Capital Preservation for Value Investor

[palantir]

even when one has a 10 yrs time frame. It might be rather disturbing to some if the market corrected say20% and the portfolio lost $200k. The market might catch up to the intrinsic value subsequently... But nobody will know when... Maybe 1 yr maybe 5 yrs later. $200k loss is not a small sum even though the companies in the portfolio are fundamental good just that Mr Market is crazy

Guess one need to control the emotion

[freedom]

investment for retirement is much less risky than investment for income. You would have much more tolerance for temporary loss as the money is set aside for retirement anyway. You would not expect to use retirement fund to supplement your general consumption.

it would be very different story for investment for income. You would constantly review your decision when the bear market is long. a 3-year bear market could easily break a lot of people who just depends on investment for income. In the last 10 years, there was not any such long period of bear market. But no one can guarantee, there will not be one in the future.

[CityFarmer]

investment for retirement is much less risky than investment for income. You would have much more tolerance for temporary loss as the money is set aside for retirement anyway. You would not expect to use retirement fund to supplement your general consumption.

it would be very different story for investment for income. You would constantly review your decision when the bear market is long. a 3-year bear market could easily break a lot of people who just depends on investment for income. In the last 10 years, there was not any such long period of bear market. But no one can guarantee, there will not be one in the future.

Different strategy might required for investment for income, vs investment for retirement.

I am preparing a portfolio for income. The strategy is to split the portfolio into two (2) groups, one named as anchor group, the other is growth group

The anchor group (together with emergency fund) serves as damper during bearish period. The anchor group should provide stable dividend, resilient and quicker recovery. The anchor group (dividend + capital) + emergency fund should provide minimum income for n-years. (whatever n is comfortable)

The growth group is to provide growing of portfolio.

The optimum partition is to maximize growth group, while making sure comfortable buffer in anchor group for bearish period.

any comment?

[freedom]

if the bear market is long enough, there is no guarantee that you have enough dividend to see you through. Seldom, companies can maintain dividend when business activity is low no matter how much margin you enjoy. It is difficult to have resilient and quick recovery in a prolonged bear market, unless you trade frequently for income.

the least you should do is a worse-case simulation, assuming that bear market is long enough and dividend is cut to certain extent.

[CityFarmer]

if the bear market is long enough, there is no guarantee that you have enough dividend to see you through. Seldom, companies can maintain dividend when business activity is low no matter how much margin you enjoy. It is difficult to have resilient and quick recovery in a prolonged bear market, unless you trade frequently for income.

the least you should do is a worse-case simulation, assuming that bear market is long enough and dividend is cut to certain extent.

There are company e.g. SPH are able to maintain relatively stable dividend during bearish period. Dividend might be slightly lower, but in general never cancelled. (at least historically)

Yes, agreed. We should plan for worse-case scenario. At the same time, strike a balance between resilience and growth.

[Temperament]

http://www.gold-eagle.com/gold_digest_01...12201.html

So anyone got any good idea how to survive in the stock market?
My take is indeed to survive in the stock market as a retiree (no income from work anymore) is completely a different kettle of fish from when you are still working. i still learning from anyone cares to share.
Shalom.

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As a value investor, what will you do if your holdings dropped 20% due to downturn in economy/market (systemic issue)? Will you sell?

How will a value investor preserve his capital? Don't think the dividends collected subsequently can make up the loss of capital right?

I think perhaps what others have not yet mentioned within this thread, and which I feel is most relevant to your question, is that one should always focus on the business and not the stock market. Value Investors essentially analyze businesses and are actually, in essence, business analysts. If the investor can assess the business fairly accurately and is certain that it is a high quality business which is significantly mis-priced by Mr. Market, then he would seek to purchase more as he would have his requisite margin of safety.

