Wednesday, April 15, 2015

5 Years of Advanced Pay

One of my inspiration to set up my local SGX portfolio is actually based on what I learnt from reading the DIY Income Investor who is based in the UK.

I've always believed that buying is the easiest part about investing. Don't know what to buy? Surf the net for 5 minutes. There are tons of "gurus" out there trying to sell you things that they are "buying as well". Try to be more discerning and know how to cut through the crap. Advise on what to buy is everywhere, all around you. The hardest part is actually selling. I don't even think I do it right most of the time myself, but I'm trying to learn, adapt and improve.

So it was a very refreshing for me to see SillyInvestor pocketing some gains based on what looks like a variation of the DIY Income Investor's sell rule. SI took capital gains worth 4 years of income, while the DIY Income Investor stretches it a bit more and tries to go for 5 years of income of capital gains.

Personally, I very much like this sell rule because it helps you harvest your stocks while giving you a comforting psychological reason for doing so. I think for me, this is especially useful because I invest mainly for dividend yield. My preference is dividend yield. I don't really like capital gains very much.

"Investing in stocks for yield? STUPID OR WHAT? Stocks for capital gains, bonds for yield! Go back to school! Boooo!"

All right buddy, whatever floats your goat.

So for my previous portfolio sales, if I look at it in "years of income pocketed", then it looks like this:

CDW gave me 41% of capital gains, which is just shy under 5 years of income.
Hock Lian Seng gave me 41% of capital gains, which is 8 years of income.

Today I just sold off my nibble with Falcon Energy for 25.5% capital gains. This sale of Falcon Energy is an exact pocketing of 5 years of future income. However, if adding in transaction costs, it would be similar to CDW, just shy under 5 years of income.

At $0.295 per share, Falcon Energy had a ttm DPU of $0.015, which translate to a current yield of 5.1%. When I first bought Falcon Energy at $0.235, the yield was a lot more attractive at 6.4%, but the run up in price has compressed it yields.

On a macro note, I still do not believe that Oil has made a bottom yet. Of the 3 criteria I am looking out for, the only thing that I have seen so far is the seeming reversal of the USD. Actual fear has been increasing if measured in outflow from USO although it does not look sustained yet and rigs are still falling, but it is decelerating. Signs are pointing that we are around the bottom. Have we past it? Many people seem to think so, but I am less hopeful. My concession though is that I think that the USD has topped out and the unwind slowly begins. That would be supportive of oil prices, which in turns helps the industry.

Based on my previous forecast (hatam anyhow guessing), I am looking for the signs to signal me to buy in May. I honestly do like stocks like Keppel and SembCorp, but the macro factors are not agreeing with me just yet. Of course if you look at price action, they both seem to have made good recoveries so far. Its not easy to find perfect investments when all the stars have aligned. If I had that skill, I wouldn't be here blogging.

I would be in my penthouse taking a massive morning dump while overlooking New York City.


  1. Hi GMGH

    What about businesses whose fundamentals keep increasing and there is hardly any way back to buy at a lower price? Does an investor forego that business and move on to search on an equally good fundamental business which are still undervalued?

    1. Hi B,

      That is the scariest scenario actually, selling off a good and growing company that you might never get back into because it keeps running away. This is scarier than selling off a normal company prematurely.

      If fundamentals are also growing, I think that a certain expectation of returns (with respect to time) should be baked in to normalise all the market noise. That would mean that a gradual capital gain won't raise any red flags, but a 25% jump in a month on no company specific news will signal that this is not a normal move.

      Selling off only bits of the investment to trim it down in value to be in line with expectations is probably the more prudent move. This is basically value averaging. Some profits are locked in, while exposure is still there.

      Of course, any attractive alternatives would also be a good place to invest the proceeds into. However, I think even just holding cash and waiting to get into the same investment at a lower price is also an acceptable strategy. Just like how investments might irrationally spike down and investors can tell that this downside is temporary and is a buying opportunity, I believe that investments can also irrationally spike upwards giving investors a small window of temporary opportunity to sell as well.

      I think learning about value averaging has strongly affected how I think about making sell decisions. Didn't realize that until I tried to verbalise my thoughts!

  2. hmm i thought u sold your CDW like last month?
    if you gain 8yr or 5yr of dividend, thats a pretty good reason to sell
    its always good to take profit

    1. Hi Jimmy,

      Yup, I did sell CDW earlier, but I was just illustrating how many years of waiting that capital gain was worth.

      Selling prematurely is always a worry though. When it goes up higher after you sell, it does almost feel like a lost, haha.

  3. On the other hand, if you examine it a few years later, you might find that not having sold it would have reaped even higher returns (including dividends)?

    1. Aye Lizardo, that is the biggest fear.

      I've sold with the thinking that I have good odds getting back into this at a price or valuation more attractive over the next 5 years.


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