The Best & Worst Months for Shares

In Jeremy Siegel's book "Stocks for the Long Run", it was mentioned that the best month for stocks is January while the worst month for stocks is September. October, although not the worst month, is the most volatile, having witnessed the stock market crashes of 1929, 1987 and more recently 2008. Let's review the case for Singapore to see if Singapore's stocks follow the same pattern.

The table below shows the average monthly return for the Straits Times Index based on data for the past 24 years since 1988 (2013 is excluded as there are still 2 more months to go).

Calendar Month	Average Return	Standard Deviation	No. of Best Months	No. of Worst Months	No. of Best - Worst Months
Jan	0.8%	7.3%	5	2	3
Feb	0.9%	7.0%	2	1	1
Mar	0.5%	5.1%	0	1	-1
Apr	2.7%	6.5%	3	0	3
May	-0.3%	7.6%	2	5	-3
Jun	0.2%	6.4%	2	1	1
Jul	1.6%	4.3%	3	1	2
Aug	-2.9%	6.5%	0	5	-5
Sep	-1.1%	7.1%	2	4	-2
Oct	1.0%	9.2%	1	4	-3
Nov	1.6%	5.6%	1	1	0
Dec	2.8%	4.9%	4	0	4

Based on the average monthly return, the best month is actually December at 2.8% while the worst month is August at -2.9%. However, if based on the no. of times that month has the best return in a calendar year, the best month is January with December not far behind. August remains the worst month. It is interesting to note that August was never the best month in any year. Similarly, December was never the worst month in any year. Based on the standard deviation of the monthly returns, October is the most volatile at 9.2% while July is the least volatile at 4.3%.

Hence, from the above analysis, Singapore stocks exhibit similar trends to US stocks, with December/ January being the best month while August/ September being the worst and October being the most volatile. The similarity in patterns should not be surprising, since stocks between US and Singapore are closely correlated.

From the last column of the table, it can also be seen that there is a sequence of positive returns from December to February. Similarly, there is a sequence of negative returns from August to October. Hence, there appears to be some sense in the adage "sell in May and go away".

Personally, do I follow calendar months when buying or selling shares? Actually not really. It is only a secondary consideration. The key consideration is still asset allocation and individual share performance. For example, if I intend to sell shares and January is around the corner with shares rising, I would wait till the end of January before selling. Sometimes, I might even wait till the end of February. Similarly, if I intend to buy shares and September/ October is around the corner and shares are falling, I would wait till the end of October before buying.

However, calendar effects do not always happen. Take this year for example. At end August, shares were falling due to widespread concerns that Fed might start to taper their Quantitative Easing (QE) programme. Shares dropped by 6.0% in that month. Given this backdrop, I would assume that the selling trend would continue into September and October. However, Fed did not taper QE against all expectations. Shares rose by 4.6% in September. Till yesterday, shares are up by 1.2% for October. So, calendar effects do not always happen.

In conclusion, there are certain months and quarters when shares are likely to perform better and certain months and quarters when shares are likely to perform worse. It is useful to know this information when buying or selling shares, but don't bet on it.


See related blog posts:

• Stock Market Performance During World Cups

Do REITs Overpay for Their Acquisitions?

REITs have been active in acquiring properties to add to their portfolios. They do this to increase the rental income and distribution to shareholders as well as diversify the sources of rental income. In addition, there is also the potential for capital gains when the properties are sold. In the process of acquiring properties, they might also raise new capital from the market and increase the liquidity of the shares. However, do REITs overpay for their acquisitions in their attempts to expand? As industrial REITs are most active in acquisitions, we look at a list of acquisitions that industrial REITs have entered into with other companies.

Below is a table listing the acquisitions industrial REITs have carried out with other companies listed on the SGX, showing the acquisition price, valuation price and premium above the valuation price.

