My Weekly Goal for 2017

As we welcome the year of 2017 and say good bye to 2016, it is important to do some reflections while planning for the future at the same time.

As we continue to sharpen our skill plus knowledge in dividend and REITs investment, we might want to have a personal growth plan for 2017. As Jack Welch said, You Gotta Have Growth!

For 2017, my personal growth plan to enhance practical know how on equity investment include the following weekly goals:

1) Read The Edge Malaysia to sharpen knowledge on economics and corporate development of listed companies and REITs in Malaysia.

2) Read The Edge Singapore to understand corporate development of listed companies and REITs in Singapore.

3) Read Busy Weekly, Malaysia's first Chinese economic and investment weekly to enhance knowledge on Malaysian corporates and sharpen linguistic skill.

4) Read at least one book a week in the areas of equity, REITs and economics. Many great books such as the one written by Greg IP on economics and investing in REITs by the late Ralph Block are worth to re-read.

5) Learn one listed companies or REIT in Malaysia or Singapore on a weekly basis.

I would also consider to attend or sign up for any good online course to widen knowledge towards Singapore REITs or dividend stocks.

Most importantly, I would also love to speak more like-minded investor in 2017 to learn from their experiences and wisdoms.

That said, the weekly goals will amount to nothing in the absence of focus and action. While we build our knowledge domain, it will be great if we can harness the know how to generate more positive returns to enhance our networth too.

Lastly, wishing everyone a year of growth in 2017!

Is REIT a Risk-Free Investment?

Is REIT a Risk-Free Investment?

The answer is NO.

REIT might be a lower risk investment relative to other investment options. But it does carry certain layer of risk factors. Let's talk about price risk which refers to the fluctuation in REIT's market prices.

Imagine if you have bought into IGB REIT in May 2013 at around RM1.45, the price nose-dived into RM1.15 level in early 2014, translating into capital loss of 20%, investors who thought REIT is a risk-free investment, will be in for a rude awakening during that period of time!

Source: Bursa Malaysia

The decline in prices between May 2013 to early 2014 shows that REIT is not immune to external noises. What happen back then was due to US Central Bank’s announcement to gradually remove the money printing policy. Recalled that US has embarked on “money printing” measure after Subprime Crisis in order to spur US economic growth. The money printing measure has eventually "ended".

One of the Possible Factors that Cause the Plunge in REIT's Prices

Investors were worried that when US Central Bank remove the money printing measures gradually, it may signal that US is confident of its economic recovery, hence capital may flow out from Emerging Market (EM) to US as stronger economy would lead to stronger USD and higher interest rate which would make it attractive for foreign investors to move its capital from EM to US. Hence, it may cause domestic REITs to be less attractive unless the prices decline to a level that market deem attractive again.

Hence, fluctuation in REIT's prices is something that investor should anticipate.

The purpose of this sharing is to articulate that as long as the underlying properties that form the REIT continue to do well i.e. rising rental income and distributable profit. The market price of the REIT would eventually reflect the earning power of the REIT. 

Yes, it is not a risk-free investment, but investor who invests into good REIT at good price would have improved the chances of winning.

Despite the plunge in IGB REIT’s prices as discussed above, Mid Valley and Gardens Mall continue to perform well and distribute rising amount of dividends. People still went to the malls and SHOP!

The End Result?

Rising profitability will increase the value of the REIT and eventually, translate into higher market price in the long run.

Not forgetting, IGB REIT’s prices scaled new high in 2H 2016.

Note: The REIT mentioned above is for illustration purposes only.

Learning from Dividend Quotes

“A stock dividend is something tangible- it is not an earnings projections; it is something solid, in hand. A stock dividend is a true return on investment. Everything else is hope and speculation".

