Most financial planners and fund managers would tell you that ‘time in market is more important than timing the market’.
Most of them would also state that investors should stay 100 per cent invested, ignore short-term market gyrations and focus on the long run.
But if you give the same advice to the rich, they probably would think that it just shows up your ignorance about investing.
According to my study of the rich, I have discovered that they share something in common. They have what I would call an ‘opportunity fund’.
Most financial planners would advise you to have an emergency fund. This is basically spare cash that you should set aside. It should be sufficient to pay for at least six months of your expenses to meet contingencies or in case your lose your job.
However, the rich, besides having an emergency fund, also have an ‘opportunity fund’.
An opportunity fund is simply any spare cash, including your Central Provident Fund savings, that you have set aside in addition to the emergency fund. And the objective of having such a fund is to ensure that you are ready and can take advantage of investment opportunities, as and when they arise.
How big an opportunity fund does legendary investor Warren Buffett have? According to some estimates, he had more than US$40 billion (S$59 billion) in his opportunity fund, which he had been holding off from investing in the last few years as he could not find any compelling opportunity.
It is because he had such a fund that he was in a position recently to grab a ‘fantastic’ deal to buy US$5 billion worth of Goldman preference shares with a yield of 10 per cent.
As part of the deal, he was given the option - but without the obligation - to buy more shares of Goldman Sachs at US$115 per share at a future date. This is less than 50 per cent of its share price of US$250 apiece last year.
This deal was fantastic because Mr Buffett had basically covered his downside risks and was positioned to participate in any upside potential.
Mind you, US$5 billion is only 12.5 per cent of his total opportunity fund. During a recent interview, Mr Buffett even went so far as to say that he would keep at least US$10 billion cash as his minimum opportunity fund.
Similarly, because he had an opportunity fund, businessman Oei Hong Leong was recently able to take advantage of the market carnage to buy US insurer AIG shares at US$1.80 each. He then sold the shares in less than two weeks for about US$5 each, more than a 100 per cent gain, which was definitely not bad at all over such a short time.
Imagine if Mr Buffett and Mr Oei had heeded conventional advice to stay 100 per cent invested. What would have happened? Well, by being 100 per cent invested and having no opportunity fund, they could only have stared at the opportunities and not been able to profit from them at all.
Personally, I sold out 80 per cent of all my stock holdings last year and took money off the table. I’m sure glad that I did so, since in the last year or so, global stock markets have headed south, plunging by as much as 70 per cent.
Now armed with my opportunity fund, as the global financial crisis deepens, I can have the luxury of considering whether to use part of it to buy stocks priced at over 50 per cent discount to their net worth.
If we look at historical records as a guide, during the last stock market crash which took three years to bottom out in March 2003, the benchmark Straits Times Index (STI) dropped to as low as the 1,200 level. SingTel, for example, fell to as low as $1.20.
Of course, you might say that no one can catch the bottom, a view which I agree with.
But the fact is, you don’t have to catch the bottom, you can simply wait for the market to plunge before investing your money. Imagine if you had invested when SingTel was $1.50 in 2003, you could have easily taken profit when the counter went up to as high as $4.10 last year.
Again you might say that no one can catch the top. And again, I have to agree. In fact you can wait for the market to top and still have a comfortable few months to sell SingTel at $3.80 and make 153 per cent returns. And you don’t even have to know how to pick stocks. You can simply invest in the STI Exchange-traded Fund (ETF) - which tracks the STI.
ETFs are baskets of stocks that typically aim to track the performance of a stock market index. For instance, by investing in the StreetTRACKS STI Fund, you gain exposure to all the 30 stocks - such as Singapore Press Holdings, SingTel and Singapore Airlines - that make up the STI.
Of course, the wise rich will never risk all their money at one go or in one single investment. They know how to spread their risks. Thus, even if they are wrong about one investment, they will not be totally devastated.
The saying goes that a crisis is an opportunity. The truth is - a crisis is only an opportunity for those with an opportunity fund. For people who do not have the cash, a crisis is just a crisis.
In a crisis, there will be people who are rich but have over-extended themselves during the good times and might end up having most of their wealth wiped out or even go bankrupt.
However, for those people who are well positioned (that is, have an opportunity fund), a market crash actually represents a rare opportunity for them to scoop up bargains. Some of these people can move from being in the middle class to becoming really rich. And those who are rich might become even richer.
The important question we need to ask ourselves is: Should a crash happen, how have we positioned ourselves financially? Do we have an opportunity fund?
Your answer to this question will determine whether a crash means a crisis or an opportunity for you.
The writer is an avid investor and an accountant by training. He co-founded www.HousingLoanSG.com, an independent mortgage consultancy portal, in 2003.