Property	Date	Price	Buyer's Valuation	Price - Valuation	% Premium
65 Ubi Ave 1	May 2003	$35.0	$35.0	-	-
1 Changi Business Park Ave 1	Sep 2003	$18.0	$18.0	-	-
TT Int Tradepark	Nov 2003	$92.0	$92.0	-	-
12 Woodlands Loop	May 2004	$24.8	$24.8	-	-
9 Changi South St 3	Oct 2004	$32.0	$32.0	-	-
5 Toh Guan Rd East	Oct 2004	$36.4	$36.4	-	-
52 Serangoon North Ave 4	Feb 2005	$14.0	$14.0	-	-
84 Genting Lane	Jul 2005	$10.0	$10.0	-	-
20 Old Toh Tuck Rd	Nov 2005	$11.6	$11.6	-	-
50 Kallang Ave	Dec 2005	$28.6	$28.6	-	-
2 Serangoon North Ave 5	Dec 2005	$45.0	$45.2	-$0.2	0%
31 Ubi Rd 1	Dec 2005	$23.0	$23.0	-	-
2 Senoko South Rd 26 Senoko Way	Oct 2006	$49.0	$49.0	-	-
30 Woodlands Loop	Nov 2006	$10.3	$10.4	-$0.1	-1%
20 Tampines St 92	Dec 2006	$10.0	$11.2	-$1.2	-11%
134 Joo Seng Rd	Dec 2006	$10.7	$10.9	-$0.2	-2%
3 Changi South Lane	Dec 2006	$13.9	$14.4	-$0.5	-3%
521 Bukit Batok St 23	Dec 2006	$24.1	$24.9	-$0.8	-3%
9 Tampines St 92	Dec 2006	$11.0	$11.0	-	-
31/33 Pioneer Rd North 119 Neythal Rd 30 Tuas Ave 8 8 Tuas View Square	Aug 2007	$36.8	$37.6	-$0.8	-2%
31 Int Business Park	May 2008	$246.8	$246.8	-	-
1/2 Changi North St 2	Aug 2010	$22.1	$22.2	-$0.1	0%
25 Tai Seng Ave	Sep 2010	$21.1	$21.5	-$0.4	-2%
4/6 Clementi Loop	Mar 2011	$40.0	$40.0	-	-
3C Toh Guan Rd East	Nov 2011	$35.5	$35.5	-	-
16 Tai Seng St	Mar 2012	$59.3	$59.3	-	-
15 Jurong Port Rd	Dec 2012	$43.0	$43.0	-	-
Average		$37.2	$37.3		-1%

From the table above, we can see that most of the transactions are carried out at the valuation price. A minority of the transactions are at a slight discount, ranging from 1% to 11%. The average discount of all transactions is 1%. On this basis, REITs do not overpay for their acquisitions.

As the counter-parties to these transactions are also listed companies, the sellers might also announce the transactions on SGX. Some of the sellers would disclose their valuations of the properties, thus allowing us to see both sides of the transactions. The list of transactions with sellers' valuations is shown in the table below.

Property	Date	Price	Seller's Valuation	Price - Valuation	% Premium
65 Ubi Ave 1	May 2003	$35.0	$35.0	-	-
TT Int Tradepark	Nov 2003	$92.0	$92.0	-	-
20 Old Toh Tuck Rd	Nov 2005	$11.6	$9.3	$2.3	25%
31 Ubi Rd 1	Dec 2005	$23.0	$23.0	-	-
28 Senoko Dr	Apr 2007	$12.0	$12.0	-	-
31/33 Pioneer Rd North 119 Neythal Rd 30 Tuas Ave 8 8 Tuas View Square	Aug 2007	$36.8	$22.6	$14.2	63%
1 Kallang Way 2A	Jan 2008	$14.0	$12.0	$2.0	17%
31 Int Business Park	May 2008	$246.8	$246.5	$0.3	0%
29 Tai Seng Ave	May 2010	$53.0	$40.0	$13.0	33%
1/2 Changi North St 2	Aug 2010	$22.1	$14.3	$7.8	55%
25 Tai Seng Ave	Sep 2010	$21.1	$16.6	$4.5	27%
44 & 46 Changi South Rd	Dec 2010	$16.8	$12.5	$4.3	34%
4/6 Clementi Loop	Mar 2011	$40.0	$22.0	$18.0	82%
3C Toh Guan Rd East	Nov 2011	$35.5	$31.0	$4.5	15%
16 Tai Seng St	Mar 2012	$59.3	$59.0	$0.2	0%
15 Jurong Port Rd	Dec 2012	$43.0	$33.0	$10.0	30%
Average		$47.6	$42.6		24%

