Friday, November 7, 2008

Simple and Brainless way of Investing

The current financial crisis has brought many economies down, along with their indexes. Dow Jones, S&P500, Nasdaq, Straits Times Index, Nikkei, Shanghai Composite Index, Bombay Sensex, Hang Seng Index, etc, you name it.

In particular, Straits Times Index (STI) has fallen from its high of 3900 to a current ~1800 situation, with expectations of 1500, 1200, or perhaps even lower. Many stocks are at a very low and attractive price. To invest and benefit from this recession, we should have a strategy.

As a newbie in the world of investing, and someone who has just graduated and started work just months ago, I wouldn't have much cash to invest in. My current strategy is thus a very conservative one.

My simple and brainless strategies:
  1. Buy and hold blue chip reasonably high-dividend stocks like SPH and SingPost.
  2. Buy STI ETF (Straits Times Index Exchange Traded Fund) when STI reaches 1200 and hold till STI reaches 3600.

Strategy 1
To me, SPH and SingPost are considered very 'safe' play. Reason?

SPH is the monopoly for local newspapers. It's also one of the main propaganda tools of the incumbent ruling party. It's long term trading price is around $4.40, and it is current trading at around $3.40. My average price is $3.905 at the moment, 4 lots.

SingPost is also the monopoly for local postage. Companies still have to send out financial reports by post (I just receive mine from SPH), we are still posting letters here and there. In any case, we still need to use SingPost's service. It's long term price is around $1+, and is currently trading at 78 cents.

These are two companies whose dividends are acceptably high (at least higher than fixed Ds), will likely still be around in the next 20 to 30 years, and are trading way below their long-term average price. The risks are near to zero in my opinion for these. My strategy would be to accumulate on these two as I earn more from my full-time job and part-time tuition.

Strategy 2
Economy goes in cycles, although on a long-term upward trend. It sort of follows a x sin x curve. At the moment, it is near the bottom of the curve, i.e. at a recession.

Previously, empirical statistics show that one cycle (between a boom to the next boom) lasts around 10 years. Recently, however, it seems like the cycle has shortened to around 5 years, perhaps due to the fact that we are living in the Information Age where news travel around the world in a matter of seconds. We can thus expect STI to crawl back to the 3000 level within a few years, before encountering the next recession.

With the above knowledge, it seems almost brainless that if we start to invest in STI ETF from 1200 and below, we will highly likely achieve a capital appreciation of at least 150% to 200% when STI reaches between 3000 to 3600. Suppose it takes 5 years (might be less) to reach that amount, we would have averaged off nearly 30~40% a year! This excludes the ~3% dividends we get from investing in this ETF.

What are the possible risks?
  1. If Singapore economy fails to recover, which would probably happen if the govt run out of funds to help steer it up, and in which case, fixed Ds cannot be 100% guaranteed anymore.
  2. If the issuer of the fund, StreetTracks, collapse, which to me is of extreme low probability.

It's time to be excited about making your dollars work for you, with minimal effort :D

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