The Stock Market has Been in a Sideways Trend

After rally strongly for 14 months after markets hit the bottom of the financial crisis (March 2009), both the US Markets (Dow, D&P 500) and Singapore Market (STI) have been going sideways over the last 4 months.

A hopeful rally that had the S&P 500 up as much as 9.4% for the year came to an abrupt halt in late April 2010 as a sovereign debt crisis in Europe, efforts to slow the Chinese economy, and the arrival of some disappointing economic data in the U.S. triggered the first 10% pullback by the S&P 500 since it started its recovery rally in March 2009. The net result is that the S&P 500 ended the first half of 2010 down 7.6% for the year so far. On the other hand, the STI is up a small 3% of the first 8 months of the year.

The Stock Market is Attractively Valued…But…

As a whole, the US Market and Singapore market are very attractively valued. PE ratios of the index are below the historical mean of 15. Shanghai’s PE of 18 is also considered fair value given its higher expected growth rate. The only Asian country that is overvalued is Jakarta that carries a PE of 31.

• S&P 500 PE ratio is 13
• STI PE Ratio is 11.8
• Shanghai composite PE is 18
• Jakarta Composite Index is 31

Corporate balance sheets are also in good shape. S&P 500 companies have nearly $1.2 trillion in cash and short-term investments that allows for plenty of flexibility to enhance shareholder value. The cash build-up, though, is still regarded more as defensive positioning in the event of another downturn than it is as an offensive-mined growth weapon.

Why US Market May Move Sideways for Quite a While

While markets are slightly undervalued based on PE, the US market indexes like the Dow and S&P 500 may well continue to move sideways for a while. There is uncertainty about how the sovereign debt problems in Europe will ultimately be resolved. There is uncertainty about how much China’s economy will slow. There is uncertainty about both the labor market and the housing market in the U.S., both of which are intricately linked. There is uncertainty about the political and regulatory environment. There is uncertainty about the proper policy course for getting huge budget deficits under control. There is uncertainty right now about whether inflation or deflation is the bigger issue for the market. All this uncertainty is preventing markets to rally further. It will also take a while for the US economy to truly recover and return to a hope-filled state of rising standards of living, full employment, higher home values.

According to Conrad’s research on historical market trends, the Dow Jones Index has been known to go sideways for as long as 20 years after a brief recovery from a downturn, before resuming its long term uptrend. Does this mean that if the Dow Jones index goes sideways for the next 20 years, we cannot make a high return on our portfolio? Absolutely not!

For example, for the last 10 years (2000-2010), the Dow Jones index actually went almost sideways. If you had bought the Dow Jones index ETF in Year 2000 and held it till 2010, you would have just broken even. One reason is that the Dow was trading at a PE of 45 in 2000 (highly overvalued) and so, it has obviously no where to go but down for the next 10 years. Today the Dow is trading at a PE of 13 times, which leaves it a lot more upside potential.

However, EVEN IF the Dow goes sideways for another 10 years, can you still make lots of money? Absolutely! Remember that the Dow Jones is made up of the 30 largest Mega Cap stocks in the US. In the years that the MEGA CAPS went sideways, Mid Cap stocks actually showed double digit returns. For example, from 2000-2010 (when the Dow went sideways), the S&P 400 MIDCAP index returned a staggering 81%!!! This is because mid cap stocks (medium size companies) have much more room to expand that mega cap stocks that make up the Dow or large cap stocks that makeup the S&P 500. So instead of buying the Dow Jones ETF or the S&P 500 ETF, you can buy the S&P 400 Midcap Index ETF. The ticker symbol for this is ‘MDY’

At the same time, if you has bought UNDERVALUED stocks of good MEGA CAP companies (that met the 9 steps of value investing) in 2000, you would also have gotten a huge return. For example, if you bought McDonalds (MCD) in 2000, at a time when it was undervalued, you would have made a 365% return!!!

Also, while the US index may go sideways for the next 10 years, strong and robust Asian countries (especially Singapore, China) will likely continue to move upwards. From 2000-2010, even a stable, defensive stock like SMRT went up 338%!!!

What is All Means

Some people are saying that the US markets may go sideways for the next 10 years. The point is that even if the case may be, there is still huge profits to be made if you invest in 1) the S&P Midcap ETF, 2) Individual stocks that are undervalued and who are going to benefit from the Asian growth story, 3) Asian indexes like Singapore and China.

Have you ever wondered how the world’s greatest investors think? That was the question I asked myself nine years ago when I started to dive into the world of investing and found my burning passion from making money from the markets.

