Sunday, September 24, 2017

Are We Heading For Another Dot Com Bust?

With the rise of tech companies and the prominence of tech-related issues such as driverless cars and AI (artificial intelligence), some veteran investors and traders may be wondering, “Are we heading for another dot com bust?”

Well, the answer is somewhere out there and only time can tell, but let us try to find one by going through some of the trends and indicators that we can see now.

First, we shall go through a history lesson.

The Original Dot Com Boom and Bust

The original dot com boom and bust period was generally accepted to be between late 1998 and early 2001. Using the NASDAQ Composite Index as a gauge, from a modest 1500-ish points in August 1998, it reached to slightly above 5,000 points in March 2000, before falling down again to about 1,800 points in March 20011. Back then, anything and everything related to the internet were seen as a huge potential, and huge amounts of money were invested in these companies, both private and publicly listed. Exuberance ruled the days back then, when investors and traders were convinced that certain companies would give them a big break.

The overall strategy adopted by these dot com companies were to create brand awareness and capturing the market share. This meant spending large amounts on marketing and providing freebies or huge discounts to customers. It was planned that after a substantial market share was captured, the companies would stabilise down to create a more profitable structure. While money was spent, a very huge proportion of the companies did not make any of it.

With all these factors in place, a bubble was thus formed and we knew the rest of the story.

Any Difference Between Now and Then

Fast forward 16 years, we are still seeing some of the signs that had happened back then. Some companies are still adopting the brand awareness and market share capturing approaches with freebies and discounts; The valuation of the listed tech companies, based on Price to Earnings ratio (or P/E ratio), are relatively higher than their non-tech counterparts, though not as outrageously high back in 2000. For the unlisted companies still in the domain of private equity investments, valuations were placed in the billions for the well-known ones.

So, with this similarity, are we seeing a second dot com bubble forming?

Before we jump to that conclusion, there are two main factors, in my opinion, that could spell a difference between then and now.

The Smartphone Revolution

The first factor would be the entry of the smartphone. Back in 1999 to 2001, there was no such thing as the iOS or the Android OS, and smartphones were rare to begin with. Anything that was related to the internet had to be accessed through a computer, and even though there were laptops, which were more mobile, they were expensive devices to have.

Now things are different; in 2016, the world smartphone penetration was about 28.3% and it is projected to rise to 37% by 20202. Many business-to-consumer tech companies (and some business-to-business ones) are utilising the smartphone as a way to reach out to their customers, since it is cheaper and more convenient.

Internet Usage

The second factor hinged on the prevalence of the internet in our lives. In year 2000, at the height of the dot com bubble, only about 5% to 6% of the world population used the internet; By June 2017, that number jumped to 51.7%3. In fact, numerous surveys and studies have shown that a lot of people could not live without the internet.

By Their Powers Combined…

The smartphone and the internet have combined into one powerful platform for both businesses and consumers alike, and they permeate deeply into our everyday lives and goings-on, ranging from social media (e.g. Facebook, Instagram, Twitter, etc.) to shopping (e.g. Amazon, eBay, Alibaba, etc.). Also, comparing to the early 2000s, the mature industries and sectors now are feeling more threatened of being partially or totally replaced.

So What Is The Answer To The Question

Back to the question of “Are we heading for another dot com bust?”, after digesting some facts and figures, my answer would be “I do not know”. Yes, it may sound as a bummer, but one thing is for sure that a thorough fundamental analysis would probably save you from being hit hard in a similar bubble.

If you wish to invest in tech companies or their related sectors, do remember not to put all in one basket, and also the 12% limit rule along with it.

1 – Yahoo Finance. NASDAQ Composite.^IXIC/ (accessed 23 Sep 2017)

2 – Statista. Smartphone user penetration as percentage of total global population from 2014 to 2020. (accessed 23 Sep 2017)

3 – Internet World Stats. Internet Growth Statistics. (accessed 23 Sep 2017)

Saturday, September 9, 2017

Using CPF for The Bedokian Portfolio? Part 2

In this part, I will describe on how to go about implementing your Bedokian Portfolio using your CPF Ordinary Account (OA). Take note that I am posting this from the perspective of an investor who is below 55 years old.

