As A Contrarian, You Will Always Walk Alone

A lot of investors have posted good results for last year. However, if you were like me and had been worrying that the stock market could crash in 2017, a year that ends with 7, you would have missed out on a stock market rally in which the STI rose by 18% in 2017. When everybody else is posting good results online, it does feel depressing occasionally.

I was not totally out of the market last year. Having participated in the stock market for 32 years, I will never be totally out of the market, even though I respect the folklore that the market would experience a crash whenever the year ends with 7. I took a defensive stance, ensuring that I had around 45% to 50% cash to deploy in the event that a crash were to materialise. As I sold stocks that were rising, I continued to invest in stocks that were forgotten by the market. Below are some of the stocks that I bought, did not buy, and sold last year, including the reasons.

Stocks that I Sold

Electronics stocks, especially semiconductors, were the rage last year. Nevertheless, I sold them. Needless to say, they went much higher after I sold them. For the semiconductor stocks, Sunright, sold at $0.305, is now $0.895; ASTI, sold at $0.056, is now $0.084; and UMS, sold at $0.78 on average, is now $1.07. For the electronics stocks, Frencken, sold at $0.515, is now $0.59; and Valuetronics, sold at $0.795, is now $0.93. All these were sold to shore up defence for the crash, if any. On hindsight, they were sold too early, as I did not expect the electronics recovery to be so strong. To-date, I still have not figured out what is behind the strong electronics demand, which will determine whether the strong demand can continue or will fizzle out soon. 

There were also some buying and selling of Oil & Gas (O&G) stocks. A notable sale was Keppel Corp at $6.16, as I was concerned that new orders were not coming in fast enough to replace old orders. Furthermore, existing customers are not collecting their vessels (and paying for the delivery) even though the vessels have been completed. See What Keppel Offshore & Marine's Order Book Can Tell Us for more information.

Stocks that I Did Not Buy

Other than electronics stocks, banks and properties also rose by a lot last year. I had an opportunity to buy OCBC at $8.56 in late 2016, shortly after the US presidential elections. However, I gave it a miss, as I was concerned that O&G losses were still mounting. Although rising interest rates would increase banks' profits, there are also risks that their customers could not cope with the increasing interest expenses given the lacklustre business environment. In the longer term, there are also concerns whether fintech would chip away the traditional profits that banks make as financial intermediaries. In short, I had not figured out the banks.

The only major property stock that I had was Global Logistic Properties (GLP). To be honest, GLP made a lot of money for me last year. But with the privatisation of GLP, I had to find a replacement. Potential replacements were Capitaland and Frasers Centrepoint (FCL). Learning the lessons from GLP, I decided that Capitaland at $3.50 was not cheap enough. As for FCL, I was concerned that it had too much debts. I watched it rose from $1.66 before finally buying at $1.92. Still the lingering concern did not go away and I sold it at $2.07.

Stocks that I Bought

If you had read Howard Marks' famous memo "Yet Again?", he mentioned 6 options that investors could take in the current low-return investing environment. These options are reproduced below for easy reference (please read his original memo for a complete understanding of the 6 options):

1. Invest as you always have and expect your historic returns.
2. Invest as you always have and settle for today’s low returns.
3. Reduce risk to prepare for a correction and accept still-lower returns.
4. Go to cash at a near-zero return and wait for a better environment.
5. Increase risk in pursuit of higher returns.
6. Put more into special niches and special investment managers.

His preferred options? A combination of no. 2, 3 and 6.

The equivalent of option 6 for me is distressed assets and stocks unloved and forgotten by the market. There were 2 distressed asset plays last year. The first was Triyards, which I tried to take advantage of Ezra's troubles and potential sale of a controlling stake in Triyards. Unfortunately, this did not pan out and I lost $33K as a result. See Know Your Customers Well! for more information. The second was First Ship Lease Trust (FSL). Unexpectedly, FSL did not manage to refinance its debts and had to seek a moratorium on debt repayment. Nevertheless, it has been selling ships to pay down the debts. If it can successfully liquidate all its ships (or until the debts are fully paid off), there is residual value for shareholders. See Valuation of First Ship Lease Trust for an estimate of the liquidation value of FSL carried out in May last year.

There is actually quite a no. of unloved industries and stocks. The first is telcos, with concerns over whether the entry of the fourth telco would increase competition and erode away the handsome profits and dividends that telcos used to earn. However, my view is that the fourth telco is fairly irrelevant. Already, the existing telcos are competing fiercely against each other through SIM-only plans, data upsize plans and Mobile Virtual Network Operators, etc. See Do Telco Investors Need to Fear the Fourth Telco? I bought into Singtel and M1. 

The second unloved industry is O&G. Here, it is a little tricky, because some parts of the industry value chain are recovering while other parts are still declining. The recovering part is the upstream Exploration & Production sector with the rise in oil price, while the declining part is the ship/rig building sector, as discussed in Is A Recovery for Oil & Gas Shipbuilders Near? The ones in the middle, the Offshore Support Vessel (OSV) sector, is probably entering a trough as new vessels enter the market and increase the supply glut. I decided it was about time to enter the OSV sector, buying CH Offshore, Ezion warrant (it got suspended the day I bought it), Mermaid and POSH.

The third unloved and forgotten industry is the shipping industry. After the bankruptcy of Hanjin Shipping in late 2016, conditions have actually improved a little, with the Baltic Dry Index and World Container Index slightly higher in 2017 than in 2016. I bought Samudera, Singapore Shipping and Uni-Asia.

Another unloved and forgotten industry is hotels. Investors love hotel business trusts that pay distributions regularly, but not hotel companies like GL and Stamford Land. After being alerted to their undervaluation by Mandarin Oriental's spectacular rise and City Developments' privatisation of Millennium & Copthorne, my analysis shows that there is hidden value in hotels. I bought GL and Stamford Land. See Some Hotels Could Be Very Valuable! for more information.

Needless to say, these stocks that I bought have not risen much compared to the electronics, bank and property stocks.

Conclusion

As contrarian investors, it is sometimes difficult not to be depressed when the market moves in the opposite direction. However, we are the ones responsible for our own money. We carry out analysis independent of the market and invest according to our beliefs. To all fellow contrarians out there, I will leave you with Benjamin Graham's advice to Warren Buffett:

"You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right — and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else."

See related blog posts:

• No, the Stock Market Did Not Crash in 2017
• Another Year That Ends with 7 
• What Have We Got After 8 Years of Easy Money?

