10 Lessons Learnt from Mr Market: Part 1

This is a two part series where I consolidated all my reflection and lessons learnt into two posts. This is so that it will be easier for one to refer to and hopefully these lessons learnt are relatable to what you have experienced in your investing journey.

1. Importance of Interest Rate in specific industry

Imagine yourself as a borrower during a low interest rate environment, as a borrower with floating rates you will be paying less interest to the lender. This analogy is the same for REITs as majority of their acquisitions are funded by debt. Low interest rate is beneficial to REITs or borrowers but detrimental to banks or lenders as the lenders will be receiving less interest if the rate to their loan is floating. This is reflected on the price of some REITs and banks. Some REITs such as Ascendas Reit and Mapletree Industrial are not affected and are up 8% and 11% respectively. On the other hand, banks such as DBS is still down 19% YTD.    

I previously shared with someone about my thoughts on REITs. I believe that with the low interest rate environment, we should be looking at the spread between risk free rate and the dividend yield of the REITs instead of metrics such as P/B ratio. I shared with him how the yield spread when I bought Mapletree Logistics in November 2018 was about 4%. This was before Fed announced the reduction in interest rate, interest rate was further reduced recently to 0%-0.25%. This results in 10Y SGS Yield to be 0.9%. The current yield spread of MLT is about 3% which is slightly better than the yield spread in February when it was just about 2.4%. 

This is not a recommendation to buy REITs but I believe that there’s still room for some capital appreciation but I think that the downside risk will be higher than upside risk if Fed announces an increase in interest rate prematurely. Therefore, I have slowly built up my position in DBS for long term holding.

2. Importance of not killing your golden goose that lays golden eggs and not price anchoring

I cannot stress the importance of not killing your golden goose that lays golden eggs. Using REITs as an example, there are some REITs where I will describe it as golden goose. They are Ascendas Reit, Mapletree Industrial, Mapletree Logistics, Mapletree Commercial, CapitaMall Trust, Frasers Centrepoint, Keppel DC Reit, ParkwayLife Reit. These are REITs where one shouldn’t sell and to add if there’s discounts to its price. They are solid as they are well managed with increase in DPU every year, the management thinks of the unitholders’ interest where they will not deal with dilutive acquisition that will only benefit managers themselves. It’s extremely regret for myself to sell prematurely when I see it flew even higher. This leads me to my second point – Price Anchoring.

Having been monitoring the share price performance of MLT prior to my purchase in 2018 where it was trading range bound. I thought to myself whether I could realise some profit before buying back at or near my initial buying price. The buyback failed as I was resisted by Price Anchoring. Price Anchoring refers to a behavioral bias in which the use of a psychological benchmark carries a disproportionately high weight in a market participant’s decision-making process. 

Price Anchoring is still my biggest enemy. Unfortunately, I am still practising price anchoring. In my case, Price Anchoring happens when I set a target price and any price that is above target price is considered expensive. This resulted in me missing many opportunities. In the case of Covid-19 market crash, I kept telling myself that a 10% gain after it has bottomed is expensive which caused me to stay out and see it going even higher. If I have thought in another perspective where the price is down x% from the peak, it will be a discount, I could have bought more. Luckily, I applied this mentality on DBS else I would have not averaged down at around 20% from my initial purchase price. Though it is not exactly 20% off my initial purchase price, at least I did not miss the opportunity due to Price Anchoring.

3. Importance of sticking to your plan and not deviating much

I believe the second point of price anchoring is related to the third point of sticking to your plan and not deviating much. I am referring to the plan for averaging down your stocks that you wish to do so. When the market was crashing, I crafted a plan on the price I should average down for DBS. The intensity of the crash was so powerful that I decided to average down from the initial 10% to 15%. It was then adjusted further multiple times to 20% – 30% below my purchase price. 

As someone who has limited bullets compared to working adults who can average down multiple times, my warchest was very precious to me. The problem with young investors who are cautious is that we aim to buy at the bottom but it is impossible to time where it is. Sure, I did make use of US futures to decide whether I can wait for another day to transact but at the end of the day we cannot solely rely on it. 

I think it is fine to adjust depending on how intense the crash is but we still want to stick to the plan and don’t be greedy. Back to my example when I adjusted my first average down on DBS at 30% below my purchase price. The price that I wanted to average down was $16.88 which actually happened on March 23 but the US futures was in the red which I thought that I can wait for another day. One day later, market bottomed and it recovered quickly. Price Anchoring kicked in and this resulted in me fixing the buy price at $16.88. As you can tell, I did not buy at any price until one month ago where I started thinking that it’s actually alright to average down at 20% below my initial buy price. 

Therefore, I believe the second point of price anchoring is related to the third point because the reason why we would like to DCA into the market is to prevent timing it but with price anchoring it jeopardizes the purpose of DCA as evident from my experience above. Therefore it is important to not all in, stick to your plan and do not have the mentality of price anchoring. 

4. Importance of doing thorough research on the companies you buy

When sports betting and lotteries were closed a few months ago, many started to treat the stock market as an online casino. Some have the mentality that the prices have dropped significantly and it presents an opportunity to buy just because the price is cheaper. Sure compared to sports betting and lotteries, where you do not have the chance of losing 100% instantly, we shouldn’t be treating the stock market as an online casino. It is important to do a thorough research on the counters you buy. At least, you can sleep peacefully that you have made the right choice in buying them. 

My first counter that I invested in was Singtel. As I was busy with studies prior to the purchase, I did not know why the share price was at 52 week low. There will always be a reason why the share price was at 52 week low. It was only after a few months I am in the market then I realised why Singtel fell further. 

Covid-19 has affected us in many ways. In terms of companies, they are reporting lower earnings and therefore resulting in lower share price. Compared to pre-Covid-19, has the earnings multiple actually increased? We cannot solely depend on share price to evaluate whether the stock is cheap. If the earnings multiple have increased and yet the stock price is cheaper than before, this will be the main question we have to ponder, is it really cheap?

5. Importance of risk management for punting

There will be people who go to the stock market to punt. No doubt there are more people doing so when market crashed few months back. I think it is important to look into your portfolio allocation for punting. I think it is alright to punt but the main point is how much of your portfolio should be meant for punting. I believe the allocation should be just single digit compared to the whole portfolio. I think some youths would like to take more risk and would all in on just punting. I feel that it is dangerous. I had my own experience and it wasn’t great. 

As mentioned above, I bought Singtel and was disappointed with my loss from Singtel. I saw Creative rising rapidly and I thought to myself maybe this is the chance to recover my losses. So I bought Creative in the afternoon minutes before it flew off. It was like riding a roller coaster. The capital of punting Creative was 100% of my portfolio value and close to 50% of my total assets. Almost half of my monies were at stake and I was afraid that I will just lose all. In the end, I settled with a $250+ profit which was only able to cover most of my losses selling Singtel. Creative was still in my watchlist and seeing her rise even further tempted me to re-enter once again. What made me think twice was because I actually got burned by Creative when I executed the second trade. From them on, I practise cautious trade and will not be engaging in punting. 

One should set aside a small amount to punt and not sell off your holdings just to punt. If the small amount is insignificant enough to make a decent bet, I suggest not to do so as it is really very risky. If one wants to punt, one must have the courage to execute it and do not hesistate. I believe that once people hesitate, they might lose out the opportunity. Market doesn’t wait for anyone, only brave ones will win. That being said, one should have a stop loss so that it can be contained to a certain level that one is comfortable to lose.

You may continue to read the second part of this series over here.  

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