Sunday, August 6, 2017

Ceteris Paribus

If it sounds Latin to you, yes it is. In English the term ceteris paribus is “other things equal”, meaning in an experiment or observation setting where the relationship between two variables or factors are studied, all others are taken as constant or unchanged.

Ceteris paribus is often used in economic studies, where analysis of cause and effect between two variables in a given situation is carried out to give a result in the absence of other variables. Though in the real world there are many factors at play to produce a given market or economic situation, ceteris paribus could at least provide a basic assumption at the lowest level.

Demand and Supply Example

For example, using one of the basic economic models, the law of demand, where the variables price and quantity of let’s say, apples, are studied, from the consumer point of view, the demand for the quantity of apples will go down when their price increases.

Using another basic economic model, the law of supply, with the same variables of price and quantity of apples but from a supplier’s viewpoint, the quantity of the apples will increase when their price goes up.

Combine these two, and you will get the demand-supply graph of apples, ceteris paribus. Since it is ceteris paribus, other items (such as oranges, bananas, grapes, etc), which may have an impact on the demand and supply of apples, are not taken into account in this whole analysis.

Use in Fundamental Analysis

For The Bedokian Portfolio fundamental analysis (FA) style, the implementation of ceteris paribus can be used at the environmental factors and economic conditions level, where more assumptions are required as compared to financial statement analysis at the company level. Remember in carrying out the assumptions, the most straightforward and simplest explanation is to be considered first. Taking the telco sector for instance, a fourth telco operator to the status quo would mean more competition in the sector, ceteris paribus. Or for the case of interest rates, their rise would bring inflation down, ceteris paribus.


The ceteris paribus is just the beginning in the whole scheme of things in FA. A lot of assumptions and scenarios would have to be placed together to form a more coherent picture, but then again this would be subjective. This would probably explain why analysts and economists have different opinions and interpretations on the state of the financial markets and the economy, even though they could be working on the same set of information.

Sunday, July 30, 2017

It’s Been One Year

Exactly one year ago, I had launched my ebook The Bedokian Portfolio and this blog. I would like to thank you, the reader, for your support and I hope you have benefited from this blog as well as from my ebook. To date, there has been almost 15,000 pageviews to this blog, and slightly more than 1,000 downloads of the ebook.

Review and Going Forward

I had written 30 articles for the past year, covering topics from macroeconomic issues such as interest rates to how to store your physical gold and silver. These articles are meant as additions and appendices to The Bedokian Portfolio, as I had wanted the ebook to be as basic as possible so that new investors could read and adopt it with ease.

Going forward, I would continue to write articles that supplement The Bedokian Portfolio with new insights and current developments, which may help you in your investment decisions, whether you are a Bedokian Portfolio investor or not. There has been a question on whether am I coming out with a second edition of the ebook, to which my answer is not at the moment. However, I am working on a write up on an investment concept, and it is still very much in its infancy stage. It could be another book or just a normal project paper, so do watch out for it.


Let us have a fruitful and beneficial investment journey ahead.

Cheers!

Wednesday, July 19, 2017

Tactical Asset Allocation

If you have read enough portfolio publications and books, you may have came across this term called “tactical asset allocation”. According to Investopedia, tactical asset allocation is “an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors”.1 In other words, your portfolio’s asset class allocation will change according to the prevailing environmental factors and economic conditions.

Taking the balanced Bedokian Portfolio for example (35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash), if the market is pointing to a boom period where equities and REITs are likely to gain, and in order to capture their rise, you would adjust your portfolio to 40% equities and 40% REITs, while reducing the bond component from 20% to 10%. Then with recession looming, you would increase your bond holdings to 30%, and reduce equities and REITs to 30% each, since bonds perform better in such times.

