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Friday, September 8, 2017

Emotions and Vulnerability in Trading

Every time i end up on TED Talks consciously or subconsciously, i am reminded of this one TED talk that i watched many years ago.

Youtube: The power of vulnerability | BrenĂ© Brown
TED Talk Link - Link

The topic resonated with me so much that i went to buy one of her books on Vulnerability after that.

Image from Amazon

Everyone must have their own stories of feeling unworthy, of feeling shame, of feeling vulnerability. 

Should i confess to her my feelings? Is this the right time to do it?
The company did not call back after the interview. Did i do something wrong?
Should i speak to the sweet looking girl at the end of the bar?

And recently, i saw the similarities of that with trading.

Every time you initiate a new position, you are completely at the mercy of the markets. You have rescinded the control over to some thing else other than yourself. No matter what you do, there is no way to direct the action of the markets.

That is Uncertainty.

It is extremely difficult to embrace that. Some people do it well, perhaps, translating their ability to handle vulnerability from other parts of their lives. Some of us don't deal with it so well. We shun it, we don't like uncertainty. We don't like to feel vulnerable.

But that is exactly how it works.

I did attempt to change myself and try to embrace vulnerability in my life. That was way before i started dabbling with the markets. I liked to think that i made progress but i think i am not quite there yet. Clearly in terms of trading, i am nowhere close.

Fears still grip me and then i see the counter i identified ran. 
Greed still has a hold on me and i chase after a breakout and get stuck.

The next time it happens again, i am going to read this post again.

I'm going to leave you with two quotes from the video.

On what traits the people who embraced vulnerability had.
"willingness to do something where there is no guarantee"

On how and why we numb ourselves to vulnerability.
"we make everything that is uncertain certain"

Keep Learning

Wednesday, September 6, 2017

Rights Issue - Are they Right for You?

I honestly have been extremely lazy to write any post but work has been a bit hectic recently so that's my lousy excuse. A storm is brewing outside and i am cooped up here so why not pen something down?

There has been a series of Rights issuance this year for Singapore REITs versus 2016. Off the top of my head, i can recall Sabana having one earlier this year; Cache and Manulife just announced almost back-to-back, and of course, we have Ascott who does it almost like celebrating birthdays.

Other more established blogs will cover the whole basics of rights issue. No point talking about it here. But something pertinent popped up in conversations with my peers. Some people think that REITs are useful vehicles to use during retirement.

I disagree and i bold the highlight why i think they're not.

Against my disagreement, dividend from REITs are somewhat predictable, extremely regular and acts as a good inward cashflow for retirees. This much i agree.

Now, what do retirees have to deal with if said REIT does a rights issue like now?

You have to cough up large amount of important cash flow to subscribe if you do not wish to be diluted. Are you going to eat bread and drink plain water for 3 weeks because the money you needed for a lifestyle is now forced to be entered into an equity position?

Don't subscribe.

Fine. But then your dividend per unit drops aka you take back less dividend which then negatively affects your cash flow. How now brown cow? Of course, if this reduced dividend is still sufficient for you to get by, this would not affect you.

There are a multitude of ways to prevent this occurrence for sure. My point is, REITs are not as useful as people think they are. The same people often blindly chase after the high yields they offer. There is a reason why bonds are recommended and used for this purpose.

Not to detract from the good instrument of REITs, if you're in the wealth building stage, they make fantastic cash flow vehicles. I personally have 30odd% of my portfolio in REITs.

Throw in a spanner into the works. What if the rights issue is like the one Manulife is doing? For growth and not like what Cache is doing to improve balance sheets?

There is a possibility that even with the increased number of units, the dividend may be maintained or even grow. This is definitely good and even with the dilution, the cash flow for the retiree may maintain. Even better if you managed to subscribe and maintain the yield payout.

So, obviously i did not like the Cache rights issue. They are doing it now because the unit price is very favourable. When you have high unit price, you could raise more funds even with a steep discount for the exercise price. This is why hardly any REIT did rights issue when prices were low in Feb 2016. Sabana did it at a low probably out of a little bit of desperation.

Essentially, rights issue is just a means of fund raising. It is always cheaper to finance through a bank, ie, take on debt vs asking from the public open market. I am not based in the finance industry so people in the know can correct me on that statement.

Cache Results Presentation Slide. (link)

But for Cache, this is no longer that feasible. MAS has a ruling that REITs can only leverage up to 45%.  At 43.6% there is hardly any room to take on more debt. Plus, should the properties drop in valuations, which is very likely in this climate, the ratio might rise to hit the limit soon. Should that happen, a rights issue at that point in time might be extremely damaging to the value of the REIT.

I see this exercise a preemptive move to prevent that from happening. There might be some form of savings in terms of interest to be paid, but DPU will almost definitely fall on top of the negative rental reversions the sector is already facing.

It's just bad for almost everybody until they can grow again.

As a side note, none of the 3 acquisition that Sabana did the rights issue for went through. The management can say anything they want to market the rights issue so that people throw their cash in to fund the company, but end of the day, deals may still be broken.

So, to finish off this post. I am going to start an experiment. This might have been tested before and if any one could point me towards it, it would be great.

The idea came from a friend who asked if you could subscribe for excess rights, and then later sell out the excess shares you have to lock in the gain so that your position is back to the same value as before. Would that be better than not subscribing?

For example.
Pre-rights. Your cost was 50c.
Rights at 40c and you got a bit of excess rights.
Assuming it is a 50% dilution and 1000 excess is granted.
Original position was $5000. New total cost is $9400.
New cost per unit is 44.8c
If you sold back $4400 worth to return to your original exposure value, you actually have a lowered cost and a little bit of extra shares to sort of maintain your yield.

There's a lot of assumptions about price movements in that example so i shall record the findings using Cache and Manulife and see what we get at the end of both the rights exercise.

Cache
18 for 100
Original Price: 88c
Rights Price: 63.2c
TERP: 84.2c

Manulife
41 for 100
Original Price: 96.5c
Rights Price: 69.5c
TERP: 88.6c

Information above obtained directly from announcements made to SGX

I am vested in Manulife REIT and i have friends in Cache who (i'm hoping) can report back on the status of the excess allotments.

Keep Learning.