No, the Stock Market Did Not Crash in 2017

A year ago, I blogged about the trend that the stock market usually experiences a crash whenever the year ends with 7 (see Another Year That Ends with 7). As it turns out, not only did the stock market not crash, it rose significantly. The STI rose from 2,880.76 to 3,402.92 for a 18% gain! 

So what happened? Instead of lacklustre growth like the years before it, the global economy in 2017 staged a synchronised recovery. Locally, the government relaxed property cooling measures and both banks and property developers gained. The strong growth caught many people by surprise, including myself. So, what do I still think about the folklore that the market usually experiences a crash whenever the year ends with 7?

A year ago, as mentioned in my post, I had experienced the crash of 1987, 1997 and 2007, so it is a folklore that I respect. However, to believe and act on it, I need evidence that either the stock market is at dangerously high levels or the economy is on the brink of a collapse. Back in late 2016/ early 2017, I was concerned that the massive liquidity pumped by central banks around the world was propping up asset prices, but that did not help the many companies in many industries that were facing poor business and/or low margins. See What Have We Got After 8 Years of Easy Money? for more info.

A year later, as I revisit the above blog posts, the situation has improved for most of the industries mentioned, particularly for banks and properties. However, other industries have only seen modest and/or uneven recovery, such as Oil & Gas and shipping. In addition, there are industries that are still in decline, such as shipbuilding. Even though the consensus economic outlook is promising in 2018, I remain on the defensive. My own assessment of the financial market and economy plays a more important role in my investing decisions than whether the year ends with 7 or not. Certainly, I am not rushing to invest in the stock market just because the market has safely passed 2017.

Even though the market did not crash in 2017, the folklore that the market usually crashes whenever the year ends with 7 is still something that I respect. But to believe and act on it, I need evidence. That viewpoint has not changed.

See related blog posts:

• Another Year That Ends with 7
• What Have We Got After 8 Years of Easy Money?
• As A Contrarian, You Will Always Walk Alone

Another Year That Ends with 7

You probably have heard of the folklore -- whenever the year ends with 7, the stock market would crash. In 1987, Dow Jones Industrial Average went through the Black Monday in which it crashed 22.6% in a single day on 19 Oct 1987. Stock markets worldwide followed suit. In 1997, Asia went through the Asian Financial Crisis which did not end until nearly 2 years later. The STI went from 2,216.79 on 31 Dec 1996 to 805.04 on 4 Sep 1998, which is a precipitious drop of 64%! Fig. 1 below shows the extent of the crash during that period.

Fig. 1: STI Crash in 1997

In 2007, it was US' turn to experience a financial crisis, which eventually inflicted all other countries in the Global Financial Crisis (GFC). The stock market crash did not begin at the start of 2007, but sometime in Oct 2007 and ended only 1.5 years later. From 3,875.77 on 11 Oct 2007, the STI crashed until it bottomed out at 1,456.95 on 9 Mar 2009 for a steep drop of 62%! Fig. 2 below shows the crash during that period. In fact, 3,875.77 remains the all-time high of STI. For the next 10 years afterwards, the STI never came close to reaching this level.

Fig. 2: STI Crash in 2007

It is 2017 this year, another year that ends with 7. Will history repeat itself and the stock market experience another spectacular crash again?

Personally, I have experienced the crash of 1987, 1997 and 2007. In 1987, I was helping my father to monitor stock prices when he was at work. On that fateful day (20 Oct 1987), I saw prices gapping down by 33% when the market resumed trading from its lunch break. It was such a shock that it became the moment when I knew that the stock market was destined to be a part of my life (see Confessions of a Serious Investor). 

In 1997, I was 1 year away from graduating from university. Being the "smart" guy in the family, I had recommended my father to buy a certain financial stock that had fallen from $3 to $0.75. We never saw the money on this stock again. This crash had the heaviest impact on my family. Because of the financial crisis, Malaysia imposed capital controls, resulting in suspension of trading of all Malaysian stocks listed on the SGX Central Limit Order Book (CLOB) market. All shares were frozen and transferred to the Malaysian stock market. They were only released a few years later. By then, they were mostly worthless. 

In 2007, I was investing with my own money for 9 years when the GFC happened. At the start of 2007, I was uneasy with the speculative fever over structured warrants that pushed stock prices to high levels. Unadjusted for corporate actions, Capitaland reached $8.60, Ezra $6.75, NOL $5.45, SGX $15.40, SIA $19.30, Swiber $3.66! Unfortunately, the money that I pulled out from stocks went into REITs and high-yield business/ shipping trusts, such as FirstShip, Rickmers, MacCookPropSec, etc. which crashed equally significantly. At the depth of the crisis, I estimated I was sitting on paper loss of about 65%! Undaunted, I liquidated half of my bank preference shares and pumped fresh money into the stock market. The market recovered and I recouped all my losses and made some money (see Behind Every Successful Bear Market Recovery is A Cash-Like Instrument).

It is 2017, do I believe in the folklore that the market would crash spectacularly again? I respect folklore, especially having gone through 3 severe market crashes previously, but I needed evidence that a crash is likely, such as sky-high stock prices like the case in 2007. Thus, in the later half of 2016, I was wondering what would cause a crash to materialise. The realisation came when the market did not crash after Brexit happened in Jun 2016: the massive liquidity injected by central banks around the world was propping up asset prices, but that did not help the many companies in many industries which are instead facing poor business and/or low margins, with some companies entering judicial management (see What Have We Got After 8 Years of Easy Money?). Although there is euphoria after the US presidential election that Trump would increase infrastructure spending, cut taxes and regulations and thus speed up the recovery of the economy, he is at the same time advocating protectionist trade policies, potentially triggering trade wars with other countries. Furthermore, increased infrastructure spending would lead to inflation and interest rates rising more rapidly. There is also the risk of capital flight out of non-US countries into US, making US dollar debt burdens more heavy for companies in Asia (see Making America Great Again and Its Impact to Asia). 

Thus, I am not optimistic about the stock market for 2017 and have been shoring up cash positions whenever possible. The crash may or may not happen. But if it happens, I am prepared.

See related blog posts:

• No, the Stock Market Did Not Crash in 2017
• What Have We Got After 8 Years of Easy Money?
• Making America Great Again and Its Impact to Asia

Making America Great Again and Its Impact to Asia

I delayed writing about the impact of Trump's victory in the US presidential election, primarily because I wanted more time to observe his policies. However, since US Fed is meeting this week to discuss interest rate rise, I will pen down my current thoughts. Things will change, as Trump might adjust his policies after he becomes president.

