Monday, December 31, 2018

Thinking of Every Investment In A 10 Year Timeframe Will Help Frame Your Decision Easier

Happy New Year Folks!

With the official start in 2019, I wanted to start with an article that advocates a long term mindset strategy that can help you make better informed decisions as investors.

This is something which I've personally used when I look into buying the equity of these companies.

It has helped me tremendously from the very first I began investing, especially the way I framed my thesis into making an informed decision.

Investing is an incredibly tough and arduous activity because many investors made them so.

For years, folks have begun to experiment on deep theories and implement different strategies to meet the needs of their returns, often high returns that ended up not quite working for them.

For beginners who have never touched investment previously, I can sympathize with them.

With the ubiquitous of news floating around these days, it gives people plenty of choices to ponder upon which can be good if they know how to be patient and dissect each information to their advantage. Unfortunately, we are born to be impatient in nature and are often blinded by greed which can lead us to the wrong side of ending.

Fortunately, there is one strategy which I think it could help.

That strategy is to consider every investment that you make in a 10-years time frame.

Now, at face value, you may ask me if holding on to a stock that long warrants a feasible strategy.

Read it again.

Positioning ourselves into thinking in a 10 year time frame doesn't mean that we have to hold the position for that long.

All it does is it gives us a different perspective looking into things and help frame our decision easier, ensuring that we consider all aspects of the business cycle, valuation and be mindful of the potential downsides so it does not throw us into the deep end of getting into the hottest wrong stock in town (Hello Creative).

If you buy a company with that sort of mindset to begin with, and for any reason, Mr Market decides to throw you a surprise by appraising it 20% higher in a few months time for instance, then you are most welcome to divest them when you see fit.

Again, most money is made when you purchase so it is imperative that you purchase with a solid reasoning and margin of safety.

You can also use the 10-years time frame strategy if you are a strong dividend investor but an amateur at valuing companies.

What this means is you are strong in your capital and you have a large base which makes it easier to pursue a dividend investing strategy.

Because your capital is large, the required return on your dividend investing doesn't have to be on the extreme end on the high.

This entails that you avoid companies that either pays out high payout ratio or high dividend yield that might sound you out a little bit as a trap. So you filter a lot of fluffy companies out that will increase your risk.

You ended up with a slightly "safer" companies after the filtering, assuming you have some basic knowledge to read up on the business model, history of the company, and financials (free cash flow in particular).

So you picked up a company, and say for instance it's Far East Hospitality Trust or Far East Orchard Limited.

One is a Reit, while another is an investment holding developer company.

The latter owns the former some 30% or so.

Far East Hospitality Trust (FEHT) is a pure Singapore based real estate investment trust company with the principal investment strategy of investing in the hospitality industry such as hotels and service apartments on a long term basis.

FEHT is currently trading at 60 cents, which gives a valuation of a forward dividend yield of 6.9% and a price to book value of about 0.7x.

Their properties are not exactly your typical A-grade well known of Fullerton or Marina Bay Sands, but they are a very respectable upscale to midscale grade of your Oasia Novena or Rendezvous Hotel. They also have a few in the neighbourhood area such as the one in Changi.

If you see the lease tenure of these buildings, they will at least last on average another 60 years or so and possibly seek an extension after that, which by then will not be my concern anymore because I am probably gone from the face of this earth at that stage.

Sure, they will need to ramp up to enhance some of the old buildings for maintenance and to remain competitive and this will need money but a good management is there to watch this out for us.

Now, if you are a beginner and you adopt the 10-Years time frame strategy I was advocating in this article, then you'd know that at the end of the 10 years, you'd have received a dividend return amounting to 6.9% x 10 years = 69% return, without accounting for any capital gain (or loss).

You can then look at it two ways.

First, you look at your dividend return as a part of your overall ROI on your capital payback. You know that doing the maths you'll get your money back after around 14.5 years or so (100/6.9). We have mentioned that the lease tenure of these properties goes well beyond this 14.5 years so just by sitting doing nothing and assuming FEHT is still around after that, you are likely to end up winners as an investor.

The returns might be slow, but you get the idea.

And ending up as winners means you beat 90% of the retail folks out there who are blindly losing their money not knowing why or how.

Second, you can take a look at the dividend you received as part of your reduction in the company's residual valuation.

This is actually similar to point number one I was making with the difference only by looking at it from a different angle.

If you have received a dividend return of 6.9% x 10 years = 69% return, which is equivalent to 41.4 cents, and you deduct this from your purchase price of 60 cents, then your average price will go down to 18.6 cents. If the NAV of the company stays the same after 10 years (which most likely be or can even increase for good Reits), then the valuation of the company will become so attractive at Price to NAV of 0.2x.

The same can be said of Far East Orchard Limited, which currently trades at 5% dividend yield and an attractive valuation of 0.4x Price to Book.

Even if this investment ended up as a dud or trap at the end, you get your money back through dividend after 20 years and you can be sure companies like Far East Orchard are less likely to go bust, with their history track record.

Final Thoughts

For folks like you and me who's been investing for sometime, we are always looking at returns differently in a way we wanted to challenge ourselves harder than simply just floating above the water.

But the challenge for the new investors is surreal and real.

They are not only overwhelmed by the seemingly high returns their friends are making but many are attracted to value traps or companies they buy at the peak and ended up losing their hard earned money, which spiralled down as scars for the rest of their lives.

To begin well a new investor has to be patient, remain calm and accept that floating above the water in the first few years is the norm. And most importantly, adopt the correct mindset and strategy that he can improvise after getting more experienced in the market over time.

Thanks for reading.

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  1. Hi B,

    Regarding holding stocks for the long term,
    How do you balance conflicting emotions that you can be right eventually in the long run (example 10 years) VS being continually wrong all this time?

    Also, how often do you review the news of your investments in order to adjust your views of its valuation?

    1. Hi INTJ

      Happy new year.

      I usually review my news on a daily basis. I just love doing that as a process. But for some people who doesn't have the time, I think it's fair to do once in a quarter when the financial results come out.

      Regarding being right or wrong, our track record should really tell us something over time too. It's about whether we can trust the process that we implement for ourselves and earned that trust over time.

  2. Hi B,

    Happy New Year.

    All the best to you and your family in 2019.


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