1 comment:
Have spare cash for investment opportunities
By Dennis Ng
2 November 2008
Most financial planners and fund managers would tell you that ‘time in market is more important than timing the market’.
Most of them would also state that investors should stay 100 per cent invested, ignore short-term market gyrations and focus on the long run.
But if you give the same advice to the rich, they probably would think that it just shows up your ignorance about investing.
According to my study of the rich, I have discovered that they share something in common. They have what I would call an ‘opportunity fund’.
Most financial planners would advise you to have an emergency fund. This is basically spare cash that you should set aside. It should be sufficient to pay for at least six months of your expenses to meet contingencies or in case your lose your job.
However, the rich, besides having an emergency fund, also have an ‘opportunity fund’.
An opportunity fund is simply any spare cash, including your Central Provident Fund savings, that you have set aside in addition to the emergency fund. And the objective of having such a fund is to ensure that you are ready and can take advantage of investment opportunities, as and when they arise.
How big an opportunity fund does legendary investor Warren Buffett have? According to some estimates, he had more than US$40 billion (S$59 billion) in his opportunity fund, which he had been holding off from investing in the last few years as he could not find any compelling opportunity.
It is because he had such a fund that he was in a position recently to grab a ‘fantastic’ deal to buy US$5 billion worth of Goldman preference shares with a yield of 10 per cent.
As part of the deal, he was given the option - but without the obligation - to buy more shares of Goldman Sachs at US$115 per share at a future date. This is less than 50 per cent of its share price of US$250 apiece last year.
This deal was fantastic because Mr Buffett had basically covered his downside risks and was positioned to participate in any upside potential.
Mind you, US$5 billion is only 12.5 per cent of his total opportunity fund. During a recent interview, Mr Buffett even went so far as to say that he would keep at least US$10 billion cash as his minimum opportunity fund.
Similarly, because he had an opportunity fund, businessman Oei Hong Leong was recently able to take advantage of the market carnage to buy US insurer AIG shares at US$1.80 each. He then sold the shares in less than two weeks for about US$5 each, more than a 100 per cent gain, which was definitely not bad at all over such a short time.
Imagine if Mr Buffett and Mr Oei had heeded conventional advice to stay 100 per cent invested. What would have happened? Well, by being 100 per cent invested and having no opportunity fund, they could only have stared at the opportunities and not been able to profit from them at all.
Personally, I sold out 80 per cent of all my stock holdings last year and took money off the table. I’m sure glad that I did so, since in the last year or so, global stock markets have headed south, plunging by as much as 70 per cent.
Now armed with my opportunity fund, as the global financial crisis deepens, I can have the luxury of considering whether to use part of it to buy stocks priced at over 50 per cent discount to their net worth.
If we look at historical records as a guide, during the last stock market crash which took three years to bottom out in March 2003, the benchmark Straits Times Index (STI) dropped to as low as the 1,200 level. SingTel, for example, fell to as low as $1.20.
Of course, you might say that no one can catch the bottom, a view which I agree with.
But the fact is, you don’t have to catch the bottom, you can simply wait for the market to plunge before investing your money. Imagine if you had invested when SingTel was $1.50 in 2003, you could have easily taken profit when the counter went up to as high as $4.10 last year.
Again you might say that no one can catch the top. And again, I have to agree. In fact you can wait for the market to top and still have a comfortable few months to sell SingTel at $3.80 and make 153 per cent returns. And you don’t even have to know how to pick stocks. You can simply invest in the STI Exchange-traded Fund (ETF) - which tracks the STI.
ETFs are baskets of stocks that typically aim to track the performance of a stock market index. For instance, by investing in the StreetTRACKS STI Fund, you gain exposure to all the 30 stocks - such as Singapore Press Holdings, SingTel and Singapore Airlines - that make up the STI.
Of course, the wise rich will never risk all their money at one go or in one single investment. They know how to spread their risks. Thus, even if they are wrong about one investment, they will not be totally devastated.
The saying goes that a crisis is an opportunity. The truth is - a crisis is only an opportunity for those with an opportunity fund. For people who do not have the cash, a crisis is just a crisis.
In a crisis, there will be people who are rich but have over-extended themselves during the good times and might end up having most of their wealth wiped out or even go bankrupt.
However, for those people who are well positioned (that is, have an opportunity fund), a market crash actually represents a rare opportunity for them to scoop up bargains. Some of these people can move from being in the middle class to becoming really rich. And those who are rich might become even richer.
The important question we need to ask ourselves is: Should a crash happen, how have we positioned ourselves financially? Do we have an opportunity fund?
Your answer to this question will determine whether a crash means a crisis or an opportunity for you.
The writer is an avid investor and an accountant by training. He co-founded www.HousingLoanSG.com, an independent mortgage consultancy portal, in 2003.
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