From the table above, it is interesting to see that most of the transactions are carried out above the seller's valuation price, with premiums ranging from 0% to 82%. The average premium of all transactions is 24%. Note that these valuation prices are not historical costs at book value; they are obtained from recent valuations commissioned by the sellers.

So, we are back to the original question: do REITs overpay for their acquisitions? To answer this question, we need to address 2 other questions, i.e. why do buyer's and seller's valuations differ, and the relative bargaining powers of buyers and sellers.

It is not uncommon for valuations of the same property to differ. Based on the disclosure in the SGX announcements by both buyers and sellers, 2 key reasons could be distilled:

• Buyer's valuations are more rigorous than seller's valuations. Buyer's valuations are generally based on 3 or more valuation approaches, some of which include direct comparison of recent transactions, discounted cashflow of income stream, capitalisation of income stream and replacement cost of the property. In contrast, seller's valuations (note: there are only 5 sellers that disclosed the valuation approaches used) are based on less approaches, including desktop valuation. Furthermore, some of the acquisitions need to be funded by bank loans. If the properties are overvalued, banks would run the risk of loss. On this basis, the "correct" value of the property probably lies closer to the buyer's valuation.
• Basis used in valuations. The basis used in valuations play a key role in the eventual value of the property. In one of the sellers' announcements, it mentioned about valuations on a sale-and-leaseback basis and on a vacant possession basis. Needless to say, the valuation on a sale-and-leaseback basis should be higher than on a vacant possession basis given that the leaseback agreement provides a rental guarantee for several years.

On the relative bargaining powers of buyers and sellers, even though the seller might have a valuation price, it does not necessarily mean that the seller would be willing to sell at that price. The seller probably had been operating from the property for several years already and enjoying continual appreciation in property values. Some premium above the seller's valuation price is required to entice the seller to sell the property and give up future capital gains as well as converting from being a property owner to a property lessee.

Lastly, of all the properties mentioned above with the latest valuation, only 2 properties have seen their valuations fall below the original purchase price.

In conclusion, on the basis that (1) the acquisition price does not differ much from the buyer's valuation price, (2) the "correct" value of the property probably lies closer to the buyer's valuation than the seller's valuation, (3) a premium is likely required to entice the seller to sell the property, and (4) the current valuation of most properties mentioned above is equal to or above the original purchase price, REITs do not overpay for their acquisitions.

See related blog posts:

• The Hidden Risks of Buy-and-Leasebacks for Industrial REITs
• Cash Over Valuation for REITs 
• REITs Are Not Forever Attractive

Managing Expenditure

Saving is usually the first step towards achieving your financial objectives. One approach of building up savings is to have additional sources of income. The other approach is to defer consumption to a later date. To manage my expenditure, I have tried several ways over the last 2 decades; some work and some don't quite work. Let's discuss the ways that don't quite work before discussing the ways that work.

Ways That Don't Quite Work

The conventional way to manage expenditure is to set a budget for the various categories of expenditure. After trying for several years, I have come to the conclusion that budgets don't work. It works well for expenditure that are regular, such as utilities, taxes, etc. But when it comes to discretionary expenditure such as recreation, social events, etc., the budget is sometimes exceeded. The main reason is that the budget does not come to mind at the time of spending money. By the time I remember about the budget, money is already spent.

