Lattes and pizzas, cars and drugs

"Where have all the flowers gone, long time passing? Where have all the flowers gone, long time ago?" - Pete Seeger's hit folk song

YET another year is about to pass, and hopefully your portfolio has grown with it, or at least your accumulated stash of investing wisdom.

This week, in the final column of the year, we take stock of the key themes highlighted here in 2016, and look forward to the next year.

Cracking the S$5-latte problem

The year began with a discussion of two philosophies of personal finance ("The S$5-latte problem and a radically conservative solution", Jan 4, 2016).

Do you prefer the old-fashioned method of holding a steady job, being thrifty and skimping on that S$5 latte, or do you take great risks, borrow money and start a business? Do you focus on saving or do you focus on growing your income?

The article, which was among the column's most popular features this year, discussed a method of getting rich and retiring in one's 30s that is gaining some traction.

Cutting back on the latte is ultimately just a metaphor for the willingness to change an ingrained habit.

If you are motivated enough to go all out with extreme cost-cutting and perhaps some part-time jobs, a fresh graduate can, on a starting salary of S$3,000 a month, accumulate S$150,000 or more within five years. Invested right, this sum will yield more than the worker who invests S$500 a month for 34 years straight.

We highlighted several early retirees at home and abroad. The point is, one has to think differently to get rich. And everybody has a chance.

Go West, young investor

Another key theme highlighted this year was the importance of looking beyond Singapore's shores for investment opportunities.

Many established, profitable brands trusted by consumers everywhere are listed in stock exchanges around the world.

This column first began exploring overseas stocks in September 2015 after China's market crashed ("Introducing the Hang Seng Index", Sept 28, 2015), following that up with a look at one of the index's major components ("Follow Tencent, China's Internet gaming giant", Oct 12, 2015).

In the depths of the global stock market scare in February 2016, we highlighted Pizza Hut and KFC owner Yum Brands ("It's a big investing world out there", Feb 15, 2016). The piece was luckily timed: The stock is up 30 per cent since.

Foreign-exchange risk is less of an issue if a company gets revenue streams from a large number of countries around the world.

Right after the United Kingdom's vote to leave the European Union or Brexit, we also highlighted some consumer and pharmaceutical stocks in the UK's FTSE 100 index ("What opportunities 'Remain' in FTSE 100 after UK votes to 'Leave'?", June 27, 2016).

We noted that the biggest companies listed in the UK offer diversified streams of revenue that will mitigate the impact of Brexit. This remains true today.

In the FTSE 100 are cigarette makers such as British American Tobacco; consumer powerhouses such as Reckitt Benckiser, which makes Dettol, Strepsils, Lysol and Durex; Unilever, which makes Dove soap, Sunsilk shampoo, Lipton tea and Magnum ice cream; and pharmaceutical giants such as GlaxoSmithKline, which sells asthma prevention drug Advair and the generic drug Panadol.

Many of these companies would rally hard with the sharp depreciation of the British pound after Brexit. A weaker-reporting currency leads to higher-reported profits.

Because they appeared so stable, they became bond proxies, giving a steady stream of dividends in a low-yield world.

But with US yields rising, along with hints of slower growth, these consumer stocks have fallen from their post-Brexit peaks and might yet present opportunities in the years ahead. They are all expensive still going by earnings multiples, however.

Besides the UK, we also focused on Germany, Europe's largest economy ("The cars and chemicals in the DAX", Oct 17, 2016).

There are many high-quality engineering and industrial firms there that were not as dearly priced as the consumer plays, notably the makers of Mercedes-Benz (parent company Daimler), BMW or Volkswagen cars, along with industrial giants such as Bayer and BASF.

In another article timed to coincide with political news, we focused on some fashion-related growth stocks in Italy right after its referendum ("Seeking sunshine in Italy", Dec 5, 2016).

Budget retailer OVS, luxury down jacket maker Moncler and luxury e-commerce play Yoox Net-a-Porter were among stocks most favoured by analysts there.

Ultimately, the "developed world" of the United States and Europe still constitutes the bulk of global financial markets. While Asian markets are rising in importance, one should not ignore established brands trading in Western exchanges.

Investor education at home

Closer to home, we discussed how one might value real estate investment trust (Reits), which are popular investments among retirees looking for a steady dividend income.

Given that Reits are bond-like, one way to value them is according to their current spreads relative to history ("How low can Reits go?", Nov 21, 2016). Spreads here refer to the difference between their yield and that of the 10-year Singapore bond.