Besides asset classes, tactical asset allocation can also be done on a sector/industry level. During recession times, defensive sectors/industries such as utilities and consumer staples fare better than others, so more allocation is given to them. Sometimes asset class and sector/industry tactical asset allocation can be done together. All these are done in an attempt to maximize returns given the situation. Since the tactical asset allocation is done based on the economic cycle, this investment style is also known as economic cycle investing.

The Economic Cycle

The economic cycle, or sometimes referred to as the business cycle, is “the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession)”.2 There are various sub-stages within this broad view of expansion and recession, and the typically accepted stages are expansion, peak, recession and trough (see Fig. 1).



Fig. 1 – The economic cycle

About Strategic Asset Allocation

Let me share a bit about strategic asset allocation, where it is “a portfolio strategy that involves setting target allocations for various asset classes, and periodically rebalancing the portfolio back to the original allocations when they deviate significantly from the initial settings due to differing returns from various assets”.3  This means come rain or shine, the portfolio asset class allocation remains the same. The Bedokian Portfolio is a form of strategic asset allocation, and rebalancing back to your preferred asset class allocation periodically is part and parcel of the overall strategy.

The Bedokian’s Take

Portfolios using tactical asset allocation have their merits on the theoretical assumption of having more returns in a given economic cycle condition than strategic asset allocation, since the asset class/sector/industry that perform well at that moment is given more weightage to capture the returns as compared to strategic asset allocation ones. However, from the perspective of The Bedokian Portfolio, whether you are an active or passive investor, it is better to stick to its original form.

It is hard for any investor to predict the direction and behaviour of the markets and economy, let alone know at which point the economic cycle is at, even with ready information on hand. Fig. 1 is a perfect example on how the economic cycle looks like, but in the real world this may not seem so. The expansion could be longer or shorter than the recession phase, and sometimes what is deemed to be down (or up) could quickly reverse to go up (or down). In this case, it is better to be more reactive and less proactive.

Even if you are able to guess the movements of the markets, the constant rebalancing of your asset classes and sectors/industries would incur more transaction costs than even a normal active Bedokian Portfolio investor, and this in turn means lesser returns.

However, I am not totally against tactical asset allocation, just try not to use it on your Bedokian Portfolio. Remember, the main aim of it is “passive income through dividend and index investing”. If your capital allows, you could have another portfolio that uses the tactical way, which is good for a topic of discussion for another day.


1 - Investopedia. Tactical Asset Allocation - TAA. http://www.investopedia.com/terms/t/tacticalassetallocation.asp (accessed 17 July 2017)

2 – Investopedia. Economic Cycle. http://www.investopedia.com/terms/e/economic-cycle.asp (accessed 18 July 2017)

3 – Investopedia. Strategic Asset Allocation. http://www.investopedia.com/terms/s/strategicassetallocation.asp (accessed 17 July 2017)

Saturday, July 1, 2017

Bob Is Rebalancing

I had mentioned here that Bob would be rebalancing his Bedokian Portfolio with an S$5,000.00 capital injection on 30 June 2017. Let us go through how he did it step by step.

In The Morning

When the market opened at 9:00 AM on 30 June 2017, Bob checked the opening prices of the securities in his portfolio. He then translated the prices to the table below (Fig. 1).


Fig. 1
Note: USD 1 = SGD 1.38

Bob added S$5,000.00 to the cash component, bringing it up to S$7,019.22 (see Fig. 2).


Fig. 2

Purchasing The Securities

There are now a few ways to allocate this newly injected cash amount among the different securities. If the asset class allocation is still within the designated percentages, he could just make the cash portion at 5% and split the rest accordingly.

Another way is he could work out the ideal percentage allocation of each asset class and purchase the securities as close to the shortfall amount. For example, using Fig.2, the current STI ETF stands at 31.22%. The 35% amount of S$36,991.01 is S$12,946.85, so he would try to purchase about S$12,946.85 – S$11,550.00 = S$1,396.85 worth of STI ETF.

