I writing a topical email every week to my mailing list. Here’s our last email to subscribers which I thought I share.
You can sign up on our mailing list to get the latest updates when it goes out every week.
Investors often focus on investing returns which is easy enough to understand. At the same time, experience has taught me that the biggest impediment to long term returns are catastrophic losses and improper position sizing.
Examples in the last few years are common enough – from Hyflux perpetuals to Oil & Gas bonds. These problems become fatal when concentrated positions are taken inadvertently.
It is important to start off by differentiating between scams and investments that simply did not turn out well.
There is always an inherent risk in investing in businesses as not all decisions pan out as initially conceived.
Let’s take the example of high yielding perpetual securities. The key thing is to always assess the underlying assets and most importantly cash flow generation from said assets. The Genting perps issued in 2012 were supported by healthy cash flow from its casino operations.
In contrast, Hyflux had been cash flow negative for several years before its 2016 perps were launched. The problems with Tuaspring plant have been well documented in the media. Suffice to say, its initials projections were not met.
I have every belief that Olivia Lum intended to make money on the project (afterall, she has the most of to lose from the downfall of Hyflux). Unfortunately like all things in life, things do not always go the way you want to do.
The important thing to note is that these are business decisions that have gone wrong. When it comes to investing in businesses, we have to size our positions appropriately. There is a big difference in investing in Singtel (diversified cashflow from telcos around the world) to investing in Hyflux.
Taking hugely concentrated positions in the latter exposes you to extremely high amounts of risk if as one commentator has coined it “shit happens”.
There is nothing wrong investing in such situations if you are adequately compensated for the risk, and size the positions are very small.
Moving from bad business decisions to fraud
Let’s move outside the realm of legitimate investments into outright fraud. I’ve seen many variations of these “investment schemes” but here are the few things that they all have in common.
First off, there is no regulatory overview by the appropriate financial authority.
Having regulatory oversight is no guarantee of not losing money (which tells you how low the bar is set really) – and it’s a huge red flag if the investment manager is unable to meet even the basic regulatory requirements.
Checks and balances are boring topics… until they become absolutely critical and being MAS regulated is the bare minimum.
Secondly, they offer unrealistic returns that are often guaranteed.
I understand that the idea of investing long term with volatility in the hopes for 8% to 10% (referring to dollar cost average index investing) isn’t sexy nor exciting.
That’s why many people seek “higher guaranteed returns”. Unfortunately, life doesn’t work that way. You can’t just demand something and magically hope for it to appear.
At the end of the day, any legitimate investment scheme will have to invest the money raised from investors into the markets or businesses. There isn’t a magic fountain whereby managers are able to derive risk free high returns that are paid without fail every month.
As the old saying goes, if it sounds too good to be true it most definitely isn’t.
How to avoid losing money in stocks and investments
Many investors focus on financial literacy and education only after huge sums of money are lost. As the saying goes, it is good to learn from your mistakes but even better to learn from the mistakes of others.
Sadly, the lessons of Hyflux, Noble, Swiber and more will no doubt be lost in the coming years as the next craze sweeps in.
My sincere wish is that readers of this newsletter will be able to draw from the learning points articulated in our weekly letters to maintain grounded and to make prudent decisions going forward.