So to directly answer the question(s), the value investor would be concerned with the market price only with respect to his assessment of the intrinsic value of the business, after accounting for cash fow generation, growth prospects, dividend yields etc. The market is merely a mechanism for him to transact, and should not dictate his actions. Therefore, an investor who has a sound understanding of business fundamentals and valuations would not sell during market panics/downturns, but would instead seek to increase his stake.

The value investor preserves his capital not from the accumulation of dividends to offset a capital loss. This is from the perspective of a person who looks to the market price as an indicator of whether he is "right" or "wrong". The investor would judge his performance based on whether the intrinsic value of the business is increasing at the pace which he had expected, and if it surpasses inflation. If the returns he is getting from being a shareholder exceed the cost of capital of the business (and the investor's hurdle rate), rhe is doing well, regardless of what Mr. Market thinks. Frequently though, market price would catch up to the intrinsic value of the business, though it may take a lot of time and patience.

Always remember that when a business does well, the share price would naturally follow.

Can not agree more. But still it is based on when you need the fund in the market for other purpose?

[d.o.g.]

if the bear market is long enough, there is no guarantee that you have enough dividend to see you through. Seldom, companies can maintain dividend when business activity is low no matter how much margin you enjoy.

It is true that not many companies can maintain their dividends in bad times. But an investor is not required to invest into every dividend-paying stock out there. It pays to be selective.

Those who blindly bought REITs and shipping trusts on the basis of passive income learnt this the hard way when many REITs destroyed value via rights issues, and many shipping trusts cut or even suspended their distributions.

Personally, if I had to go on a 10-year vacation with no ability to monitor the portfolio, and I was required to live off the dividends, my portfolio would look very different from my current one, where I am able to actively monitor and make changes any day I want.

For a 10-year zero-maintenance portfolio, my first priority would be the safety of the dividend. Evidence of a sustainable dividend might include:

1) a large cash buffer, sufficient to pay several years' worth of dividends at the current rate; and

2) a relatively low payout ratio (say 50% maximum), such that the absolute cash payout can be maintained even if earnings decline materially.

Yield is a function of price and would largely be secondary to the safety of the dividend, though obviously if your portfolio yields 2% in aggregate you will need a very large portfolio to generate an acceptable income.

In the Singapore context I would personally suggest 3% as the minimum, though 5% would be much better. 7% or more would suggest heavy weighting in REITs, not a good idea since REITs are fundamentally acquisition vehicles (which means rights issues that you need to deal with, breaking the zero-maintenance requirement).

Other things that would suggest a sustainable dividend:

3) business is of a steady and recurring type e.g. consumables (food, medical supplies, toiletries etc), utilities (water, electricity, energy, telecommunications);

4) a long history (10 years or more) of paying dividends; and

5) a strong balance sheet. For industrial-type companies, perhaps total debt should not be more than 1/3 of total assets, for utilities perhaps 1/2. These are upper limits, the investor may well prefer a totally debt-free company for peace of mind, though for utilities this is near-impossible.

Note that meeting just one of the above criteria would probably not suffice. At the time it went bankrupt in 1970, the Penn Central railway had an unbroken dividend record going back over 100 years.

One simple rule of thumb: the lower the future maintenance, the higher the upfront investment of time and effort.

As usual, YMMV.

[CityFarmer]

Useful info from d.o.g and others, thanks

The portfolio for income will be managed actively, instead of zero-maintenance. So i do expect higher return from 3-7% as stated by d.o.g

Those factors highlighted will still serve as good guideline for my selection of anchor stocks

[snowcap]

even when one has a 10 yrs time frame. It might be rather disturbing to some if the market corrected say20% and the portfolio lost $200k. The market might catch up to the intrinsic value subsequently... But nobody will know when... Maybe 1 yr maybe 5 yrs later. $200k loss is not a small sum even though the companies in the portfolio are fundamental good just that Mr Market is crazy

Guess one need to control the emotion

Let me put it this way, if you are talking about a $1million portfolio such that a 20% drop means a paper loss of $200k:
a) yes it is a lot of money (for the average Singaporean), but
b) if you have a 10 year time frame and have no need for the money in the next 10 years, then you must control your psychology. Tell yourself you still have clothes to wear, still have food to eat, and so on. Basically nothing changes in your present lifestyle. So don't worry be happy. Emotion is about your self-talk inside your head. If you keep thinking "wah, lost $200k, could have bought so many things with the $200k, etc, etc" you will be miserable. Instead, if you say to yourself, "the fundamental of the business is not affected, so no problem for me" or just "let me go on doing what I do everyday - go to work, play with kids, exercise, meet with friends..." then you can weather the downturn easily.

