Category: Boring Investor

Will SIM-Only Plans Cannibalise Regular Telco Plans?

It has been a year since I last wrote about telcos. Looking back at what I wrote, it has been gratifying to see that I was right about M1’s revenue/ profits bottoming out sometime in 2H2017 and Starhub facing challenges in its Pay TV and broadband busi…

How To Select a Housing Loan Package

After selecting our desired condominium, the next step is to choose a housing loan package. There is a variety of loan packages, such as fixed or floating interest rates. For fixed interest rate packages, you could choose whether to fix the interest rates for 1, 2 or 3 years, after which the loan reverts to floating interest rates. For floating interest rate packages, you could select whether to peg the interest rates to the Singapore Interbank Offered Rate (SIBOR), Swap Offer Rate (SOR) or fixed deposit rates. Assuming that you choose a SIBOR or SOR package, you have to further decide whether to peg to the 1-month or 3-month SIBOR/ SOR. Likewise, for fixed deposit rate packages, you can choose between 9-month, 15-month or 36-month fixed deposit rates. The choices can be fairly overwhelming.
Step 1: Fixed or Floating
The first step to decide is whether to go for a fixed or floating interest rate package. Given that US Federal Reserve (Fed) has increased interest rates 5 times since Dec 2015 and plans to increase them another 4 times this year, we decided it is prudent to choose a fixed interest rate package instead of a floating interest rate package.
Step 2: Fix for How Many Years
This is a tricky question. Thankfully, there are some hints. Besides setting the current interest rates, the US Fed governors also provide their projections of future interest rates. By plotting the interest rate projections, we can see how US interest rates are likely to move in the coming years. Fig. 1 below shows the current Fed dot plot, which indicates that the median interest rate projections will rise from 1.375% in 2017 to 2.125% in 2018, 2.6875% in 2019 before finally peaking at 3.0625% in 2020. Having said that, do note that these are just projections by individual US Fed governors. The actual interest rates may differ from the projections depending on how strong the economy is in the coming years.
Fig. 1: US Fed Dot Plot
Given the rise in interest rates over the next 3 years, it makes sense to fix the interest rates for 3 years. However, on the other hand, a 3-year fixed interest rate package is naturally more expensive than a 2-year package, since banks bear the risks of interest rates rising rapidly. Using the bank that we chose as an example, the interest rates for a 2-year and 3-year package are as follows:
2-Year 3-Year
Year 1 1.48% 1.68%
Year 2 1.48% 1.68%
Year 3 15M FD+1.43% 1.68%
Afterwards 15M FD+1.43% 15M FD+1.55%
As shown above, not only is the fixed portion of the interest rates higher, the margin for the floating portion of the interest rates is also higher (note: not all loan packages are as such). For a $650,000 loan over a 25-year tenure, we will end up paying $11,867 more in total interest if we were to select the 3-year loan package. That is equivalent to an extra interest of 1.83% on the $650,000 loan. For the 2-year loan package to be more expensive than the 3-year loan package, the 15-month Fixed Deposit (15M FD) rate, which is currently 0.25%, has to reach close to 2.0%.
We decided on the 2-year loan package. In the event interest rates continue to rise, we can choose to re-finance and fix the interest rates when the lock-in period expires. If conditions permit at that time, we might also choose to pay down some of the loan.

Step 3: Peg to Which Base Interest Rate
As discussed above, we selected a loan package that is pegged to the fixed deposit rates. Fixed deposit rates are actually board rates set by individual banks and are therefore less transparent compared to SIBOR and SOR, which are set collectively by a group of banks. The conventional wisdom is that if banks were to raise their fixed deposit rates to earn more interest on the loans, they would also have to pay more interest on the fixed deposits. Hence, banks are less likely to raise fixed deposit interest rates. However, the reality is that 98% of local banks’ deposits have maturity of less than 1 year. Raising the interest rates on fixed deposits of more than 1 year maturity will not hurt them. See Behind Fixed Deposit Home Loan Rates for more info.
On the other hand, although SIBOR and SOR are more transparent, they are more volatile compared to fixed deposit rates. The shorter the SIBOR/ SOR tenure (i.e. 1-month vs 3-month SIBOR/ SOR), the more volatile the rates are. Also, between SIBOR and SOR, SOR is affected by the USD/SGD exchange rate and therefore fluctuates more than SIBOR. See Why Singapore Interest Rates Might Rise Faster than Expected for more info.
Comparing between the transparency of SIBOR/ SOR loan packages and the stability of fixed deposit loan packages, we went for stability as they provide greater visibility on the amount we have to pay every month, which helps us in planning other expenses.
There is a large variety of housing loan packages. It can get overwhelming at times, especially since you have to decide on a loan package quickly after you sign the option to purchase the property. Choosing the right loan package can save you some money and offer greater visibility in later years.

