Styles

Went for a technical analysis workshop yesterday, not because of interest or curiosity but because of an obligation. Shall not elaborate on that. The speaker was a very engaging one, he claims to have found a trading strategy that nobody else has found, and demonstrated his technique through demonstrations by looking through previous charts. Seemed to be a wonderful strategy, did a live demonstration but wasn't as convincing due to the fact that he said certain blue chips were controlled by the big boys and wasn't so accurate, sounding doubtful in tt statement. Shall give him credit for the fact that some of his charts do look convincing on this technique, and according to his claims, this technique probably works well for him(he mentions earning a 24% p.a compounded interest on his portfolio for the last decade), and he claims that he is teaching and not trading because his passion lies in teaching people(MOE?) and not trading and earning money. He charges $3,000++ for his course and has a few months of mentorship for members. For those interested to know more, you can contact me. Shall charge him a commission for advertising his technique here, and tell him that my passion lies in advertising, and not in earning money.



The intention of this post is to bring out the point that well, the stock markets aren't something u can predict accurately in the next few days or so. He demonstrated this when like earlier mentioned, a person from the crowd picked out UOB as one of the stock picks to demonstrate his technique and he failed to find a discerning pattern. Well, when you can't beat them, join them as they say. Which probably explains why indexing is a great place to park ur funds right now.



The only fund that tracks the Straits Times Index is the streetTRACKS STI ETF. What the ETF does is to aim to track the movement of the underlying index, which in this case is the STI. The ETF is traded live on the Singapore Exchange in the secondary market, and is managed by fund managers who merely attempt to track the index, which is also called passive investing as there is no attempt to outperform the index. Units will be bought from Participating Dealers who create and redeem shares(because the STI ETF is open-ended), and this allows the fund price to be close to the Net Asset Value of the fund(which obviously changes everyday).

Since the ETF holds the same underlying stocks as the index it is attempting to track, the performance of the fund moves in tandem with the markets. There are several advantages of this:

1) There is a great amount of diversification. For e.g. the STI comprises of 30 of the largest companies according to market capitalisation, and by owing the STI ETF, the investor immediately diversifies his holdings according to the index, which is also relatively fairly represented in various sectors.

2) Low costs. Instead of attempting to time the market and trading very frequently which results in high transaction costs incurred, owning the ETF is much less costly. The charges will comprise of the brokerage fees (which depends on which brokerage you signed up for) and the management fees (which is kept minimal , <1%, because the fund is passively managed, as previously mentioned). Compare this to another mutual fund which attempts to outperform the index (and frequently fails to) and charges much higher transaction fees(~5% inital and 1-3% for management).

3) Easier transactions. An ETF can be sold intra-day like a stock, i.e. during trading hours from
9 - 1230 p.m and 2 - 5 p.m. Compared to unit trusts, the latter cannot be traded intra-day and will only be processed the next day when the order is received before 3p.m.(check your individual prospectuses for this one).

4) Cheaper alternative to real indexing. Indexing, not through a fund, will require a huge amount of money. To do so, the investor will need to buy the components of the stock at its individual allocated weights, and this will incur a transaction cost larger than that of the STI ETF(some stocks trade below the minimum level, so the minimum brokerage fee of $25 will be charged, and this $25 will be a larger percentage than the usual 0.25% for other stocks). The STI ETF will not require such a large amount to invest in, with the minimum trading board lot costing around $3,000 or so.


Every good thing has a bad side to it.

1) Illiquidity. The ETF is not currently a very liquid stock, with trading volumes varying around a few hundred lots per day, to a drab 48 lots exchanged for today.

2) Tracking error. The ETF also employs derivatives and options to attempt to track the index. There are times when the ETF has a tracking error, i.e. the ETF cannot replicate the performance of the STI. Don't forget the fact that there is a small management fee charged annually, just like any other mutual fund.

3) Health of the general Singapore economy. The economy's well being is essential to the STI ETF doing well, as the STI is a general indicator(albeit leading) of the economy's prospects. In the event that the STI does underperform, the ETF is expected to follow suit, and also vice-versa.

For the 1st point, although the STI ETF is relatively illiquid, it should not matter to investors who wish to invest for a longer time horizon. As for the 2nd, the ETF's tracking error is not expected to be large, although there are times when the price does lag the general market(possibly due to pricing in). The 3rd point is something that the investor cannot do anything about though, sad to speak.

In essence, the ETF is definitely suitable for investors who wish to compound their earnings in a more passive manner. Although it is tempting to attempt to pick up stocks that will outperform the market, however, those with little resources and energy, and also expertise, should try to stick to the ETF to maximise their returns. Active investing might add a few years to your retirement instead of shaving them off. Alright, that's a might, and there are probably other reasons you want to pick individual companies in the first place(e.g. for the experience of investing) The returns of individual companies might be tempting, but it is equally likely for the investor to falter when it comes to stock picking.

Back to the beginning, the investor who wishes to adopt a less active approach by minimising transaction costs will be better off doing fundamental approaches rather than technical approaches. Without going into a lengthy debate as to which camp will be better at maximising wealth, I would simply like to point out the main difference, which is seldom mentioned, between these 2 camps: that the technical trader will probably be more cash rich(provided he is a competent trader) whilst the fundamental investor will probably be more asset rich(provided he is a competent investor, which in this case his assets are in stocks). The trader is more likely to see more cash end up in his pockets whilst the investor who buys on fundamentals is likely to see his cash compounded in the markets in the long run. So, for those investors who wish to see more cash in the pockets, but are also fascinated by the riches and wealth of successful value investors like Warren Buffett and the like, do take heed. The idea of having lots of cash in hand, and also compounding earnings like other successful investors like Peter Lynch does, might not reconcile at all. Think twice before u set your mind on which style of investing is suitable for u. For those enticed by the potential riches, do note that fundamental investing might result in extended periods of time where cash flow is insufficient(on this note, please do not invest any money that u require for emergencies in the markets. That might create an emergency in itself!)And yes, do not for one actually think that u can compound ur earnings at the rates that the legends have done. Stay practical and be on ur feet.

Hang on. This is one hell of a ride.