–Richard Russell

 “The very attention we place on rising dividends puts us squarely in the position of ‘owners’ of a company, of true investors who understand that a satisfying and reasonable return from a stock investment isn’t a gift of the market or luck or the consequence of listening to some market maven, but it is the logical and inevitable result of investing in a company that is actually doing well enough, in the real world, to both pay dividends and to increase them on a regular basis”.

– Lowell Miller

“The good thing about the dividend-paying stocks is, first of all you have stocks, which are real assets if we have some inflation. I think we’re going to have 2%, 3% maybe 4%. That’s a sweet spot for stocks. Corporations do well with that. It gives them pricing power. Their assets move up with prices. I’m not fearful of that inflation.

– Jeremy Siegel

 “At the end of the day, look for dividends that are safe, sustainable and steadily growing, these dividend-paying stocks would carry our networth to a greater height”


– Dividend Growth

The Little Prince and Equity Investment

When I read The Little Prince by Antoine De Saint-Exupery, it taught me a lot of important life lessons. I believe we will learn something new when we read The Little Prince at different life stage.

Little prince was first published in 1943 and the fourth most translated book in the world! The book also make several observations about human and life which I found interesting!

One of the Key Lessons that We Could Learn from the Story?

During the Little Prince's adventure to explore planets around him, he came across a geographer who refuses to explore his own world because he is too busy in conducting geographical research. The Little Prince asked him whether there are mountains or oceans on his planet, the geographer has no idea. 

Geographer told the Little Prince that he is a geographer, but not an explorer. He will only talk to explorers and record what they say!

Sometimes, we might fall into the trap of doing analysis on places, but without exploring the places. Sometimes, we might invest into companies' equities based on financial report analysis without exploring the company's product or services.

This part of the story taught me an important lesson.

While financial analysis or number crunching is important to aid our equity investment decision. The following is very important too so that we could explore and understand the company further.

1) Dutch Lady - be the consumer and explore products of Dutch Lady to gauge if the products are up to par or even better than competitors.

2) Lonpac Insurance- be the policyholder of Lonpac Insurance and gauge the quality of its customer services or claim process etc.

3) Old Town- breakfast or lunch or just try out Old Town's food and beverages and gauge if you think their businesses will prosper in the long run.

4) Retail REIT- go shopping at the malls parked under selected REIT and form an opinion if you think the malls will prosper in long run.

5) Hospitality REIT- Let say YTL REIT owns resorts such as Pangkor Laut and more. You can make a trip Pangkor Laut Resort as well and gauge if the resort is doing well.

6) Padini Holdings- buy Padini's shirts, pants or shoes and gauge the comfort and quality of its wear to form an opinion if you think Padini can continue to prosper.

7) Berjaya Food- visit Starbucks or Kenny Roger and gauge if these divisions will perform well in the long term since Starbucks and Kenny Roger form a big chunk of its revenue. You might also want to study the competition threat from Nando's!

The moral of the story: 

Be an explorer and geographer at the same time! Be a business analyst!

Note: The companies mentioned above are merely for illustration purposes.

Are You a Stock or Bond?

A friend of mine spoke to me last week on the losses he has incurred by investing into Oil & Gas (O&G) related stocks. Needless to say, O&G sector has been disappointing with companies registering losses or weakening profitability as a result of the plunge in oil prices. Big player such as Bumi Armada has also been suffering.

Upon further "investigation" into his rationale behind the O&G stocks’ investments, he shared with me a finance theory that he has learnt from an investment course.

I will elaborate slightly more for ease of understanding.

Are You a Stock or Bond?

If Mr.X derives salary from a job with stable employment prospect, he can be considered more “bond-like”, a safe job that resembles a high quality bond. A bond is simply a borrowing instrument issued by borrower and in exchange for the borrowing sum; the lenders will be paid a fixed interest return in most instances. The stable salary received could be similar to the regular interest income received by the lender.

According to the theory, Mr.X can invest more in stocks and take more risk in his investment portfolio to balance the conservative nature of his job.

