Sunday, August 31, 2008

Ping Pong, Patience, Psychology

After 48 years, the Singapore women table tennis team finally got through the nerve-wrecking semi-finals to end the medal drought. It was the most fascinating experience watching the semi-final game live. And hence the inspiration to draw parallels between table tennis and investing.

For those who missed the game (btw it was office hours, so most diligent, career-focused Singaporeans were actually working hard), let me just briefly summarized what happened. Feng Tianwei won the first match easily and it looked like the rest of the game should be a breeze for Singapore. But Li Jiawei lost the 2nd match after 5 tough games. Singapore came back to win the doubles, then Wang Yuegu lost the 4th despite putting up a very strong fight and it has to come to the 5th match. Of course our heroine Feng battled all out in the last match and finally broke the Koreans.

The Koreans are very defensive players, they sliced the balls all the time and simply waited for the Singaporeans to make mistakes. That was how Li Jiawei lost. She was not on form and her successful smash rate was definitely below par. But needless to say, when she succeeds, the smash was a sure killer. Feng, on the other hand, smashes with higher accuracy but seldom kills the opponent, ie they managed to defend. Feng is also definitely more patient, only smashing when she gets a good angle.

In investing, this concept is actually pretty important. Buffett used to remind us, "Imagine you only have 15 bullets in your life, do you shoot everything that pops out, or do you go for the big turkey?" Li Jiawei goes for the kill at the slimmest chance, she misses a lot but when she hits, its a grand slam. Yes, the opponent get killed spectacularly, but it's still just one point.

In investing, Jiawei's strategy can work if that grand slam is a 10 bagger, and you recover all your losses from the other 9 losing bets. This is how Venture Capital (VC) works. But my guess is you will have better luck with Feng's strategy. And this ties in with patience. Don't simply buy stuff on a spur. Cosco has dropped 50%, it is definitely a buy now! SPC dividend yield is 10%, buy! There are reasons why they dropped so much in the first place. Exercise patience, strike when your chances of success are very high, not just when it is hot.

Back to the matches, it occured to me that it should be quite unlikely whereby someone is down by 2 games and then comes back to win the next 3 games and win the match. Similarly, if you are lagging by even just 2 or 3 points and your opponent is at game/match point, it is quite difficult to win. Psychology is at work here. In order to counter this, a lot of mind training is needed. In this aspect, I would say the Singapore team was quite good, but the Koreans were better. Of course, world No.1 Zhang Yining, is probably the best at this.

In investing, your opponent is the market. Most of the time, you are down by 2 to 3 points bcos it is very hard to beat the market. 90% of all professional fund managers underperform the market. So you need to train your mind and be calm. Otherwise, emotions cloud everything and you make stupid mistakes. Trading rules some times help. E.g. stop loss levels, profit taking levels. Needless to say, right-sizing the bets is equally important. If your investment is too big and you are losing sleep, you need to scale it down.

Of course, most true blue value investors don't believe in trading rules and sizing of bets. They believe that if the stock is down, you should buy even more since it's cheaper now. And you should bet your house and car on it bcos that's how you maximize returns.

Thursday, August 21, 2008

The Singapore Property Market: Personal Take II

This is a continuation of the last post.

Ok, so the bulls will say expats can pay. Now I do not know what is the average expat pay, but let's just assume the average expat gets the same salary of the top 10% of our population ie $12k per mth. If you are an expat earning $12k per mth, will you fork out 33% of your salary for rent? For me, if I were an expat, I know I am not going to be in Singapore forever, I would rather stay somewhere cheap, save the extra $1-2k on rental and spend it on touring Angkok Wat or something right? Of course that just me lah.

Btw the rule of thumb is roughly 20% of your salary on rental/mortgage. So going by this rule only expats earning $20k or above can afford this place. How many expats in Singapore earn $20k per mth, ie $240k per yr? Given that only 2,000 people earns more than $1mn in Singapore, my guess is roughly 7,000-8,000 people (including expats and Singaporeans).

How many rentalable condos in Singapore? About 300,000. So, sorry, charging $4,000 per mth for rental, it's a once in a lifetime chance, it won't last. Yes some hot locations can command this kind of rental today, but you cannot expect to charge this kind of rental for the next 20 yrs. At least not until Singapore GDP per capita further improves from here.

The other argument is that the company pays for the rent, not the expat himself. Now if you are the HR and you have your budget to work with, essentially the rental of $50k restrict your capacity to hire pple bcos you can only pay someone $50k less than what he should get. ie this expat suppose to get total package of $300k you can only give $250k bcos the other $50k goes to his rental. So this means less expats will choose to come to Singapore over time.

So the bottom line is this, $50k annual rental (which works out to be rental of $4 psf per mth) is not sustainable in Singapore today. It may be sustainable 10 yrs from now when our GDP per capita increases and our expat population increases tremendously. But not now. Our salary levels are too low compared to property prices today. Note that expat salary is also a function of our GDP per capita and our salaries, so as of now, $4 psf per mth is too expensive. That's my personal view.

So this translates to the fact that a $1000 psf for property price is to expensive. We are not even talking about those $3k psf yet... Ppty prices have to come down. FYI Singapore is now more expensive than Tokyo, New York and maybe Shanghai. We are only behind Hong Kong, London and a few whacky cities where psf is like 5 digits and above (in USD) like Moscow and Mumbai.

The time to look at property will be the time when prices are falling to $600-700psf in prime areas. ie pple who bought at $2,000-3,000 psf lose more than 70% of their property value and the whole world gets totally digusted with Singapore ppty as with in 1998. It may take some time, but now is the time for us to prepare and have to guts to buy when the time comes.

Tuesday, August 12, 2008

The Singapore Property Market: Personal Take I

In this post, I am going to give my two cents on the Singapore property market. As with people giving their two cents, usually it is worth about one cent, esp when people try to give their two cents in some arena where another 10,000 people already gave their answers to 6 million dollar questions. So always do your own analysis and learn to be an independent thinker. I think that should be everybody's goal and that means also you shouldn't be reading the rest of this post. Hehe.

But read lah, just for entertainment lor.

So back to the Singapore property market, I belong to the bearish camp, and the following would be my rationale:

Lets start with today's $1,000 psf, a sort of low benchmark for ppty in some prime locations. But we have to start somewhere, so let's just use $1,000 psf. This means a 1,000 sqf condo will cost $1mn. In order to justify $1mn on the property, I would say that the rental yield needs to be 5%.

Actually in the industry pple use 4% and they call this the cap rate, but I try to be conservative here. You can also think of this as assuming that the PER for the property is 20x, which will give an earnings yield of 5%.

As you can see, PER of 20x is not cheap at all, but if we use a lower PER or higher yield, in will only further prove my point: the property market has gotten too expensive. So let's just stick to this 5% yield.

With the yield at 5% it means that the property priced at $1mn should fetch you $50k rental per yr if you rent it out. This works out to be $4,000 plus per mth. The 90th percentile household salary in Singapore is $12,000, so basically only 10% of Singaporean household can afford to rent this place, assuming that they are willing to fork out 33% their household salary on rental.

Ok most pple won't, or rather couldn't, bcos they spend like 90% of their salary. Esp for Singaporeans, we hate to fork out cash for mortgage. And it is impossible to use just CPF to pay for a $1mn mortgage. Well the point here is that this property cannot be rented out easily to Singaporean households or foreign workers earning less than $12,000 per mth.

Link to Singaporean household income

Stay tuned for Part 2!