Letting Programs and Formulas Manage Your Investment Portfolio

Imagine a computer that can tell you which company's share to buy and when to buy them, and at the end of a 5 year period, you can most certainly outperform a benchmark Index such as the S&P500 by a margin of 2 - 3 %, which is a significant difference over 17 years.

This is a new concept and investment idea that I have gotten interested in, after listening to the advice of a successful fund manager who was kind enough to guide me. This kind soul is none other than Mr William Cai, one of the speakers from the ETF forum that I attended in April this year.

2 of the books that he recommended, which I will in turn recommend to you are called <The Little Book That Beats The Market> by Joe Greenblatt and <Quantitative Value> by Wesley R. Grey PhD and Tobias E. Carlisle.



To summarise the contents of the books, it is basically the proof that by following a set of relatively simple formula strictly, one can consistently generate high returns of more than 15% per annum over a minimum investment period of 3 to 5 years. The books went to great lengths to validate their methodology and conducted extensive back-testing using high quality data of up to 17 years and are free of various biases such as survivor-ship bias and look-ahead bias.

Survivor-ship bias is the use of data that excludes companies that are no longer around today. This bias dilutes the test results by not looking at companies that are doomed to fail, information that is not available in real life application. Look-ahead bias is the use of point-in-time data that are usually not available at the stated period as it takes a few months before annual reports are audited and released. Such data are "in the future" and not possible for real life execution.

The concept is to first eliminate all poor quality stocks from the universe of stocks that I am looking at. Poor quality refers to the possibility of going bankrupt as well as the tell tale signs that the company is faking its financial results. Next, I will rank all stocks separately against 2 measurements: Quality and Price. Based on the 2 measurements, I will re-rank them according to their aggregate score to find the top 1% of stocks that are relatively the cheapest and of highest quality.

Being all pumped up, I am ready to put this concept to the test. With my knowledge of using advanced Excel formula and newly acquired Excel skills such as web scrapping and integrating Excel with Access database, I am very well aware of what I need to do to conduct my own tests. But I am faced with 1 major road block, and that is the source of data for my testing.

Garbage in, garbage out. So to avoid having useless results that could fatally mislead my test, securing reliable data is extremely important. However, as you might expect, quality stuff do not come free. One of the data source that the books recommended, Compustat's point-in-time data, is the database that I would really like to get my hands on. But I have no idea how to obtain it. If you happen to have access to this database, kindly let me know and allow me to use the data. I would be in your debts.

Regardless, I have managed to find a source of 10 year financial statement data which I am able to scrap for free. I shall use this source to build my financial model and run some preliminary tests on the concepts described in the books. Once the system is built, it would only take the plugging in of quality data for me to achieve the end result I want.

So here's my plan:

After building the system and running as much tests as I possibly could, if the results are as the books describes, I intend to raise funds of SGD100K to try out the investment strategy. The portfolio shall consist of up to 10 stocks with equal weightage. I will strictly follow the instructions churned out by my system for 5 years, with the portfolio being re-balanced every 12 months.

One of the biggest obstacle that an average person faced when trying to accumulate wealth is the very regulations that is put in place to protect them. Many investment funds can only serve accredited investors, people who are either earning SGD300K a year or have assets worth SGD2mil. This makes the rich richer while the poor have to struggle to find good returns on their money.

Hence, with the up and coming trend of crowdfunding platform and the roundabout regulations on securing funding from others, I believe that an average person should be allowed to invest in such high return projects.

While there are definitely some risks involved in this investment, the margin of safety is relatively wider as compared to picking stocks individually. Nonetheless, to assess if you should even consider investing, here's a basic checklist that I have created.

For a minimum investment of SGD10,000:
1) Are you taking home less than SGD3K a month?
2) Are you saving less than SGD500 a month?
3) Does SGD10K make up more than 50% of your total cash and cash equivalent assets?
4) Is the total debt that you currently owe (mortgage, car loan, school loan etc) more than your 4 year income?
5) Is the monthly repayment on your debt more than 50% of your take home salary?

If your answer to any of the above 5 question is "Yes", I am sorry to say that you should not consider investing in such strategy and should opt for safer options such as the new Singapore Saving Bond that is stipulated to launch in mid June 2015.

As a disclaimer, I am not authorised to managed funds as I do not have the proper license. But if you trust me and would like to find out more about this strategy, feel free to get in touch with me at my email ohhanwee@gmail.com

Thank you for reading. If you have any comments or feed backs, please post them in the comment section below.

Disclaimer

This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.

My Portfolio Performance

Recently, I came across a web service known as Dr. Wealth which allows me to track my personal finances. I got curious with what it could do and went ahead to create an account. This web service provides an amazingly wide array of financial tracking tools for Investments, Financial Health, Networth, Budgeting, Insurance, and Goals. It also has many useful articles and helps me to increase my financial knowledge.

