Dividend Portfolio Performance Update

Almost three months ago, I came up with a dividend-focused portfolio to tide us through the shaky markets and to show its theoretical benefits for us as investors (click here to check it out). Today, I revisit this portfolio to show the real, practical benefits of this dividend portfolio, without the theory. To do this, here's a little back story:

Between the day I created the post for the portfolio, I found a job, posted a celebratory 1000-page-views entry for this blog, finished my last semester in university, and had a great time enjoying my holidays. Of course, I kept up with markets regularly, but my life and time were not overwhelmed by my investments.

You could say that life went on with minimal change; and for those of us who are working, I'm sure that you can appreciate this even more. However, one significant, yet almost invisible change in our lives however, is the fact that our investments have begun working for us. While we continued our daily lives, capital gains and dividends subtly racked up in background. So how did the portfolio perform?

Just to refresh our memories, here's the dividend portfolio allocation once again:

This particular portfolio provided diversification among industries that were minimally affected by the plummeting oil prices, shaky Eurozone market, and had solid businesses that consumers and businesses would demand even if economies were doing poorly. 

Ultimately, the portfolio did well, earning 4.09% in its first month, and outperforming the market by 6% by the third month. 

Moreover, during this time, any of us investing in the portfolio would have earned 10.26 cents in cash for every unit of this portfolio ($5.18 per unit based on 14 March prices). This is a significant difference compared to other investments where most, if not all of the earnings would still be locked into the investment. Now we can decide for ourselves if we want to spend the cash or reinvest it. 

And so, here it is, a real life, practical application of the dividend portfolio which has earned us good returns, outperformed the market, and given us an option to spend the returns, all while being hassle-free.

What Do E-sports Have To Do With Investing?

It's been two weeks since I got back to writing, and I've got my first 1,000 page views! Thank you for reading and sharing all this time my friends, it has been extremely encouraging! To celebrate, here's a post paying homage to a hobby that's been a big part of my life - gaming. 

In recent years, e-sports games like Dota 2 and League of Legends have grown so significantly that they have outstripped most, if not all markets around the world. Take Dota 2 for example: its prize pool has risen at a Compound Annual Growth Rate (CAGR) of 62.85% per year over the past 5 years. Comparatively, the local market (SGX) has fallen by 9.74% in the same period - it's largest CAGR was between 2011-2015 when it grew 5.75% year on year.

Talk about volume and we see League of Legends (LoL) averaging more than 11 million viewers per day over its 4-week, 73 game-long world championship. Even more, the finals alone attracted more than 36 million unique viewers - that's more than 6 entire Singapore populations watching. Without a doubt, E-sports is big and E-sports is growing. 

With that out of the way, the topic today is for all of us, whether we game or not. Here are three investment lessons that we can take away from games:

1. Multiplayer Online Battle Arenas (MOBAs) like Dota 2 and LoL have time-sensitive strategies, just as there are various investment strategies for differing investment horizons - Make use of them.

In MOBAs, time is generally categorized into early, mid, and late game. Most teams set out with an understanding of their strategies based on their heroes (i.e. assets) to capitalize on each of these time periods. Some teams might hunker down in the early/mid game to prepare for the late game, while others make their moves much quicker. Ultimately, knowing when their team is strongest crystallizes the players' decisions in the game, and grasping this concept is key to making sound choices when applied to our investments. Each of us have our unique goals an
d circumstances, and knowing our investment horizon allows us to plan for the bigger things in life.

Let's apply this to current markets for a practical understanding. Equities as a whole are relatively cheaper than they have been over the past year, with some at bargains arguably better than the Mcdonald's $2 Filet-o-Fish (I talked about this briefly in my previous post, click here to see it). While it may be tempting to enter the market now, the question we need to first ask ourselves is what our investment horizon is. The market is still rocky as it is, and if we are not ready to sustain losses in the near term, perhaps investing now may not be the best idea. However, for those of us with some spare cash now, the current market still displays opportunities which we could capitalize on for the late game.

2. MOBA players have roles that define their actions in the game, much like how markets have their own players with roles that yet again, define their actions - Understand them. 

MOBA players would know of the general terminology used for roles - Support, Carry, Initiator, Ganker, Pusher. This list is by no means exhaustive, but these are the major roles used more often than not. A market also has its players with similar roles. Unfortunately, the players and their roles are usually much more obscure than those in a MOBA game, and understanding our role in the market solidifies our idea of what strategies will or will not work for us.

