Tan Kin Lian's Blog: Invest in assets at deflated prices

Tuesday, January 13, 2009

Invest in assets at deflated prices

In normal times, investment in shares give a dividend yield of around 3%. In a crisis, when the share price dropped by 50%, the dividend yield increase to 6%. It is likely that the company will suffer lower profits, so the dividend will be reduced. After reduction, the yield is likely to be still quite attractive.

If business conditions are bad, the company has the choice to reduce their cost by downsizing their operations. When their profit stabilizes, their share price will also stop dropping. When the profit increases with the return of economic growth, the share price will show a good gain.

It may take a few years or longer, but it will eventually happen. In the meantime, the dividend yield will continue to be quite attractive. To avoid the risk of selecting the wrong shares (i.e. of a company that may go bust), it is important th diversify the investment into a fund (e.g. an exchange traded fund).

My view: Invest when the share price is deflated, due to the pessimistic situation. Invest for the long term.

10 comments:

Anonymous said...: Sage.; January 13, 2009 5:18 PM
Anonymous said...: STI-ETF; January 13, 2009 6:12 PM
Anonymous said...: I am waiting for the ST index to drop to 1200 before investing; January 13, 2009 7:59 PM
Anonymous said...: STI ETF is thinly traded and at time of need you may not be able to sell.; January 13, 2009 10:04 PM
Anonymous said...: One minus point to watch:
with bank credit/loans harder to secure, many companies will conserve cash by reducing dividend or withold dividend during lean years.; January 13, 2009 10:09 PM
Falcon said...: In my opinion, Gold is the best asset to buy at this time. I am referring to physical Gold and not paper Gold. The reason is because physical Gold is limited in quantity and traditionally Gold is the asset to buy in times of turbulence. This recession even more so because of the great uncertainty in all other asset classes, including bonds as reasoned by Mr Tan. Equities are not out of the woods yet and properties are just beginning to slide.
On a macro view, even external economies, including the US and China, the rich investors there would also be piling into physical Gold. Paper Gold is easily manipulated but physical Gold, once it is in your hands, there are no recurring fees, administrative fees and other sorts of fees that the financial institutions can pile on you. Once physical Gold is yours, it is yours till you choose to sell it.
In times of inflation, physical Gold holds its own very well too.
The only downside is that you are not paid any interest on it, except in Vietnam, and you have got to have a safe place to store it.
But hey, who needs the few percent of interest when the risk is so high that you can lose your principal.; January 13, 2009 11:45 PM
Anonymous said...: DBS Bank, City Dev and Capitaland are good choices at deflated prices at the moment.; January 14, 2009 12:01 AM
Anonymous said...: The best form of investment in this difficult times is on higher education !; January 14, 2009 7:00 AM
Anonymous said...: Not if you are 70 going on 80.

It is vv gd advice for those in 20s-40s.

And don't forget, if you need the money in an emergency, you may have to sell at a loss even after taking into acct the dividens received.

So use only money you think you are not likely to call upon in the medium term.; January 14, 2009 7:18 AM
Stephen Folan said...: Unless the dividend is reduced as well and remains at 3%. There are a lot of people catching falling knives at the moment and we are probably looking at a flight to commodities or manufacturing and away from services.; January 15, 2009 12:54 AM