Posted on by CTKS · 8 Comments

7 Timeless Concepts From “The Intelligent Investor”

Written by the founding father of value investing, Benjamin Graham, The Intelligent Investor has been considered the bible of stock investing ever since it was first published. While some ideas are may no longer be relevant today, many have withstood the test of time. Here are 7 timeless concepts from The Intelligent Investor.

1. What is investing?

Let us start of with Graham’s definition of investing. In The Intelligent Investor he wrote that “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return”. This definition can be segmented into 3 parts. First, “upon thorough analysis” suggests that investing requires you to commit sufficient time to do research and your due diligence. Next, “promises safety of principal” means that investing involves protecting our capital from losses. Lastly, “an adequate return” implies that investing provides a fair return for our time and effort, not a windfall. This definition thus draws a clear distinction between investing and the likes of gambling and speculation. Investing serves to protect our capital while providing a decent rate of return. Gambling, on the other hand, provides the possibility of a windfall but also a high chance of losing everything.

2. Behind every stock is a business

This brings me to my next point: a stock is not just a ticker symbol, it is an ownership in an actual business, with an underlying value that does not depend on its share price. With stock prices continuously hitting all time highs today, it is easy to forget that there is an underlying business behind each stock ticker.

A litmus test to check whether we are buying a stock because of the underlying business is to ask ourselves this question: if there was no market for these shares, would I still be willing to have an investment in this company on these terms? If the lack of a market would mean that you will be unwilling to make this investment, you are playing a fool’s game, where you are hoping that the next fool will come along and take these shares off your hands for a higher price.

After all, before the creation of the stock market, investing in a business entails putting up capital for a stake in a company with no way to consistently track the price of that ownership. The creation of the stock market has made it possible to have all the quotations at our fingertips. Whether this is for the better or worse depends on how we use it (more on this later).

3. Share price and value will often deviate

The third concept is that deviation between the share price and the value of a company is a natural phenomenon. Sometimes, this deviation will last a week or two but other times, it can go on for many months. Graham wrote: “The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The intelligent investor is a realist who sells to the optimists and buys from the pessimists”. This quote reminds me that volatility is part and parcel of investing. The sadness we feel when we see our holdings dip is the cost we have to pay in order to take part in this machine of wealth creation. However, if you believe that the market is at least somewhat efficient, prices and intrinsic value will eventually converge in the long run. Thus, looking at the market levels today where prices seem to be running way ahead of value, there are only a few possibilities that can follow: stock prices come down, value of businesses goes up, or both.

4. Future returns of every investment is a function of its present price

Another implication of the relationship between price and value is that the future returns of every investment is a function of its present price. The higher the price you pay, the lower your return will be. This is because for a company with an extremely high valuation, their future growth is already priced in. This means that this future growth is to be expected of them. If future earnings turn out to be worse than expected, this valuation is no longer justified and their share price will tumble. An implication of this is that a great company is only a great investment at the right price. For instance, despite improving fundamentals, Amazon did not break it’s dotcom bubble peak of USD$105 until 9 years later in 2009! This is because in 2000, Amazon’s share price ran so far ahead of its value that it took almost a decade for its fundamentals to “catch up”. As Warren Buffet so aptly put it: “Price is what you pay; value is what you get”. When investing, we are looking to get more while paying less.

5. Volatility does not equate to risk

Building on the previous two points, Graham argued that risk is not fluctuations in price but rather the loss of value which either is realized through actual sale, or is caused by a significant deterioration in the company’s position – or, more frequently, is the payment of a price greater than the intrinsic value of the stock. When investing, we are putting up our capital for potential appreciation. Due to the uncertain nature of the future, there is always a chance of losing our capital due to misjudgement, competition, a recession or a multitude of other reasons. These are the risks that we are undertaking when investing in a company, not the day to day fluctuations in the company’s share price. In other words, risk is the chance of a permanent loss of capital, while volatility is the temporary losses on our investments. Graham also wrote that “The intelligent investor realises that stocks become more risky, not less, as their prices rise – and less risky, not more, when their prices fall”. This is because a company’s share price is a reflection of its expected future earnings. With lower prices, a company has lower expectations of future earnings and is hence less likely to fall short. Thus, volatility can potentially provide opportunities to accumulate even more shares in great businesses at cheaper prices.