After inputting all the relevant fields as accurately as I could, its really amazing dashboard was able to shows me my investment composition, networth, etc. It even offers me my financial assessment and highlight areas that require improvement.

What really got me interested was the Investment tracking tool that allows me to track my portfolio performance against a benchmark of my choice. As my portfolio consists mainly of SGX stocks, I tracked it against the Singapore's Straits Times Index and below was my result.

My portfolio's trailing 12 month performance was at 18.2% (including dividends and capital gains from stocks sold), compared to 7.22% of the benchmark performance. I was pleasantly surprised at my portfolio's performance and could not believe the accuracy at first. I declare that I did not temper with any stock composition to get such results. All I did was to enter the exact date, price and quantity of stocks that I have bought or sold.

It is often ill-advised to announce your portfolio investments as it makes you vulnerable to sabotage or places your credibility at stake. However, my current portfolio is considerably small in size and I have created this blog with the intention to help others find confidence to invest, so I shall take the risk and share my portfolio composition. Do take note that those stocks with 0 shares held are my unloaded stocks and all of them were unloaded at a net profit after factoring dividend gains.

Most of my holdings have been paying dividends, so the gains are not really visible in the diagram above. I would like to add that if you had followed my journey of stock investment, you would know that I had recently modified my stock selection criteria based on more solid financial knowledge. I regret to say that none of my previously selected stocks were up-to-par according to my current criteria of very good quality companies.

Only TTJ and Sarine, which are my latest additions were what I would consider as great companies. Nonetheless, my previous selections did not prove to be too disappointing as the companies are all still currently profitable and paying dividend well.

In conclusion, I would like to recommend my readers to invest time in creating a profile on Dr. Wealth. Fill in your information as honest as you can and see how you are performing financially and where are the areas you should improve on. I would also like to emphasize to my readers that value investing works and all you need to have is patience, courage, and the right knowledge to pick winning stocks.

Thank you for reading, please help to share this post if you think it will benefit people you care about.

The Story of Active Income VS Passive Income

Once upon a time, on an island far far away, there was a little kampung. In this kampung, there lived 2 young men who were best of friends since young. One of them is called Ah Strong, and the other is called Ah Smart.

Ah Strong and Ah Smart are turning 18 this year, so by traditions of the kampung, they have to enlist for their kampung service for 2 years like every other young men. So on the day of their enlistment, Ah Strong and Ah Smart packed their bags, bade their farewell to their family and reported to the kampung chief's house where they will receive their service orders.

As the kampung is far inland, the main source of water is from a well that has served the people of the kampung for generations. However, the well is showing signs of drying up and the kampung shaman forecasted that the well will be dried up this year.

To prevent the kampung from suffering from a drought, the village chief ordered Ah Strong and Ah Smart to carry water from the river 2.4 km away and pour it into the well every day for the next 2 years as part of their kampung service.

The kindhearted kampung chief told them that they would not be working for free, and offered them $5 for every 10 liters of water that they pour into the well. Feeling excited that they can finally serve the kampung, Ah Strong and Ah Smart changed into their service attire and each took 2 buckets of 5 liters from the chief's shed.

To save time so that they can carry more water, they decided to run to the river since they were not carrying much weight. But little did they know that a 2.4 km run can be very tiring, especially for someone who has not ran that distance in their life before.

Their first trip took them 15 minutes and they were thoroughly exhausted. After a 10 minutes break, they scooped up the 10 liters of water each and marched their way back to the kampung which took them 30 minutes. After another 10 minutes break, they took off towards the river again.

This continued the whole day with only a 1 hour lunch break at noon. At the end of the day, both Ah Strong and Ah Smart each made $30 for carrying 60 liters of water for the kampung.

To celebrate their first day of enlistment, Ah Strong and Ah Smart went to the enlistee mess where they ordered alcohol and drank to their hearts content. Being very generous at heart, Ah Strong offered free drinks to whoever could win him in arm wrestling. When it was time to settle the bill, Ah Strong realised that he had to pay $45 for the drinks as he lost quite a few round of arm wrestling. With only $30 in his pockets, Ah Strong had to borrow from Ah Smart who only spent $5 for his own drinks.

Sooo... to keep the long story short, the kampung service of Ah Strong and Ah Smart continued uneventfully, with occasional alcohol drinking and splurging by Ah Strong. But because they are best friends, Ah Strong always repays his debts and both of them are happy.

6 months later...

Both Ah Strong and Ah Smart can now complete a 2.4km run below 9 minutes 45 seconds without tiring and they needed much lesser breaks in between. Amazingly, they can even jog back to the the kampung with their 10 liters of water on their backs. But as Ah Strong was the stronger of the 2, he could complete 2 more trips than Ah Smart every day. Ah Strong is now earning $60 a day while Ah Smart earns $50.