Over the years, my investing success has been shaped by the teachings and lessons from world’s most legendary investors like Peter Lynch, Warren Buffet and the father of value investing, Benjamin Graham. What is remarkable about these investing legends is that their investing philosophies are very similar and go against what the majority of professional money managers and amateurs do. When everyone is selling and stocks are cheap, they are buying. And when everyone is buying and stocks get expensive, they are selling.

Their are independent and totally contrarian approach is what allows them to make consistent profits in the markets years after year. Here is a compilation and distillation of philosophies.

Peter Lynch’s Golden Rules

Peter Lynch was the manager of Fidelity’s Magellan mutual fund from 1977 until 1990. He grew the fund from $18 million to $19 billion in assets. Peter Lynch’s compounded average annual investment return during the 13 years was 29.2%. A thousand dollars invested the day Lynch took over Magellan would have been worth $28,000 when he left.

“Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.”

“In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.”

“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 correlation between the success of a company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.”

“Owning stocks is like having children- don’t get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies. There don’t have to be more than 5 companies in the portfolio at any one time.”

“Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners”.

“When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom”.

“Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it”.

“You should invest in several stocks because out of every five you pick, one will be very great, one will be really bad, and three will be OK.”

“Bargains are the holy grail of the true stock picker. The fact the 10 to 30 percent of our net worth is lost in a market sell-off is of little consequence. We see the latest correction not as a disaster but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time.”

“Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested”.

“If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market-companies whose achievements are being overlooked on Wall Street”.

Benjamin Graham’s Golden Rules

Benjamin Graham was the father of value investing and the mentor of Warren Buffett. He authored ‘The Intelligent Investor’ and ‘Security Analysis’. His firm, the Graham-Newman achieved an average annual return of 17%, one of the highest at the time.

“Nobody ever knows what the stock market will do, but we profit by reacting intelligently to what it does do”.

“The individual investor should act consistently as an investor and not as a speculator. This means… that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”

He coined the phrase “margin of safety” to explain his common-sense formula that seeks out undervalued companies whose stock prices are temporarily down, but whose fundamentals, for the long run, are sound. The margin of safety on any investment is the difference between its purchase price and its intrinsic value. The larger this difference is (purchase price below intrinsic), the more attractive the investment.

Benjamin Graham’s Parable of Mr. Market
Imagine you are partners in a private business with a man named Mr. Market. Each day, he comes to you and offers to buy your shares in the company or sell you his. The problem is that Mr. Market s emotionally unstable. At times, he suffers from excessive highs and at other times, suicidal lows.

When he is in a very good mood, his offering price for the business is high as well, because his outlook for the company is wonderful, so he is only willing to sell you his stake in the company at a premium. At other times, he goes into a bad mood and all he sees is a dismal future for the company. He becomes so depressed that he is willing to sell you his part of the company for far less than it is worth. All the while, the value of the company may not have changed – just Mr. Market’s mood.

The best part is that you are free to ignore him if you don’t like his price. The next day, he’ll show up at your door with a new price. The more emotionally unstable he is, the more opportunity you will have to take advantage of him .As long as you have a strong conviction of what the company is really worth, you will be able to look at Mr. Market’s offers and reject or accept them… the choice is yours.

This is exactly how the intelligent investor should look at the stock market – each stock that is traded is merely a part of a business. Each morning, when you look at the stock market, you can find Mr. Market’s prices. It is your choice whether or not to act on them and buy or sell. If you find a company that he is offering for less than it is worth, take advantage of him and buy. Surely enough, as long as the company is fundamentally strong, one day he will come back in a good mood and offer to buy the same company from you for a much higher price.

Warren Buffett’s Golden Rules

Known as “the Oracle of Omaha”, Buffett is Chairman of Berkshire Hathaway and arguably the greatest investor of all time. His wealth fluctuates with the performance of the market but as of 2008 his net worth was estimated at $62 billion, making him the richest man in the world.

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1”

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

“Wide diversification is only required when investors do not understand what they are doing”

“Risk comes from not knowing what you’re doing”

“We’ve long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children”

“In the short run, the market is a voting machine. In the long run, it’s a weighing machine”

“I only invest in businesses I understand. That narrows it down to just 10% of the companies out there. You have to stay within your circle of competence, and pick companies that sell for less than what they’re worth”.

Dear Investors

The last three market days saw the US Market (Dow Jones) lose 600 points, its largest decline since July last year. What is more significant is that the index broke the psychologically important 10,500 level and is now sitting at 10,172 points. The Dow and S&P daily candles have also breached their 20 and 50 day moving average.