6. Margin of safety

Next, is the need for a margin of safety. Graham argues that no matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. In today’s VUCA world, this is more true than ever. With so many factors affecting the outcome, no one can be 100% certain which companies will thrive 10-20 years from now. Furthermore, luck and risk are also factors out of our control. There is always a chance that a business can do everything in its power but still lose out to its competitors. Therefore, there is a need for a “margin of safety”. This gives us assurance that even if we are wrong, we don’t suffer crippling losses and are able to continue investing (aka capital preservation). This is one of the ways to effectively deal with luck and risk; stay in the game long enough until luck becomes on our side.

7. Mr. Market

Finally, there is Mr. Market. This, in my opinion, is a powerful way to view the stock market and price quotations. Imagine that you have a business partner called Mr. Market. Everyday, Mr. Market gives you quotations on a list of businesses. These are prices that Mr. Market is willing to sell you shares of a business at or buy shares of the business from you. However, the quotations that Mr. Market gives us are subjected to his rapidly changing emotions and the news he reads. Some days, he may be overly pessimistic and sell you shares in wonderful businesses for extremely low prices. On other days, he may be overly optimistic and quote insane prices. While Mr. Market may give you many different prices on many different businesses, we need not need to act on it every single time. Our job is to be discerning. If Mr. Market quotes us a low price on a wonderful business, do not sell your stake and consider seizing the opportunity by accumulating more shares. If Mr. Market offers to sell his stake in a business for an insane price, we can ignore it or consider selling him some of our shares. This concept helps me worry less about the daily stock prices and focus on the underlying businesses.

These are the 7 timeless investing concepts I have learnt from The Intelligent Investor. Hope that it may benefit all and help us stay rooted in today’s volatile and uncertain market. For more articles and resources like this, click here to join The Dollar Sapling telegram channel!

Posted on by CTKS · 4 Comments

Irish Domiciled ETFs

If you have read my previous posts, you will know that I am a proponent of passive investing (AKA buy and hold ETFs). In this article I will be sharing the ETFs I personally dollar cost average into, which are known as Irish Domiciled ETFs. Without further ado, let us jump right in.

What are Irish Domiciled ETFs?

The common S&P500 ETFs such as SPY and VOO are domiciled in the United States. Which means they are registered and regulated in the US. These Irish domiciled ETFs are thus registered and regulated in Ireland. This is not to be confused with their place of listing as Irish domiciled ETFs are typically listed on the London Stock Exchange. Meaning that an ETF can be domiciled in one country and listed in another.

Why does the country that an ETF is domiciled in matter?

  1. Withholding Tax

The short answer is that it matters for tax efficiency. As a non US resident, we are subjected to a withholding tax of 30% when dividends are paid from a stock or ETF domiciled in the US to us. However, due to a tax treaty that exists between the US and Ireland, the withholding tax can be reduced to 15%. Here is how it works.

When dividends are paid from the S&P500 companies to a US domiciled ETF such as SPY or VOO, there will be no taxes. However, when the dividends from the ETF is paid out to us, there will be a tax of 30%. As for Irish Domiciled ETFs, the US-Ireland tax treaty will reduce the withholding tax to 15% when the S&P500 companies pay the dividends to the Irish Domiciled ETFs. As Ireland does not have a withholding tax for foreigners, we will not be taxed when we receive the dividends from these ETFs. This means our effective tax rate will be reduced from 30% to 15% simply by purchasing Irish Domiciled ETFs instead.

  1. Estate Tax

While we are on the topic of taxes, another tax that the US levies is the estate tax, which is basically a tax on all of your assets located in the US when you pass on. This includes property, shares of US companies and cash (even cash in US brokers such as IBKR!). As you might have guessed, because Irish domiciled ETFs are not regulated in the US, they are exempted from the US estate taxes. For a rough idea of how much estate taxes can add up to, here are the estate tax rates from the IRS.

From the table above, if you have 1 million worth of assets domiciled in the US, the estate tax will amount to a WHOPPING $345,800! Thus, Irish domiciled ETFs is one way to minimise the impact of the US estate taxes.

