December 27

7 lessons on where to invest money in Singapore

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In October 2016, I made my first ever investment. As a pimply, young student that had found some spare cash, investing a total of $8000 into Raffles Medical and SATS, felt pretty sexy.

Especially when I would take my bank book to the ATM, and see the printed lines stating that dividends had just been sent into my account.

It didn’t matter that it was just a paltry $42. Or that it probably didn’t cover the horrific losses I was seeing in the likes of Raffles Medical and SATS, bought at a high of $1.43 and $4.99 respectively.

It just mattered that I was invested.

7 years have passed since that fateful day in October 2016.

And when I look at the performance over the past 3 years, especially in light of COVID, I think it’s been a pretty credible performance.

But what has contributed to it?

More importantly, what are the lessons you can take about where exactly you should invest in Singapore?

My biggest returns over the years has tended to come from the small, mid cap stocks of the SGX
My biggest returns over the years has tended to come from the small, mid cap stocks of the SGX

Pure value plays don’t always work out

I started as a value investor, modelling the likes of Warren Buffett in his early days of ‘cigar-butt investing’. If you’re not sure what that is, it’s the type of investing that goes after pure value, even if the company has a poor business model.

That was how Buffett landed up with Berkshire, a textile manufacturer, even though its business was rapidly declining after the First World War.

But after meeting Charlie Munger, his business partner, he finally parted ways with this idea of value investing, and began to invest more heavily into companies that were good, but not necessarily cheap.

Over the years, I’ve also seen a similar transition in my approach to investing in Singapore.

You need to ask what the catalyst is

Take for example Valuetronics.

Just basing it on valuations, it looked cheap.
Just basing it on valuations, it looked cheap.

When I first bought it at $0.805 in January 2020, I thought the valuation looked positive. It looked cheap.

But what I didn’t realise that its low market cap and thin liquidity (there were relatively few shares traded everyday on the market) meant that there was little catalyst for it to grow, even if it was an extremely well run company.

Make no mistake. When I went for its 2023 Annual General Meeting (AGM), Gerald Woon, the person in charge of their investor relations, told me,

Their management sleeps on site at the factory from Monday to Friday, going home only on the weekends to see their family.

They work extremely hard.

But if you see how their share price has cratered to $0.60 today, you would understand that the Singapore market in general doesn’t appreciate such stocks.

The Singaporean market is a difficult beast, needing a different approach.

Just go to some of these AGMs, and you would find retail investors more interested in packing home the food, and asking why the buffet this year isn’t that nice, compared to really asking the management what’s happening with their company.

In this case, because it seemed like a boring company which only made electronics, there seemed little of a catalyst that would drive their revenues (and accompanying share price) up.

So what worked better?

High could go higher

Now let’s take the example of Propnex, which I entered at $0.735 in December 2020, and which to date has banked me around 59.1% in percentage returns, over 3 years.

If you looked at the point of entry in December 2020, the stock looked pricey. It was at an all-time high and it didn’t look like it could go higher.

I thought so too.

But I bought it anyway because of 3 reasons.

  1. They were a market leader in the property brokering market.
  2. It looked like house prices were escalating quickly because of the inability to cope with demand, with building of houses hampered by COVID restrictions. This meant that Propnex, which took a cut of commissions, would get even more money.
  3. I liked that their business model was extremely asset light. If yo looked at their return on capital, it was nearly 45%.

The fundamental principle I learnt here is to go towards what’s working, rather than trying to force the market to suit your desires.

We would all love to think that we can discover the next 10-bagger, but that’s not possible if the market is not looking at it.

So one way is to use factor investing, where you cross value, momentum and quality to see what is giving the biggest returns.

The biggest mistake you might make is thinking that what has shot up, couldn’t possibly shoot higher. That’s not always true.

Understand their opportunity for growth in the market

Here we want to study the highest returning stocks since they listed.

At the top you can see stocks like

  1. Venture – 23,271% up since listing
  2. Genting Singapore – 15,603% up
  3. AEM – 4553% up
  4. Best World – 3136%
  5. Metro – 3086%
  6. Jardine Cycle and Carriage – 2872%
  7. UOB – 1924%

But of course, that’s if you had the foresight to look at them when they first listed.

If you didn’t, what can you do?

So I thought it might be better to look at those in the past 5 years, and see if there were good lessons to glean from them. Not everyone has the foresight to buy an IPO stock, especially at the start, when its business model is not proven.

We also choose the time horizon of 5 years because we think it’s a better time frame to look at investing, for the long term.

The highest returning stocks over the past 5 years in the SGX include some names you might not know
The highest returning stocks over the past 5 years in the SGX include some names you might not know
The highest returning stocks over the past 5 years in the SGX include some names you might not know

I will confess here that it is hard to understand all the businesses here, but I will expand on those that I do understand more. Keyword – more. And I’m not professing that I’m an expert on these industries.

Investing in small or mid cap works better

Whilst it’s sexy to tell people you’re invested in large-caps like DBS, you might see your returns not being as sexy.

It’s far far easier to see stocks increase as a small or mid-cap, compared to a large cap.

If you look at the majority of the stocks on that list, none of the 14 were large-cap stocks (stocks above $10 billion in market cap).

High returns on capital

One of my best returning stocks has been The Hour Glass, which has grown 250% since I bought it at the price of $0.655 in October 2018.

Why we initially invested in The Hour Glass
Why we initially invested in The Hour Glass

When we first looked at it, you can see that the return on capital was above average at 13.3%, but not extremely high.

You might wonder why return on capital matters.

For one, it shows a high degree of profitability. They are not having their profit margins compressed because of a poor business model.

Secondly, it shows that their business model is easily scaleable.

This might be hard to understand if you don’t do business. But take for example the luxury watch retailing business. As the CEO of The Hour Glass, Michael Tay shared during the 2023 Annual General Meeting, there was more demand than they could cope with.

All they needed to do was get more watches on the hands of those customers that were waiting for them. There’s a queue for their products.

Compare this to your hawker stall at the wet market, that’s struggling to get any customers. That’s a business model that can’t scale as easily.

And you can see below that their returns have doubled over the past 5 years.

The Hour Glass’ return on capital as of December 2023 (information from Stockopedia)
The Hour Glass’ return on capital as of December 2023 (information from Stockopedia)

Understand how they can make more money

Business models that are easy to understand tend to be better places to put your money, compared to those you can’t. Sure, you can invest in a big bank like UOB, but you may not necessarily know how it makes more money.

But taking the example of The Hour Glass again, I knew that I wasn’t that smart to understand the business model of a bank, especially when I had studied no economics in university or school.

But The Hour Glass was easy.

With the COVID pandemic, I knew that people couldn’t travel.

But they still wanted to treat themselves. They needed an outlet for their discretionary spending. Luxury watches and property was the rage, as people spent their excess money on luxuries.

Know the management by attending their AGMs

I’m a nerd. And you might not be as crazy as me, reading 10 years of annual reports before you feel you understand the management enough.

One way is to make a small position in the stock, buying just 100 shares to get a chance to attend their AGMs as a shareholder.

Go prepped with some questions.

And you would slowly realise that you would learn a lot more about their business, than you would do sitting behind the screen.

You’re not buying a stock, you’re buying a company

Whatever stock you buy, you have to remember this.

You’re buying a company, not a stock. Or a ticker. Or a price.

And you’re buying into the company’s future, and your future. It’s your bet on money that you could otherwise leave sitting in a fixed deposit. Don’t take things lightly.

 


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