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Thursday, 5 October 2017

Is this not Concentration Risk?


During my early investing days, one of the biggest corporate failure (and fraud) in the US was Enron.

Enron went into bankcruptcy late 2001.

One interesting but sad footnote was that quite a few Enron employees lost their life savings for they had invested heavily into Enron shares...

They exercised the stock options they were given and piled into their own company's stock when Enron was flying high during the bull market.

Now beside losing their life savings, they are out of a job when Enron collapsed... Double whammy!


This Enron example was used by many financial advisors to warn clients never to go all in with such a risky concentrated bet - buy stocks in the same company you worked for.


However, try telling that to the employees of Apple, Amazon, and Facebook who bought their company's stocks. Shouldn't they have an edge over outside minority retail investors? I mean the company you worked for, do well do bad, you don't know?


Its a dilemma isn't it?

Whether to be a Koala or Panda bear specialists who only buy nothing but Singapore stocks - live in Singapore, work in Singapore. What? Me worried?

We should have an advantage since we are Singapore born and breed right?

Homebase advantage! 


Or maybe we should diversify our stock investments at least regionally, if not globally?

I remember my insurance agent had left the industry for teaching just after the Asian Financial Crisis of 97, and the replacement agent for my orphan account met up with me and tried to "sell" me the wisdom in investing in an insurance-linked fund that invests in the US and Europe.

Of course he would, wouldn't he?

The old diversification mantra... See? If a Singaporean investor had invested in a global stocks fund, his losses for 97 AFC would be mitigated as US and Europe stocks were doing relatively OK.

No, I didn't bite. 

And thank goodness for that! 

2 years later, we had the Nasdaq crash of 2000...


 


26 comments:

  1. Nobody can forecast the future. No one!

    ReplyDelete
    Replies
    1. ofcos ofcos!

      problem is most investor think things will stay the same!

      Delete
    2. CW and coconut,

      Its like the weather. See dark clouds, bring an umbrella then looked silly when the whole day never rained... Then on blue sky days, got fully drenched when the sky opend up unexpectedly :(

      I can't predict the weather; but I can prepare.

      I now have a small foldable umbrella in my backpack when I go to work during the weekends.

      No need to predict. I focus on what I can control ;)

      Delete
  2. Hi SMOL,

    This is indeed something on my mind. Of course there are a few counter arguments:

    E.g.
    1) which Singapore company don't have a overseas exposure? Think GLP and capitaland in china perhaps. Or Singtel

    The counter-argument would yes, they might have a significant overseas exposure but it's it a alpha company in an overseas market ? Well, some might be.

    2) also, there are also some trusts with pure overseas exposure. Like accordia golf in Japan; ports in Hong Kong and Yantian

    Counter-argument is such pure plays are leveraged instruments and of course there are also golden agri which is a Indonesia play and plain vallian company.

    Then .... I finally figure out what I wanted....

    I didn't want diversification for the sake of diversification. I want good choices which I understand.

    I think peterlynch said that himself in another way.

    However, after a kind soul Anon comment on my post, there are indeed some US etf that I like when the price is right when for diversification. A strong underwriter and the bluest of bluest of companies in US. No rush though, just started reading the us companies that are in the etf.

    Maybe up to half of my portfolio might be a "no-brain mum" portfolio soon

    ReplyDelete
    Replies
    1. Sillyinvestor,

      I see you have thought it through ;)

      No rush indeed!

      US valuations are not exactly "compelling"...

      Its always good to have a "shopping list" of assets we would like to accumulate when prices come to our buy zone.

      There are 2 ways of entries - we chase the market prices; or let the prices come to us ;)


      Its part of the evolution of a retail investor after some years in the market.

      Should we continue as DIY active?

      Outsource to professional money managers?

      Or go with the passive indexing route?

      And maybe the nuclear decision to stop investing as we suck big time, and focus on savings instead?


      Delete
    2. Do take note of the dividend withholding tax if we buy direct on US stock exchanges. Although we don't need to pay capital gains taxes, which is more damaging IMO.

      Careful of foreigner estate tax too --- Trump hasn't repealed it yet haha!! Although this can be "avoided"...

