Monday, May 22, 2017

The math of crisis investing

I want to find out what is the possible rise in my portfolio after investing during crisis, and in so doing, I can find out the optimum amount of cash to keep. The problem with cash is that while it's very useful during crisis, there's a cost to it. It's the drag on your portfolio return, that is, your cash is rotting in the bank doing nothing. On the other hand, investing throughout the ups and downs will mean that your portfolio volatility will be swinging in extremes too. Not for the faint hearted.


I start off by looking at Straits time index in the past. These are the major crisis that happened and what the STI returns look like after while. The first dates indicated the lowest point in STI while the second date refers to the apex of the bull run that occurs after market recovers. The % refers to the percentage increase i.e. 220% means if you invest 100k, your portfolio will increase by 220k.

1998 Sept to 2000 Jan - 800 to 2580 - 220%
2003 Apr to 2007 July - 1220 to 3900 - 220%
2009 Mar to 2015 Apr - 1450 to 3550 - 145%

The last current bull run might be still 'running'. As you can see, all these are from hindsight. It's not clear until after the fact had happened. Since I can't predict the future, well, the past history is all that I have.


Assuming that we can only capture 70% of the bull run from trough to peak, we are talking about 220% x 70% = 150% gain or a 250% increase in portfolio. Let's use that figure to guesstimate our returns from crisis investing.


If we keep 100% cash and invest during crisis, we can realistically expect to get about 150% increment. That means we're looking at 225% increase in our portfolio. If we keep 80% cash, and invest during crisis, we can realistically expect to get about 200% increase in our portfolio. If we keep 60%, we can expect to get a 175% increase in our portfolio. If we keep 40%, it'll be 150% increase in portfolio.




Here's a few thoughts:

1. If you think the returns are too low, you can leverage. But it comes with its own set of problems.

2. If you're hoping to become a millionaire after the crisis, you have to be realistic. Ask yourself how much you have in your portfolio now and how much cash you are keeping and how long are you waiting for that big crisis to happen. We haven't even talked about whether you have the balls to go in while others are busy rushing to get out.

3. Since STI tracks only blue chips, which are safer, we can technically do a few rounds of the crisis investing. When STI is at the trough, we get into blue chips first. Once the blue chips recovered and STI goes up, people will take notice of the rising market and get in, so we get out of the blue chips and enter the mid/small caps before they do. When the blue chips had finished rising, the next rotation will be the mid/small caps, so technically we 'compound' our cash faster. Instead of going in and out during crisis, we recycle our capital and do it within each cycle itself. Easier said than done, of course, but that's the plan. The execution depends on your skill.

4. For me, I aim to get around 40% to 80% cash during crisis. That should realistically get me a minimum of 150 to 200% increase in my portfolio growth organically. Haven't include recycling of capital or injection of new capital or dividends.

5. We only get 2 rounds of solid crisis and I've wasted one already. I can't waste it anymore. Save hard, work hard on my craft and execute it. I don't want to be caught in a crisis without the cash to utilise, or the psychology to take advantage of it. If executed properly, this can save me a few years of my life.


Updated (22nd May 2017)

Thanks to theintelligentinvestor from Investingnote community from spotting my calculation error in the percentage. At first, I still thought that crisis investing is still alright. Now, with the changes in the error, an organic portfolio growth of 150 to 200% is crazy and I know it's do-able!

Monday, May 15, 2017

The evolution of needs and wants

My baby is slightly more than 3 months old now, and I learnt a lot from the experience of being a first time father. One of the first things I get to observe is how the needs and wants of the child develops as he gets older.

When my son is less than 1 month old, the term 'needs' and 'wants' are interchangeable. You can even say that the needs and wants are indistinguishable from one another. The default mode of the baby is sleep. If he is not sleeping, it's because of the following reasons:

1. Food
2. Change of diaper
3. Hug

Took us a few weeks to get it right, but once I thought I mastered the art of baby soothing, the baby evolves. After 1 month to 2 month, the needs and wants changes, so we have to adapt to them again. Here are the needs:

1. Food
2. Change of diaper
3. Hug in the right manner
4. Rock

Okay, it's still alright, I thought to myself. I can't hug it anyhow, because the baby needs to feel right. I also have to rock the baby to quieten it down. Thankfully I have a gym ball that my wife uses pre-child, and we can sit on it while hugging the baby and bounce up and down on it. That makes the rocking part manageable, because at this point in time, we're holding a 5kg weight that can scream, puke, cry and smile.