Related to setting a budget is to record all the expenses made. By recording and compiling all the expenses, you can analyse at the end of the day/ week/ month whether the money has been spent wisely and if not, to remind yourself to spend wisely the next time. Again, it does not quite work. Regret only lasts for as long as I'm looking at the expenses. It does not last until the time of spending money.

Perhaps the only time that budget setting and expense recording work is near the end of the month. If the budget is almost exceeded, I would try to defer some expenses to the next month.Conversely, if I spend less in this month, I would bring forward some expenses from the next month so that more money is available for spending next month. This is usually done by topping some stored value cards that are regularly used.

Ways That Work

The ways that work in managing expenditure (at least for me) has to do with how we think about expenditure. There are 2 ways of thinking about expenditure. The first way is to think of it in terms of opportunity cost. When you spend money on certain items, it means that you can't spend on some other items. As investors, it also means that the money cannot be invested and grown. Hence, the opportunity cost to investors is usually very high. The higher the rate of return and the younger the investor is, the higher is the opportunity cost. As an illustration, I have a target rate of return of 10% per year. At this rate of return, money will double every 7.2 years. I have 27 years before reaching the retirement age of 65. So, every $1 today will become $14.81, say, $15, when I retire. That means that for every $1 I spend today, I will have $15 less when I retire. Hence, the price tag of every item today is multiplied by 15. A mid-level digital camera that costs $2,000 to most people will actually cost $30,000 to me. That is a lot of money! From this perspective, I would think very hard about spending money on big-ticket items.

The second way of thinking about expenditure is to think about the amount of hours you need to put in at work to pay for the item. Let's say the expenditure is equivalent to 2 weeks of salary. Instead of the company paying you a monthly salary and using part of the salary to pay for the item, would you be willing to work for FREE for 2 weeks and at the end of the 2 weeks, the company gives you the item? Bear in mind that during these 2 weeks, you will need to endure the usual scolding from the bosses, tight deadlines, office politics, etc. Very likely, you will think a little longer about spending the money.

Conclusion

Generally, my experience is that if you manage the big-ticket expenditures well, you do not really need to worry too much about the small-ticket expenditures. You might overspend on the small-ticket items, but they will not blow a big hole in your pocket. Managing expenditure is not about being a miser; it is about knowing when to spend.


See related blog posts:

• The Philosophy of Spending Money
• Living a Frugal Life
• How Many Months Do You Have to Work This Year?

Clean Out CPF Balance When Taking HDB Housing Loan?

When you take a housing loan from HDB, it will take all the money in your CPF Ordinary Account (OA) before giving you the loan. This is to reduce the loan quantum that you need to service. To avoid having an empty OA account, you'll need to transfer some or all of the OA balance to somewhere else before you apply for the loan. One way is to invest in some bond or money-market unit trusts that will not drop too much in value while you're holding them. But the key question is, do you want to leave some money in your OA account or clean it out? It depends on whether you have any need for the OA money in the future and your risk preference.

There actually isn't a lot of approved uses for the OA money. Besides building up your retirement nest egg, you can buy properties, service insurance policies, invest in stocks and unit trusts and finance your family members' tertiary education. If you foresee that you need to use the OA money for such needs in the short- and long-term, then it's better to keep some money in the OA. This is because if you have an empty OA account, it'll take a fairly long period of time to build it up again as the monthly loan repayment will take a portion of your monthly CPF contributions. In any case, assuming you keep some money in the OA but later find that you have no other need for it, you can always make a lump sum repayment to reduce the loan quantum.

The second factor that you need to consider is your risk preference. Do you prefer a bigger debt burden (and bigger OA balance) or a near-empty OA balance (but smaller debt burden)? Some people will prefer to have a smaller debt burden so as to reduce the amount of interest payable over the loan tenure and/or to become debt-free earlier. Personally, I prefer to have a bigger OA balance. The main reason is it takes a long time to build up the OA balance when you start to service the loan as explained earlier. If, for some reasons, you are in between jobs for several months, the OA balance will quickly become insufficient to service the monthly repayment and you might risk losing your flat (I understand HDB is quite forgiving if you miss a few monthly payments, but the risk exists). Not only that, you might also default on other financial commitments such as insurance premiums, risking your insurance coverage as well. For this reason, I prefer to live with a bigger debt burden than to risk a snowball default. Of course, you can always make up any shortfall with cash, but it would be a constant worry over the low OA balance.