On the other hand, Mr.Y is working on commission-based job and his income can be ‘volatile’, hence Mr.Y is considered to be more “equity-like”. In this case, he might want to invest more into low-risk bond investment or holding more liquid assets.

What about My Friend?

My friend is a “bond” since he is receiving stable salary. Armed with the finance theory, he invested into equity to optimise his wealth position and hopefully, equity could deliver more and “faster” return to complement his salary.

Although the theory makes sense to certain extent, my friend should not have hastily invested into O&G stocks during the bullish period of O&G sector for the sake of optimising his wealth position.

Until today, he is not happy with his portfolio performance as I suspect the O&G stocks that he hold would have given him NEGATIVE returns. Instead of building wealth, the equity position might have reduced his networth.

Moral of the Story?

Always make investment decision based on a sound framework and objective. 

If my friend had invested into good company in a growing industry, perhaps the financial capital or POSITIVE return generated would have complemented his quest towards wealth building!

Is Interest Rate Cut Positive to REITs?

Bank Negara Malaysia cut Overnight Policy Rate (OPR) by 25 basis points (0.25%) from 3.25% to 3.00% on 13 July 2016.

I could recall selected REITs’ prices moved up significantly after the OPR cut was being announced. 

To illustrate the above, IGB REIT was trading at RM1.61 per share on 1 July 2016 and the price rose to RM1.69 following the rate cut, this translate into 5% capital gain in less than 2 weeks’ time.

IGB REIT settled lower at RM1.58 as of 30 November 2016. The excitement and increase in the share price following rate cut seems to be short-lived.

So, is interest rate cut positive to REITs at the end of the day?

The following are some theoretical permutations and they are not meant to be exhaustive and the points below can also be discussed from various perspective.

Interest rate direction	Impact on share price	Impact on dividend
Decline	Likely to increase in short term	Inconclusive due to various moving factors to be elaborated below.
Increase	Likely to decrease in short term

Why would REITs’ prices increase when interest rate is being cut?

1)     Cost of borrowing becomes cheaper, but if the REIT’s borrowings are majority in fixed rate as opposed to floating rate, it may not benefit the REIT immediately in terms of lower borrowing cost. But there is feel good factor due to cheaper interest rate environment.

2)  Lower cost of borrowing may allow the REIT to incur more debts to acquire other income producing properties to be injected into the REIT.

3)  Fixed Deposit (FD) rate would also be revised lower, lower FD rate could increase the attractiveness of yield instrument such as REIT.

4)  In the short term, share price can fluctuate widely. But, share price should reflect the fundamentals of the REITs in the long run. If there is interest rate cut and the REIT’s fundamentals are poor, I doubt it will create much shareholder value in the long term.

Is cut in interest rate positive to REIT’s dividend payout?

1)      If borrowing cost becomes cheaper and the REIT has a lot of floating rate loans, there could be some interest savings which could be passed through to unit holders in terms of higher dividends. BUT….

2)   Why would Bank Negara cut rate at the first place? It is usually to support and stimulate the economy during weak economic growth environment. If Malaysia’s economy slow down further coupled with decline in consumer spending, this would affect retails sales and profitability of tenants, which in turn may impact their ability to even pay rental, hence impacting the REIT’s dividend payout in the extreme case. Currently, if a retail REIT could secure mid-single digit rental revision rate, a REIT's shareholders should feel happy.

3)    Hence, If the interest rate is being cut aggressively to stimulate economic growth, although REIT prices may increase in short term, if the tenants go out of business or unable to absorb higher rental payment if economy continues to be weak, the rate cut is unlikely to boost the REIT’s rental income significantly.

4)      Hence, if you invest in retail REIT, do continue to monitor the performance of its properties.

So far, Aeon Jusco, the Store and Parkson have not been doing well in terms of its retailing division; hence it will be important to monitor our retail REITs.

Is rate cut a definite positive to REIT? It depends J

Happy reading!