Around 2 to 3 months, just as we thought we got the hang of it, the baby evolves again. They say change is the only constant, and I say the person who came up with that saying must have been parents. So their needs/wants became:

1. Food, but must be of the right temperature
2. Change of diapers, but must be fast
3. Hug in the right manner, but must change position every now and then
4. Rock, but only after doing all the above
5. Temperature - must be cooling enough
6. Play - you need to spend time interacting with me!
7. Sleep in the right position

Wah, suddenly as the baby's sight improves and the brain functions start to whir in action, there's more and more things that we need to do right. If the past history can be extended to the future, there'll only be more needs and wants, and soon there will be a differentiation between the needs and the wants. Then what happens?




Depending on individuals, there'll come a inflection point where the needs and wants stop increasing. It starts to stay constant, then decrease as we age further. All the wants are removed, leaving only the bare basic needs. And when we're on our dying beds, I suspect strongly that the following needs are as follows:

1. Family
2. Happiness
3. Free of suffering

I've mentioned earlier on in the article what my son's 1st month needs are. Let's review them again:

1. Food
2. Change of diaper
3. Hug

Hey, isn't that the same wish list as that in our dying beds? It's of a different form but it's essentially the same theme. Food, change of diapers and hugging is the expression of the same values as family, happiness and free of suffering, but specifically exhibited by a baby. Food and change of diapers is the baby's equivalent of 'free of suffering'. Hug is what the baby's equivalent of 'family'. I've always said that a child is like a buddha-baby. A child is extremely enlightened in what the important things in life are, and we, as adults, can take a leaf out of his/her book.

Saturday, May 06, 2017

Fear-based selling

There's a lot of fear out there. Everytime you switch on the news, out of 10 news, perhaps 8 are bad news. Maybe some air plane crashed, some terrorist attacks somewhere, some murders elsewhere. Then comes the commercial interval selling things. It's known that fear can trigger emotional buys (for certain items), so is this the way to pre-suade consumers to part with their money?


A typical example would be that of a insurance agent. The sales pitch is that you don't know when you're going to die, and there'll be huge medical costs, and you must be responsible for your family and so on. That's fear based selling. It can be for a tutor too. Oh, your child is going to fail his O'lvls because his foundation is so weak. There's only 4 months to the major exams and he's so weak in his foundation, so do you want to increase the number of lessons during June? Fear based selling. How about a furniture seller? This special promotion is only valid until today, if not it'll revert back to the original price which is 20% more than the current. Oh, this is the last piece left, and someone just called me to ask me about it. Do you want me to reserve it for you (by paying a deposit) so that the other caller don't be able to have it?


Fear sells. But it leaves a bad taste in the consumer's mouth after buying it.




In the stock market, there's also fear based advice. This stock is going to run if you don't get this. Or I've a whatsapp group that offers great advice for people because there are so many people in there with eyes on the market 24/7, and I'm offering you at this great price for only a limited period of time. Everyone is making big bucks in the chatgroup, so why don't you join? Fear of missing out is also a fear based selling.


As STI marches past 3200 and still moving upwards, beware of more and more people doing fear based selling for all sorts of things. If memory serves me right, in the last major bull run, there are a lot of gurus offering crazy returns by attending this workshop and that, a lot of cheating incidents and a lot of funny ways to make crazy returns in oil, land banking, crabs, trees or what have you. You see it everyday in the newspaper, sometimes with ads like these taking up a quarter of the page. You don't see such things when the market is depressed.


Look at this piece of news back in 2007 here. It talks about university undergraduate making huge money in the stock market, so they are chasing grades and trades. Or this one, also in 2007, here (courtesy of musicwhiz). This one is a memorable case study of a student who made up to 80k per month trading in the height of the bull run. Just a few months later, he lost all and more, including his parent's life savings of 300k. I just want readers to be aware of such emotional battles. When people are making huge money and you have a lot of cash rotting in the bank, are you able to withstand the pressure and all the fear based selling and NOT commit to mistakes?