The tough part is establishing whether the business fundamentals are still intact.

Anyway, if the 20% drop happens to me (assuming the business is still ok), what I will do is I will tighten my budget, spend less, so that I have cash to buy the stocks on sale!

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Those who blindly bought REITs and shipping trusts on the basis of passive income learnt this the hard way when many REITs destroyed value via rights issues, and many shipping trusts cut or even suspended their distributions.

As usual, YMMV.

Thanks d.o.g. for the insightful post.

I was one of those who had REITs during the 08 GFC and the massive rights issues.

One thing I want to clarify is how do rights issues destroy value? I know they dilute the earnings over a larger number of shares, but when they issue rights at low prices and I subscribe to the rights, in the end my returns (yield) is still around 6% on total investment (initial investment + rights subscription). Compared with about 6% also before the rights issue. Am I missing something?

Sorry for the noob question, I'm not financially trained.

[Temperament]

even when one has a 10 yrs time frame. It might be rather disturbing to some if the market corrected say20% and the portfolio lost $200k. The market might catch up to the intrinsic value subsequently... But nobody will know when... Maybe 1 yr maybe 5 yrs later. $200k loss is not a small sum even though the companies in the portfolio are fundamental good just that Mr Market is crazy

Guess one need to control the emotion

Let me put it this way, if you are talking about a $1million portfolio such that a 20% drop means a paper loss of $200k:
a) yes it is a lot of money (for the average Singaporean), but
b) if you have a 10 year time frame and have no need for the money in the next 10 years, then you must control your psychology. Tell yourself you still have clothes to wear, still have food to eat, and so on. Basically nothing changes in your present lifestyle. So don't worry be happy. Emotion is about your self-talk inside your head. If you keep thinking "wah, lost $200k, could have bought so many things with the $200k, etc, etc" you will be miserable. Instead, if you say to yourself, "the fundamental of the business is not affected, so no problem for me" or just "let me go on doing what I do everyday - go to work, play with kids, exercise, meet with friends..." then you can weather the downturn easily.

The tough part is establishing whether the business fundamentals are still intact.

Anyway, if the 20% drop happens to me (assuming the business is still ok), what I will do is I will tighten my budget, spend less, so that I have cash to buy the stocks on sale!

---

Those who blindly bought REITs and shipping trusts on the basis of passive income learnt this the hard way when many REITs destroyed value via rights issues, and many shipping trusts cut or even suspended their distributions.

As usual, YMMV.

Thanks d.o.g. for the insightful post.

I was one of those who had REITs during the 08 GFC and the massive rights issues.

One thing I want to clarify is how do rights issues destroy value? I know they dilute the earnings over a larger number of shares, but when they issue rights at low prices and I subscribe to the rights, in the end my returns (yield) is still around 6% on total investment (initial investment + rights subscription). Compared with about 6% also before the rights issue. Am I missing something?

Sorry for the noob question, I'm not financially trained.

NO. i think you still have not experienced a drop of 30-50 % . When you do, see that at least some your stocks are able to recover and then some.
And over-all, your Portfolio still can make money in 2010 or 2011 or 2012.

Sorry hoh! If you bought in 2007 and caught by the bear in 2008/2009, it should be anything from 35-50 % drop.
Please check what WB said about tolerating Market Bear's Paw.
If you can't then put your money somewhere else.
My 2 cents.