Tag: t_Tanko2rule

few adopt my2investment criteria: Tanko+JL.Lim

Posted on by tiger40490

I told Tanko about my 2 stringent criteria to pre-qualify an investment asset. I then asked Tanko ..
Q: why so few in our cohort follow similar principles?

— 1) A (Tanko’s immediate answer): many don’t have enough free cash like 500k (Tanko’s figure).  In The affluent often favor Funds over stocks@@, I discussed 200k as a criteria.

On 5 Feb 2022, I met my HJC classmates. Joonling (JL.Lim) said that most in our cohort (Singaporean Chinese) don’t have a lot of spare cash risk_capital to invest in stocks. He singled out burn rate on car + mortgage. I guess many Singaporeans (Zeng?) in my cohort have over-sized property assets paying out very little (or negative) DYOC — i.e. non-productive assets. I see that as cashflow low_ground.

Put yourself in the shoes of a big(like 500k+) mortgage borrower .. some of you probably don’t want to invest too much into stocks. The heavy debt limits the risk appetite, risk tolerance and overall capacity to take risks. Analogy — gymnasts carrying weights?

— 2) A (Tanko): If they have 500k, many investors prefer to see their 500k staying safe in a bank account, rather than fluctuating in an investment account. I guess my wife is one, so is my dad.

Put another way, I set aside risk_capital, whereas these investors have plenty of free cash yet very little risk capital.

However, some risk takers in my cohort maintain mortgage so as to invest 200k loan money in equities. This amount would be higher-tier risk_capital.

— 3) A (I told Tanko): a fundamental reason is that dividend yield is widely seen as insignificant compared to windfall achievable with growth stocks or SP500 passive investing.

Their burn rate probably makes $1k nonwork income insignificant. See $1k nonwork income=more meaningful to ME than others. To make a difference, they probably need $4k/M or $50k/Y nonwork income. At 5% payout rate, that requires $1M invested. So many of them would not be interested in receiving 5% payout.

With a risk capital below $200k, I would say a 6% nonwork income (below $1k/M) is not exciting or life-changing given their burn rate. Therefore, they probably want to deploy it to big bets.

consistent high payout: rEstate^stocks^mufu

Posted on by tiger40490

For ffree and other purposes, the rare gems are those financial assets that pay consistent annual payouts while maintaining liquid value, as defined in my 2 stringent criteria .

  • liquid value … unrealistic for rEstate
  • maintaining value … not too volatile  not losing value due to unsustainable dividend payout, as happened in many Allianz fund

So far only 2 asset classes come close towards this high bar : 1) rental properties in U.S., SEAsia.. 2) dividend stocks. A number 3 might be HY/PE

— regular blue-chip …… Among the stable, non-tech blue-chip stocks, the vast majority pay dividends below 4%.
If you buy relatively low, then a dividend aristocrat would reward you with growing DYOC.

Many U.S. stock brokers support fractional sell, so you may argue that an investor in my mindset should consider total return rather than dividend yield. I hesitate. Consider a fast-riser stock. Unlikely a dividend-aristocrat company, fast risers are managed for stock price growth, not consistent high dividend ! Its business model, its competitive landscape probably doesn’t support consistent high dividend.

— mufu … I don’t know any mutual funds that meet my criteria 🙁 They can pay max 5% dividend after annual fees. Anything higher tends to erode NAV. Their payout ratio exceeds 100%, well above the 60% threshold for safe-dividend stocks.
— SG condo … won’t pay even 3% 🙁

cur_payout + NAV_protection #w1r2

Posted on by tiger40490

After the 2021 new year, I told Tanko about my 2 “high bars” (later becoming acid tests[1]) to pre-qualify[3] an investment asset

  • 1) criteria: Does it generate steady nonwork payout rate around 5% as current income? I have a blogpost on 6% being the highest realistic return over long-term, but that’s a Return rate. A Payout rate of 6%/year is harder.
  • 2) criteria: Does it show decent prospect of principal preservation over a 10Y horizon, worst case 20Y to recover? This is a personal view and conviction, because most of my chosen assets (except stocks) are actually illiquid , with no real time mark-to-market. In the short term, the liquid value could drop and I would endure.
  • .. Resist the temptation of windfall. Maintain a healthy detachment.

Note I spend quite a lot of time clarifying my principles 1) to give my “advisors” a less ambiguous description of my investment principles and 2) to help myself catch my own inconsistencies, irrationality, prejudices, illogical thinking…

[1] After I acquire the asset, I would use my 2 criteria as acid tests. BGC fails AcidTest1
[3] obviously I have other due diligence checks such as currency risk, affordability, concentration risk, liquidity

— [s=my soft spot].. In short, I look for the “killer combo” of steady passive income + confidence for long-term capital protection/preservation … A high bar. Any asset that qualify are rare gems.

This is my irrational soft spot, where I demand neither HIGH income or FULL protection.

— pre-qualified assets
Note — Like my healthy_longevity focus, any useful criteria need to prove its enduring strength and resilience against popular, mainstream herd-mentality. Therefore, it’s important to examine how my criteria disqualify some popular asset classes.

  1. CPFLife (not now) investing close to payout age
  2. SEA rental properties bought without mortgage
  3. [s] A subset of A-list and B/C-list div stocks, with DYOC above 5%. Note most big banks, big oil, big tobacco stocks hit 4%+
  4. [s] Energy12 + some (not all) of Jill’s HY/PE
  5. — also-rans and disqualified:
  6. Most Singapore Reits? no protection of principal. Low hope of steady appreciation. They are more like stocks than real estate.
  7. most mutual funds? lower current income than div stocks, and no long-term principal protection
  8. U.S. rental properties? Usually not passive
  9. China and SG properties? paltry current income
  10. BGC? lower income than khm + currency risk as a risk to of principal

— khm rEstate as case study
When I assess the Flatiron vs the Peak#4 opportunities, I realize that among all assets, these commercial rEstate appeal to ME (not sure about other investors). Do I romanticize the 10Y GRR? Possibly, so I caution myself about 1) credit risk 2) market risk 3) what after 10Y

Shop units (offices, hotels..) are the first asset class to meet the above criteria. Now I feel dividend cash-cow stocks are somewhat similar. To understand this asset class, we must compare it to those hot tech stocks:

  • dividend stocks are usually less glamorous partly because they don’t show fast or windfall appreciation
  • my favorite dividend stocks are usually household names, just as the tech stocks.
  • Unlike commercial properties, dividend stocks do fluctuate in valuation. This means buying at low price is more “possible” than in real estates
  • credit risk is higher with properties because dividend aristocrats are known to keep paying.