Since Trump's surprise victory, stock markets have rallied strongly. Part of the reasons has to do with some of the positive policies proposed by him, such as infrastructure spending, tax cuts, reduced regulations on banks, etc. If enacted, these policies will increase aggregate demand and speed up the recovery of the US economy. This is a refreshing change, considering that we have had 8 years of loose monetary conditions and the economy has not improved much since the end of the Great Financial Crisis. In fact, risks have increased in some areas of the economy, as described in What Have We Got After 8 Years of Easy Money?

However, Trump's proposed policies are not all positive. Chief concerns among his policies are his protectionist stance and worries that increased infrastructure spending would lead to inflation and interest rates rising more rapidly. Although increased infrastructure spending and tax cuts would strengthen the US economy, if US adopts a protectionist stance and raises import tariffs against other countries, other countries would not benefit from increased US demand as much as previously. This is especially so if other countries engage in a tit-for-tat retaliation against US protectionist policies. Furthermore, given the rise of anti-globalisation sentiments in many developed countries, the risks of increasing protectionist policies and trade wars cannot be ignored. Thus, while the US stock market has valid reasons for rallying, it is a little strange for other stock markets outside US to cheer when protectionist policies have beggar-thy-neighbour effects.

It should be highlighted that US policies have significant impact on other countries, as the world economy is mostly centred around US. US is a major export destination for many countries. Thus, when US decided not to proceed with membership in the Trans-Pacific Partnership (TPP), the TPP is said to be practically dead. When US pulls out of TPP, the net effect is equivalent to all other 11 members of TPP pulling out at the same time. In contrast, Brexit is only one country pulling out of the European Union. Had it been Singapore which pulled out of TPP, the Singapore stock market would have dropped, not risen as it had after Trump's victory.

Although a protectionist trade wall can limit economic benefits spilling outside of US, it does not restrain financial tightening from spilling into other countries. Given the unimpeded capital flow around the world, increase in US interest rates will lead to increase in interest rates in other countries as they try to hold back capital from leaving the country. Not only that, US dollar will rise relative to other currencies as investors get attracted to the better economic prospects in US. Companies that hold large amounts of US dollar debt are especially vulnerable. During the Asian Financial Crisis in 1997/98, regional currencies depreciated significantly against the US dollar (due to unsustainable trade deficits) and companies with large US dollar debts collapsed.

When news of Trump's surprise victory initially filtered through to the markets, stock markets fell precipitiously before rebounding equally sharply. Part of the reason is the reconciliatory tone in Trump's victory speech, which gave the markets hope that he might not go ahead with some of the more controversial policies proposed during the election campaign. It is interesting to note that the markets are willing to discount the negative policies but continue to give full weight to the positive policies. Whether Trump is able to implement the positive policies in full can only be seen a few months after he becomes president. If, for budgetary or political reasons, the policies cannot be implemented in full, the markets will likely be disappointed.

Thus, I am not optimistic about the recent rally in the Singapore stock market. It might continue for some time, but a few months into Trump's presidency, the markets will have a clearer picture of what he can or will do. Also, the interest rate path will become clearer by then.

Related blog posts:

• Why Is Protectionism A Concern For Singapore?
• What Have We Got After 8 Years of Easy Money?
• Is Brexit Just Noise?

How Should I Defend Against the Next Market Crash?

Barely 2 weeks after I wrote The Exit Might Be Narrower Than Expected, both British Pound (GBP) and Gold demonstrated what I have been worrying about. In a space of 1 week, GBP dropped by 3.8% while Gold dropped by 4.4%. GBP dropped after the British Prime Minister announced a timeline for starting Brexit talks with the European Union while Gold dropped on renewed fears of US Federal Reserve raising interest rates on the back of an improving economy. In particular, on Fri, GBP dropped 6.1% within 2 minutes. The sudden drop was rumoured to be caused by a fat finger (i.e. trading error) or computer trading algorithms. Regardless of the actual cause, the fact that the forex markets could not even defend against a fat finger speaks volume about the lack of depth of the financial markets against massive selling volume. It is definitely something that I need to guard against for my own portfolio.

My target asset allocation in the current investing environment is 50% equities and 50% reserves. Although I am wary of the financial markets, I do not believe in holding 100% reserves. During the market turmoil in Jan, I calculated that I need about 35% reserves to guard against a major stock market crash (see Prudence is the Name of the Game). A target allocation of 50%, which is 15% above the minimum required, is considered comfortable and not excessive. Too much cash would lead to erosion of value due to inflation while too little cash would lead to inability to recover from the crash. A rule of thumb that I always use in place of a detailed Value-at-Risk analysis for equities is a loss of 40% at the depth of the crash. Naturally, the loss depends on how severe the crash is and what are the stocks held. During the Global Financial Crisis in 2008/09, the loss was as high as 65%.

Thus, the problem statement becomes how do I invest the 50% in equities such that they will not suffer too much damage and how do I park the other 50% in other assets such that they can preserve their value.

Equities

Looking at my current stockholdings, the elephant in the room is Global Logistic Properties (GLP), which has a concentration of approximately 19%. The stock is a transformational experiment in trying to replicate the success of Warren Buffett. To achieve this, I need to be able to do 3 things: (1) identify a good stock, (2) concentrate, and (3) hold for the long term. Therefore, even if a crash is coming soon, I will not sell out of GLP, unless its business fundamentals deteriorate. Selling out entirely would mean that I cannot achieve at least 2 of the 3 pre-requisites required to replicate his success. Notwithstanding the above, I am happy to reduce the concentration to 15% if the price recovers to my cost price.

The second group of stocks is Oil and Gas (O&G). They are mired in heavy losses currently, but the advantage of this group of stocks is that they have their own dynamics and are less affected by global events. If OPEC were to cut production significantly, it does not quite matter to O&G stocks who wins the US presidential election or when Brexit happens. Over the past 5 months, I have mapped out a model to assess the economics of O&G companies in a series of Oil & Gas posts and will follow the plan accordingly.

The third group of stocks is growth stocks. As their moniker suggests, they grow their earnings over the years. Growth stocks can rise a lot during good times as investors chase after them, making them especially vulnerable to a market crash. However, given their ability to grow over the years, their share prices after the crash should be higher than before the crash.

The fourth group of stocks is dividend stocks. There are 2 types of dividend stocks, namely, those which have a constant payout ratio but the dividend varies with earnings, and those which have a constant dividend. My preference is for the second type of dividend stocks. They resemble closest to bonds that have constant coupons, which give bonds the ability to drop less than stocks, as described in What Can We Learn About Stocks From Bonds. If a stock could give me a constant 5% yield on my historical cost every year, I really would not mind if the stock were to drop 50% in a crash.