See related blog posts:

How Much is Proximity to a MRT Station Worth?

In my last 2 blog posts, I discussed the price differential of different ages of condominiums, size of units, as well as how long is the leasehold of the condos. See Areas Where We Saved for Our House Purchase and Could We Afford a Freehold Property?&n…

Could We Afford a Freehold Property?

As mentioned in last week’s blog post, Areas Where We Saved for Our House Purchase, we were looking for a condominium somewhere in between where our parents stay. The area that we looked at has only 99-year leasehold condos. Since leasehold properties …

Areas Where We Saved for Our House Purchase

I have never been a fan of property investments, mainly because of the demographic changes that Singapore will face in the next few decades. See A Prediction About Properties 13 Years Ago for more information. Yet because I am planning to get married, …

Are There Stocks That Can Withstand A Crash Better?

Stocks tanked this week. When I was mulling over whether I should move 22% of my money into 1 stock, Global Logistic Properties (GLP), in Nov 2015, I wondered what would happen if the stock market were to crash. Are there stocks that could better survi…

Potential Replacements for GLP

After it became clear that Global Logistic Properties (GLP) would be privatised, I have been looking for a replacement. The investment thesis for GLP is that it has a REIT manager business model, constantly developing new logistic properties and spinni…

Bye Bye, GLP!

Global Logistic Properties (GLP) was delisted last Mon after being successfully privatised. It is a growth stock, and I had hoped to hold on to it for 15 years or more, but alas, some deep pocket investors recognised its potential as well and privatise…

As A Contrarian, You Will Always Walk Alone

A lot of investors have posted good results for last year. However, if you were like me and had been worrying that the stock market could crash in 2017, a year that ends with 7, you would have missed out on a stock market rally in which the STI rose by 18% in 2017. When everybody else is posting good results online, it does feel depressing occasionally.
I was not totally out of the market last year. Having participated in the stock market for 32 years, I will never be totally out of the market, even though I respect the folklore that the market would experience a crash whenever the year ends with 7. I took a defensive stance, ensuring that I had around 45% to 50% cash to deploy in the event that a crash were to materialise. As I sold stocks that were rising, I continued to invest in stocks that were forgotten by the market. Below are some of the stocks that I bought, did not buy, and sold last year, including the reasons.
Stocks that I Sold
Electronics stocks, especially semiconductors, were the rage last year. Nevertheless, I sold them. Needless to say, they went much higher after I sold them. For the semiconductor stocks, Sunright, sold at $0.305, is now $0.895; ASTI, sold at $0.056, is now $0.084; and UMS, sold at $0.78 on average, is now $1.07. For the electronics stocks, Frencken, sold at $0.515, is now $0.59; and Valuetronics, sold at $0.795, is now $0.93. All these were sold to shore up defence for the crash, if any. On hindsight, they were sold too early, as I did not expect the electronics recovery to be so strong. To-date, I still have not figured out what is behind the strong electronics demand, which will determine whether the strong demand can continue or will fizzle out soon. 
There were also some buying and selling of Oil & Gas (O&G) stocks. A notable sale was Keppel Corp at $6.16, as I was concerned that new orders were not coming in fast enough to replace old orders. Furthermore, existing customers are not collecting their vessels (and paying for the delivery) even though the vessels have been completed. See What Keppel Offshore & Marine’s Order Book Can Tell Us for more information.
Stocks that I Did Not Buy
Other than electronics stocks, banks and properties also rose by a lot last year. I had an opportunity to buy OCBC at $8.56 in late 2016, shortly after the US presidential elections. However, I gave it a miss, as I was concerned that O&G losses were still mounting. Although rising interest rates would increase banks’ profits, there are also risks that their customers could not cope with the increasing interest expenses given the lacklustre business environment. In the longer term, there are also concerns whether fintech would chip away the traditional profits that banks make as financial intermediaries. In short, I had not figured out the banks.
The only major property stock that I had was Global Logistic Properties (GLP). To be honest, GLP made a lot of money for me last year. But with the privatisation of GLP, I had to find a replacement. Potential replacements were Capitaland and Frasers Centrepoint (FCL). Learning the lessons from GLP, I decided that Capitaland at $3.50 was not cheap enough. As for FCL, I was concerned that it had too much debts. I watched it rose from $1.66 before finally buying at $1.92. Still the lingering concern did not go away and I sold it at $2.07.
Stocks that I Bought
If you had read Howard Marks’ famous memo “Yet Again?“, he mentioned 6 options that investors could take in the current low-return investing environment. These options are reproduced below for easy reference (please read his original memo for a complete understanding of the 6 options):

