Game Plan: Shifting Gear but not full throttle

Context

First I will start off by stating the obvious: My portfolio is a sea of red. And it is getting redder by the day. Having been through the 2007-2008 Great Financial Crisis, I think sooner or later I will see this (if I stay in the market long enough).

Having said that, my personal thoughts are that with every crisis we start seeing flaws in the system that we were not aware of. With the current COVID 19 outbreak, it led to the collapse of the fragile oil-exporting alliance between Saudi Arabia and Russia after almost four years. On Monday, oil prices had their worst day since the 1991 Gulf War, falling 24 percent to around $34 per barrel.

A crisis begets another crisis. Will there be another? And why not?

After all, we do not know what we do not know. I am sure the system is not perfect. Given such a long bull run, I am sure there are inflated assets and bubbles waiting to pop.

Many are worried about the US Fed’s impotence in the face of further economic risks. Interest rates are now set in a 1 percent to 1.25 percent range, how low more can it go? Is negative rate a good solution to start with? Look at the European countries and Japan with negative interest rates, how are their economies faring a few years after that? Could have been better…

Ok.

I did not think I would be giving so much thought on my Game Plan for this year in such a short span of time. We are still early in the year 2020 (mid-March to be exact). However, given how things have quickly developed from late last year to today… with the US markets in bear territory, Hong Kong in recession, Singapore flirting with recession with the Singapore market at a record low, etc… I reckon it is inevitable that I need to give the plan some thoughts.

• Singapore shares hit 10-year low over COVID-19 fears (read here)

Investing Principle

Firstly, my principle so far has not changed. I intend to create a stream of dividend income from my stock portfolio. A bear market incidentally offers a chance to accelerate this process.

To be more detailed, the strategy is:

1. To have a cash cushion or war-chest. I am not 100% invest in stock. To have bonds or cash as a counter-balance. In times of crisis to utilise the war-chest.
2. To diversify my stock portfolio (Unless I think I am Warren Buffett, and I am not, there will always be a chance that I would be wrong. And I have been wrong on many occasions).
3. To invest in quality companies and hold for the long term.

Secondly, I would like to highlight that I think this principle actually works … well, not in the monetary reward sense (not yet I reckon). I actually felt quite at peace with myself while we are going through this ‘turbulent’ period in the stock market.

What Changed

Before I talk about my plans moving forward. I would just highlight a few points. I think our experience in the past kind of affect how we think (or shall I say mould our thoughts). We like to think we are rational beings who are unbias … but for me, I think my past experience influenced my decisions from time to time.

I have been through the 2007-2008 GFC. And I am aware that the stock markets can wreak havoc to my savings and it can change from green to red (with no amber in between) in a flash. So yes, it still haunts me. The difference between the then me and the now me…..more than a decade later, is back then I do not have a significant war-chest. I did not have much then, so didn’t have much to lose anyway. Now I do. Back then, I have a mortgage to pay and planning to have a child.

I recently reached the net-worth milestone I have been aiming for, for a long time, only to see it dropped shortly due to the market crash.

Another point is.. I kind of completely missed the 2018 market drop. I guessed I procrastinated too long and thought the market will continue trending lower longer. I did not invest a lot during that time.

Nevertheless, many things are still the same now. I still do not know how long the current downtrend will be. Will it be as severe as the 2007-2008 GFC? I hope not and think it probably won’t. I started a Hong Kong centric stock portfolio in late last year in view of the recession in Hong Kong not knowing that we will have the current crisis now, so soon. Still, I reckon that although there might be dividend cuts in some of the stocks I am holding to… the projected dividend income should be higher than the year before.

I am not that affected or hoping for capital gains via stock prices. Although I do hope that the stock price drops don’t go beyond my pain threshold (>50%). I view my stocks as assets that would pay me dividend and to do that, they and the industry they are in need to be fundamentally sound. The market can change … but at least I get paid while waiting for the market to turn.

Game Plan

Occasionally I came across people who are shocked, sadden, angry by the crash. Some are 100% invested in stocks prior to the crash and are now staring at massive losses. My heart go out to them. In fact, many of my stocks are not performing well.

Personally, I think the blue ring (Hope) is a much stronger ring than the red ring. Especially when it (blue ring) is combined with the green ring (Will).

However, I think we all need to have a plan before we invest. With the US markets at multi-year high only not too long ago… there is always a possibility of a crash. We can’t escape the pain (to quote Kyith from Investment Moat). Is this crash any surprise to begin with? The US market has had the longest bull run in history. Since 2016 -2017 onwards I have been reading more and more articles about the impending crash. What were their plans then (if things suddenly turn ugly)?

Then there are another group of people who are thrilled by the crash (probably been waiting for it since 2016 and have huge war-chests).