However, a reversal to a downtrend is not confirmed UNTIL the indexes weekly candles break below their 50 day moving averages (see below). As of now, they are sitting RIGHT ON the moving average line.

Dow Jones Index (daily candles)

Dow Jones Index (weekly candles)

The catalyst that sparked the decline was Obama’s proposal to increase bank regulations and uncertainty over whether Bernanke will be reappointed as FED chairman. As you should know, earnings season has kicked off and results have bee pretty mixed. Banks like Bank of America and Citigroup habve posted greater losses than expected while Goldman Sachs and Wells Fargo had profits that beat expectations.

The Singapore STI got spooked by Wall Street’s decline and fell 100 points to 2,819 points (See below). Technical analyst see a healthy correction with support at 2814 points and further downside support at 2774 points before the STI continues its bull run

Straits Times Index (daily candles)

As usual, experts are divided over whether this is a healthy correction or a possible reversal to a downtrend. So far, more analyst believe that the former is more probable.

As long as weekly candles stay above their moving averages, The market will continue to be on a healthy uptrend. However, the moment the MAs are broken, we could see another reversal downwards. That’s when you may want to take some money off the table for ETF index positions and if you are holding stocks that are overvalued.

What I Am Doing
As usual, the contrarian-value investor part of me is getting excited and greedy again. No, I am not selling anything I have as I am taking a 5-10 year view with my stock portfolio. In fact, I am waiting to start buying more of my favourite US and Singapore stocks once their prices get really undervalued again. Those of you who are Wealth Academy graduates will soon get my email on exactly which stocks I am adding to my portfolio and why. Stay tuned.

” Do I have what it takes to be a millionaire?” This is one of the most common questions I am asked by participants attending the Wealth Academy Programmes. The truth is that everyone has the capability of becoming a self-made millionaire. You do not have to be a particular age, race, educational background or even have to be from a certain family background to qualify.

The reality however is that very few people ever become financially successful. The reason is because many people have been programmed by their parents, friends, school etc… to have financially sabotaging mindsets and habits. Many people also lack the necessary skill-sets and strategies to become rich.

Many people ask me this question. “Adam, I got top grades in school. I have got a Masters Degree. I am really hardworking. I got a job in prestigious company. So, how come I am not as rich as you?’ Well, although educational qualifications and hard work is really important, it has little to do with being able to generate sustainable wealth.

Just because you have the skill to get good grades and to do your job really well, it does not mean that you have the skills to make money. You see, the ability to make money is also a skill. Just like cooking and driving a Formula 1 race car is a skill. The trouble is that schools don’t teach us the skills to become wealthy. The educational system teaches us how to be good employees in order to make our company’s bosses rich.

So, do you have the mindset, habits and skills to become a self-made millionaire? I have designed a MILLIONAIRE POTENTIAL ASSESSMENT that consists of 15 questions to help you find out. I have asked these 15 questions to over 500+ people in 7 countries. I have found that when participants answer the questions HONESTLY, I am able to predict with over 80% accuracy, their level of financial success (measured by their net worth).

How come? This is because your thoughts, decisions and actions create your financial results. If you have very little money today, it is because of the poor thoughts and actions you have had in the past. People who make millions have different patterns of thinking and behaviours. If you keep thinking and doing things the same way, your financial situation will stay the same. To truly change your financial situation, you have to change your thoughts and develop new millionaire skills.

So, go ahead and answer these 15 questions:

Millionaire Potential Assessment
This assessment is designed to help you discover if you currently possess the attitude and aptitude to be financially successful. There are no right or wrong answers. Please circle the answer that describes you the most.

1) How Do You Honestly Feel About Rich People?
a) I don’t like rich people.
b) They intimidate me. I feel inferior to them
c) I respect them but feel that they are very different from me
d) I respect them a lot and know that I deserve to be like them

2) When People Reject You And Tell You That You Cannot Do Something, How Do You React?
a) I accept it and feel bad
b) I get angry and throw a tantrum
c) I will give it another try with more doubt
d) I get even more excited to prove them wrong. I never take ‘no’ for an answer.

3) How Do You Feel About Borrowing $500,000 to Invest in a Money Making/ Business Opportunity?
a) I will never borrow to invest. It’s too risky.
b) I will borrow $10,000-$20,000 at the most. Anything more and I will not be able to sleep at night.
c) Even if it is a credible and worthwhile investment, having a $500,000 liability will give me a lot of stress
d) With enough planning and risk management, I will have the confidence to do it.