  1. Invest as you always have and expect your historic returns.
  2. Invest as you always have and settle for today’s low returns.
  3. Reduce risk to prepare for a correction and accept still-lower returns.
  4. Go to cash at a near-zero return and wait for a better environment.
  5. Increase risk in pursuit of higher returns.
  6. Put more into special niches and special investment managers.
His preferred options? A combination of no. 2, 3 and 6.
The equivalent of option 6 for me is distressed assets and stocks unloved and forgotten by the market. There were 2 distressed asset plays last year. The first was Triyards, which I tried to take advantage of Ezra’s troubles and potential sale of a controlling stake in Triyards. Unfortunately, this did not pan out and I lost $33K as a result. See Know Your Customers Well! for more information. The second was First Ship Lease Trust (FSL). Unexpectedly, FSL did not manage to refinance its debts and had to seek a moratorium on debt repayment. Nevertheless, it has been selling ships to pay down the debts. If it can successfully liquidate all its ships (or until the debts are fully paid off), there is residual value for shareholders. See Valuation of First Ship Lease Trust for an estimate of the liquidation value of FSL carried out in May last year.
There is actually quite a no. of unloved industries and stocks. The first is telcos, with concerns over whether the entry of the fourth telco would increase competition and erode away the handsome profits and dividends that telcos used to earn. However, my view is that the fourth telco is fairly irrelevant. Already, the existing telcos are competing fiercely against each other through SIM-only plans, data upsize plans and Mobile Virtual Network Operators, etc. See Do Telco Investors Need to Fear the Fourth Telco? I bought into Singtel and M1. 
The second unloved industry is O&G. Here, it is a little tricky, because some parts of the industry value chain are recovering while other parts are still declining. The recovering part is the upstream Exploration & Production sector with the rise in oil price, while the declining part is the ship/rig building sector, as discussed in Is A Recovery for Oil & Gas Shipbuilders Near? The ones in the middle, the Offshore Support Vessel (OSV) sector, is probably entering a trough as new vessels enter the market and increase the supply glut. I decided it was about time to enter the OSV sector, buying CH Offshore, Ezion warrant (it got suspended the day I bought it), Mermaid and POSH.
The third unloved and forgotten industry is the shipping industry. After the bankruptcy of Hanjin Shipping in late 2016, conditions have actually improved a little, with the Baltic Dry Index and World Container Index slightly higher in 2017 than in 2016. I bought Samudera, Singapore Shipping and Uni-Asia.
Another unloved and forgotten industry is hotels. Investors love hotel business trusts that pay distributions regularly, but not hotel companies like GL and Stamford Land. After being alerted to their undervaluation by Mandarin Oriental’s spectacular rise and City Developments’ privatisation of Millennium & Copthorne, my analysis shows that there is hidden value in hotels. I bought GL and Stamford Land. See Some Hotels Could Be Very Valuable! for more information.
Needless to say, these stocks that I bought have not risen much compared to the electronics, bank and property stocks.
As contrarian investors, it is sometimes difficult not to be depressed when the market moves in the opposite direction. However, we are the ones responsible for our own money. We carry out analysis independent of the market and invest according to our beliefs. To all fellow contrarians out there, I will leave you with Benjamin Graham’s advice to Warren Buffett:

“You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right — and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”

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No, the Stock Market Did Not Crash in 2017

A year ago, I blogged about the trend that the stock market usually experiences a crash whenever the year ends with 7 (see Another Year That Ends with 7). As it turns out, not only did the stock market not crash, it rose significantly. The STI rose fro…