A small group of stocks that is worth mentioning is the nothing-to-lose stocks. They are considered nothing-to-lose because the amount invested in them is very small, making them easily written off the moment they are purchased. A brief explanation of them can be found in My Oil & Gas Fightback. Since there is already "nothing to lose" on them, it really does not matter if they were to crash 50% or more.

Reserves

Most of the time, I only need to worry about the risks on the equities portion. This time round, I have to worry about the reserves portion as well due to the extremely low interest rates currently.

Traditionally, the main instrument for parking excess cash is bank preference shares and retail bonds of good companies. However, ever since the redemption of OCBC's 4.2% preference shares in Dec 2015 and the surprise loss of liquidity in retail bonds in Aug 2015 as described in Sneak Attack on My Cash Reservoirs, this instrument has reduced in importance.

Thankfully, around the same time as retail bonds demonstrated hidden liquidity risks, a new instrument was introduced -- the Singapore Savings Bonds. It has 2 important benefits, namely, easy liquidity and 100% capital protection, making it ideal to preserve value and liquidate for stock investments at the depth of a market crash. The disadvantage is that there is a limit on the amount that can be invested.

The other instrument that I have used to park cash this time round is US dollar. Given the impending rise in US interest rates, USD will also rise in tandem as explained in Getting Ready for US Interest Rate Rises. However, there is a limit on the amount of cash that can be parked in USD, as there is not a lot of USD-denominated assets that can be purchased. My preference is not to switch in and out of USD so as not to incur the bid-ask spread.

All other instruments have more disadvantages than advantages. Singapore Government Securities (i.e. government bonds) will fall in value when interest rate rises. Likewise, Gold will drop when USD rises, as demonstrated this week. There is really not many places to park cash safely.

Conclusion

In my opinion, the current investing environment is tricky. But there are also not many places to hide safely.

See related blog posts:

• The Exit Might Be Narrower Than Expected
• Getting Ready for US Interest Rate Rises
• Another Year That Ends with 7

What is Holding Up US Share Prices?

If you had read my previous post on What Have We Got After 8 Years of Easy Money?, you would know that the US equity market has gone on an 8-year bull run even though many industries (at least those in Singapore) are facing poor business and/or low margins. Fig. 1 below shows the performance of S&P500 index since 2012, which is mostly on a straight upward trendline.

Fig. 1: S&P500 Index Since 2012

Yet, when you look at the earnings of S&P500 companies over the same period, they have been relatively flat. See Fig. 2 below (source: Cash Piles at American Companies Are Shrinking). This is due to the lacklustre global economy since 2012.

Fig. 2: Flat Earnings Since 2012

Thus, on one hand, we have flat earnings, but on the other hand, we have rising share prices that have increased by about 73% since 2012. The main reason is of course the massive liquidity unleashed by 8 years of low interest rates and multiple rounds of Quantitative Easing by central banks around the world.

However, it is not just investors who are taking advantage of the cheap and plentiful liquidity to bid up asset prices. Companies themselves are also taking up loans to fund share buybacks and dividends. See Fig. 3 below (source: U.S. Profit Recession Means Debt Fuels Most Buybacks Since 2001). Notice also the bottom chart of the figure which shows the flat EPS growth since 2012, which is consistent with Fig. 2.

Fig. 3: Debt-Fueled Share Buybacks and EPS Growth

Share buybacks can provide a boost to share prices in the short run, but when earnings are flat and companies have to take up loans to fund these buybacks, they may not be sustainable. In the short run, share prices can be out of sync with earnings. But in the long run, the 2 must converge. This is another reason why I am not optimistic about the investing environment moving forward.

See related blog posts:

• What Have We Got After 8 Years of Easy Money?
• The Exit Might Be Narrower Than Expected
• How Should I Defend Against the Next Market Crash?

The Exit Might Be Narrower Than Expected

As expected, but disappointingly, US Federal Reserve did not raise interest rates on Wed. The reasons for my pessimism for the current economic conditions are explained in What Have We Got After 8 Years of Easy Money? Unless we see evidence of coordinated fiscal stimulus from governments around the world to increase aggregate demand, more liquidity via easy monetary conditions will only lead to more value destruction as we have seen so far. Given the precarious investing environment, I have been gradually taking money off the table and building up my defences, before everyone else starts to rush for the exit. Based on the experience of the last 12 months, I believe the exit might be narrower than most people expect.

12 months is not a long time. However, over the same period, we have had at least 3 market declines, namely:

• Aug 2015 - China's renminbi devaluation triggering worries about China's economic slowdown
• Jan 2016 - China's stock market circuit-breaker meltdown and oil price collapse
• Apr/May 2016 - "Sell in May and Go Away" syndrome?

In all these 3 episodes, the declines were fast and furious. See the figures below for the extent and duration of the decline. Note that the no. of days in the figures refers to the no. of trading days.

Fig. 1: STI Decline in Aug 2015

Fig. 2: STI Decline in Jan 2016

Fig. 3: STI Decline in Apr/May 2016

In fact, these 3 episodes are not the only times the stock market has declined so rapidly. As far back as Jun 2013, when then Fed chairman raised the possibility of slowing down and scaling back its bond purchases under the Quantitative Easing programme, the markets had also gone into a tailspin, triggering the famous Taper Tantrum. However, neither the extent or the speed of decline matched those that we observed in the last 12 months.

Fig. 4: STI Decline in Jun 2013

A summary of the declines is shown in the table below.

Period	Start Index	End Index	No. of Days	% Decline	Avg Daily Decline
22 May 13 - 24 Jun 13	3454.37	3074.31	22	-11.0%	-0.50%
24 Jul 15 - 24 Aug 15	3352.65	2843.39	19	-15.2%	-0.80%
31 Dec 15 - 21 Jan 16	2882.73	2532.70	14	-12.1%	-0.87%
21 Apr 16 - 6 May 16	2960.78	2730.80	10	-7.8%	-0.78%

The purpose of this post is not to encourage anyone to sell. Perhaps the market might climb the wall of worry and rise further. However, for those who believe that they can wait until the last moment and run faster than the rest, they might wish to take the above findings into consideration. The exit might be narrower than most people expect.

See related blog posts:

• What Have We Got After 8 Years of Easy Money?
• What is Holding Up US Share Prices?
• How Should I Defend Against the Next Market Crash?

What Have We Got After 8 Years of Easy Money?

