Investment vs. Speculation

Have you wondered what is the difference between investing and speculating? Which do you prefer, and which of the two have you been doing lately?

[Photo: Dearoot]

There are many avenues for us to get rich. First, we need some spare cash, but what’s next?

Do we go to a betting outlet and try our luck with 4D, Toto or Soccer? After all, we just need a dollar or two to place a bet!

How about visiting the Turf Club and bet on which horses will win the races? Again, placing a small bet may mean we win big time!

Perhaps, we should be more adventurous and try our luck at one go at Genting or Macau. That will save time, and we can concentrate better!

Too lazy to go out? How about placing a call with our broker or just go online to buy and sell stocks, warrants, bonds, gold or unit trusts? In fact, anything buyable or sellable under the sun. It’s easy!

Doesn’t all those actions above seem similar? First, we pick a target. Then, we hope that we are right and win some money. In that case, what really is the difference between speculating and investing? Do we really know what we are doing?

In fact, it is not surprising that many “investors” are just speculators. They have no idea what they are buying, they think they can “beat” the market, and they do not know how much risk they are exposed to with their “investments”.

Side-track: I’m always amused whenever I come across advertisements in the newspapers that claims Mr. X or Miss. Y managed to make lots of money within a month or perhaps a few months. By relying on their superb skills using special trading techniques and analysis, we can supposedly grow $10,000 to $100,000 easily. And they want to teach us how to do so! So very generous of them. :)

CashBench has never responded to any of these advertisements. It’s just too good to be true, and these people charge very high fees for their “secrets”. :) Furthermore, are these people teaching investing skills, or are they encouraging speculation? What really is investing?

“If we “invest” and strive for a profit above 15% within a short time, we are likely to be speculating.”

Investing is making use of our spare cash to make a reasonable profit while exposing ourselves to an acceptable level of risk. What is reasonable and acceptable varies from person to person. However, as a CashBench rule-of-thumb, if we "invest” and strive for a profit above 15% within a short time, we are likely to be speculating.

For example, Mr Tan may have just spent $5,000 on a stock and hopes to sell it at $6,000 two months later for a profit of $1000. Easy money, he say, and it’s a potential profit of 20%. Cool! But Mr Tan is most likely speculating on that stock. If his mind is set on speculating, it really doesn’t matter how he does it, be it through the stock market or elsewhere. Mr. Tan could just as easily have placed a bet in a Casino on tai-sai and have a high chance (close to 50%) of getting a 100% return in just two minutes.

[Photo: Alancleaver]

In fact, whenever we get a large profit within a short period, we have exposed ourselves to a large amount of risk. This is always true, and there are no exceptions. There is really no such thing as easy money with little or no risk. We can just as easily lose $1000 for the chance to gain $1000. The next time you “invest”, ask yourself: Am I speculating? How much can I afford to lose?

Luckily or not, it’s not easy for someone to tell at a glance if you’re speculating. Only you yourself will know, and CashBench advises that you invest, not speculate.

The Airline Industry, Your Take?

What do you think of the airline industry’s prospects over the short term given the bad news from falling passenger numbers, the IATA forecast of a US$9 billion loss, and even passengers falling out of the sky from an A330 plane?

[Photo: Rockstarassi]

The biggest news from the airline industry lately that really impacts us is not the Air France AF447 plane disaster but the sombre news from the International Air Transport Association (IATA) of an expected US$9 billion loss for the year 2009. Of course, some of us will be freaked out that a small speed sensor on a big plane may possibly be the cause of an air disaster. That will send shivers down our spines for sure, but statistics has shown that sitting on an air plane from point A to B should still be pretty safe and an accident is quite remote. A US$9 billion loss is much more certain to happen, relatively. Who among us are still holding on to stakes in airlines?

“A US$ 9 billion loss is much more certain to happen, relatively. Who among us are still holding on to stakes in airlines?”

More certain, really? Yes. In Asia, we have our fair share of bad news that will “help” to fulfil IATA’s forecast. Air China announced on 2 Jun that it will inject US$63 million into Air Macau to keep it barely afloat while Air China itself is hoping for a government rescue. Reuters reported on 11 Jun that China Eastern has set up a task force to merge with Shanghai Airlines. How useful the merger will be remains to be seen because both airlines are not doing well separately and a merger is not likely to solve their problems. The top 3 airlines in China (Air China, China Eastern & China Southern) already lost more than US$4 billion in 2008. Why are we not surprised that they will help to contribute a big chunk of the US$9 billion loss in 2009?

