Author: Jeremy Chia

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.

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.

3 Portfolio Management Strategies To Adopt

These 3 portfolio management strategies can help you better manage the risk-reward profile of your investment portfolio.

Portfolio management is an important skill in investing. Take on too much risk and you may be left with sizeable losses. Take on too little risk and your returns will be mediocre. 

So how do we balance risk and returns? 

Given the uncertainty surrounding the market today, I thought it would be an opportune time to share some portfolio management tips that I believe investors can adopt.

Mind the size

Whatever you invest in, it is important to invest an amount that you are comfortable with. 

Of course, this can vary depending on the size of your portfolio, your investment strategy, investment horizon, and even your risk appetite.

For stock investors, I encourage you to invest no more than 5% of your entire portfolio capital in a single stock. This reduces the risk that a sudden drop in price in the stock will have a detrimental impact on your returns.

It is not uncommon to find stocks fall more than 30% and never recover. Sometimes it may not be the fault of the investor. Unforeseen circumstances can cause a sudden and irrecoverable disruption to a company’s previously sound business.

We can avoid potentially painful losses when we sufficiently diversify our investments.

Manage the risk

Adding to the first point, it is important to assess the risk-reward profile of a particular investment. For an investment such as a high-growth stock that has a high-risk but high-return possibility, it may be wise to size down your investment to reduce the chance that a permanent fall in the price of the stock will cause a large loss to your portfolio.

Keep cash in hand

Although not all portfolio managers may agree, I prefer to keep some cash in hand. The cash will come in handy when a bargain suddenly appears in the market.

To ensure that I have the means to take advantage of an investment opportunity, I hold 5% of my total investment capital as cash.

There are, however, exceptions to this rule. If stocks have seen a market-wide decline, presenting plenty of investment opportunities, it may be wise to be fully invested to make the most of these bargains.

Portfolio Management Simplified

Obviously there is no one-size-fits-all strategy to invest well. Investors need some investing experience to personalise their own portfolio management according to their goals and needs. However, these three strategies can act as a framework for how to manage an investment portfolio.

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.

5 Things To Look For in REITs

Here are 5 essential characteristics you want your REITs to have.

Investing in Real Estate Investment Trusts (REITs) can be hugely rewarding. Besides providing investors with exposure to a variety of real estate, REITs also enjoy tax benefits and pay out regular and stable dividends (technically REIT dividends are called distributions but let’s not split hairs here) each year.

But as with any asset class, not all REITs will perform equally. Investors need to be able to sieve the wheat from the chaff. With that said, here are five things to look out for that can help you choose the best REITs to invest in.

1. A strong existing portfolio

Investors should look for a REIT that has a good line-up of properties in its portfolio. As a guide, here are some qualities to look out for:

  • A diversified portfolio of properties, which ideally includes both Singapore and off-shore assets
  • Properties that have a long or free-hold land lease
  • Highly sought after sites that could appreciate in value over time
  • Properties that are located near to public transport or residential hubs (in the case for retail REITs)
  • Characteristics that suggests tenants are willing to continue renting the space such as a high tenant retention rate, history of positive rental reversions and a high occupancy rate

2. Capable and honest management

Managing a portfolio of properties is no easy task. Managers of the REIT need to maintain a good working relationship with tenants, upkeep the property and carry out strategic asset enhancements to keep the property desirable.

On top of that, managers also have to sell underperforming assets and recycle the proceeds into investments that can grow over time. REIT managers need to make use of low-interest rate environments to grow the portfolio, whilst maintaining a safe capital structure.

With that said, here are some qualities to look for:

  • A long track record of stable returns for unitholders
  • A track record of good capital-allocation decisions
  • A low frequency of private placement (sale of equity only to privileged investors) equity fundraising that dilutes minority unitholders

3. A safe capital structure that can be optimised further

Ideally, investors should look for REITs that still have room to grow in the future. One way that a REIT can grow is to take on more debt in the future to buy assets that can increase its dividend per unit.

In Singapore, REITs need to maintain a capital structure that has not more than 45% debt and 55% equity. Investors should look for REITs that have debt levels well below this regulatory ceiling. While there is no hard and fast rule here, I prefer REITs that have a debt-to-asset ratio of not more than 35%.