2 unusual events happened in July. The first was the Brexit referendum, in which Britons unexpectedly voted to leave the European Union, but the stock markets, equally unexpectedly, did not crash. Within 4 trading days, the Straits Times Index was back to where it was before the vote. It turned out that the markets had correctly predicted that central banks around the world would rush to loosen monetary conditions further to avoid a market crisis from developing because of Brexit. The second was the yields on 10-year Singapore Government Securities dipped below the interest rate of a 1-year fixed deposit that I had placed barely 3 months earlier in Apr. Granted that we are talking about different time periods (Apr vs Jul) and different credit risks (corporate vs government), but the fact that a 10-year government bond could not beat the yield on a 1-year fixed deposit simply amazes me. Is this a warning sign that the financial markets are close to a top?

Actually, both these 2 events are related. Because of a rush by central banks to loosen monetary conditions, which were already very loose, yields on government bonds dropped further, to the extent of going below that of a fixed deposit. Since the Global Financial Crisis (GFC) in 2008, central banks have kept interest rates at historically low levels. US interest rates are now only 0.25% to 0.5%. Several countries, such as Eurozone, Japan, Denmark, Sweden and Switzerland have even taken the unprecedented step of dropping interest rates to negative levels since Jun 2014! As if low/ negative interest rates are not sufficient, US and other central banks have carried out multiple rounds of Quantitative Easing (QE) to flood the markets with cash since Nov 2008!

Back in Nov 2008, if someone had told me that interest rates would remain at historically low levels for 8 years and central banks around the world would take turns to implement multiple rounds of QE, I would have predicted a booming global economy at risk of overheating and a raging bull run in the equities and bond markets!

Yet, 8 years later, what have we got? Sure, in the financial markets, we have a very long bull run in US equities and global government bonds. In Singapore, however, the STI did not even come close to breaching the level achieved prior to GFC, stopping at around 3,500 points versus the peak of around 3,800 points in Oct 2007.

In the real economy, the picture is even worse. Instead of a booming economy at risk of overheating, we have poor business and/or low margins in industries ranging from Oil & Gas, agriculture, commodities, shipping, shipbuilding, properties and banks. In the REIT space, almost every sector ranging from office, retail, hotel and industrial are facing challenges, due to either oversupply or changing demand. In some of the industries mentioned, some companies have even entered judicial management. Banks, being the barometer of the general health of the economy, are facing rising Non-Performing Loans. This is not a picture of a booming economy, but rather, a picture of an ailing economy.

Some people might argue that the reasons for the economic difficulties are OPEC countries flooding the crude oil market, property cooling measures and slowing global economies, especially that of China. These are valid reasons. However, aren't low/ negative interest rates and QE supposed to revive the slowing global economies? With the exception of the US economy, 8 years of low interest rates and multiple rounds of QE have not been able to add to the overall demand in the global economies. Instead, the flood of easy money have added to the overall supply by making it easy for companies to borrow money and build capacity. Ironically and in spite of the flood of easy money, what we have is not more money, but a fairly wide-ranging destruction of value across many industries. Investors who have lost money in stocks in the above-mentioned industries, despite a long-running US equities bull market, would understand best.

The value destruction described above affects companies and investors. Losses are, after all, part and parcel of investing. However, what is of major concern is that the same scenario seems to be playing out at the individual consumer level in the area of residential properties. On the one hand, we hear stories of a glut of completed properties and difficulty in finding tenants. At the same time, we also hear news of some new residential properties selling like hot cakes. Properties are not cheap these days. Without $1 million, you cannot buy a private property with enough space for a family of 4. Yet, there is no shortage of buyers for such properties. The situation is reminiscent of Offshore Support Vessel (OSV) companies which took on huge debts to expand their fleets of OSVs rapidly when oil price was high but are now having difficulties finding charterers to hire their OSVs. For these OSV companies, they will have to significantly tighten their belts and slowly pay down their debts for many years in order to stay afloat. If the same situation affects residential properties, many people will have to likewise tighten their belts and pay down debts. The local economy, which is predominantly services-based, will grow fairly slowly for several years.

The US Federal Reserves will meet to discuss interest rates in the coming week on 20 and 21 Sep. I doubt they will raise interest rates at this meeting. However, after witnessing the widespread destruction of value across multiple industries, I am in favour of raising interest rates.

Interestingly, despite 8 years of low and even negative interest rates, it requires the occurrence of an extraordinary event with economic significance, the Brexit referendum, and the equally extraordinary absence of an accompanying shock to the stock markets, for me to realise what is happening. Having said that, it does not mean that the financial markets will crash soon. It has been 3 years since the taper tantrum of Jun 2013 when then Fed chairman raised the possibility of scaling back its QE bond purchases, but the financial markets have gone on to achieve new heights. However, I have no wish to invest further in such an environment and will shore up my cash position when the opportunities arise.

If you wish to have a second opinion on the state of the global economies, you can refer to the writings of Rolf Suey.

See related blog posts:

• What is Holding Up US Share Prices?
• The Exit Might Be Narrower Than Expected
• How Should I Defend Against the Next Market Crash?

Is Brexit Just Noise?

And so, Brexit fears went as quickly as they came. Within 4 trading days, the Straits Times Index had recovered all of its losses from news of the Brexit referendum, giving very little time for investors to either buy or sell. Does the speed at which Brexit fears came and went and the relatively limited damage to the stock market make Brexit a non-event and noise to be ignored by investors of all stripes?

First of all, whether Brexit is a noise or not depends a lot on the investor's investment strategy. For a passive investor, Brexit (and most other events) is just noise. Regardless of Brexit or not, an investor using Dollar Cost Averaging would continue to put in the same amount of money at the same fixed time intervals. Likewise, an investor relying on Portfolio Rebalancing would rebalance his portfolio at fixed intervals or when the asset allocation moves away from the target allocation by a pre-defined threshold. For a long-term active investor with an investment horizon of 5 years or more, Brexit is also irrelevant as UK would have completed its exit from EU and established new relationships with the EU and other trading partners. However, for active investors with a shorter investment horizon of 2-3 years, Brexit is not without impact. Just because the stock markets recovered rapidly after the Brexit news does not make it irrelevant and just a noise.

As news of the Brexit referendum results broke out on 24 Jun, Japan's Nikkei index crashed 7.9%, Germany's DAX index dropped 6.8%, France's CAC index fell 8.0% while UK's FTSE index declined by a much smaller 3.1%, despite being the protagonist of this episode. When I wrote my initial thoughts about Brexit in What's Next for Brexit?, I was still wondering why UK's FTSE index fell much less than the other European stock markets. It turns out that the answer lies with the forex markets.