It also helps that the HDB loan interest is only 0.1% higher than the OA interest rate. At 0.1%, you pay an extra $100 for every $100,000 in your OA balance that is not being used to repay the loan. Over a 25-year loan tenure, this works out to be $3,112. This extra payment is like insurance premium, to guard against a snowball default and constant worry over the low OA balance. Not only that, you get to save the money for some other uses in the future and have the flexibility of making a lump sum repayment. And if you manage to invest the OA money at a rate higher than the loan interest, you get to grow a bigger retirement nest egg as well!

See related blog posts:

• How to Avoid Cleaning Out Your CPF Balance When Taking HDB Loan
• Housing Loan Servicing - Cash or CPF?
• Is CPF Accrued Interest Double Counting of Housing Loan Interest?

Housing Loan Servicing – Cash or CPF?

Should you use cash or CPF to service your housing loan? Most people would use CPF, so as to conserve the cash for other purposes. Moreover, CPF money is considered as being "locked up", so you cannot use it for most other purposes. However, if you have the cash, does it make financial sense to service the housing loan using cash?

The main argument for using cash to service the housing loan is because interest rates for cash savings are so low, at around 0.05%, whereas the interest rate for CPF Ordinary Account (OA) is at 2.5%. By using cash to service the loan and keeping CPF untouched, effectively, you gain 2.45% on the loan repayment annually. Considering the effect of compounding over time, this can add up to quite a bit of money over the length of the loan tenure.

Besides these 2 options, there is a middle option, which is to service the loan using CPF and top-up the CPF using cash. Effectively, you are servicing the loan using both cash and CPF. (Note: the cash top-up into CPF goes into the Special Account (SA). When the upper limit for SA is reached, the balance will overflow into OA that is used to service the loan. But when the limit is reached, it also means that no further top-ups are allowed under the Minimum Sum Scheme). When you top-up CPF using cash, you can also claim for tax deduction for up to $7,000. If your marginal tax bracket is 7%, that means a tax savings of $490 annually. That can also add up to quite a bit of money over time. So, the question is which option makes the most financial sense -- servicing the loan using cash, CPF or CPF top-up?

To answer this question, let's consider the following scenario:

Loan Details
Loan Principal	$200,000
Loan Tenure	25 years
Loan Interest Rate	2.60%
Annual Loan Repayment	$  10,980
Income Details
Annual Income	$  60,000
CPF	$  12,000
Annual Taxable Income	$  48,000
Annual Income Tax	$    1,110
Cash	$  46,890
CPF Top-up	$    7,000
Cash Interest Rate	0.05%
CPF Interest Rate	2.50%

Let's further assume that all the cash earned is not spent but saved in the bank. At the end of the 25-year loan tenure, the total amount of cash + CPF for the 3 options are as follows: 