Now, you may be wondering why I am taking this into consideration at such a young age. This is because I intend to continue dollar cost averaging into ETFs tracking the S&P500 and hold for a long long time (basically my whole life). This means if anything were to happen to me (touch wood), I may not have time to make arrangements. The last thing I would want is my dependents having the shock of their lives when the IRS sends them a bill for hundreds of thousands of dollars. Life always seems to throw a curve ball when we least expect it, so it is good to plan for the unexpected.

  1. Accumulating ETFs

Accumulating ETFs are ETFs that automatically reinvest the dividends. The typical US listed ETFs are distributing, meaning they pay the dividends out to shareholders and it seems like there are no accumulating ETFs in the US. I am guessing this is due to withholding taxes and perhaps other reasons. On the other hand, there are many accumulating Irish domiciled ETF options.

As someone who wants to maximise the compounding of my investments, accumulating ETFs are a fuss-free and cost effective solution. Instead of having dividends paid out to me and having to reinvest manually through a broker which will incur additional commission fees, accumulating ETFs will help me do this automatically and save on fees as well. Furthermore, as the dividends I receive are not much, I may not be able to buy complete shares of ETFs. With accumulating ETFs, I do not have to worry about buying complete shares as the dividends are all reinvested, no matter how little.

The two screenshots above compare an accumulating ETF (CSPX) with a distributing one (VUSD). Both track the same index (S&P500) and have the same expense ratio (0.07%). As you can see, the dividends that are automatically reinvested show up in higher capital gains (about 17% in the last 5 years).

All that being said, there are some cons to Irish domiciled ETFs as well.

Firstly, Irish Domiciled ETFs will have lower trading volumes and thus have a higher bid-ask spread than their US counterparts. This can be considered a hidden fee of sorts.

Secondly, the commissions for LSE will likely be higher than that of the US markets.

However, both commissions and bid-ask spread are upfront costs paid when we purchase a stock. On the other hand, lower withholding taxes and automatic reinvesting of dividends are recurring cost savings. Not to mention the astronomical estate taxes that we will be avoiding in the future. Thus, all things considered, Irish domiciled ETFs will still be more cost effective in the long run, maximising our returns.

Choosing a broker

If you are convinced about the benefits of buying Irish Domiciled ETFs instead of the US domiciled ones, you will need to choose a broker to get started. When I was first doing my research, I shortlisted SAXO markets and Interactive Brokers (IBKR) based on these criteria:

  1. competitive trading commission fees
  2. zero or low management fees (ideally zero of course)
  3. trustworthiness

Here is a quick comparison and my final verdict:

Previously when IBKR charged USD$10 monthly minimum fees for accounts with total asset value less than $100,000, SAXO markets was more cost effective for investors with assets less than $100,000 and IBKR was the cheaper option for those with assets more than $100,000. Since then, IBKR has removed their inactivity fees. This makes them the best brokerage to purchase Irish Domiciled ETFs in my opinion. The only downside is that IBKR’s interface can be slightly hard to navigate initially and takes some getting used to.

choosing an etf

To conclude this rather long article, here is a comparison between some of the common Irish Domiciled ETFs and how I go about picking the ones that suit my portfolio and personal preferences.

First, let us start with the ETFs that track the S&P500.

Personally, I look out for a combination of low fees and accumulating type. This is because I do not require the dividend pay outs at the moment and wish to reinvest everything in order to maximise compounding. This leaves CSPX and VUAA, both of which are accumulating and have extremely low fees of 0.07%.

The main differences would be the share price and volatility. CSPX is currently priced at USD$456.42 while VUAA is priced at USD$82.20. Thus, if you are DCA-ing less than USD$460 (SGD$621) a month, VUAA would be the obvious choice.

The trade off would be that trading volume of CSPX is much greater than that of VUAA, meaning that VUAA will have higher bid-ask spreads. However, as mentioned above, these fees should not be a cause for concern in the long run.

In the end, I decided to go with CSPX by DCA-ing every 2-3 months instead of monthly so that I will be injecting a larger capital each time. I do so to keep trading commissions low. Else, just buy VUAA and don’t worry about the spread.

The next group of ETFs track world indices.

As mentioned above, I favour the accumulating options. Thus, my choice was between VWRA, ISAC and SWRD.

I chose VWRA because compared to the other two, it gives me slightly more diversification away from the US market and greater exposure to emerging markets such as China. This suits my portfolio considering I already buy CSPX.