Over the same period, British Pound (GBP) declined by 8.1%, from USD1.4877 to USD1.3679. EUR also declined, but by a smaller 2.4%, from USD1.1385 to USD1.1117. On the other hand, JPY rose by 3.9%, from JPY106.16 to JPY102.22 per USD, as investors fled from GBP to safe havens such as JPY. The implication of these currency fluctuations is that UK's goods have suddenly become 8% cheaper while Japanese goods have become 4% more expensive. It is no wonder then that Japan's (and other European) stock markets dropped more than the UK stock market! To a global investor, should Brexit be considered economically irrelevant and just noise to be ignored?

Now, 2 weeks after the Brexit referendum, GBP has declined further to USD1.2954, EUR stayed relatively flat at USD1.1051 while JPY rose further to JPY100.54. From just before the Brexit referendum till 8 Jul, GBP has declined by 12.9%, EUR by 2.9% while JPY rose by 5.6%. Over the same period, in the stock markets, UK's FTSE index has not only recovered all of its Brexit losses but also gained 4.0%, Germany's DAX index is still losing 6.1% while Japan's Nikkei index is still down by 7.0%. The economic effects of Brexit are just beginning.

A major reason why global stock markets did not fall off the cliff after the Brexit news was the realisation that central banks around the world would loosen monetary policies to stave off any economic fallout from Brexit. The impending US Fed interest rate hike went from near certainty in Jun/ Jul to being postponed at least until the end of the year. This has pushed up stocks that are sensitive to interest rates like REITs. On the other hand, bank shares have been relatively flat, ranging from -1.5% for DBS to 1.9% for OCBC during the 2-week period. If you think about it, if interest rate sensitive stocks are gaining from lower interest rate expectations, why are banks not suffering from it? Banks make money from the interest rate differential that they charge on the loans and pay on the deposits. Since the begining of this year, the 3-month Singapore Interbank Offered Rate (SIBOR) has declined from approximately 1.25% to 0.93% as at end Jun. They have also reduced the interest rate charged on housing loans recently. Coupled with lower loan growth and no improvement on Non Performing Loans from the Oil & Gas industry, banks are likely to see lower profitability moving forward, until US Fed decides to raise interest rates. To a local bank investor, should Brexit be considered a non-event and just noise?

If local banks are going to see reduced profitability from lower interest rates, imagine what would happen to European banks which had shown signs of stress even without the threat of Brexit in early this year, due to increased regulations, global economic slowdown, commodity price collapse, etc. (see Why investors are freaking out over European banks (again)). With Brexit, there is further economic slowdown in Europe, reduced cross-border business, forex losses at UK operations, and now, reduced profitability from lower interest rates. European banks are a major cause of concern (see Italy eyes €40bn bank rescue as first Brexit domino falls). Having said that, it is unlikely that there would be a repeat of the Lehman Brothers incident as central banks would step in to rescue any banks deemed as systematically important.

In conclusion, even though stock markets have recovered quickly from news of the Brexit referendum, it does not mean that Brexit is economically irrelevant and can be treated as noise and ignored, at least not by active investors with shorter investment horizons. It is akin to leaving the door unlocked and no thief came in. Does it mean that it is safe to leave the door unlocked? We might just be plain lucky.

See related blog posts:

• What's Next for Brexit?
• It Is Possible to Survive a Currency Depreciation
• Making America Great Again and Its Impact to Asia

What's Next for Brexit?

I seldom like to blog about the latest financial news, primarily because I am a slow but deep thinker. Nevertheless, after the financial mayhem that Brexit caused on Fri, Brexit was at the top of my mind. So, I might as well pen down my thoughts. Furthermore, blogging helps to sharpen the thoughts on it. The current thoughts that you see in this post are already the second iteration. The first iteration of thoughts are similar to the general consensus, which is that UK is likely to break up with Scotland seeking independence and UK faring worse than the European Union (EU) post-Brexit. The second iteration of thoughts, however, is a refutation of the first iteration. Let's begin.

The single most important question after Brexit is, what will happen to UK? Will Scotland and Northern Ireland seek to break away from UK so as to remain in the EU? The initial thinking was yes, because Scotland voted clearly in favour of staying within the EU. In fact, when Scotland rejected its own independence referendum in 2014, it was partly on the premise that UK would remain in the EU. Now that Scotland will be taken out of EU against her wish, it is likely that the Scottish Government would seek a second referendum and succeed in gaining independence. It is interesting to note that in the 2014 independence referendum, 55% voted to stay in the UK. In the Brexit referendum, 62% of Scottish voters chose to stay in the EU. A net 7% of Scottish voters do not mind leaving UK but staying in the EU. So, a new independence referendum would definitely result in Scotland's independence from UK.

The current thinking is, Scottish independence is unlikely. With all these referendums happening, it seems that people could choose to conduct a referendum and vote to leave a country or union as they wish. However, referendums actually need approval from higher authorities for the results to have any legal effects. In the case of the 2014 Scotland independence referendum, approval from the UK Parliament was needed (see Agreement between the United Kingdom Government and the Scottish Government on a referendum on independence for Scotland). To run another independence referendum, similar approval would be required. Given the shock results of the Brexit referendum and the likely outcome of the next Scottish independence referendum, nobody would be in the mood for another shock.

The more important reason why Scottish independence is unlikely is that none of the major powers wish to see a break-up of UK. UK is a major ally of US, often siding with it on major issues. A UK without Scotland would be weakened, which would be to the disadvantage of US. This is why President Obama said that the special relationship with UK would remain despite Brexit. Even the EU, despite the current squabbles with UK, would not wish for a weakened UK when it faces Russia to the east. Thus, the major powers would tell the Scottish Government that a Scottish independence would not be welcomed, at least in the near future. To understand the geo-political considerations of nations, a very good book to read is George Friedman's The Next 100 Years. Anyway, as will be explained later, staying within UK might not be a bad option.

So, UK is likely to remain intact with Scotland and Northern Ireland staying put. The next question is, will UK enter into a long-term decline post-Brexit? Together with the earlier question, this question has implications on the value of UK assets and British Pound. UK would lose privileged access to the EU single market that is reserved for EU members. It might also see companies relocating across the English Channel to EU. All these present serious challenges for UK. However, as a civilisation, UK/England has faced significant challenges in her history, recovered and prospered. Despite years of war, England failed to conquer the whole of the British island and had to share the island with Scotland, yet, both nations managed to put aside their historical rivalry to join in a political union to create the Kingdom of Great Britain that would later dominate the world. Also, despite failing to gain an edge over France in the 100 Years' War, UK/England went ahead in the 16th century to build an empire that would eventually span across the entire globe. In addition, despite losing its first empire (i.e. America) in the American War of Independence, it went ahead to build a second empire in Asia, Africa and the Pacific. During this period, UK also ushered in the first industrial revolution that changed the world forever. It was only in the last century that UK declined, no thanks to the 2 world wars fought in Europe. The most glorious days of UK were actually when she was looking outwards towards the rest of the world. It would be a mistake to write off the British people. Thus, UK would also recover from this event and prosper in the medium to long term.

