Bargains

"being less expensive does not qualify something as a bargain"

Bargains can be classified as "comparative bargain" and "absolute bargain".

For Comparative Bargain, one usually looks at the PRICING of similar objects and makes comparison to the asset of interest, drawing conclusion that it is overpriced or underpriced. I will contrast that with Absolute Bargain below. For an investor looking for Comparative Bargain, his focus would be the TRANSACTION PRICES. For example, if HDB flats are transacted at 800K for over a certain period of time, comparative bargain hunters will take it that the VALUE of such flats is 800K each. Sadly, this basis of valuation, a close-looped circularly referenced feedback mechanism, does not reflect the actual value of the asset. The other problem with this type of valuation is that when reference prices taken are inflated, like in a property bubble, investors detach the intrinsic value from the prices - much like the internet stock bubble. And as prices escalate, the idea reinforces itself that the asset is really worth that price.

For Absolute Bargain, we are talking about a discount to the intrinsic value of an asset. Ben Graham had so eloquently explained it in Security Analysis and I shall not repeat his words. Using stocks as example: If both TSE and NYSE are traded at PE of 100 and SGX at PE of 70, it does not automatically qualify SGX as a bargain stock. Bargain only exists if the price of the stock is below its intrinsic value, derived after careful analysis of its earning power, assets and future competitiveness. In fact, Absolute Bargain investors would shun all three stocks, knowing that prices are irrationally high for whatever reasons. When TSE and NYSE eventually trade lower, the Comparative Bargain for SGX immediately disappears. Such is the pitfall of neglecting the intrinsic value. Such "dangers" do not exist if investor adopts the concept of Margin of Safety. Using property as the example: In a very large farm land in Australia, if it cost $100K to buy a land parcel and build a house, and someone is selling a ready-built one to you at $50K, that's a bargain. However, if the neighbour 30km away recently sold his for $500K, it will not be a bargain to buy the one that costs only $50K for $300K - you can build it yourself even though paying $300K may save you some time. This example may not relevant in the Singapore context but it brings light to what a bargain is - comparative or absolute.In conclusion, bargain in HDB is a misnomer. The reality is that HDB is expensive - some being more expensive. So that brings us to the quote "being less expensive does not qualify something as a bargain".

HDB flats should be purchased on the basis of affordability if one is buying a home. If "comparative bargain" exists but the flat is still unaffordable, PASS. If it is for investment purpose, I believe Graham would also call it a pass.

Retirement

There is too much talk about retirement. The newspaper had an advertisement with a tropical island depicting retirement. It looks as though that is a destination for the people in Singapore. The government is emphasizing that we must have enough retirement fund for our old age. It becomes really confusing...what is retirement?

If my computer becomes no longer usable, I retire it. If I feel sleepy at night, I retire in bed. The dictionary has various definitions for the word "retire". The street too defines retirement differently.

It seems to me that in Singapore, retirement means having enough money to spend for the rest of one's life. The financial aspect is heavier than the actual action of retiring from something - and that something is active employment. We are so confused - employment, income, retirement, useful work, useless work - they are all so mixed up.

My friend in their 30s are saying that they want to retire by the age of 40 or 45. To me, retirement only happens when one becomes useless, much like the computer that I retired when it no longer runs. But I know what they mean. When they said retire, they actually meant achieving a state of financial independence or freedom. In other words, they don't need to work for wages, and can still live life comfortably.

Just imagine, if one is borned with a silver spoon, and he doesn't need to work a single day to earn his living, does that mean that he is borned a retiree? No. Therefore, retirement should not be confused with the financial state of health. A person retires when he has to retire, not when he has certain amount of money. A person with that money even after quiting active employment can continue to do useful things. Likewise, a person without that money sometimes continue doing useless things just to earn himself a living.

Working for Retrenchment

Today, I am extremely delighted to receive my retrenchment package. The amount is equivalent to what I could have saved in a year if I continued serving my duty as an obedient employee. The official date, however, will be another 2 long days from now. I am celebrating anyway, for this is what I have always been working for - retrenchment.

Is not this what everyone in Singapore is doing? Our environment is so conducive for foreign investment to participate in the growth of Asia's economy through our pro-business atmosphere coupled with a stable political climate, and at the same time to "cut losses" easily when "unforeseen circumstances" arise. These FI need not worry too much about the ill-effect of Singaporean workers for we are just too lazy to organize ourselves into stubborn unions - which is a good thing in my opinion.

Retrenchment is the way to go. If retrenchment is made too difficult, Singapore will lose its competitiveness in the global fight to attract investments. It is investment that drives our economy and we all know that MNC is already leading the SME 10-0 before half-time. Going into the second half, if retrenchment is made too difficult, SME may not even have the numbers to field a complete team. That is perfectly fine if we all enjoy being fair workers and have no interest in the appreciation of modern capitalism.

To understand capitalism, we must understand business. A business exists because of its customers. The customers provide the revenue for the business to prosper. A job on the other hand exists because there is a boss. And most of the time, workers work to serve the boss and earn their wages. The main difference here is that a business decides the value of its service or product whereas the boss decides the value of a worker - usually based on experience and education, and how much the boss can pay. That points to another discussion as to what good do experience and education have if they do not yield wisdom. We will discuss that in another editorial. So, for example, if the value of your service is worth a dollar but the boss decides that you deserve 40 cents for whatever reasons justifiable, you are really short-changing yourself each time- because for every 40 cents you earn, the capitalist uses the remaining 60 cents of leveraged value from you to earn him a return. Of course he bears the risk of selling your service below par value and ends up earning nothing for himself. And when that happens, be sure that retrenchment will there to save his day.

Long Term Investing

I posted the below article in one of Singapore investment forums.

We always hear “take a long term perspective when investing. If we are young, we can take on a higher risk for a potentially higher reward.” Suppose we have a 30-year horizon and we invest in equity and equity funds (assuming they represent the high-risk instruments). After the initial investment we never touch the investment (so that to take a long term view) and periodically we re-evaluate the investment (and find it still valid). After 2-3 years, we find that our portfolio did not grow, or worse it shrank. Nevermind think long term. 25 years on, same thing still. What should we do now? Long term did not pay off and time is running out. Should we continue to hold on to our 30-year view or should we "cut our loss"? If we get out now are we missing out the long term benefit of the stock market. No matter what, time left for long-term is running out.

My points:
1. With a 30-year horizon, we do not really have the full 30 years to involve in a high-risk-high-return type of investment.
2. Any incompetence in investing will be compounded over the investment period.

I later posted a supplementary one on the same topic.

Perhaps I may point out what I missed out earlier. Long term investing is not just about buy and hold, till death do us part style of investing. It should not even be viewed as an investment style. It is about money management over time. Even before we put in the first dollar, we should think about where our end point is. Long term investing makes you think about your exit point. Unless you are trying to leave behind a legacy like our Great, we would at one point or another want it out. That point is the investment objective. My investment objective is to hold a portfolio of stocks/cash that will provide me with a monthly income of $5000 (of year 2000 money). With the objective in mind, we can then beat the path towards it. In our journey, we find that every step we take is important. Just like a navigation exercise in Mandai jungle using only a map and a compass. An error in either the interpretation of the map or deciding on the wrong bearing will lead you away from reaching your objective.Therefore, long term investing is not jumping into a risky investment, and hoping the investment appreciates some time during your waiting period. Long term investing is made up of all the little steps you take and the decisions you make while navigating through the investment jungle to reach your investment objective.

Original text is edited for clarity