We also discussed hard liquor monopolist Thai Beverage ("Is Thai Beverage worth drinking to?", May 23, 2016). We wrote about it after the company appeared to have turned around its Chang beer brand.

The stock will go on to surge another 20 per cent as a fever for consumer stocks in a low-yield, low-growth world took hold. But recently the stock is being sold off, and it is now back to its May levels. The firm has an enormous exposure to Thailand, but is an intriguing play as the Thais do drink quite a bit.

Other pieces focused on the basics of how to go about finding a stock you like ("An introduction to stock research", March 14, 2016), along with accounting fundamentals ("Cracking the income statement code", March 21, 2016; "Probing foundations: Balance sheet basics", April 4, 2016).

While investors might zoom in on how much money a company is making or might make in the future, it is also important to examine whether it is financially healthy.

When I invest, I focus a lot on the balance sheet, trying to determine if assets there are overvalued, if receivables cannot be collected, or if a company borrowed too much.

As an aside on the balance sheet, we focus on a curious phenomenon that crops up in every stock market: companies which trade for less than the cash they have in the bank ("Cheap cash-rich companies on SGX: Opportunity or trap?", May 16, 2016).

Some businesses are worth more liquidated than if they continue running. But sometimes it is not worth the trouble to take the company apart and return the money to shareholders.

I prefer hunting for bargains among cash-rich companies which happen to be consistently profitable. Many of these firms might be small and vulnerable to the vagaries of the business cycle. But the cash they hold, assuming the cash is indeed there, provides a substantial margin of safety for investors should anything go wrong.

Another investor education piece centred upon the rights-issue process and the trading of the rights themselves, or the entitlements to subscribe for new shares ("Mothers, daughters, and the Noble Group rights issue", Aug 1, 2016; "The drama of nil-paid rights trading", Aug 8, 2016).

The takeaway here is to be clear about the price a stock should trade at after the rights are issued, assuming everything stays the same.

Sometimes, as demonstrated in the Noble case study, a price fall after the stock trades without its rights entitlements, is actually a rise, when compared to its theoretical ex-rights price.

Safe investments

Everybody knows stocks are volatile, but they are always looking for "safe" places to park their money.

The reality is that nothing is really safe. And until very recently, the safer places, such as government bonds, yielded almost nothing.

In Singapore, beginner investors who are scared to lose money do have decent places to store their hard-earned savings.

In various articles throughout the year, we discussed three options:

With bond yields rising sharply since the US election, January's issue of the Singapore Savings Bonds, which you can apply for this month, already yields an average of 2.18 per cent a year over 10 years.

February's issue, which you can apply for in January, is likely to yield a little bit more as the bond yield spike has been sustained thus far in December. Average Singapore 10-year yields this month will be used for the pricing of the February issue, out in January.

Other than the Savings Bonds, one key recommendation made is for young investors to start contributing the maximum of S$7,000 a year in cash towards their CPF SA accounts.

This ensures that the compounding starts early. You also get a nice tax deduction.

Take note that you can withdraw excess money from the SA only at age 55, once you have set aside the Full Retirement Sum (FRS) needed to purchase the CPF Life annuity. Nevertheless, if you are thinking long-term, the CPF SA is a good place to start.

But don't overdo it. Some people advocate transferring one's OA (Ordinary Account) monies, meant for housing, into the SA as well to speed up the accumulation process. The process is irreversible. Doing so means you will have less money for housing needs, and also will not be able to keep on getting tax savings by contributing cash into the CPF SA. You won't be able to do so once you hit the FRS cap.

What 2017 brings

The above sums up the key themes discussed in 2016.

Next year, this column might restart a series of basic articles on financial literacy and investing, in addition to pieces on more advanced areas.

Like this year, we will also examine locally listed stocks as well as step into foreign territory. We might go from a developed region such as Japan, to an emerging market such as Thailand or Indonesia, or a frontier one such as Vietnam.

There are opportunities everywhere. The world is getting more and more connected. Information will become more widely available. The final barrier is language.

Investors might have home bias and prefer investing in companies they can see and touch. And this isn't wrong, because you should invest in what you are comfortable with.

But sometimes, you can more effectively diversify your Singapore portfolio with companies listed elsewhere. There are so many more choices.

Where this column is concerned, the mission remains the same: to educate investors, especially beginners but also more experienced ones, on a complex topic where there is plenty of misinformation.

Thank you for following us thus far. Feel free to write in with your suggestions and feedback, and have a wonderful year ahead.

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