Thursday, April 30

Investing in the S&P 500

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Besides buying into a local ETF that tracks the Straits Times Index, one can also consider buying into major US indices such as the S&P 500. However, there are a few ways in buying into an index fund that tracks the S&P 500 so which way would be the best approach ?

The first way would be to buy the associated ETFs that tracks the S&P 500 directly such as the SPDR S&P 500 ETF or the iShares S&P 500 Index ETF directly on the American Stock Exchange or in short, AMEX. That will mean that you will have to open an account that allows you to trade stocks listed in the US with a local or foreign brokerage. There are a number of drawbacks to this approach. Firstly, if you open an account with a local brokerage, the brokerage fee is quite high at a typical commision rate of 0.4% or a minimum of around 20 USD. To add on, there is also a custodian fee which means that you will have to pay a small fee monthly to hold on to your US stocks. Secondly, there is currency risk since you are paying for the US stocks in USD. That means you will have to convert your SGD to USD and you may incur a loss when you buy and sell your US stocks depending on the prevailing exchange rate. Furthermore, you will also have to incur charges for exchanging your SGD to USD.

The second way would be to buy a unit trust that is available in Singapore that tracks the S&P 500. One such unit trust is the Infinity US 500 fund. However, there are drawbacks associated with this approach too. The main drawbacks are that the sales charge is rather high at 1% and the expense ratio is also rather hight at 1.17%. However, you will not be exposed to currency risk since this unit trust is quoted in SGD. The details of the Infinity US 500 fund can be seen below.



So which way will be the best approach to invest in the S&P 500 ? Fortunately, someone has carried out a study on this issue. Assistant Professor Roger Loh from SMU has written a paper regarding this and you can check out the paper he wrote, which can be retrieved from his webpage here. The conclusion of his paper was that it may be better to invest in the ETFs listed in the US directly rather than buying the unit trust that tracks the S&P 500 due to the high expenses associated with the latter.
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Tuesday, April 28

Swine Flu: Resemblance of the past

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The current swine flu crisis, which seem to be growing rather swiftly, seems to bear some resemblance to the SARS period back then in 2002. Whether this swine flu will develop into a epidemic is of anyone's guess, but it will be good to take a look back then at the stock market during the SARS period.



Back then, STI was recovering from the dot com crash or the technology slump as it was inching steadily upwards from the bottom made in October 2001. All it seems well until SARS came into the picture. From then on, STI began to tank all the way to the bottom made in October 2001 before rebounding it off again.



Although, I can't say that STI is recovering from the bottom made in March this year, it is some way off the bottom already. I'm pretty sure nobody heard of the swine flu until a few days ago only and suddenly, the swine flu seems to be dominating the headlines everywhere. This is a new event which can prolong the current bear market even if it seems that the market and economy is recovering.

No one knows whether STI will revisit the previous lows or even break them. The most important thing is to plan on what to do if and when the market reaches these levels. And what I'm suggesting is that if this comes true, the market may be offering another chance for you to pick up quality counters at a less dearer price once again. Do get ready to brush aside any pessimism and base your decisions on fundamentals and logical reasoning.

Sunday, April 26

Case study of Capitaland Rights Issue

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Capitaland conducted a rights exercise not long ago to raise capital so I thought it will be good to use it as a case study using pictures to illustrate the process. I realize that rights issue can be very confusing thus I hope this post will help.

The important dates for a rights issue are given in a schedule and this can be found in the Offer Information Statement or the OIS.



Once a rights issue is declared, the counter will go on 'cum-rights' and there will be a 'CR' beside the name of the counter.



Subsequently, the counter will go on 'ex-rights' and there will be a 'XR' beside the name of the counter. If you wish to receive the rights, you will have to buy the counter before it goes on 'XR'.




Next, the rights will be traded on the market after it is issued to the shareholders who bought before 'XR'. This can be seen in the 'Capitaland R' and 'Capitaland R 500' counters.



After this, the trading of the rights will be stopped. When the payment of rights is done, the rights will be converted to rights shares and that will be the end of a rights issue exercise.



In this case, Capitaland has a rights issue at a ratio of 2:1. This would mean that shareholders who are holding an odd number of lots for example, 1 lot will receive 500 shares if they subscribe to the rights issue. To facilitate the trading of these 500 shares, a counter labelled 'Capitaland 500' with a lot size of 500 shares will be listed temporarily on SGX.
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Thursday, April 23

Upgrading from HDB to private property

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If you look at the HDB Resale Flats Price Index, the index is still hovering near its previous peak and the price has been stable for the last 3 quarters. However, the index has been falling for the past few quarters for the Private Residential Property Price index. This would mean that homeowners of HDB flats can take advantage of this difference by upgrading to a private property without making significant loss in the sale of their HDB flats. Furthermore, their purchase of a private property will be at a discount from the peak of the index. However, this is inferred from the indices only.
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Sunday, April 19

Gambler's Fallacy

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Gambler's fallacy is a behavioral trait which we should be aware of. This is because this can affect our performance when it comes to investing. As defined by Investopedia, gambler's fallacy is when an individual erroneously believes that the onset of a certain random event is less likely or rather, more likely to happen following an event or a series of events.

Personally, I had a brush with this fallacy a few months ago and that cost me quite dearly in my point of entries for some of the stocks that I had bought. Back in October last year, I was waiting by the sidelines to pick up some counters at a bargain. In the days before the STI found its interim bottom on the 28th of October last year at the low of 1473, the closing of STI was mainly negative, In fact, 7 out of the last 9 trading days before that interim market low were negative. The last day before that interim bottom was the worst as STI tanked by a percentage of around 7.1%. During this entire period, I was rather pleased that the market was plunging as it made the purchase of stocks cheaper but somehow at the same time, there was some fear creeping at the back of my mind due to the relentless plunging of the markets.

On the 28th of October, STI opened with a huge gap down at around 1496 and touched a low of 1473. Without any reason, STI went on to rally to close at a level of 1666 and that was a huge percentage gain of 13.1% on a significant trading volume. From the point of technical analysis, I knew that the probablity that the market has bottomed is pretty high thus I decided to make my purchase of stocks the next day.

When the market opened the next day, I did not purchase the stocks which I had in mind. Why ? This was because I had let fear overwhelmed me irrationally. Somehow, I felt since the market has been plunging most of the time before the huge rally on the 28th of October, it would continue to plunge more and that was completely illogical. After all, the plunging of the STI for the past few days does not implies that the STI will continue to plunge indefinitely. If my reasoning was logical, STI will hit ground zero within two weeks but that would be impossible.

In the end, I made my purchase of stocks a few days after the interim bottom was formed but by then, STI is already somewhere off the bottom already. 

To overcome this, it would be important to separate your logical reasoning from any reasoning that is influenced by emotions or any irrational form of reasoning. Once this is done, a plan will have to be made based on this logical reasoning only after which, this plan will then be resolved or be carried out.

On hindsight, I should have took some time off to think about it back then. After separating the fear that was clouding my logical reasoning, I would make a plan that will be carried out the following day. For example, this plan would have been something like "Buy 10 lots of stock X and 50 lots of stock Y at 10am the next day". When the next day arrived, I would just follow through to execute this plan regardless of my emotions. 

I do think that this fallacy is one of the main reasons why the majority of investors tend to buy high and sell low instead of buying low and selling high and I will be discussing on this in a subsequent post.
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