      Can mitigate by buying equivalent ETFs on LSE, especially the Vanguard ones (but transaction cost slightly more expensive).

      If you're only going to be buying after big -40+% crashes, or like me only going for momentum & uptrend, then the dividend withholding tax not so big deal.

      NOTE: For US companies EVERYBODY pays dividend taxes, whether you're US citizen or foreigner. It's just whether you pay less or more. No tax treaty pay maximum 30% rate, like S'pore. Countries with tax treaties pay 15% which is similar to what US citizens pay. UTs/funds sold in S'pore are domiciled in either Luxembourg or Ireland which have US tax treaties. The 15% withholding tax is processed behind the scenes on the US-side.

      And speaking of home bias, Buffett is one fellow that is a die-hard fan of US stocks & US economy. I doubt if he has even 5% in overseas companies. Of course many of his stocks have large global revenues e.g. Kraft Heinz, Coke, Apple, IBM and smaller positions in Visa, Mastercard, Monsanto, Moody's, Restaurant Brands (Burger King/Popeyes).

      Delete
    3. Spur,

      For every Warren Buffett, there's a John Templeton ;)

      That's why investing is so fun and yet frustratingly difficult!

      We just have to choose our own poison and get on with it ;)

      Delete
  3. No more HC, still can save meh?

    ReplyDelete
    Replies
    1. temperament,

      I bet 90% of readers have no clue what is HC!?

      LOL!

      Cannot invest, cannot save. Then live hand to mouth lor!

      Delete
  4. Hi Gerald, there are a handful who can make it. I cut and paste this example here, if you could allow me. Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.
    And there was another person, IIRC was a taxi driver who bought and only bought HSBC shares for donkey years and now can retire on his dividends.
    cheers!

    ReplyDelete
    Replies
    1. Ang Gong Gong,

      Of course it can be done!

      But we are never sure whether its luck or skill...

      For every example you gave, we can also have examples where the employee went all-in with his company's stock in Kodak, Nokia, Hanjin, and Lehman Brothers...

      We can also add AIG although it did not go belly up due to US govt's rescue.

      But to the orginal shareholders, you got so diluted until that you only got 10 cents on the dollar back :(

      AIG is a wonderful example especially for those who like to say if our banks fail, Singapore will fail too!?

      I'm not so sure... Iceland just nationalised the failed banks and let them fail, while creating new banks to take over the dosmetic operations.

      Shareholders and creditors got nothing.


      That's why I posted this post - its a dilemma!

      STI ETF has narrow country focus risk.

      If we zoom closer into a specific sector like SGX REITs only, that adding even more risks!?

      Yes or no?

      LOL!


      Delete
    2. There will be always examples and counter-examples. That why we have bei kambing in the market to lose their hard earned money. No one lose? How to win?

      Delete
    3. CW,

      Ain't it the truth!

      Bill Gross said it best when he questioned whether he's the Bond King due to luck or skill in his article - A Man in the Mirror.

      I mean riding on the coattails of a 30 year long Bond bull market must have helped!

      So have a lot of retail "investors" who started after 2009. The real litmus test is when they experienced a real bear market like 1997 and survived to tell the tale...

      Delete
  5. Like i have said in Cw's blog, it's common sense to bet for 20 or 30 years, it's better or safer to bet on 500 horses rather then on one or a few horses.

    Why WB's legacy is favouring 500 horses rather than only on a few horses?

    i think most of us here have this common sense but we always think we are better than our common sense lol.

    LOL (me included).

    ReplyDelete
    Replies
    1. temperament,

      I think you have chosen the wrong "guru" to quote about diversification...

      Warren Buffett is about Concentration ;)

      https://www.youtube.com/watch?v=wbjPiYE-F4Y


      LOL!

      Of all people, you got pointed out by me! A non-fan of Warren Buffett!?


      No, to get rich, its concentration. To stay rich, we need diversification ;)



      Delete
    2. Errr Temperament is right about Buffett's legacy plan ... Before his wife's earlier death messed it up.

      Wife wanted him to donate most of their assets while they were still alive. But he wasn't too keen.