Bob followed the second method, and then purchased the following securities, using the Last Done prices of 30 Jun 2017 (all transaction costs included):

STI ETF x 400 shares x S$3.27 = S$1,335.31
Philip Dividend REIT ETF x 1,700 shares x S$1.295 = S$2,229.20
ABF Bond ETF x 1,200 shares x S$1.16 = S$1,419.35

Bob did not purchase the GLD ETF as firstly, the commodities portion is still within percentage deviation of 2.5% (5% - 4.43% = 0.57%). Secondly, for SGX, he would need to buy at least 10 GLD ETF shares, the minimum required, which would upset the asset allocation if purchased.

After rebalancing, Bob’s Bedokian Portfolio would look like this (Fig. 3).


Fig. 3


References:

http://bedokianportfolio.blogspot.sg/p/bobs-bedokian-portfolio.html


http://bedokianportfolio.blogspot.sg/2017/06/have-i-forgotten-bob.html

Sunday, June 18, 2017

More On Associative Investing

Back in August 2016, I had touched on the concept of associative investing to capitalise on disruptive technology companies, where we could invest in areas that support and/or result from these firms, especially since there is little or no avenue to invest in the said companies themselves.1

The basis for associative investing is simple; all sectors and industries are dependent on one another, and it is making use of these interdependence relationships to carry out investing. For example, if you want to invest in e-commerce, besides e-commerce companies, you could take a look at sectors and industries that are related, like data centres, logistics firms, payment solution companies, etc.

A simple way to carry out associative investing is to draw out a relationship chart (e.g. a family tree or an organisation chart) of the sectors/industries concerned. To draw the lines and fill out the various boxes in the chart, you could get the information from online and documentary sources, personal observations or even logical inferences and deductions. After filling out the related sectors, you could select companies and ETFs that best fit these sectors/industries, and then carry out fundamental analysis on them to pick the right ones for your Bedokian Portfolio.

It is not necessary to name the sectors/industries or their sub-categories if you are not familiar with them. Using the e-commerce example above, you could instead use simple terms such as “computers”, “smart phones”, “delivery vehicles”, etc. in your charting.

Once you get the hang of this relationship charting, you could further modify it by having the target sector/industry in the middle of the chart, with suppliers/supporters on top and consumers/resultants at the bottom, creating an “upstream and downstream” map. You could also include competitors and substitutes, making it like a Strength-Weakness-Opportunity-Threat (or SWOT) analysis.

Associative investing allows you to view the entire economic and market ecosystem, as well as the dynamics amongst them. It could also be used to spot future sector/industry trends, a topic which I will touch on in my later posts.



1 - http://bedokianportfolio.blogspot.sg/2016/08/disruptive-technology-capitalise-on-it.html

Wednesday, June 7, 2017

Have I Forgotten Bob?

No, I do not. In fact, I still remember him and his Bedokian Portfolio. This is the nature of passive investing, where the portfolio would just sit there (and be easily forgotten) and you do not look at it again until the time that you want to rebalance it.

Anyway, since we had started this test portfolio at the beginning of the year, let us take a look at the status as of 6 June 2017:


*USD/SGD rate at 1.38, from www.xe.com as at 6 June 2017

**Inclusive of dividends from STI ETF of S$185.50 and from Philip AP Dividend REIT ETF of US$159.57 x 1.38 = S$220.21. Bank interest not included.

Bob’s Bedokian Portfolio, which started off with S$30,000.00, has an overall gain of S$1,861.62, which included S$405.71 in dividends parked under the Cash component. Asset class percentage wise, they are still within the tolerable range (recap: ±5% for asset classes of more than 10% allocation and ±2.5% for asset classes below 10%), so Bob need not do rebalancing to address the percentage deviations. However, Bob has decided to transfer S$5,000.00 from his emergency fund and inject it to his Bedokian Portfolio, and he would do a rebalance on 30 June 2017.

So we shall wait till then to see how he does it.


For up-to-date information on Bob’s Bedokian Portfolio, you could visit this page to monitor the progress.