4) How Much Do You Want To Increase Your Income By In The Next 12 Months?
a) Ten percent increase
b) Fifty percent increase
c) Double by income
d) Five to ten times increase

5) What is Your Attitude Towards Money?
a) I am afraid having too much money might change me
b) It’s nice to have more money but I am happy where I am
c) I wish I had more money but I am afraid of all he sacrifices I must make to get it
d) I get excited about how having lots of money can make life better for me and the people around me

6) How Do You Feel About Working?
a) I hate working.
b) I do not mind working, but I rather relax
c) Work is okay. I don’t mind working hard to make money.
d) I love working. Work is like play to me.

7) How Do You Usually React When You Go Through a Huge Defeat or Failure?
a) I feel so demoralized that I wouldn’t dare another attempt
b) I will take some time to get over it. I may try again later.
c) I will give it another try, but with much less confidence
d) I quickly learn from my mistakes and bounce back with as much enthusiasm and confidence.

8) When You Face Big Problems In Life or Work, Do You:
a) Ignore it and hope it will go away?
b) Complain why things are so difficult
c) Get someone else to deal with it
d) Get excited about solving it

9) How much time do you spend each day reading and analyzing financial news and managing your finances/investments?
a) None at all
b) Less than half an hour
c) Half and hour to two hours
d) Two hours or more

10) How much money do you invest on business & financial books, seminars and consultancy annually?
a) None at all
b) Less than $500 a year
c) $500-$2,500
d) More than $2,500

11) What Are Your Money Habits?
a) I tend to spend more than what I earn, using credit to finance my expenditures
b) I spend whatever I earn. I live from paycheck to paycheck
c) I try to save whatever I am left with each month
d) I plan exactly how much to save and invest each month and stick to my plan

12) How Do You Usually Make Investment Decisions?
a) I don’t invest at all
b) I listen to advice from friends
c) I leave my investment decisions to stockbrokers and financial consultants
d) I get input from professionals but will only invest after doing my own thorough research. I only invest in something I fully understand,

13) What is Your General Attitude Towards People and Work?
a) I don’t like to work with people that much. I can only trust myself to do a good job
b) I trust people very easily. I believe they will never cheat or harm me.
c) I tend to feel comfortable working and being around people who are less capable than me
d) I enroll the help of highly talented people to give me input but I always make the final decision

14) What Kind of Friends Do You Spend Most of Your Time With?
a) Losers with no ambitions
b) Dreamers who lack the drive
c) Ambitious and hardworking individuals
d) Millionaires and business leaders

15) Which Statement Best Describes Your Personal Motivation?
a) I lack motivation to get started on any goals I set
b) I tend to keep procrastinating until the very last minute
c) I get motivated at first but lose my focus and drive after a while
d) When I plan to do something, I get highly motivated and never stop until it is finished

Now, calculate your score. Count the number of a’s, b’s, c’s and d’s you have chosen. Give yourself 1 point for every ‘a’, 2 points for every ‘b’, 3 points for every ‘c’ and 4 points for every ‘d’.

My Score is ___________________

INTERPRETING YOUR SCORE

If Your Score Is: 15-25
It Means: You are probably in debt or have a low net-worth You need to completely change your mindset and develop new skills to improve your financial situation

If Your Score Is: 26-35
It Means: Your net-worth is average. You may have a few thousands in savings but you are far away from making your first million.

If Your Score Is:36-45
It Means: Your net-worth is probably above average ($100,000- $300,000 in investments & assets). With some improvement, you are on your way to become a millionaire.

If Your Score Is:46-60
It Means: Excellent! You are probably a multi-millionaire, millionaire or on the way to becoming one

If you got a low score, do not worry. Awareness is the first step to change. It only means that if you want to be financially successful in the future, you have to really change your mindset, habits today. You have to start acquiring the knowledge and skills to become a millionaire. This is exactly what I do through my intensive Wealth Academy Training & mentorship programmes

Most people know the great benefits of investing in a portfolio of properties. Not only do you get the steady capital appreciation of property over time, you also get the monthly passive income from renting it out. Holding a property over the long-term will see the rental income paying for the property itself. In fact, most of the richest people make their money through property investment, myself included.

The US property market is at one of its lowest points in the last twenty years and investing in the right real estate today can yield smart investors spectacular profits over the next few years. A stable government, increasing population and new economic growth drivers coming from the new Integrated Resorts should also see property in Singapore appreciate over the long-term.

