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.

2009 ends a decade (1999-2009) where for the first time in history, the S&P 500 index ended with a loss. It is the only time the Dow Jones ended a 10-year period with a loss since the great depression (1930-1940).

So, does this mean that Warren Buffett’s buy and hold theory for compounding wealth is dead? Does this mean that the theory that buying the index for almost guaranteed returns in the long term does not work? What does this mean for the next decade?

What Happened in this Lost Decade? (1999-2009)

So, what caused stocks to ‘suck’ over this period? The answer is simple: valuation!

At the starting point of this decade (i.e. 1999), stocks were at its most overvalued in history! In 1999, the average price-to-earnings ratio (PE ratio) of the S&P 500 index was a mind boggling 43! (when the historical mean is 15). Take a look at the PE ratio of the top 10 stocks making up the S&P 500 in 1999.

Microsoft, PE Ratio: 72 times earnings.
General Electric, PE Ratio: 47 times earnings
Wal-Mart, PE Ratio: 57 times earnings
IBM, PE Ratio 29 times earnings.

If you had bought stocks in 1999, you would have paid an average of 43 time earnings! This means that companies will have to growth profits at 43% every year for ten years for your stocks to have a chance to make money for you. That’s ridiculous and impossible. . That was an enormous headwind on returns over the past decade. And that is why stocks have gone nowhere over the past 10 years, because your starting point was so high in terms of valuations that almost no degree of earnings growth could have overcome that enormously high level of expectations implied by 43 times earnings. It’s kind of like peddling uphill on a bicycle against this enormous weight of a PE ratio.

How about today in 2010. What are stock valuations today? Let’s take a look at the top 10 stocks in the S&P now.

Microsoft, PE Ratio: 19.77
General Electric, PE Ratio 13.51
Wal-Mart, PE Ratio: 15.45
IBM, PE Ratio 13.48

If you bought stocks today, your average PE ratio would be about 15 times earnings. This means that the market is at fair value today and as a result, there is a high chance (in my opinion) that the next decade would give the investor of today much higher returns, since you are buying the market at a fairly reasonable price. Of course, if you had started buying stocks in mid-2009, when I shared the ideas in my book ‘Profit from the Panic’, you would have paid a PE ratio of 6-8, which was a time when the market was unusually undervalued. That would boost your returns even more.

Is Buy and Hold Theory Dead?

Many people ask me if the theory of buy and hold over the long term is a dead theory that doesn’t work anymore in today volatile market. Personally, buy and hold strategy is still the very best way to invest and compound your wealth. Personally, I have found that I have made the most money in investments where I was in it for the long term versus small money I make trading in and out.

HOWEVER…. Buy and hold long term only works IF you buy the RIGHT COMPANIES at the RIGHT PRICE. This means following the 9 Step Value Investing Criteria taught at Wealth Academy and buying only when stock prices are safely below intrinsic value. If you are buying the Index, buy when PE ratios are 15 or below. If you follow these rules, you will always end up making money in the stock market. Break these rules and you will lose money. Buffett follows these rules and that is why he MADE LOTS OF MONEY in the last decade while the market index lost money

How Did Buffett Do In this Decade?

Lets’ see how well Buffett did versus the S&P 500 with his contrarian, buy and hold strategy. Shares of Warren Buffett’s Berkshire Hathaway far outperformed the benchmark S&P 500 stock index over the decade, Buffett achieved a gain of 76.8% while the S&P lost 24.1% over the same ten year period.

Source of Charts: www.CNBC.com

How did he achieve this? Simple. He stayed away from the stock market in 1999-2000 when PE ratios were 40+, especially technology stocks. When everyone else was greedy and buying, he was fearfully staying away. Can I also proudly and shamelessly brag that I did the same thing? That is where education and modeling great minds pay off.

At the same time, Buffett bought stocks in 2003 (after the Dot com crash) and 2008 (in midst of the financial crisis) when fear drove PE ratios to below 10. He was being greedy when others were fearful. So, going against the crowd and sticking to sound investment rules (laid out in Wealth Academy and my books) will give you that winning edge. This is why I shared that it was a great time to buy stocks in my book ‘Profit from the Panic’.

The last decade 1999-2009 has been one of worst for the stock market. It is the only decade (besides the Great Depression of 1930s-1940s) that the Dow Jones Index returned a negative. After going through the Dotcom bubble crash of 2001-2003 and the recent financial crisis of 2007-2009, what is the outlook for the economy and stock market looking forward.

Again, you have experts on both side of the fences. One group (the BULLS) is saying that after going through a lost decade, we are on the verge of a super bull run that will take the US and Asian markets all the way back to pre-crisis levels and beyond. Another group is saying that the economic recovery is not sustainable and that the stock market has risen too fast and too soon. These BEARS are saying that there will be a double dip and that stock markets could go all the way back down again.