With the increased income, Ah Strong began to pick up other habits under the influence of his "friends" at the enlistee mess. Ah Smart tried to persuade him but was often rebutted for being too rigid and boring. So the 2 of them started drifting apart.

With more time alone, Ah Smart started to think about his future plans when he completes his kampung service. He considered signing on to this routine of water carrying as it is very meaningful and helped the people of the kampung. However, something snapped at his mind when he was toying with the idea of carrying water for the rest of his life.

"How long can I be carrying water for?"

"What happens when I can no longer carry any more water?"

At these thoughts, Ah Smart began to ponder...



"Is there a better way to serve the kampung people?"

He had an idea...


Being very excited about his idea, Ah Smart drafted a proposal that he intend to submit to the kampung chief the next day. He told Ah Strong excitedly when the big guy came back from the mess. But being already drunk, Ah Strong waved him Ah Smart off and called him naive.

So Ah Smart brought the proposal to the kampung chief the next morning and was well received with praise.

"I shall grant you half a day each day for you to undertake this project, I will also provide you with the materials you need, but you would have to bear the pay cut because of the lesser water you carry, any problems with that?" said the chief.

"No Problem Sir!!" answered Ah Smart enthusiastically.

For the next 6 months, Ah Smart carried water from the river to the well in the morning and spent the afternoon digging trenches. On a few occasions, Ah Strong came to advise Ah Smart to stop his folly and focus on increasing the number of trips a day like what he is currently capable of.

"With a little bit more training, I'm sure you can carry 200 liters of water a day like me! C'mon, abandon this madness at once." said Ah Strong.

"This is a worthy sacrifice for a better future my friend, you should join me. Together, we can accomplish this a lot faster and enjoy the fruits of our labour sooner. It's called delayed gratification!" replied Ah Smart.

"You're MAD! I can't be wasting time on you now. Good luck and cya around" exclaimed Ah Strong before strutting off.

And so, Ah Smart continued to work on his project while Ah Strong continued to carry more and more water. Soon, it is time for them to be discharged from their kampung service.

Having spent most of his days carrying water, Ah Strong decided that he would not mind doing this for a living and told the chief that he is willing to sign on as a water carrier. The chief was elated and decided to offer Ah Strong a pay increment. Now, for every 10 liter of water fetched, Ah Strong will be paid $7.50.

As for Ah Smart, his project was officially completed and it was time for the opening ceremony.

He gathered everyone in front of the chief's house and unveiled a complicated looking machine. It has many large valves that are constantly pumping and many pipes circulating round the machine. The oddest part is that its has something which looks like an elephant nose protruding out in front. The machine is connected to a giant pipe that leads in the direction of the river.

"Dear fellow kampung mates, today you are gathered here because I have something to offer every one of you. The machine that you see here, is what I call The Automatic Pumping machine, in short, it's called a TAP!" announced Ah Smart.

"When you turn this knob you see on the TAP here, water flows out like magic!" continued Ah Smart while gesturing at the nose-like feature.

"No more lowering your pail into the well to scoop water, and no more worry that the well will run dry. And most important of all, I am offering twice the amount of water at half the price that all of you are paying right now!"

There was a murmur, which turn into an excited uproar. Everyone swarmed forward to take a closer look at the machine, curious to find out if it is really as magical as they have just heard. All except Ah Strong, who sneered and went away, to continue with his job of carrying water.

Many years later...

Everyone from the village started to use Ah Smart's TAP for water. All Ah Smart had to do was to maintain his machine to ensure that it keeps pumping water from the river. With no additional effort, Ah Smart is enjoying the fruits of his labor from years before. With much time to spare without having to worry about an income, Ah Smart built many more innovative inventions for the kampung and improved everyone's lives. Ah Smart became the richest man in the kampung and was well respected by everyone.

Ah Strong on the other hand, started feeling the toll on his body for carrying water everyday. His income stops when he did not work, so he would often force himself to work even when he is sick. He envied Ah Smart for having it easy and hated himself for not listening to Ah Smart many years ago. Nobody would pay for his expensive water anymore and he had to find other employment. But because brute strength was all he cared to develop, he could only be doing manual labour work. Life was miserable for Ah Strong seeing his friend doing so well.

Although both men started their own family and lived till ripe old age, one had a fruitful and enjoyable life while the other had to constantly labour and worry about the next meal. One was respect by many people for his contributions while the other was just another ordinary man not worthy of remembrance.

Time is a commodity that we all have in common quantity, but how we choose to spend it will determine the value of our lives. The most important thing about having a passive income is not only to become rich, but to have the time to do what ever you want without having to worry about your livelihood. Only when you have freedom to do what you want, will you be able to say that you have truly lived.