While there may be a myriad of ETFs to choose from, my advice would be not overthink it. No point wrecking your brains over which ETF to choose because any of these are excellent options to form the core of your portfolio. As usual, the most important thing is to pick an ETF, start dollar cost averaging and stay the course.

Click here to join The Dollar Sapling telegram channel where I will be sharing more about passive investing and ETFs!

Posted on by CTKS · 2 Comments

4 Reasons Why You Should Invest

Still on the fence about whether to invest? In this article, I will make the case of why investing is essential, and perhaps even necessary for most of us.

The first reason why you should invest is because earning and saving is only half of the equation to building wealth over the long term. When we work, we are “exchanging” our time for money. As we only have 24 hours a day, there is a limit to how much we can work and how much money we can earn using our time. If we want to maximise our earned income by working more hours, we will eventually have to work at the expense of having less time to rest or to do things that brings us joy. Worst still, our mental health will deteriorate and we may become at risk of burning out. Personally, I view investing as making your money work for you, even when you are asleep. As your income from investing increases, it can supplement your main income stream and this means it will free up more time for you to do the things you love such as pursuing your hobbies or spending time with family and friends.

This brings me to my next point, which is that investing can help diversify your sources of income. Diversification one’s sources of income is a topic that is not talked about enough. One only needs to look back at the past year and a half to see why diversifying our income streams is necessary. As Covid-19 ravaged the world and forced many economies into lockdown, many people lost their jobs. If our day job is our only source of income, losing it means having to survive on stimulus checks an watching our savings whittle down. During the same period, the stock market has continued to chug along, rewarding those who remain invested. Thus, a second source of income via investing could potentially help tide us over in a time of crisis. Furthermore, research has shown that generally, the more sources of income you have, the more income you tend to make. With dividends and capital gains being the most common income streams after earned income, investing in equities is a good place to begin.

Next, I view investing as a way to protect your savings against inflation, the silent killer. Today, cash sitting in the bank earns an interest of 0.05%, essentially nothing. Imagine that you saved up a respectable sum of $50,000 by the time you are 30 years old. If you were to leave this sum in the bank, it will be worth less than $33,400 in real terms by the time you reach 50 years old (assuming an average inflation of 2%). Essentially, you would have lost over $16,600 by simply doing nothing. Investing, on the other hand, allows us to earn a return greater than the inflation rate. This grows our savings in real terms, protecting them from being eroded by inflation. Inflation is so deadly because it lurks in the shadows and goes largely unnoticed. By the time people feel its effects, it is often too late. Thus, the sense of assurance we feel when we have loads of cash in our bank account is a false one. If you are not convinced about the threat of inflation, just ask your parents how much a cup of coffee or a bowl of noodles cost when they were a student! Thus, while returns on investing in stocks are not guaranteed, leaving your retirement savings in the bank is a sure way to have your savings eroded.

Lastly, being able to retire on savings alone is a luxury. For someone who earns the median wage of $4,500 in Singapore from 25 years old to 60 years old, being able to save $1 million dollars for retirement seems like an impossible uphill task. They would need to save $2,380 a month, more than 50% of their income, in order to hit this goal. If the same person were to dollar cost average into an ETF that has an 8% annual return on average, he will only need to contribute $465 each month to achieve the goal within the same time period of 35 years. Now that is a much more achievable goal! While I admit that this is a theoretical example, the 8% return is a rather conservative one given that the S&P500 has a historical average return of 10% annually. Furthermore, by saving and investing more than the $465 there will be more leeway for any potential setbacks.

I hope that this post has convinced you about the importance of investing in order to achieve achieve our financial goals more easily. While there are indeed risks involved, as with most things, avoidance is not the solution. Instead, we should recognise the risks involved and understand that successful investing can be achieved with the right strategy and mindset. Thankfully, these are well within our control. If you would like to learn more about investing, check out my other posts on how to invest here. Additionally, I will be sharing which ETFs I personally DCA into monthly so click here to join The Dollar Sapling telegram channel and stay tuned!

Posted on by CTKS

How To Invest Your First Dollar

One way to set yourself up for financial success in the future is to build a diversified investment portfolio and take advantage of compound interest. This is a beginner’s guide on how to channel your income from part time jobs and side hustles towards investing for your future. This article is written in collaboration with @gapyearsg, check out their page here for career tips, job opportunities and more resources!