In the last post, I said that it is not point attempting to predict the market because the market is too dynamic for 100% accurate predictions. Whatever happens to the markets (up or down or sideways), you can still make consistent profits when you follow the strict rules of investing. Buy only consistently profitable, financially strong companies and stock prices below their intrinsic value. As long as you do this, you will always come out with profits at the end. It also help to understand how to use Options to hedge your portfolio against market downturns (protective Puts) and and to generate income in a sideways market (covered call strategy). This is just some of the stuff we cover at the Wealth Academy Programme run in Singapore, Indonesia and Malaysia.

However, it is important to know the factors that could drive the market both up and down. let’s take a look.

WHAT THE BEARS SAY

The Bears say that the economic recovery is artificially pumped up by massive stimulus from governments an not sustainable. Stock markets have gone up way to fast and too soon and there is an eminent crash back to the crisis lows. The worst case scenario is that the US may follow the way of Japan where poor consumer spending and deflation has caused the Nikkei Index to be on a bear market for more than 20 years. Here is the Bears case.

• Stock Markets have risen too much too fast. The US market is up is up 61%, Singapore STI is up 86% and Hong Kong is up 75% since 2009 March lows.

• The US Government deficit is $1.7 trillion and growing. This accounts for about 11.2% of nominal GDP. In attempt to control and reduce it, the government is probably going to increase income tax rates, which will reduce consumer spending and threaten growth. This is in contrast to the beginning of the great bull market in 1982 when the highest marginal tax rate was 69%. This gave the government the ability to cut rates and stimulate growth back then (expansionary fiscal policy).

• Keeping interest rates so low may trigger asset bubbles and hyper inflation

• Higher inflation and the devaluation of the dollar may trigger a currency crisis, where the US loses it role as the world’s reserve currency, thereby jacking up interest rates and curbing growth

• Unemployment in the US is still high, putting a drag on consumer spending and hampering growth again

• GDP growth is artificially driven by government stimulus and cannot be sustained once removed

• The US stock market today lacks the drivers it had back in 1982, when the stocks started their 18-year bull market up to 2000. Back in 1982, the Fed Funds interest rates were at 12%, leaving the Fed the freedom to cut interest rates to stimulate economic growth. Today, in 2010, the Fed Funds rate is already near 0%, leaving the Fed only room to raise rates moving forward. This rise in interest rates could cut into corporate earnings, consumers’ disposable income, and economic growth

Wow. That’s a lot that could go wrong. However, the Bulls have their side of the story as well. The Bulls believe that economic growth is sustainable and stock markets, led by the US and China are on the verge of a great bull run just like from 1982-2000. The Dow Jones will soon reach 14,000 and beyond and the STI will hot 3,800 and beyond. Here is the Bull’s case:

WHAT THE BULLS SAY

• Super low interest rates less than 1% will stimulate spending and business growth. Never before have interest rates been kept so low for so long. It also drives investors to put their money to work in higher yielding assets like stocks.

• Governments of the world have injected a massive global stimulus of $10 trillion. This is compared to only a $150 bil stimulus in 1991. Yet, back in 1991, stocks rose 561% in 10 years.

• As of end 2009, $590 billion or the $787 billion stimulus plan has yet to be distributed. So, there is plenty of money left to be pumped into the system to sustain spending and growth

• Lots of liquidity on the sidelines by big investors and institutional funds who have missed out on the rally. When they start to come in, they will provide the next boost for stocks.

• Once thinking that the Federal Reserve will stand to lose billions by lending money to US banks through the TARP programme (Troubled Asset Relief Fund), it now seems after bank shares rebounded strongly, that the FED is sitting on a potential of $14 billion in profits from loans

• Fears that low interest rates will drive Inflation up (and force the FED to raise interest rates) is unlikely given that unemployment is still high. As long as unemployment is high, businesses will not dare to raise prices, thereby keeping inflation in check.

• A lower US dollar is actually beneficial to the US. It is helping the US to boost exports, reduce imports and hence lower its trade deficit. A lower US dollar also boost companies earnings from overseas.

• Even after the recovery rally, the US market is trading at 14.5x earnings and the Singapore market at 14x, putting it at fair value. So, the stock market is fundamentally not overvalued.

• The last decade (1999-2009) has been one of the worst for stocks. This has been the result of two major bear market crashes triggered by the Dotcom bubble in 2001 and the financial crisis of 2007. Historically, a lousy decade has often been followed by a great decade for stocks. After a negative decade from the great depression of 1930-1940s, the next decade 1940-1950 saw the Dow Jones up 48% and the following decade up 203%. After a sideways decade from 1970-1980, the following decade saw stocks rise 220%.

• The global economy is being driven double digit growth from developing economies like China, India, Brazil etc…

So, there are the arguments from both sides. Whatever happens, educate yourself financially so you know how to act when whatever scenario unfolds and make money from it.