We all have a choice to make, what's your choice today?

Insights Gained on ETFs

On 25th April 2015, I attended an Exchange-Traded Fund (ETF) Forum organized by The Edge Magazine and sponsored by Saxo Capital Markets. The forum was free for all readers of The Edge Magazine and this is the second of such event that I have attended
since becoming a subscriber to the magazine.

I first noticed ETF when one of my army friends was asking me for advise about a reasonable cut for his work colleague who invested on his behalf and was making some handsome profits. Being skeptical as we all should when facing unfamiliar territory, I advised him to be cautious with his money as it is him who is bearing all the financial risk while his colleague merely bear reputation risks. Nonetheless, my first impression of ETF was that it is a derivative and that according to Warren Buffett's opinion of derivatives, they are the "nuclear bombs" of the investment world.

But I later realized that I was very much mistaken about the nature of ETFs. According to Investopedia: "An ETF is a type of fund which owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares". Since the assets are actually owned by the ETF, it should not be classified as a derivative. However, there are actually ETFs which owns derivatives so those ETFs should be another class on its own.

When I attended an Applied Value Investing Workshop conducted by Mr Peter Lai Hock Meng and Mr Puah Soon Lim, (Read more about my blog on this workshop here) Mr Puah mentioned that there are actually 2 ETFs that is on the market which utilizes fundamental value investment strategies for its composition.

The approaches of these 2 ETFs mentioned are labelled "Brave" and "Patient".

The "Brave" approach involves the purchase of 200 stocks that are relatively cheap compared to their own sector, and uses a weighted combination of 5 value measures such as Price to Earnings, Forward price to earnings, Price to Book, Free Cash Flow to Price, and Earnings before Interest and Tax, depreciation and amortization to enterprise value.

The "Patient" approach on the other hand, involves buying stocks with strong balance sheets and consistent dividend yields.

The results of these 2 ETFs combined was a 13.4% return per annum as compared to 8.4% of an equal weighted market index.

Warren Buffett endorsed the concept of investing in the S&P 500 index, emphasizing that it has a much better chance of out performing a investment fund that is managed by someone. And by investing in a ETF that tracks the S&P 500 index, you would expect the same gain as the index itself.

Back to the forum that I mentioned at the beginning.

There were 4 speakers in the 3 hour forum. There was also a half an hour tea break which served a sumptuous buffet of sandwich and pastries. 3 of the speakers are relatively young and only 1 seems to be local.

The first speaker was Adam James Reynolds, Chief Executive Officer of Asia Pacific Saxo Capital Markets. He seem very experienced and spoke on the macro view towards the economic outlook. As I was conditioned to pay no heed to predictions or forecasts by anybody, I was not really paying much attention to him and he was probably speaking from a very high level perspective that is not really applicable to normal people like myself.

The second speaker was David Kilmer, Director of iShares, Asia ex-Japan. This guy looks pretty young and has a Hong Kong accent. He mentioned some ETFs, namely Lyxor ETF India, iShares MSCI India Index ETF (INDIA:SP) iShares Barclays USD Asia High Yield Bond Index ETF(AHYG:SP) and iShares J.P. Morgan USD Asia Credit Bond Index ETF (AJAC:SP), which really speaks about the strategy that he is adopting. High risk, high return.

The third speaker was Sunny Leung, ETF Business Developement Manager of Asia ex-Japan State Street Global Advisors Singapore Ltd. Another relatively young man who has what I think is a Malaysian accent. Nonetheless, his presentations were livelier where he referenced a research proving that monkeys are better stock pickers than humans. His ETF recommendations were SPDR of STI, DJA, S&P and Gold.

The last speaker was William Cai, Vice President of Personal Financial Services, GYC Financial Advisory Pte Ltd. He is my favourite speaker of the day mainly because out of all the speakers, this man utilized all the proper techniques of engaging the audience. His slides were more pictorial rather than wordy and his gist messages are packed into punch lines and delivered effectively. My main take away from this speaker was that simple technical analysis tools such as moving averages may be used in conjunction with fundamental analysis to identify entry and exit points for good quality ETFs.

Although technical analysis still sound like hocus pocus to me, I believe that it would not hurt for me to really try and understand the art behind its large following and perhaps glean some insight that might be adopted for my investment strategy.

An observation that was brought up by one old gentlemen who was sharing a table with us during our tea break was that the people who attended the forum are mostly elderly and my girlfriend and I were the younger ones around.

All in all, it was a fruitful 3 hours spent together with my girlfriend. Though I was expecting the crowd to be of more elderly than the young, it is still my desire to meet more like-minded young adults like myself at such forums where we can learn from the experts in the industry. We may not necessary agree with their approach, but we sure will gain more insights and perspective towards our personal financial management.



Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.