In the short term, UK would suffer an economic decline due to investors' uncertainty over the eventual shape of UK, reduced cross-border trade with EU, relocation of companies to EU, etc. She would also have to re-establish trade pacts with other countries. There is a global backlash against globalisation and free trade currently, which is one of the reasons contributing to Brexit and the rise of nationalism in many countries. However, given UK's status as the 5th largest economy in the world and the fact that the existing EU trade pacts are going to be missing the UK portion, I believe that UK should not have much difficulties re-establishing such trade pacts, so as to make whole the EU trade pacts at least.

The third question from Brexit is whether other EU members would be emboldened by the move and follow UK out of EU. The implication for this question is whether EU and Euro will survive. In the short term when UK is suffering an economic decline from Brexit, the answer is no. EU members who aspire to do their own EUxit would want to see what happens to UK first before making the move. However, in the medium term, if UK prospers despite leaving the EU and if EU remains the current state, then yes, more countries will exit EU.

EU was born out of a desire to end the centuries of war waged among the various civilisations in Europe and to replicate the large single market of US. However, despite the grand and noble vision, EU remains very much a work-in-progress after almost 60 years of existence. The main issue is the unwillingness of individual countries to relinquish further power to a central EU government (i.e. European Commission) for complete integration. For as along as EU citizens see themselves as British, Germans, French, Greek, etc. and not as EU citizens, there can no integrated and united Europe like the US. Look at the economic side of the union. There is economic and monetary union, meaning EU members have a common set of trade rules and can share a common currency and a common central bank, but there is no fiscal union, meaning there is no fiscal transfer of money from one member to another via a central government budget. Thus, when the threat of Grexit erupted almost a year ago, individual EU member governments had to approve the bailout for Greece instead of the European Commission dispensing money to help its member state in need. As an analogy, when West Germany merged with East Germany, if West Germany had refused to help East Germany, very soon East Germany would not want to be part of a united Germany. Thus, EUxit, whether Grexit or Brexit, is only a matter of time. I just did not predict it to be Brexit. Unless EU integrates further, the likely outcome is some EU members will follow the footsteps of UK in leaving and the Euro will fall apart.

The figure below shows the performance of the UK and European stock markets on the first day after the Brexit news. 

European Stock Market Performance on Day 1 after Brexit News

The UK market dropped 3.15%, but the German, French and Spanish markets dropped even more, at 6.82%, 8.04% and 12.35% respectively. If the conventional wisdom is that UK will fare worse than EU post-Brexit, why is it that the German, French and Spanish stock markets dropped more than that of UK? Granted, this is only Day 1 after the Brexit referendum, but it is something for us to think about.

Finally, the most important question for investors is, will markets recover or continue to tank further after Fri? It is difficult to answer. In Fri's stock market rout, banks led the decline. Early this year, even without the threat of Brexit, European banks had shown signs of stress with doubts over the banks' ability to meet their liabilities in contingent convertible (CoCo) bonds. With Brexit, there is further economic slowdown, reduced cross-border business, forex losses at UK operations, etc. The current thinking is central banks will step in to prevent a repeat of the Lehman Brothers collapse, so perhaps it is not as bad as it seems. The stock market rout in Jan this year taught me that if I cannot figure out what the market will do, at least I must figure out what I should do.

See related blog posts:

• Is Brexit Just Noise?
• Making America Great Again and Its Impact to Asia
• Financial News Can Be Very Scary At Times

Financial News Can Be Very Scary At Times

The trading year kicked off with a decline in Chinese equities and a fall in Chinese Yuan (CNY). The news that China had allowed its currency to fall further since the depreciation last Aug triggered further declines in global equities. Aggravating the worries was news that China's foreign exchange (FX) reserves had declined by a record USD108 billion in Dec alone and by USD513 billion in 2015. Having experienced the Asian Financial Crisis (AFC) in 1997/98 where regional currencies depreciated significantly and set off a recession and a deep bear market in equities, I started to worry whether there would be a repeat of AFC.

The news flow is worrying enough. As mentioned earlier, China's FX reserves had declined by a record USD513 billion in 2015 to USD3.33 trillion, which represented a decline of 13.3%. Yet, CNY had not depreciated against USD by much. A year ago, the exchange rate was 1 USD to 6.2556 CNY. A year later and with a 13.3% decline in FX, the exchange rate is 1 USD to 6.5788 CNY, which is a much smaller decline of 4.9%. Even though China has the largest FX reserves in the world (the next largest FX reserves is Japan's at USD1.23 trillion), it set me thinking whether China has sufficient reserves to defend its currency from further depreciation. Add on the news in Dec that China had created a CNY exchange rate index referencing to a basket of currencies instead of solely to USD, it further suggests that China is prepared to depreciate its currency against USD further. All these are truly worrying news.

Fig 1: 1-Year Movement in USD:CNY

A very intense analysis was carried out over the weekend to determine whether there would be a repeat of AFC. Looking back at AFC, countries that faced large capital outflows had several options (other than seeking assistance from the International Monetary Fund):

• Allow its currency to depreciate
• Raise interest rates
• Impose capital controls
• Do any combination of the above

In China's case, raising interest rates is out of the question, as doing so will further cause its economy to slow down. In fact, it is doing the opposite to stimulate its economy. China, however, has capital controls in place. The big question then is how tight and effective are the capital controls in stemming the outflow. Since I am no expert in macroeconomics, I turned to the internet to search for answers to this question. The answers were found in an article by The Economist at Capital flight from China: Flow dynamics. A crude assessment suggests the article to be correct, since if the capital controls were weak, China would risk aggravating the outflow by lowering interest rates. In any case, China could always tighten further its capital controls should present ones be insufficient.

Having resolved the biggest risk, I started to wonder why was I not aware of the CNY depreciation in 2015 given that it was such a big news. Was it because I had focused so extensively on US' interest rate rise in the West that I became oblivious to the emergence of an even bigger risk in the East? The answer can be found in the CNY:SGD exchange rate movement below.