The interest expense should also be manageable. REITs will usually provide investors with a snapshot of how much interest they have to pay relative to their earnings. This is called the interest coverage ratio. The higher the interest coverage ratio the better as it suggests the REIT earns more than enough to cover interest payments.

4. A good an honest sponsor

The REIT sponsor is usually also one of its major shareholders. It is responsible for providing the REIT with a pipeline of properties and may also have a stake in the REIT managers.

With such a big say in how the REIT is run and the possibilities of conflict of interest, it is therefore absolutely vital that you trust that the sponsor will treat minority shareholders responsibly.

To determine if a REIT has a good sponsor, investors need to look at the sponsor’s track record in both sponsoring and managing REITs.

Mapletree Investments Pte Ltd in Singapore is one example of a good sponsor that has treated minority shareholders responsibly in the past.

5. A decent valuation

Last but certainly not least is a decent valuation. While some investors prescribe the use of the price-to-book ratio to determine value, I prefer the dividend yield. REITs are a buy-and-hold vehicle and usually do not rapidly recycle their assets. As such, REITs may trade below or above their book values for extended periods of time. For instance, REITs that own properties located in Hong Kong tend to trade at a discount to book value because of the relatively low rental yield of properties in Hong Kong.

On the other hand, the distribution yield gives investors a much clearer idea of how much returns they can actually expect to make.

An investment return in a REIT is the addition of the current yield plus any capital appreciation. As such, investors should look for REITs that have high yields rather than low book values.

The Final Takeaway

Of course, REITs that displays the first four characteristics listed above will likely not sport the highest yields in the market. Investors need to determine for themselves what’s a good price to pay for a REIT that exhibits these favourable characteristics. From experience, if a REIT fits all the characteristics above but trades at a slight premium to the market (ie lower distribution yields compared to the other REITs), they still tend to do much better than their peers over time.

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.

The Power of Compounding

Compounding works best the longer the investment timeframe.

Compounding is a well-publicised concept in investment. Essentially, it refers to the returns that an investor gets when he reinvests his earnings each year. 

Albert Einstein was said to have referred to compounding as the eighth wonder of the world. The power of compounding is also well illustrated by Warren Buffett’s own investment journey. Despite starting his investment journey at the ripe age of eleven, 99% of Buffett’s wealth was earned after his fiftieth birthday.

How you can compound your wealth

So how can the retail investors compound wealth over time?

Ser jing and I have formed a list of criteria that can help us find stocks that can compound meaningfully over the long term.

For instance, one of the characteristics we look out for is companies that operate in an industry that is growing. These companies tend to grow along with the industry. But that’s not all. We also want to pinpoint companies that can capitalise on the growing market, whilst increasing their market share at the same time.

Take Amazon.com for example. Well before the company reached its current size, shrewd investors could have identified Amazon as the next big thing. Jeff Bezos was a visionary entrepreneur who was focused on customer satisfaction. He realised the importance of a great customer experience, which enabled Amazon to dominate the growing e-commerce space. The signs back then were telling.

Even if you had bought in at the peak of the dot com boom, you would have made a 16% annualised return over 20 years. That’s a 2000% gain in just 20 years.

In addition, we also look for disruptors who can win market share in an already large industry or even create a whole new market on its own.

For instance, in the past customer relations management was not a big industry nor did companies truly identify it as a problem that needed solving. However, software such as salesforce has completed changed the way companies manage their customer relations. Nowadays, many companies cannot go a day without a customer relations tool. It has become an important software in some of the largest companies in the States.

Although much more prominent now, Salesforce is still small in relation to the potential addressable global market.

Time is your friend

Compounding is certainly a powerful investing concept. But, perhaps the biggest takeaway of all of this is that compounding works best the longer it is allowed to grow. Consider the example below.

If you have an investing life span of twenty years and are able to compound your wealth at 10% per year, your eventual returns will be 570% at the end of the investment cycle. Not too shabby. However, by adding just another five years to the investment time frame, you would have made a 980% return, 410% more in the extra five years. As you can see, time is indeed your friend when it comes to investing.

If you are thinking of investing but have not started yet, remember that the earlier you start, the more rewards you will reap in the future.

Hopefully, this post encourages readers to start their investment journey as soon as possible. With that, Happy compounding and invest on!

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.