Elsewhere in Asia, even well-managed airlines are not spared. Cathay Pacific reported back in March its first loss in 10 years of HK$8.56 billion. Closer to Singapore, a report by RHB Research estimated that Malaysia Airlines (MAS) is expected to lose RM1.7 billion in the first quarter of 2009, despite the continuing presence of managing director Idris Jala, who turned around MAS from the same level of loss back in 2005. A case of back to square one? Even Singapore Airlines has cut capacity by 11% since February as it tried harder to fill up premium seats that used to bring in the profits. Maybe the all-business class service between Singapore and New York since May 2008 wasn’t such a great idea after all. To top it off, AirBus only managed to meet 10% of its target sales order for 2009 so far.

[Photo: Bill Ward]

“Despite these gloomy news, there are pockets of sunshine. Lufthansa continued to report a profit for 2008…”

Despite these gloomy news, there are pockets of sunshine. Lufthansa continued to report a profit for 2008, with a small 1.7% drop in operating profit. Many budget airlines are still expanding in Asia, with the likes of AirAsia, JetStar and Tiger Airways still expanding their respective air links around Asia. The Middle East has also just started its first budget airline, flydubai. Is there anything we can learn from all this?

Yes, one of the key lessons for us is the presence of good investment opportunities even in the airline industry that will perform poorly overall. There is no need to shun all airlines completely and there is no need to stay away from all markets during recessions. In fact, more opportunities present themselves during market downturns because the companies and other assets you can invest in are less likely to be overpriced. For those with sharp minds, keep a lookout for good buys and stay on top of news.

Over at CashBench, we help you follow the headlines by highlighting the top news stories from the Asian editions of the major news services. You can find these on the sidebar to the right of this page. Headlines are refreshed continuously, so keep yourself updated as often as you wish.

Exchange Traded Funds (ETFs) on SGX

Are you the sort that likes to invest in unit trusts but wonders if there are any other alternatives without dipping your hands into individual stocks? Read on for more :)

[Photo: Markehr]

The Business Times reported on 4th Jun that Exchange Traded Funds (ETFs) hit record trading volume & value for two months in a row on the Singapore Exchange (SGX). ETFs are not new to Singapore, but they have become viable investment alternatives in their own right. If you have never invested in one or don’t know what’s the big deal about ETFs, this is a good time to find out more.

What are ETFs?

The best way to understand ETFs is to compare it to a unit trust. If you are familiar with unit trusts, you already know what an ETF is. Like unit trusts, ETFs allows us to invest in a group of stocks or other assets at one go.

For example, you may be thinking Taiwan’s growth prospects is now brighter after the proactive economic link-ups with China since the Kuomintang party return to power. You can certainly invest in the future of Taiwan by buying a unit trust focusing on Taiwan, but you can just as easily buy a Taiwan ETF instead.

ETFs compared to Unit Trusts

But, if ETFs are just like unit trusts, why even bother? Well, it’s then time to look at the differences between an ETF and a unit trust. ETFs in general have several advantages compared to unit trusts:

1. ETFs are continuously traded on SGX. When you buy or sell an ETF, you know the exact price immediately. In contrast, you must wait for at least 1 day or more to find out your transacted price for a unit trust, since the net asset value (NAV) of a unit trust is typically only calculated once a day.

2. Transaction costs of ETFs are much lower. You will usually need to pay a 1% – 2% sales charge to buy a unit trust. This can be much more depending on where you buy your unit trusts from. On the other hand, the transaction costs for an ETF can be as low as 0.28% through most stock brokers in Singapore.

3. You can “short-sell” ETFs. No unit trust in Singapore allows you to short-sell. However, the SGX now has a S&P 500 Short ETF by Deutsche Bank that inversely tracks the S&P 500 stock index in the US. Its price increases when the S&P 500 index decreases. This effectively allows you to profit when you can foresee the US stock market falling.

As with any investments, there are also things you should look out for before investing in an ETF. The key issue you need to be aware of is forex volatility for non-Singapore ETFs. These are usually traded in US dollars. If the US dollar is appreciating, you certainly benefit. But if the US dollar depreciates, your profit will be reduced by the forex loss.

Why invest in ETFs?

ETFs is a good investment for those who have the spare cash but do not wish to spend the time or effect to pick out winners one by one. Instead, you look at an entire market and invest in those that you feel will outperform. What’s more, you can hold on to ETFs for as long as you wish, just like stocks. This means that ETFs are suitable investments for both short and long-term.

On the SGX, there are currently 35 ETFs for you to choose from, covering the major markets in Asia and around the world (E.g. ASEAN, China, Eastern Europe, India, Japan, Korea, Malaysia, Singapore, Taiwan, U.S, Vietnam, etc), as well as Gold and even Singapore bonds. For more information, you can browse the SGX ETF site or read the SGX’s investor guide in English or Chinese.

How to invest in ETFs?

You need an account with any Singapore stock broker to buy or sell ETFs. Most will allow you to do so over the Internet once you have an account. Select a broker from the full SGX list here. Within this list, many brokers welcome retail investors and some examples include DBS Vickers, Lim & Tan, OCBC Securities and Phillip Securities.