In the past, the ability to invest in a portfolio of residential, commercial and industrial property was only a game for the rich. You had to have a few hundred thousands of dollars to a few million to start playing the game. Today, with the creation of REITS (Real Estate Investment Trust), small investors (with a few hundred-thousand dollars) can participate and enjoy the benefits of real estate investing.

For those of you who are new to REITS. Here is a quick introduction. A Real Estate Investment Trust (“REIT”) is a publicly listed company that raises capital (from shareholders) to purchase and operate real estate assets (i.e. shopping centres, office buildings apartments etc…). Over 90% of the rental income generated from these properties is then distributed back to the shareholders as dividends (DPU: distributions per unit) at regular intervals.

There are numerous REITs available in the stock market. So, how do you select a good one. Let me share with you my 5 Criteria for REIT selection.

Criteria #1: High Current Dividend Yield (> 5%)
The main reason for buying REITs is for their high dividend payouts. So, the first screen is to select REITs with the highest dividend yields. Dividend Yield should be more than 5%. Dividend Yield = Annual DPU/ Current Price x 100%.

Criteria #2: History of Consistent Growth in Free Cash Flow & Dividends
Select REITs that have a track record of achieving consistent growth in Free Cash Flow and dividends for the last 5-10 years.

When a REIT is able to consistently grow its cash flow and dividends, you will get consistently higher dividend payouts and capital appreciation from the stock price increase.

Criteria #3: High Expected Cash Flow & Dividend Growth

Select REITs that are expected to deliver higher future Cash Flow and dividend growth over the next 1-5 years. These are REITs that have:
• Quality of properties in portfolio and quality of tenants
• Expected increase in property prices
• Expected increase in rental
• Acquisition of new properties

You can find the expected cash flow growth forecast from REIT analyst reports. To see these reports, go to http://sreit.blogspot.com. Ensure long-term growth forecasts are above 5% and analyst reports are rating ‘hold’ or ‘buy’.

It is also important to exercise common sense and actually visit the properties (i.e. shopping malls, industrial estate, office buildings, apartments etc…) held in the portfolio of the REIT you intend to buy. Are the properties in prime locations? Are they very popular with tenants? Is there high traffic? Are the tenants of high quality? Are the tenants likely to stay for long? Think like a property investor!

Criteria #4: Low Gearing Ratio (< 40%)

Gearing Ratio tells you how much money the REIT has borrowed, relative to the value of the property. The higher the debt (gearing ratio), the more risky the investment is. So, check the Gearing Ratio of the REIT. Gearing Ratio = Total Debt/ Total Assets x 100%. Ensure the Gearing ratio < 40% before investing.

Criteria #5: REIT Stock Price Undervalued

Just like buying the stock of a company, always buy a REIT only if its current price is below its intrinsic value. There are two ways analyst value REITS. a) You can value REITS by Net Asset Value (NAV)
or by b) Discounted Value of Its Future Cash Flows.

a) Net Asset Value (NAV). NAV = Total Assets – Total Liabilities. When REIT price is less than its NAV, the REIT is undervalued. You can check out the NAV of a REIT by studying its annual report or looking at analyst reports.

b) To calculate the Intrinsic Value of the REIT using Discounted Cash Flow, use an ‘Intrinsic Value Calculator’. (We give you one when you enroll in our Wealth Academy Programmes). Enter the following variables:
• Current Cash Flow from Ops:
• Total no. of shares:
• Expected growth rate: See analyst reports. If unavailable, take a conservative 3-4% growth rate.
• Risk free rate (US 3-year Bonds) and Beta: See Bloomberg.com/markets/rates and reuters.com/finance/stocks

The Opportunity is Still There
Even after the huge stock market rally over the last 8 months, there are a few REITS in Singapore that are still undervalued, provide good dividend yields and have potential upsides over the long term. Some of my favourites are:

Suntec REIT, selling at $1.38, NAV is at $1.90. Dividend yield 9%
First REIT, selling at $0.865, NAV at $0.92, Dividend yield 8.7%
Lippo Maple Trust, selling at $0.52, NAV at $0.74, dividend yield
Starhill Global, selling at $0.56. NAV is at $0.80. Dividend Yield 6.3%

With the exception of Starhill Global, the other three REITS, though still undervalued, are technically overbought in my opinion. I would wait for a pullback before buying up some more. The way I look at it, the yield of 6%-9% sure beats the miserable 1% or less I will get in the fixed deposit.