For example, financial institutions tend to be market makers, aka the Initiators in the real world. They match buyers and sellers to create an environment where they (and their team) can achieve their end goal. Pension funds, sovereign wealth funds, and other funds would be the Pushers in this case as they move markets with their vast amounts of assets. Supports are the analysts and information drivers like Bloomberg and Wall Street Journal who constantly provide the data that we need to make our decisions.

The way I see it, as a retail investor, we are none of the roles listed above. In fact, we are so insignificant as individuals that we may not even deserve a role. Some may argue that retail investors as a whole hold great power and should deserve a role, after all 26% of US equities are held by retail investors (Harris, 2010). The truth of the matter is, retail investors are just about as diverse as the durian market has become. Those who have tried to unite the retail investor market have not had much success either, Mr John Soh Chee Wen being a case in point.

Despite this, there lies a beauty nestled in this proposition. This means that we as retail investors, do not have to worry what reactions the market might have to our actions. A fund manager has to think twice before reducing his fund's ownership in a stock, as he could very easily trigger a sell-off or apply too much downward pressure on the share price - both of which would ultimately reduce the value of his remaining ownership stake. We, as retail investors, can essentially do as we please in the market, without the fear of repercussion.

3. MOBA players spend hours practicing in unranked matches before playing competitively - Don't play ranked until you've practiced in normal.

In the two MOBAs that we are focusing on, players can choose to either play normal games (non-competitive) or ranked games (competitive). Ranked games allow players to rise in rankings, potentially setting them on the course towards the big leagues once they get noticed by professional teams. Most who play ranked matches, however, remain stuck in the doldrums (aka low-elo) as their skills are nowhere near the more experienced players. In fact, some players even see their own rankings drop.

This is akin to investing where the stakes are obviously much higher. The idea is this: don't start investing with real money until we've practiced with non-cash simulations. Also, there is no need to pay for expensive stock market simulators when we can quite simply make a decision, write it on a piece of paper, and track the markets thereafter. Only when we have become confident of our ability to make the right calls should we start our foray into cash investments.

And there you go, three quick investment lessons from E-sports. While there are many more, my key desire here is to share bite-sized thoughts that could help further our investing journey. All the best till my next article, and for all the E-sports fans out there, glhf!

For Dota players: A Dota player and a League player walk into a bar.
The Dota player said "League sucks". The other could not deny.

For League players: Back in 2012, Yorick walked into a bar, there was no counter.
Today, Lee Sin walked into a bar.

What Can A Dividend Portfolio Do For Me?

I made a call last week that the sell-off in the European markets had been overdone, and that markets had "speculatively priced in the problems of the future while forgoing the facts of today". As trading opens this week, I believe that markets have become much more sensible following the ECB's most robust stimulus package yet, with indices climbing all around. 

With this in mind, global markets are still recovering (at best), and the outlook is still shaky. Perhaps now's a good time to start thinking about potential investments that can provide both safety and moderate growth over the long term. By that, I mean a diversified dividend portfolio. 

A Local Diversified Dividend Portfolio

Dividend portfolios tend to provide higher absolute returns than Growth portfolios in weak market environments, and can potentially even outstrip Growth portfolios' risk-adjusted returns in strong markets. More importantly for us as retail investors, we get to collect regular distributions of cash throughout our investment holding periods which we can use to reinvest or, of course, enjoy.

To keep things simple, the portfolio I have constructed consists of stocks which we can easily purchase off the local wet market (SGX). The asset allocation looks like this:

Most of the constituents of this portfolio come from the Straits Times Index (STI), and while not all have mandated/official dividend policies, the companies have been regularly paying dividends over the past 5 years. 

From my previous post, we know that the total returns on an investment includes both the capital gains (from the stock price moving up) and dividends (click here to view that post). Now, just by comparing capital gains alone, the portfolio outperformed the STI by 17.21% over the past 5 years. 

Once we take dividends into account, the spread it earns over the STI increases to a whopping 59.65% (the portfolio's total absolute returns are 46.80% versus the STI's -12.85%). This translates into a very comfortable Compound Annual Growth Rate (CAGR) of 7.98% over the 5 years. To make things even better, this illustration does not even take into account a reinvestment of the dividends earned.

Putting things into perspective, here's the dividend portfolio's CAGR against a couple of key interest rates currently applicable here in Singapore:

For those of us who might not be as savvy or interested financially, perhaps one could consider passively investing. This would simply require us to purchase shares of stocks at regular intervals and at predetermined proportions. It might be tough getting started, but think about the long term benefits. Every $100,000 invested today that grows by 7.98% per year over the next 25 years would grow to more than $680,000 - that's 5.8x more than the value it is today.