	Using Cash		Using CPF		CPF Top-Up
Year	Cash Bal	CPF Bal	Cash Bal	CPF Bal	Cash Bal	CPF Bal
0	$             -	$             -	$             -	$             -	$             -	$             -
1	$      35,910	$      12,000	$      46,890	$        1,020	$      40,380	$        8,020
2	$      71,838	$      24,300	$      93,803	$        2,066	$      80,780	$      16,241
3	$     107,785	$      36,908	$     140,740	$        3,138	$     121,201	$      24,667
4	$     143,749	$      49,830	$     187,701	$        4,237	$     161,641	$      33,304
5	$     179,731	$      63,076	$     234,685	$        5,363	$     202,102	$      42,157
6	$     215,731	$      76,653	$     281,692	$        6,517	$     242,583	$      51,231
7	$     251,749	$      90,569	$     328,723	$        7,700	$     283,084	$      60,532
8	$     287,785	$     104,833	$     375,777	$        8,913	$     323,606	$      70,066
9	$     323,840	$     119,454	$     422,855	$      10,156	$     364,148	$      79,838
10	$     359,912	$     134,441	$     469,956	$      11,430	$     404,710	$      89,854
11	$     396,002	$     149,802	$     517,081	$      12,736	$     445,292	$     100,121
12	$     432,110	$     165,547	$     564,230	$      14,075	$     485,895	$     110,644
13	$     468,237	$     181,685	$     611,402	$      15,447	$     526,518	$     121,430
14	$     504,381	$     198,227	$     658,598	$      16,854	$     567,161	$     132,486
15	$     540,543	$     215,183	$     705,817	$      18,295	$     607,825	$     143,819
16	$     576,724	$     232,563	$     753,060	$      19,773	$     648,508	$     155,435
17	$     612,923	$     250,377	$     800,327	$      21,288	$     689,213	$     167,341
18	$     649,139	$     268,636	$     847,617	$      22,840	$     729,937	$     179,545
19	$     685,374	$     287,352	$     894,930	$      24,431	$     770,682	$     192,053
20	$     721,627	$     306,536	$     942,268	$      26,062	$     811,448	$     204,875
21	$     757,898	$     326,199	$     989,629	$      27,734	$     852,233	$     218,017
22	$     794,187	$     346,354	$  1,037,014	$      29,448	$     893,039	$     231,488
23	$     830,495	$     367,013	$  1,084,422	$      31,204	$     933,866	$     245,295
24	$     866,820	$     388,188	$  1,131,855	$      33,005	$     974,713	$     259,448
25	$     903,164	$     409,893	$  1,179,311	$      34,850	$  1,015,580	$     273,954
Cash + CPF	$1,313,057		$1,214,161		$1,289,535

As shown in the scenario above, using cash to service the loan is still the best option. Using only CPF to service the loan is always the worst option because of the higher CPF interest rate. Although the CPF top-up option generates tax savings, the amount of tax savings is insufficient to compensate for the loss in interest for keeping as much money in the CPF as possible.

There could be other scenarios in which the CPF top-up option might be better than the cash option. Some of the factors that could affect the outcome are as follows:

• Cash interest rate versus CPF interest rate. By design, the CPF interest rate will always be higher than the cash interest rate. The higher the CPF interest rate relative to the cash interest rate, the more beneficial it is to keep as much money in the CPF as possible. But when the cash and CPF interest rates are close to each other, the tax savings from CPF top-ups will make this the best option.
• Amount of CPF top-up versus CPF draw-down for loan repayment. In the scenario above, the amount of CPF top-up is $7,000 while the amount of CPF draw-down to service the loan is about $11,000. Hence, $7,000 of the loan repayment is serviced by the cash top-up into CPF while $4,000 is serviced by money originally in the CPF. Over the loan tenure of 25 years, the tax savings from CPF top-ups is insufficient to compensate for the loss in net interest from a smaller CPF balance. If the amount of CPF top-up and draw-down is close to each other, the tax savings from CPF top-ups will make this option the best one.
• Loan tenure. As explained above, the longer the loan tenure, the larger is the compounding effect of the higher CPF interest rate.
• Marginal tax bracket. In theory, the higher the marginal tax bracket, the greater the amount of tax savings from CPF top-ups. However, you will need a really high income for the tax savings to outweigh the loss in net interest and the effects of compounding.

In conclusion, based on the current interest rates and policies, using cash to service the housing loan usually makes the most financial sense. Nevertheless, servicing the loan using CPF and topping-up the CPF using cash provides greater flexibility in the future when interest rates and policies might change.