      Hence original plan was when he die, 90% of his liquid assets to go into Vanguard S&P500 index fund and 10% into Treasuries. Up to wife to donate as & when she likes.

      He didn't even have faith in his successors to retain Berkshire shares. Lol!

      But since wife died first, he has change of heart about donation & that's why all the donation pledges he's made to Gates Foundation and others.

      Delete
    3. Spur,

      Opps! The eggs are on my face!

      Thanks for pointing it out to me ;)

      LOL!


      I completely misread temperament's comment...

      Ah! Its a case of Warren Buffett sharing this is what I do (use brains), but for widows and orphans, do what I say (look ma, no brains needed).

      The former is building wealth; the latter is hanging on to wealth.

      I just find it odd when I read people who are climbing up the mountain are using strategies that are more suited for walking down the mountain ;)


      Delete
    4. temperament,

      Apologies!

      After Spur corrected me, I realised your commnent is a wonderful poke!

      Which option makes more "common sense"?

      1) Thinking we are like Warren Buffett and can invest like he does? We are his no. 1 fan!

      We use the mantra: "If Warren can do it, so can I!"


      2) We invest like widows and orphans and adopt the passive indexing strategy. Don't bother hurting our little brains. Where got time?

      We adopt the mantra: "Passive Indexing has beaten 75% of professional money managers. We stand on the side of legion."


      Now I'm stuck...

      Wait a minute.

      I'm a trader.

      I'm free again!

      LOL!


      Delete
    5. i do envy short to very short terms traders.

      They are ambidextrous in the market.

      And most of them only care about the trade can make money or not, every other things are secondary.

      But i know i don't have the temperament even i can imagine what are the ingredients to be a trader.

      Delete
    6. temperament,

      Me too!

      I'm more a trend trader who likes to hold a trading position for weeks, months, or years.

      Don't say intraday, even those contra like trading of holding a position for a few days I'm quite weak at those...

      This year I'm suffering as the biggest trend trading trade for 2017 is Bitcoins. And I missed that!

      I dinosaur :(


      Another example of fearless youth who does not know what cannot be done will beat me flat...

      LOL!



      Delete
  6. ETFs are just tools. Long ago, we can easily do a John Bogle 3-fund portfolio. Now, we can do a Rick Ferri core 4. Are the STI ETF or SG-REIT ETF "good"? Depends on how you use it?

    You said it best! We just have to choose our own poison and get on with it ;)

    ReplyDelete
    Replies
    1. Kevin,

      You are right!

      Its never the tools; but who is wielding it!


      I've chosen my own poison; and that's after trying other poisons.

      I'm very suspicious of 2 groups of zealots:

      1) Those with 1 book.

      2) Those who sway with the wind all the time.

      LOL!


      Delete
  7. Hi SMOL,

    Same same as averaging down. Cannot suka suka do one. End up being overconcentrated in one counter. Kekeke

    ReplyDelete
    Replies
    1. Unintelligent Nerd,

      Averaging down and scaling-in may look the same in "practice", its miles apart psychologically speaking.

      One is practiced by bei kambings, the other is practiced by pros.

      ;)


      Delete
    2. Averaging down and scaling-in may look the same in "practice"; but the difference is in their account size. Big fat purse is scaling-in but seen as averaging down by Small thin wallet.

      Big fat purse scaling-in so many time still less than 10% of their capital; but Small thin wallet averaging down just a few rounds already exceeding more than 20% of their capital.

      Monkeys cannot follow Gorillas. Right?

      Delete
    3. CW,

      Yes, that too.

      Pros will buy portfolio insurance with different hedging tools.

      For your example of "Gorilla" retail investors:

      1) They have secured their emergency funds separate from their investments.

      2) Have a big war chest as opportunity fund. Let cash "rot" because they know cash is KING in a bear market.

      3) And diversify across different asset classes like bonds and/or precious metals or brick and mortar properties. Permanent portfolio that sort of thing...


      If a Gorrilla took a bear's claw, its just a flesh wound.

      But to a Monkey... It can be fatal :(





      Delete

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