Time is our friend, and no matter which field of work or study we are in, we cannot deny the compounding strength of time and investments which will one day lift the financial burden off our shoulders. 

Why Do Markets Fall After ECB's Stimulus Package?

So Mario Draghi and his team at the ECB made their decision - the Quantitative Easing (QE) program will be increased to 80 billion Euros a month while interest rates have been cut by 10 basis points from -0.3% to -0.4%. And the markets responded well. Initially.

Eventually however, contrary to what a stimulus package should have entailed (and what my previous post focused on), the Euro strengthened while the stock market took a dip overall.

Why? Draghi made a staggering comment that halted the markets upward climb. He essentially pointed out that he did not anticipate any future rate cuts. Now, from my previous post, we know that company valuations are based off the expected future cash flows and interest rates. With the idea that future interest rates are almost certain to increase, valuations of stocks fall. A quick and simple formula to illustrate this is as follows:

P = ∑(CFn/(1+Rs)^n)

P: Price of 1 Share now

CFn: Expected Cash Flow in Year n

Rs: Cost of Equity (can also be Required rate of Return)

n: Number of Years from today

With interest rates as a denominator, an interest rate cut will increase valuations while a signal that increases the likelihood of future interest rates rising would lower valuations correspondingly. 

To Invest Or Not?

So where do we go from here? Seeing how jittery the markets have been recently, I feel that the sell-off was overdone. The market has speculatively priced in the problems of the future while forgoing the facts of today. The ECB has introduced a stronger stimulus package than ever before, increasing the QE program by 33% while decreasing deposit rates by 33%.

The stimulus package was introduced for its own namesake - to stimulate the market. Growth is what we should expect from the Eurozone, and the following months to come will show us the true effect of the ECB's latest monetary policy. In fact, the sell-off of the European markets provide us with opportunities to enter at a better bargain than before, and so perhaps now's a good time to start considering stocks with European exposure.

With that said, we should enter the market knowing the risks involved. Monetary policies do not directly improve economies. Monetary policies improve the factors available which enable economic growth. This ultimately means that the ECB's latest stimulus package might not have the same results as the good intentions that were attached to it. From this, we can either wait for more solid economic results to make our decisions and pay the higher prices to invest then, or accept the risks involved and invest at lower prices now. 

Whichever our choice, remember the core idea of investing - buy low, sell high. After all, who makes any money by investing when markets are at their strongest?

What Do Inflation And Interest Rates Mean For Me?

Mario Draghi's European Central Bank (ECB) has been in the news lately as the world waits in suspense for his team's decision on whether they will cut Luigi some slack interest rates yet again. The ECB has been lowering rates for the past five years in an effort to stimulate the economy, but to little success. With the Euro's inflation rate falling to -0.2%, it seems the time has come for another round of stimulus.

But wait, why does the economy need stimulus because of its inflation rate? If inflation is defined as the general sustained increase of prices, wouldn't a -0.2% cause prices to go down, meaning that now we can afford more? Isn't that good?

The answer, unfortunately, is no. Negative inflation (Deflation) typically masks a problem with the economy, one in which the government, companies, and individuals as a whole are not spending enough. Without spending, the country's Gross Domestic Product (GDP) falters, and as the economy wanes, the companies start producing and earning less. As the companies wither, they start retrenching workers, causing these workers and their families to spend less. As individuals spend less, the cycle repeats itself and the country enters a deflationary cycle. In short, prolonged deflation is really bad news.

The Effects of Lower Interest Rates
So that explains the pressure on Draghi to start stimulating the Eurozone, and quick. The question now is, if he does decide to cut interest rates, how will that affect us as individuals and investors? The answer is much clearer for the individual - the most notable factors are that bank deposits will begin/continue earning next to nothing in interest. I emphasize continue because interest rates in the Eurozone are already low as it is. Take Belgium's BNP Paribas Fortis' latest savings account interest rates as an example. Essentially, every $100,000 we save only earns us enough for 10 meals ($50). That's about 3 days worth of food for 365 days worth of savings.

While there are other impacts on individuals, let's shift the focus now to us as investors. Lowering the interest rates would effectively:

1. Drive company expansion and generate growth
Lower interest rates would make money much cheaper and more accessible to companies, improving their ability to seize opportunities that come their way. Such flexibility afforded by loosened credit could work as a catalyst for greater growth as companies engage in more projects; though bear in mind the effect of diminishing marginal returns. Only the best projects are selected when companies are cash-strapped, but increasing the flow of credit means that taking on the less attractive projects suddenly become possible as well. This could spell disaster for companies that mismanage the risk they take on with the more lacklustre projects.