See related blog posts:

• Clean Out CPF Balance When Taking HDB Housing Loan?
• Is CPF Accrued Interest Double Counting of Housing Loan Interest?
• Stretch Loan & Invest the Rest

Properties and the Population Picture

I've written a couple of times about the potential impact of demographics changes to the property market in future. However, I'm not sure how many people actually noticed and think of it in the current rage over properties. Since words did not effectively convey the message but a picture can say a thousand words, let's try showing pictures instead.

Below is a picture taken from the Opening Address at the “Our Population, Our Future” Townhall Dialogue in Oct 2012. It shows that with a Total Fertility Rate (TFR) of 1.2, the size of every subsequent generation will be reduced by 40%.

Do take note that the picture below does not reflect the current demographics figures. It is reflective only if the TFR persists at 1.2 for at least 2 generations. So, the discussion in this blog post on the potential impact on the property market applies in the future when we are about to retire and not currently.

Figure 1: Impact of TFR of 1.2 on Generation Size

How will the above picture impact the property market in the future? Each generation does not operate independently in the property market. When Our Generation retires, we will need to find alternative sources of income to support our retirement. Since quite many people are asset-rich but cash-poor (and assuming this trend continues), one possible option is to sell our properties to those who are buying, i.e. the Grandchildren Generation who are setting up their families. Even if some of Our Generation do not need to sell or downgrade their homes, eventually their properties will be passed down to the subsequent generations as inheritance.

Hence, based on the above picture, we are looking at 36 nos. of the Grandchildren Generation buying/ taking over the properties of 100 nos. of Our Generation. I cannot see how 36 persons can absorb the properties of 100 persons. We can only hope that our grandchildren will be 3 times as rich as us.

To be fair, the demographics picture above cannot be directly applied to the inter-generational transfer of assets. People are marrying later nowadays, at a median age of 29. So the inter-generational age gap is about 30 years, i.e. when Our Generation reaches the retirement age of 65, the Grandchildren Generation is only about 5 years old, hardly able to support themselves, much less to take over the assets from us. Readjusting the demographics picture to an inter-generational age gap of 20 years, the relative size of each generation would be as follows:

Generation	Age	Size
Our	65	100
"Children"	45	71
"Grandchildren"	25	51

The age of each generation in the above table looks more reflective of the actual age of the net buyers and sellers in the property market, with Our Generation planning to sell at the retirement age of 65 and the "Grandchildren" Generation (in "quotes" to differentiate it from the actual Grandchildren Generation) planning to buy around the marriage age of 29.

Based on the above table, there will 51 nos. of the "Grandchildren" Generation buying/ taking over the properties of 100 nos. of Our Generation. While the figures are better, it still does not change the overall picture that there will be more net sellers than buyers in the property market when we are ready to retire.

Having said that, there are many other factors affecting the property market besides demographics, such as migration, new housing supply and property regulations. A lot of these factors are unpredictable, especially in the long term. But the one fairly predictable factor that is demographics shows that the property market when we retire will be quite challenging. For a more complete discussion of the impact of migration and new housing supply, you can refer to the post on Properties, the Population White Paper and the Land Use Plan.

Interestingly, how did Our Generation end up in such a situation? The figure below shows the relative size of each generation based on an inter-generational age gap of 20 years:

Figure 2: Relative Size of Each Generation

 
The relative size of the "Grandparent", "Parent" and Our Generations are based on the actual population statistics in Jun 2011 for the age groups 75 - 79, 55 - 59 and 35 - 39 respectively (Note: I am in the 35 - 39 age group, but you can recalculate the relative generational size for your own age group using data shown in the post on Properties, the Population White Paper and the Land Use Plan). However, do note that there is higher mortality among the "Grandparent" and "Parent" Generations, so their sizes are smaller than they should be. The relative size of Our, "Children" and "Grandchildren" Generations are based on the TFR projection mentioned above.

