Buying Great Assets For a Song – Are You Ready?

“An investor needs to do very few things right as long as he or she avoids big mistakes.1” These were the exact words penned by Mr Warren Buffett, Chairman of Berkshire Hathaway, in a letter to its shareholders in 1992.

Why would Mr Buffett, arguably one of the greatest investors of all-time, highlight the ‘avoidance of big mistakes’ in the wealth-building process?

Imagine investing $100,000 today into a 1-year investment plan, and only getting back $50,000 at maturity – that would mean a 50% loss. But what is the percentage gain required to recover your capital of $100,000? 100%! It takes twice the effort, just to recoup the losses!

What Should I Invest In Now?

The perennial golden question on every investor’s mind is, “What should I invest in –now?” As fellow investors at Unicorn, we are always looking out for quality investments and great opportunities. But more importantly, we are even keener to avoid investments NOT to go into, which was a topic most recently covered in our Investment Seminar on September 14, 2014, with very kind and generous support from iFAST Financial.

Given today’s investment climate, we broadly classify investments into three categories:

  1. Too good to be true
  2. Good, but not now
  3. Good, and now

Too Good To Be True

Every investor would be more than happy when he is presented with an investment opportunity that guarantees his capital, and delivers a high yield. Unicorn would be very interested too. However, as the old adage goes, ‘If it sounds too good to be true, it probably is’. When such seemingly ‘sure-win’ schemes come our way, we advise investors to always ask themselves the following questions:

  1. Why haven’t the wealthy snapped up all these investment opportunities?
  2. Why me?

If investors were to ask themselves the two questions above, many could avoid being defrauded by fancy Ponzi schemes or lottery scams.

Capital-guaranteed, high-yield – yes, for the ones selling it! 

As for the investors, many are left high and dry with their hopes of achieving financial independence probably seriously dented as well. With promises of such lofty return on investment, the wealthy would be the first to jump onto the bandwagon; and with their available capital funds, probably buying into most of the investment, if not all. That would leave the man on the street with no chance to take a bite of the pie.

Not every investment opportunity is fraudulent. What we are suggesting is to make sure that we have the full picture, understand the pros AND cons, before making a decision whether our hard-earned money should be invested in it.

As further warned by Mr Buffett in the letter, “what counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”

Good But Not Now

On the other hand, we have also found a number of investments and asset classes that appear sound, and are possibly good opportunities that our clients can take advantage of. The key would be to find the most opportune time to invest.

Investments that we think fall into this category:

  • Bonds
  • REITS
  • Property (for investment purposes, not a home)
  • Developed Markets (DM) Equities

Let’s take a quick look at two of these investments, starting with DM equities.

In our November 2013 issue, we shared that many benchmarks were overtaking their previous highs. Comparing data recently collated on the MSCI indices, the price-earnings (P/E) ratio of the MSCI World Index indicated that valuations in the DM regions remain high relative to the others (MSCI World Index captures large and mid-cap representation across 23 DM countries2). Furthermore, with a P/E ratio of 18.2, DM equities fall within the range of 17-25 that is widely interpreted as being overvalued3.

Table 1 Figures accurate as of September 2014

Buy New Asset Pic1

With regard to the property market (particularly in Singapore), an investor faces similar challenges. Prices are still hovering near all-time highs4; coupled with an interest rate environment that seems poised for a rise in the future that could lead to a credit crunch, investors might do well to keep their investment property purchases on hold for now.

Good And Now

In our past issues (June 2013, August 2013, April 2014, August 2014), we have called for clients to increase their exposure in Chinese equities as well as to give some attention to gold. We stand by that advice, and would like to offer a few other suggestions to act on now. These suggestions should help position your portfolio and investment plans well, as we await the next investment opportunity.

These are:

  1. Save hard, save much
  2. Draw up a financial plan
  3. Review your economic life value risk management planning

We are always looking out for wonderful opportunities to help our clients and ourselves build massive wealth. Clients who have followed our advice to be invested in China should be geared to profit from it in the long run. It is in our view that with the raging bull markets running on its last legs into the 6th year, wonderful opportunities to acquire great assets at a low price should be available in due time. It has always been wise to be prudent, and we think it applies even more so to the current situation. And the only way we can take full advantage when the time comes, is to get prepared – RIGHT NOW.

Get Ready, Stay Ready, And The Time Will Come

There should be no room in your investment strategy for schemes that are too good to be true. There is however, every reason for an investor to be ready when great opportunities come knocking, and even more reason for an investor to get ready by doing the necessary preparations now.

As Mr Buffett once said, “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.5

Thus, the only thing left to do now is get ready!

Sources:

1Berkshire Hathaway, Letter to the Shareholders (1992, Warren Buffett)

http://www.berkshirehathaway.com/letters/1992.html

2MSCI World Index

http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-index.pdf

3Price-Earnings Ratio

http://en.wikipedia.org/wiki/Price%E2%80%93earnings_ratio

4Singapore Private Residential Property Price Index

http://www.singaporepropertycycle.com.sg/market-trends/singapore-property-price-index/

5Warren Buffett: his best quotes

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8381363/Warren-Buffett-his-best-quotes.html

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