and shareholders.

At its initial public offering, the company then raises more funds through a public offering of shares.

Those who invest in initial public offerings do so because of the assurances of the liquidity of the public market and the ability to sell shares at a future date, which is when we (stock market investors, or public market investors) usually come in.

The final piece of the jigsaw

All of which means that we, public market investors, are a small but important piece of the jigsaw that helps drive innovation and the improvement of society through capitalism.

As you can see, by participating in the stock market as investors, we are indirectly part of the reason why startups are able to raise much-needed funds in the first place.

Impact investing

Besides simply being part of the financial markets, we can also choose to invest in companies that are actively improving the world.

One way is to invest in companies that are building a better future for tomorrow through innovative technologies such as Google. We can also invest in companies that uphold a high standard of corporate social responsibility by giving back to society or through actions that help reverse climate change.

The more investors embrace Impact investing, the more firms are likely to embrace the need for a strong corporate social responsibility to enrich the lives of other stakeholders and the world.

Recently, the Singapore government set aside US$2 billion in funds to participate in public market investment strategies that have a strong green focus. Singapore Education Minister, Ong Ye Kuang, described how investments help to shape the world saying, “Finance fuels the economy and business. It determines investment decision and it drives action.”

Enriching others

As you can see, investing is certainly not a zero-sum game. The injection of much-needed capital into companies that are improving the world aids numerous stakeholders along the way.

Even if we solely invest in the secondary market (the public stock market), we are still an important – albeit small – part of the financial markets that is essential in capitalism and the betterment of the world.

Further, by focusing our investing efforts on responsible companies that are not solely profit-driven but have a strong corporate social responsibility to do good, we can mold the way investment decisions are made and help to prod business towards socially responsible investment decisions.

The Best Investing Speech, And 5 Lessons

Timeless investing lessons and wisdom were shared in an investing speech delivered 38 years ago in 1981.

Surprise! The best investing speech I’ve ever come across is not from Warren Buffett or other well-known investing legends such as Peter Lynch, Benjamin Graham, or John Neff. It’s from the little-known Dean Williams.

The speech, Trying Too Hard, was delivered 38 years ago in 1981, when Williams was with Batterymarch Financial Management. But its content remains as relevant as ever. Here are five gems I took away from Williams’ timeless speech.

1. Confidence and accuracy

“Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.”

Keep this in mind the next time you come across a market forecaster who is highly confident just because he’s backed by mountains of data. Bad data, however much the amount, can lead to bad forecasts. A poor understanding of how markets work (such as assuming that price movements in the financial markets follow a normal distribution) will also lead to toxic outcomes even when there’s plenty of data involved.

In fact, research by Philip Tetlock, a psychologist at Berkeley, brings this Dean Williams quote one step further by suggesting that confidence and accuracy in a forecast can often be inversely correlated.

2. Don’t just do something, stand there!

“The title Marshall mentioned, “Trying Too Hard”, comes from something that happened to me a few years ago. I had just completed what I thought was some fancy footwork involving buying and selling a long list of stocks. The oldest member of Morgan’s trust committee looked down the list and said, “Do you think you might be trying too hard?” At the time I thought, “Who ever heard of trying too hard?” Well, over the years I have changed my mind about that.”

Finance professors Brad Barber and Terry Odean published a paper in 2000 that looked at the trading records of more than 66,000 US households over a five-year period from 1991 to 1996. The research was astonishing: The households who traded the most generated the lowest returns. The average household earned 16.4% per year for the timeframe under study, while the most frequent traders only earned 11.4% per year.

Investor William Smead once said that “Your common stock portfolio is like a bar of soap. The more you rub it, the smaller it gets.” How true.

3. We know less than we think we do

“Here are the ideas I’m going to talk about: the first is an analogy between physics and investing… The foundation of Newtonian physics was that physical events are governed by physical laws. Laws that we could understand rationally. And if we learned enough about those laws, we could extend our knowledge and influence over our environment.