As can be seen in Figure 2 above, when Our Generation is buying properties to set up families, the "Grandparent" Generation is much smaller and buyers outnumber sellers. But when Our Generation is going to sell properties when we retire, the "Grandchildren" Generation is also smaller and sellers outnumber buyers. In short, Our Generation is at the short ends of both sides of the transactions.

Nevertheless, there are actions that Our Generation can take to avoid such a situation. We could either have more babies, or avoid being asset-rich and cash-poor when we are about to retire.

See related blog posts:

• Properties 
• Properties, the Population White Paper and the Land Use Plan
• Properties and the Arrival of Robots and Automation

Why Warren Buffet's Rule No. 1 Is Not "Always Make Money"

Everybody knows that Warren Buffet's famous Rule No. 1 is "Never lose money" and Rule No. 2 is "Never forget Rule No. 1". However, why is it that his Rule No. 1 is not "Always make money" but "Never lose money"? By right, if you aim to always make money, won't the outcome be the same as never lose money?

Since Warren Buffet is heavily influenced by the teachings of Benjamin Graham, we have to bring in Benjamin Graham's concept of "margin of safety" (MOS) in this discussion. Imagine that the intrinsic value of a stock is $1, if the stock trades at $0.90, it would have a MOS of 10%.

Let's now consider 2 investors, one who subscribes to "Never Lose Money" (LNM) and another who subscribes to "Always Make Money" (AMM). Other than this investment principle, let's assume that both investors have the same investment characteristics, e.g. same amount of capital, same rules in selling, etc.. Given this investment principle, the AMM investor will always go for an investment so long as it has, say, a 10% MOS. On the other hand, the NLM investor will never go for an investment unless it has say, a 40% MOS. 

In terms of investment opportunities, there will be more investments with 10% MOS compared to those with 40% MOS. The AMM investor will be more busy investing compared to the NLM investor. However, the AMM investor will quickly find that he has a shortage of capital to take advantage of all the investment opportunities (with 10% MOS) while the NLM investor will always have sufficient capital for an investment opportunity (with 40% MOS).

Assuming that the stock realises its potential and rises to its intrinsic value, the AMM investor's profit margin will be 11.1% ($0.90 to $1). On the other hand, the NLM investor's profit margin will be 66.7% ($0.60 to $1). On profit margin alone, one profitable trade of the NLM investor is equivalent to six profitable trades of the AMM investor. If we include trading costs, the difference in profit margins will be even greater. Now, let's not forget that the AMM investor have spread his capital thinly across many investments with 10% MOS while the NLM investor can only concentrate on a few investments with 40% MOS. The capital outlay on the stock by the NLM investor will be several times that of the AMM investor. In total, the NLM investor's absolute profit will be many times that of the AMM investor. Having said that, it should be noted that it will take a much longer time for a stock to rise from $0.60 to $1 than from $0.90 to $1.

Assuming that the stock continues to be undervalued and trades around $0.80, the AMM investor would suffer a loss while the NLM investor would not be invested yet.

Finally, assuming that the stock is a value trap and falls to say, $0.40. The loss margin of the AMM investor will be 55.5% ($0.90 to $0.40) while that of the NLM investor will be 33.3% ($0.60 to $0.40). Factoring the larger capital outlay, the NLM investor would probably lose more money compared to the AMM investor. However, to watch a stock falls from $0.90 to $0.40 will be a much larger psychological blow to the AMM investor. This psychological blow may have a greater impact to the AMM investor's investment philosophy. He might lose patience with the stock and sell it off. More seriously, he might even lose faith with the concept of value investing which has proven to work so many times.

In conclusion, the rule of "Never lose money" will lead to less frequent losses, less frequent but much larger gains, and less emotional distress and more faith with a proven investment philosophy. It's no wonder that Warren Buffet's Rule No. 1 is "Never lose money" and not "Always make money". It's just 3 words, but a lot of intelligence packed into it.

See related blog posts:

• Different Tastes for Different Folks
• Behind Every Successful Bear Market Recovery is A Cash-Like Instrument 
• A Comparison of Risk Management Tools & Strategies