2. Increase stock valuations in markets
I wrote about stock valuations and how to go about doing them in one of my previous posts, click here to read it. Essentially, valuations are based on a companies' Weighted Average Cost of Capital (WACC) and their forecasted cash flows - as the WACC decreases through a lower cost of borrowing, valuations rise. More importantly however, real world examples tell a much more compelling story. The STI ETF rose 66.04% during the same period the first Quantitative Easing was launched by the ECB (Dec 2008 - Mar 2010), and in the same vein, the German DAX index climbed 47.13%.

3. Lower the yields of bonds
As cash becomes more available, companies become less willing to pay for investor loans, and hence bonds (debt issued by companies/governments) become less attractive for the investor. Furthermore, the already-low yield is hampered further by the increasing inflation rate. Rationally, we would then move our investments toward equities (stocks) and other securities.

While searching for higher yielding investments, we should always keep our initial strategy in mind. Our investment horizon, as touched on by my previous post, is still very much at play, while our innate risk appetite can only take so much once markets begin to wobble again.

In a nutshell, lower interest rates mean more good than bad for us average investors and the onus is on us now to find the right investment. Looking forward and tying world events together, there are ripening opportunities as two major players in the global economy (the ECB and OPEC) make massive decisions within the next two weeks.

Whether we choose to invest on this knowledge or not, let us not forget that the FED only recently raised US interest rates last year, and are currently discussing the possibility of another interest rate hike. If the interest rate changes do occur, we should not be surprised by a selloff of US equities for the more favorable Eurozone ones.

Will Oil Carry the Market?

Oil has been the hottest topic fueling the market recently, and while jet fuel may not melt steel beams, it has certainly become a commodity that has rocked the foundations of the financial market.

Within the past 5 years, Brent Oil has seen a maximum drawdown of 77.67% in its price per barrel, causing massive employment cuts and crumbling the financial stability of oil and gas firms around the world. Finite as this resource may be, oil's prices seem to have been hit largely because of an ironic massive oversupply created by the world's biggest oil producers (think OPEC). 

Adding fuel to the fire, the slowdown of some of the largest economies in the world, i.e. BRIC economies, has led to a fall in global demand for oil. Brazil and Russia, for example, have just experienced their fourth straight quarter of contraction, with their latest growth rates at -1.4% and -3.8% respectively.

The question now is, why have oil prices shot up over the past few months, and is it a leading indicator of market recovery? Using Brent Oil as a proxy, we can see that over the past 3 months, USD per barrel has risen by a maximum of 64.85%. This could partly be due to the slow but steady failure of oil companies around the world (particularly shale oil producers in the US) as they produce at costs above market prices. To make matters worse, the recent FED rate hike of 0.25% means that financial institutions have become more reluctant to splash cash on these troubled oil producers.

More importantly, however, is that this jump in oil prices has caused a surge in global markets. The iShares MSCI World posted a 3.14% rise in the past month, while the local market jumped 9.65% in the same period. But does this mean that markets have finally gotten out of the rut? 

Some of us might want to jump onto the bandwagon with hopes that the markets are finally on the road to recovery, and by all means, do so. I have benefited from the wave myself, and statistics have always shown markets to recover. But investing with caution is probably the main theme at this point, largely because there are two main issues which have not yet been addressed even as markets rise:

1. The underlying fundamentals pertaining to the growth of economies have not changed significantly. In fact, some are still showing sub-par performances, while others maintain moderate outlooks. US unemployment still holds at 4.9%, unchanged from the previous quarter, while China faces its lowest GDP growth rate in 25 years.

2. Conventional wisdom does not link rising oil prices to growth. Quite the converse actually. Just about every industry uses oil in its process, and rising oil prices coupled with rising interest rates only serve to suffocate industries in their already weakened states. Bloomberg even wrote an article on how the high oil prices potentially affect economic growth back in 2012 (click here for it). These increased costs continue to trickle down to the average consumer, causing them to spend less, and ultimately results in a reduction in GDP growth. 

With this said, certain companies are displaying prices that seem well-worth the money. DBS, for example, was priced at almost 0.8x its book value just a week ago. Whether that's a great bargain or the market's realization of DBS' true risk is entirely up to us. Investing is ultimately more of an art than a science; and while current price surges might be unsupported fundamentally, it makes little sense to go against the market either.

While waiting for the wave of a lifetime, a good surfer rides the smaller waves, exiting before each one crashes, gaining invaluable experience and enjoyment as he goes.