That was also the foundation of most of the security analysis, technical analysis, economic theory and forecasting methods you and I learned about when we first began in this business. There were rational and predictable economic forces. And if we just tried hard enough… If we learned every detail about a company. . . .If we discovered just the right variables for out forecasting models… Earnings and prices and interest rates should all behave in rational and predictable ways. If we just tried hard enough.

In the last fifty years a new physics came along. Quantum, or subatomic physics. The clues it left along its trail frustrated the best scientific minds in the world. Evidence began to mount that our knowledge of what governed events on the subatomic level wasn’t nearly what we thought it would be. Those events just didn’t seem subject to rational behavior or prediction. Soon it wasn’t clear whether it was even possible to observe and measure subatomic events, or whether the observing and measuring were, themselves, changing or even causing those events.

What I have to tell you tonight is that the investment world I think I know anything about is a lot more like quantum physics than it is like Newtonian physics. There is just too much evidence that our knowledge of what governs financial and economic events isn’t nearly what we thought it would be.”

Investing involves human psychology, which is incredibly hard to model. The great physicist Richard Feynman apparently once said “Imagine how much harder physics would be if electrons had emotions.” That’s the problem we as investors have to deal with.

Investing is not always a case of “if X, then Y.” According to a study done in 2004, South Africa’s economy expanded by 6.5% annually from 1900 to 2002, but saw its stock market rise by less than 1%. The Federal Reserve in the US started its bond-purchase programme, Quantitative Easing, in 2008. Investors thought back then that interest rates would rise when QE stopped since the Fed’s massive presence would be gone. QE officially ended in late 2014 but the Fed had stopped and restarted QE on a number of occasions. Morgan Housel showed that, contrary to the general idea, interest rates rose each time the Fed stopped QE between the beginning of 2008 and April 2013.

The good thing is you and I need not be helpless. We can work with sound investing principles that are backed by strong logical reasoning and evidence, and we can invest with humility by diversifying.

4. The power of simplicity and consistency

“You are familiar with the periodic rankings of past investment results published in Pension & Investment Age. You may have missed the news that for the last ten years the best investment record in the country belonged to the Citizens Bank and Trust Company of Chillicothe, Missouri.

Forbes magazine did not miss it, though, and sent a reporter to Chillicothe to find the genius responsible for it. He found a 72 year old man named Edgerton Welsh, who said he’d never heard of Benjamin Graham and didn’t have any idea what modern portfolio theory was. “Well, how did you do it?” the reporter wanted to know.

Mr. Welch showed the report his copy of Value-Line and said he bought all the stocks ranked “1” that Merrill Lynch or E.F. Hutton also liked. And when any one of the three changed their ratings, he sold. Mr. Welch said, “It’s like owning a computer. When you get the printout, use the figures to make a decision–not your own impulse.”

The Forbes reporter finally concluded, “His secret isn’t the system but his own consistency.” EXACTLY. That is what Garfield Drew, the market writer, meant forty years ago when he said, “In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.””

I’ve previously shared in The Good Investors about how a simple portfolio of US stocks, international stocks, and global bonds have bested even the best-performing endowment funds of US colleges that invests in incredibly complex ways. Here’s another good one, according to Morgan Housel: “Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012… Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices.”

5. Investing without forecasts

“And when it comes to forecasting—as opposed to doing something—a lot of expertise is no better than a little expertise. And may even be worse.

The consolation prize is pretty consoling, actually. It’s that you can be a successful investor without being a perpetual forecaster. Not only that, I can tell you from personal experience that one of the most liberating experiences you can have is to be asked to look over your firm’s economic outlook and to say, “We don’t have one.”

Successful investing can be done without paying attention to economic forecasts. I have been investing for more than 9 years, and have never depended on outlooks on the economy. My focus has always been on a stock’s underlying business fundamentals. It’s the same when I was with the Motley Fool Singapore’s investing team – the prospects of a stock’s business was our primary concern. In his speech, Dean Williams also said “Give life a try without forecasts.” I have tried, and it’s been great.