Ideal Amount to Start

It is recommended to start off the CPF Bedokian Portfolio in one shot, much like the one bought using your disposable income with the same reasonings.1 The ideal quantum to start, after setting aside a buffer for your home mortgage payments and/or kids’ education fees, would be $36,500 ($36,500 – [35% x $36,500] – [10% x $36,500] = $20,075). The 35% and 10% are the stocks and gold limits, respectively. The remaining $20,075 is to fulfill the “no-investment” rule for the first $20K of your CPF OA.

Planning The Portfolio

The asset classes that make up The Bedokian Portfolio are available for investing using CPF OA, but we would have to tweak the allocation to suit the limitations imposed (i.e. 35% stocks and 10% gold). According to CPF, the 35% stock limit encompasses equities (including REITs) and corporate bonds, but not Singapore Government or its related bonds.2

We cannot use the balanced Bedokian Portfolio (35% equities and REITs, 20% bonds, and 5% commodities and cash) for the CPF OA based on this limitation, but we could make full use of the risk-free interest rates offered by CPF OA (currently 2.5%/3.5%) to our advantage. Cash is traditionally seen as the lowest yield bearing asset class in The Bedokian Portfolio, but with the relatively higher CPF OA interest, we can allocate a much higher portion to it in the CPF version.

The 35% Stocks Limit

The stocks part would preferably be filled up with equities and REITs that yield more than the 2.5% CPF OA interest rate. You may want to use ETFs, and for individual securities you could use the selection guidelines given in The Bedokian Portfolio3 or any other fundamental analysis methods to look for such equities/REITs.

Drilling down, I would allocate half of the 35%, i.e. 17.5% to equities and the other half to REITs, as I value the importance of diversification to manage risk. However, it is up to your preference on how this mix will be.

The 10% Gold Limit

For the gold component, there are only a few choices, with the SPDR Gold ETF listed on the Singapore Exchange (SGX) being one of them. For other gold products such as physical gold and gold savings account, so far only United Overseas Bank (UOB) offer such products, therefore your CPF Investment Account must be opened with UOB if you wish to invest in them using CPF OA.

Yield of the Portfolio

To recap from my previous blog post, the main aim of using CPF OA to invest is to achieve higher returns than the 2.5% interest rate offered, so that this amount could be used for other investments and/or payment for your kids’ education fees. Since the 2.5% interest rate (and the 3.5% interest rate for the first $20K) are considered risk-free, and gold does not give any yield, the equities and REITs yield would have to be higher than the CPF OA interest rate and to compensate for the no-yield of gold.

Using the average annual yield between 2006 and 2013 as highlighted in The Bedokian Portfolio4, equities is at 3.23% while REITs is at 6.39%. Putting them at 50-50, the average would be (3.23% + 6.39%)/2 = 4.81%. However, since this number has to compensate for the loss of yield from the gold component, we would have to discount it away by around 28.6% (10%/35%), hence the whole yield generated from the invested amount is at (100%-28.6%) x 4.81% = 3.43%, which is higher than the CPF OA’s 2.5%.

If you are not comfortable with this yield, rather than using the full 10% gold limit, you could just lower it to 5% instead, with the remaining 5% earning the 2.5% CPF OA rate. In this way the compensate for the yield bearing investments would be lower at 5%/35% = 14.3%, and the discounted yield is at (100%-14.3%) x 4.81% = 4.12%.

If along the way there are capital gains, then it would be a bonus as this would add on to the total overall returns of the investments.


As CPF contributions are mandatory, there will always be inflows to the cash portion of the portfolio, and likewise the stocks and gold limits would rise along with it. Periodic rebalancing can be done, much like a typical passive Bedokian Portfolio, with the addition of positions to the two limits.

1 – The Bedokian Portfolio p73

2 – Central Provident Fund Board. Instruments that can be invested under CPFIS. Dec 2016 (accessed 19 Aug 2017)

3 – The Bedokian Portfolio p93-101

4 – ibid p70

Further references

Investment Products Included Under CPF Investment Scheme. (accessed 8 Sep 2017)