Fig 2: 1-Year Movement in CNY:SGD

The CNY:SGD exchange rate had barely moved in 2015! A year ago, it was at 1 CNY to 0.2149 SGD. A year later, it is now at 1 CNY to 0.2171 SGD. Despite all the news about CNY depreciation, CNY actually appreciated against SGD by a very slight 1%! The figure below shows the relative movement of CNY against the major currencies of Euro (EUR) and Japanese Yen (JPY). A positive figure means that CNY rose against the competing currency.

Fig 3: 1-Year Movement in CNY Against Major Currencies

Compared to a year ago, CNY declined by 1.1% against EUR and 4.8% against JPY, in addition to a 5.0% decline against USD. The recent decline against JPY in Jan was due to investors rushing into JPY to seek a safe haven. However, as late as Nov, CNY had appreciated against EUR and JPY, notwithstanding the widely announced CNY depreciation in Aug that triggered a global equities rout that month! The figure below shows the currency movements from USD's point of view.

Fig 4: 1-Year Movement in USD Against Major Currencies

With the exception of JPY, USD had appreciated by 5.2%, 4.1% and 6.3% against CNY, EUR and SGD. So, really, the much talked about CNY depreciation against USD has as much do to with USD strength as well as CNY weakness! If it were solely CNY weakness, we would expect it to depreciate by similar margins against EUR (and other currencies like SGD) as well, but it did not. On the other hand, it is quite clear that USD is appreciating against almost all major and regional currencies. Yet, financial news choose to focus on CNY weakness rather than USD strength.

Also, it was not too long ago when EUR and JPY had depreciated significantly against USD. See the figure below for the 5-year movement of USD against major currencies.

Fig 5: 5-Year Movement in USD Against Major Currencies

Nobody raised any concerns when EUR depreciated by 26% or when JPY depreciated by 45% against USD over the 5-year period, but when CNY depreciated by 5.2% in Aug and Jan, it became extremely big news. Even though China's slowing economy and CNY weakness pose important risks to the global economy, there is no need for financial news to be so dramatic!

To conclude, there are several lessons that I learnt from this episode, namely:

• Financial news can be more scary than things really are at times.
• I should not focus exclusively on a much heralded risk and become oblivious to the emergence of a much greater risk.
• A position of weakness (i.e. overexposure to stocks due to a tactical bet on the January effect) can affect rational thinking.

Lastly, I leave you with a quote from Peter Lynch, "There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.".

See related blog posts:

• I Don't Know Where The Market Is Heading, But I Should Know Where I Stand
• Confidence Can Only Be Built From Within
• Know Yourself

What I Learnt About Stock Investments from the DomiNations Game

A few months ago, I downloaded a mobile game called "DomiNations". This game is similar to the "Age of Empires", in which you develop your civilisation and lead it through different ages. 

DomiNations Game

Civilisation View

Besides developing buildings, you could also lead an army to attack and loot other players. Likewise, you could also be attacked by others. To master the game, I tried to search online for an official game manual which could describe the strengths and weaknesses of different buildings and army units, as well as how to place the buildings for the best defence. Unfortunately, I could not find a good game manual, much less an official one. It is like the stock market, isn't it, which does not come with an official game manual. It does not teach you what stocks to buy, when to buy and when to sell. Although this void is filled by many investment books written by others, there are still gaps. For example, there is actually no book that talks about "troubleshooting", which advises you what you should do when the stock market "malfunctions", i.e. crashes. 

Consider the recent stock market downturn in Aug, which book could you rely upon to advise you how to navigate the downturn? While there are many investment books on how to pick stocks, read technical charts, analyse financial statements and understand investor psychology, I am not aware of any book which is able to guide investors on how to navigate a stock market decline. The closest book I could think of is Jeremy Siegel's "Stocks for the Long Run", which shows that historically, Sep is the worst month for stocks and Oct is the most volatile month (but can be up or down). Even so, it is not a fool-proof guide; it requires quite a lot of faith to believe that the worst is over once you past Sep and Oct. It is also not a context-sensitive guide; does what is generally true apply to the economic situations we had in Sep when China was slowing, interest rates were rising and oil price was falling, etc? In situations where there are no official game manuals, there are only 2 ways that players can learn how to be a better player.

Learning from Mistakes

When there is no official game manual, the best way players can master the game is to experiment and learn what works and what does not. In the DomiNations game, I thought my original placement of defensive buildings was good. It worked the first time I was attacked, successfully repelling the attacker with minimal loss of gold and food resources. However, when a more sophisticated attacker came the second time, my city's defences were completely and utterly overrun! It exposed, firstly, fundamental flaws in my defensive placements, and secondly, but more importantly, over-confidence in my original defensive strategy. The moral of the story is this: when you win, you practically learn nothing, but when you lose, you learn a valuable lesson in what does not work. In fact, the greater the loss, the more deeply you will learn and not repeat it. The more mistakes you make, the more knowledge you gain on what does not work. Over time, as you gain more knowledge on what does not work, you will eventually become a better player.

Winning generally does not teach you anything. Most people, when they win, they will bathe in the euphoria of winning. Seldom will anyone analyse the reasons for the victory, and even if he does, he might attribute it to the wrong reasons, which will only serve to increase the hubris of the player and eventually lead to a greater downfall! To win, you need a combination of factors in your favour, but to lose, you just need one single key factor against you. Thus, when you win and you managed to find a reason for your victory, it might be only one out of many factors contributing to your win. But when you lose, the key factor resulting in your loss is usually clearly visible. As this might not be the only factor contributing to your loss, the more losses you have, the more factors you will be able to identify that affect the outcome of your battles. The more factors you are able to have in your favour, the more likely you are able to replicate success in your next battle. So, remember to learn from your mistakes!

Learning from Others

In the DomiNations game, you could join an alliance with other players, chat with them and observe their defensive placements. Likely, these players have been playing the game longer and gained a lot more experience than you have. To save time and efforts in learning from your mistakes, you could join an alliance and learn from them. Where there are unofficial game strategies written by experienced players, read them too. It will save you from a lot of unnecessary heartaches later!

Conclusion

While I might be describing my experience from playing a mobile game, these lessons are equally applicable to stock investments that do not come with an official game manual. Learning from mistakes and learning from others are the best ways to become a better investor. Despite having 29 years of experience in the stock market, I am still learning from mistakes and I also have alliance members whom I can learn from – investment books in the library and financial bloggers on TheFinance.sg and Singapore Investment Bloggers! 

Thanks for staying tuned to this blog throughout the year. Wishing all readers Merry Christmas and a Happy, Prosperous and Healthy 2016! 

See related blog posts:

• Wealth Management Lessons from the Railroad Tycoon
• The Best & Worst Months for Shares