1. Choose a brokerage

When you are just starting out, you are likely investing small sums of money. This means that large commissions will eat into your returns substantially. Thus, it is wise to choose the lowest cost broker. Personally, I use tiger brokers because they have extremely competitive fees for Singapore and US-listed stocks. Additionally, creating an account is fuss-free and their interface is easy to navigate. Other options include MooMoo that also provide very competitive fees and have an attractive sign up bonus. Here is a quick comparison between the cheapest brokerages.

For more information on the respective brokers, check out this Seedly article on the cheapest online brokerages in Singapore.

My advice here is to not ponder too hard on which brokerage to use. Choose the one with the lowest fees and move on. It’s more pertinent that you get started on investing than fall prey to the paradox of choice.

2. Choose an ETF to invest into

The next step is to choose a suitable ETF to invest in. For starters, I recommend choosing an ETF tracking a broad index such as the S&P500 or the world index. This is also known as passive investing where you try to replicate the market returns. The beauty of this method is that it is time and cost effective. Instead of spending hours reading annual reports and researching on individual companies, buying the whole index will allow you instantly have a sufficiently diversified portfolio that is going to give you decent returns. Furthermore, ETFs are very low cost investment products, having average fees of just 0.40%. These two reasons make ETFs the most efficient way of investing, allowing you to earn average market returns with minimal time, effort and money. For more reasons why ETFs is a great investment vehicle for starters, check out my article on how to start investing with a small capital.

While passive investing may seem boring, consider the fact that 90% of investors fail to beat the market. This shows that it is not that easy to beat the market and that average returns are not so average after all! As beginners, we should be contented with earning the average market returns and ETFs will allow us to do so with minimal effort. This will also free up your time so that you can pursue your interests and focus on your part time jobs or side hustles.

In order to help you with your decision, here is a simple comparison of some of the popular ETFs.

All 3 of these ETFs are sufficiently diversified and are suitable to be the core of any investor’s portfolio. The main difference between the 3 ETFs is the exposure to the United States market. Although both VOO and VTI will give you 100% exposure to the US, VTI is slightly more diversified as it includes the entire US market while VOO will only give you exposure to the top 500 companies in the US. Alternatively, if you would like greater geographical diversification, URTH is the one for you as it has exposure to other developed markets such as Japan, United Kingdom, France and many more. However, this will come at a greater cost of 0.24% compared to just 0.03% for the other two.

Once again, there are countless options to choose from. While it is important to choose the right ETF for you, don’t ponder for too long. What’s more important is that you choose a sufficiently diversified ETF and start investing.

3. Dollar cost average (DCA) monthly

Dollar cost averaging refers to an investment strategy in which an investor divides up the total sum to be invested across periodic purchases of the target asset in order to reduce the impact of volatility on the overall purchase. This is a popular strategy used by many to reduce the impact of unavoidable and unpredictable market volatility on their portfolio. DCA is an effective strategy that removes emotion from the decision making process, allowing us to avoid timing the market. Just have the conviction to stay the course and continue to invest every month without fail. Even if the market crashes tomorrow or a year from now, just keep purchasing ETFs at a cheaper price and you will be rewarded in time to come. For more information on DCA, read my other article here!

4. Sit back and let compound interest do the work

By working a part time job 8 hours a day for 5 days a week, you will earn about $1,600 a month assuming a pay of $10/h. By setting aside $600 a month to invest, you will end up with $7,200 invested after a year. Assuming that you do not make anymore contributions, your $7,200 will grow to more than $20,500 by the time you are 30! Let us now take a look at how much of a difference four years will make. If you had invested the same $7,200 at age 23 instead (after you finish your degree), your portfolio will only be worth $14,000 by the time you are 30. That’s a difference of more than $6,000 simply by starting to invest before you begin you university study instead of after! By working a higher paying job, cutting your expenses and having a side hustle, it is possible to save and invest more. This will put you in an extremely desirable position financially. Furthermore, if you continue to work part time while studying and make monthly contributions, your portfolio will grow exponentially.

That being said, investing is merely a means to an end. As Robert Kiyosaki said “It’s not how much money you make, but how much money you keep”. Thus, we should continue to improve our financial literacy in the mean time so that we can make better decisions in the future. If you would like to learn more about personal finance and investing, click here to join The Dollar Sapling telegram channel where I share more resources and articles.