• 2020 – Game Plan (read here)

My original game plan at the start of the year is to use my excess cash (leftover from my salary) to purchase Hong Kong centric stocks. While not really touching my war chest. The proportion of stocks to war-chest then was around 30% to 70%.
Back then, I felt that the Sg REITs as a group was not undervalued (given the run-up in 2019). And I mentioned that I probably won’t be taking a stake in it unless it is for diversification. On the other hand, there are still values to be found in the HKEX and some local dividend stocks are looking not overvalued.

Sector-wise, back then I was eyeing bank stocks, HK property & Reits, local dividend stocks. I felt that bank stocks act as a counterbalance to other stocks which tend to drop when interest rates rise (typically REITs, properties and generally stocks with more debts on their balance sheets). Bank/finance stocks although technically, not at rock bottom price-wise, have not soared as much.

Some of the local dividend & growth stocks then were starting to look attractive again price-wise.

Now…today, situations call for a rethink…

Amount Spent

I have recently ramped up slightly the amount I spent per month purchasing stock. It isn’t much. The proportion of stocks to war-chest now is around 28% to 72% (despite what the amount I spent on stocks, the drop in stock price cause the stock proportion to drop).

I reckon what I have spent so far on the stock can be further increased. However, I do not want to go crazy. A bear market typically lasts for 12mths to 18mths. And as it goes lower, the amount spent on stocks should increase. Of course, I have no idea if it will trend lower or higher moving forward. And I hope it won’t be a repeat of late 2018 for me (too slow to take advantage of the drop).

In Jan, Feb, Mar 2020 … I have been unable to keep to my budget (eg. just spending the leftover from my salary). I reckon in Jan I used my bonus to purchase some stocks. There has been a slight increase from Jan to Feb. I think given the situation since the start of the year, it is ok…. buy more if there is are values to be found. The market drop this month is drastic.

Amount wise: I am still not aggressively pumping in money yet. Yes, I have taken some from my war chest to buy stocks and converted part of my short term bond to cash. But still, I am not crazily pumping much into stocks. The US market has rebounded sharply on Fri (13 March 2020). I have no idea if it is a dead cat bounce or the start of an uptrend. Nevertheless, I will increase the amount I spend. Minimally, I need to at least keep the 30% to 70% ratio. Even this ratio seems a bit too conservative now.

I don’t want to “let this crisis go to waste”.

Look I am going to be adding into my stock portfolio for a very long time…and as much as I don’t want to miss the upside (if it does happen), I reckon I still need to have some dry powder for the years to come. And I don’t think I will ever be 100% invested in stocks even if I am in the midst of the next GFC.

Someone advocated doing dollar cost average in a downtrend and doing lumpsum purchase in an uptrend. But given the wild swings in the US markets… the trend is not obvious. Things have been developing very fast.

However, with the current forward economic environment, I would probably factor in a 20% to 30% dividend cut this year. And if I am ok with that payout long term, I should not be afraid to invest in the company, provided I have confidence in the stability of the company and its industry as a whole. Yes, I will probably see paper loss right after I buy and would be staring at it for months to come.

And anyway, does it matter if it is a dead cat bounce or further downtrend or uptrend. As long as I am comfortable with the projected payout (given the anticipated cut), the valuation, then should just invest.

What to buy

For the month of Feb 2020, I have bought stocks of BOC HK, Sats, Hongkong Land and Ascott Trust.

For the month of Mar 2020, I have bought stocks of DBS (only) so far. I have been busy at work and did not spend much time putting in orders. Hope I can purchase some on Mon. To be frank, I haven’t not been paying too much attention to buying stocks.

Moving forward some of the more defensive dividend stocks in the Singapore stock market are starting to be affected (by the market sentiments).

I have been eyeing them for some time. Although the drop in their share prices is not much (relatively speaking), and some of them I feel are still overvalued eg. Industrial REITs – Mapletree Industrial Trust, Ascendas Reit, SGX, ST Engineering, Vicom, Parkwaylife Reit, etc.

The non-Singapore market stocks in my radar consist of Heineken Malaysia Bhd, Carlsberg Brewery Malaysia, Nestle (Malaysia) Berhad, Dutch Lady Milk Industries Bhd. Dutch Lady, by the way, was beaten down by quite a bit though (the odd one out)… probably fair value.

They may offer some diversification, as I do not want to be too heavily invested in banks (further Fed rate cuts seem likely), Hospitality Reits, Retail Reits, Transport related stocks, etc.

Hope their stock prices will drop more. That is also probably why I still need my war-chest (to be not depleted so fast).

Nevertheless, those beaten down are now even more beaten down (eg. Straco, Mapletree NAC, Sats, Ascotts Trust, DBS, OCBC, Hong Leong Finance, etc). I will still like to add to my HK centric portfolio. Yes, Hong Kong, you are down and out for now, but I still believe in you!

Many stocks there are beaten down even more now.

That’s it for now.