More Bonds, Market Corrections and Herd Behavior
It has been quite a busy week, with the launch of Aspial’s retail bond offer, and the general market being in negative territory. Let’s take a look at Aspial’s retail bonds first.
Aspial’s Bond Offer
In my previous post on retail bonds, I covered Frasers Centrepoint Limited’s retail bond issue. In comparison with Aspial’s offer, it would seem that Aspial’s bond offer appears to be a good deal! One might wonder, why is the coupon rate on Aspial’s bond so high compared to FCL’s bond? Well, the simple answer has already been highlighted in the post – the bond itself is unrated, and the issuer and guarantor are both unrated as well (i.e. junk bonds). This means you will be taking on more risk, as compared to FCL, and therefore, the interest that you receive for loaning your money to Aspial is quite a bit more. Contrasting this with the entire list of current retail bonds on SGX, this yield beats Genting Singapore’s perpetual subordinated capital securities at 5.15%! Furthermore the money raised from this offer is for “general corporate funding requirements (including the refinancing of existing borrowings), working capital and capital expenditure requirements, and investments, of the Issuer, the Guarantor, the Guarantor Group and the joint venture and associated entities of the Guarantor Group”, which comes back to Aspial’s bond offer to raise cash.
One interesting thing to note is that they’re heavily hoarding cash on their balance sheets, and for whatever reasons, we are not sure. However, being the common man (or woman) on the street, we would have noted the drop in gold prices, weak diamond demand and increases in various bank charges – presumably, due to fears that retail sales might not be good this year, and the rise in SIBOR rates recently (0.93% for 3-month SIBOR rate at this point of time in writing) might cause companies to go belly up, and people to go bankrupt. Most likely the cash raised from the bond issue would be to tide over the presumed bad times coming soon, and also probably to IPO Aspial’s retail arm.
Conclusion: Whether this is a good offer or not is still up in the air, as it seems rather hard to gauge at this point in time.
Market Sentiment and Herd Behavior
With the STI moving in a corrective direction this week, it would seem that the analysts are right – retail investors are mostly risk-adverse in Singapore, and the moment there seems to be a sign of a downturn, fear gets the better of people, and decide to cut loss*. Once one big fish swims in the other direction, the rest of the fish follow, just as in a herd of buffalos running across the plains of Africa.
For most investors who have started out on their investment portfolios in the last 3 to 4 years (more would have started this year I presume, when the SGX board lot size was reduced), it would seem that their efforts in attempting to be more financially secure might have been in waste, and worse, their money might have evaporated due to the recent turmoil in the oil & gas industry.
To those who have lost money, fret not – after all, you don’t put money that you need right now (or soon) into the stock market (I really hope so, because I have heard of stories of people taking their savings – or worse, their parents’ – and throwing it all into the stock market). As long as you have time on your side, who knows, your money might come back after a few years of sore returns – hopefully, at no loss – if you choose to hold the right stocks (or even ETFs). If you chose to cash out, however, it’s still not that bad, as at least you got back some money, as compared to blowing it all in the lottery. This is all assuming your financial situation is stable, though (i.e. no major milestones in life, like about to get married, buying a house, losing a loved one, etc.).
Here’s a war story from me. When I started out, I used to dabble heavily in penny stocks. This was during my “young & dangerous” days of national service and my first year of working life, and I had very little savings. I didn’t cut loss, nor did I hold on to them for too long – over time, my initial portfolio of 9 penny stocks shrank to 4, and once a stock recovered to my initial investment amount, I quickly sold it off. One of the stocks I had I took a brokerage commission hit on, but the $50++ loss (It’s $25++ for each buy and sell transaction) was better than losing more money by holding it for long term. Eventually, out of the 9, I am still holding on to 4, 3 went bankrupt and got delisted, and 2 were sold off. Thankfully the amount I invested was very small, and over the 10 years of holding it, my initial heavy losses in the first 2-3 years turned into a very minute loss per month, because I started investing early.
Another story was that I used to hold a blue chip stock and a mid-cap stock, until the financial crisis hit the STI. I was lucky to sell off the blue chip stock on the recovery, and my mid-cap stock is now finally going to be delisted as they wanted to end the business, and over the 7 to 8 years of holding it, gave me a decent return. Plus, I got my money back, as the company distributed its remaining cash to its shareholders as part of it’s winding up procedures. The blue chip stock however, is still listed, and is now considered a small-cap stock.
So, despite the ups and downs of the stock market, I made some money. Not a lot of money, but a decent amount, as I choose to hold on and not cut loss at the first sign of negative sentiment in the market. However, one bad habit which I retained was that I still dabble in penny stocks, just that I allocate a fixed amount of money for that, roughly 1 to 5% of my portfolio to punt on pennies, rather than having 90% of my portfolio in penny stocks, which is a lot more scarier.
Finally, some of you might be wondering, what does the Lepak Investor do in a market correction? The answer is simple – keep calm, collect dividends, and add good blue-chip stocks which I have been planning to buy, but couldn’t cough up the cash for, partially due to the board lot size, and partially due to my investment style of value investing. Also, sometimes, taking your mind off the market to focus on other stuff works as well, so therefore, books!
I went to the library a few days ago to pick up a couple of books for reading. Even though I have a decade of passive investing experience, I can still find nuggets of useful information and investing ideas from personal finance books. Furthermore, it’s free, since it’s from the library, which means that I’m making use of resources made available to us by the Singapore government, which gives the less socially-mobile like me a chance to move up in society through education.
*NOTE – In my opinion, “cut loss” should only refer to stocks in which there is no return to profitability, or to close out a short-term position. To “cut loss” and then take up a position later at a lower price is known as a “unhedged zero sum game” to me.