Kathy
in Memos & Musings · 6 min read
As the second half of 2024 begins, investors have much to monitor while considering the future trajectory of U.S. stocks. Key factors include an upcoming presidential election, new corporate earnings reports, and economic data.
However, the primary focus is likely to remain on the Federal Reserve and the potential timing of interest-rate cuts, which investors increasingly anticipate in September 2024. These expectations have contributed to an approximately 18% year-to-date rise in the S&P 500 as of mid-July 2024.
Now, this is going to be a long market update, but the takeaways can be useful for a really long time.
Portfolio Performance
After returning from our trip to Japan and completing our monthly market analysis for the InvestingNote Portfolio amid our ongoing workshops, we finally sat down to review our growth and dividend portfolio.
So we took a screenshot of our year-to-date performance in Interactive Broker, which shows a return of about 16.6%. Currently, we are slightly underperforming in the US market, as the S&P 500 has risen by about 17.8% year to date at the time of the screenshot on 12 July 2024.
An interesting observation about the S&P 500 this year is that market leadership has remained narrow for 2024 H1. It is mainly dominated by the US mega-cap ‘Magnificent Seven’—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—benefiting from ongoing AI-related momentum, though in a more fragmented manner (with Tesla down by a fifth this year). In the first half of the year, the performance of Nvidia, Meta, Alphabet, Amazon, and Microsoft accounted for 62% of the S&P 500’s return. Investors heavily concentrated in some of these tech or AI-related companies would have seen some significant portfolio gains.
Heatmap of the year to date performance of S&P 500 stocks
The reason why we had underperformed is we were pretty much underweight in some of these top AI-related performers and we generally have concentrated our holdings instead into other US market sectors that have yet to partake in the rally in our Moneyball Investing Portfolio. This aligns with our Moneyball investing approach, which focuses on sector rotation and positioning early when market breadth is still relatively narrow. As an investor, even as we stick to an investing strategy that works for us, it is bound to have periods of underperformance based on the near term market movements.
We remain committed to investing in high-quality companies, aiming to do so when the ratio of the upside potential to downside risk is particularly compelling. While some of our positions may yield results quickly, others might show paper losses before significant price movements, which are not a cause for concern. We share these positions in both our InvestingNote Portfolio and Moneyball Investors Playbook. Additionally, we also make these trades in real life, having skin in the game and practicing what we preach.
Achieving good returns is important, but aiming for sustainable returns is equally crucial. Investing isn’t merely about pursuing the highest gains; it’s also about building a portfolio that can withstand unexpected setbacks. We believe that successful investing involves not only selecting strong companies but also managing risk by acquiring quality assets with lower downside risk and higher upside potential, ultimately striving for better risk-adjusted returns.
As we speak, it appears that market breadth is improving, benefiting the 493 other companies, which is a positive sign. They may continue to support the S&P 500, but if the “Mag 7” stocks, which have significant weight, experience mean reversion, the S&P 500 could still be affected. We are starting to see signs of that happening and there might be a chance that “Mag 7” may underperform going forward in the near term.
There is also the firepower and potential for market breadth to expand further, helped by the “mountain of cash” on the sidelines with money market funds. Once interest rates drop off more definitively, this capital could be deployed into riskier assets like stocks or REITs.
According to BofA Global Research, assets in money-market funds reached a record $6 trillion in April 2024, with investors holding substantial amounts of cash which might be a potential source of funds for riskier equities in time to come. Investors have been flocking to money-market funds, which are yielding around 5%, as the Federal Reserve has kept interest rates high to combat inflation.
Next, let’s take a look at our Singapore REITs portfolio. We shared in InvestingNote Portfolio that we do not wish to be holding onto banks at this moment because we find that they present some downside risks to us, notwithstanding the good dividends that comes with it. SREITs of course continued to fare badly in 2024 H1 and have been appearing unattractive for the longest time. Many investors remained concerned in light of the “higher for longer” interest rates environment.
At the start of 2024, our REITs portfolio started with early 200K as we took some profits at the end of 2023 with a net cash outflow of about 50K for the year as shared in our previous portfolio update. In the first half of 2024, we injected back some new funds alongside some of the profits we made from growth investing from the US markets back into this REITs portfolio.
As of July 14 2024, this REITs portfolio itself is down by about 20.9k in our DBS brokerage.
For simplicity, if we base our calculations on the initial 237k, we’re down by about 8.8%. This is a fairly respectable performance considering that some well-known blue-chip REITs have declined by a similar magnitude or even more.
But now, here’s the interesting part. From February 2024 to July 2024, we quadrupled our stake in individual REITs with 80% of these purchases made from late May 2024 to early July 2024. These purchases were funded largely with the profits from growth investing over the years, via the gains from capital appreciation, collection of options premiums and as well as the reallocation of our funds from the money market.
As of mid-July, 2024, the paper gains from these recent accumulations are sufficient to offset the paper losses at DBS brokerage. This means we have no paper losses on REITs year to date or even right from the start for that matter. At the current depressed prices still, there is clearly significant potential for upward movement from here.
So here is the chart of the journey that we went through, with a million at work in the portfolio without having paper losses.
So how is that possible?
Let us show you our key buy points throughout the years.
We have always emphasized that we must be very selective on our purchases and technical analysis is an integral part in doing well when investing in REITs, above and beyond fundamental analysis.
For simplicity and demonstration purposes, let’s use Lion-Phillip S-REIT ETF as a proxy to show our key buy/sell periods although it is individual REITs that we invest in. We did not want to get started into dividend investing until sometime in 2018 and only made a more significant purchase (back then) during the Covid-crash. We have since then accumulated carefully and selectively and in recent times, very aggressively.
Using our proprietary technical analysis methods, we identified price levels which we positioned our funds accordingly. Generally how we define key zones would amount to buys/sells above 30 grand in a reasonable short span of time (1-2 weeks) So of course there were other trades beyond this image but mathematically, how our portfolio will fare simply relies pretty much on the trades made here for the most part.
Does this mean we will definitely see an upward trend from here? We are inclined to believe that the bottom has already been reached, though in the markets, one can never be certain.
We believe reasonable buying opportunities will still remain from time to time and for individual REITs. The key question is, would you be ready for it when it comes. To know which ones to buy and at which ideal entry prices.
For the initiated, we do have upcoming courses that may help you to do so.
In our view, it doesn’t matter if rate cuts are delayed and another pullback occurs, as we believe the downside risks are relatively contained, as we explained in the InvestingNote Portfolio. Below are some snapshots of our ongoing sharings with the members in the subscription portfolio.
We share events as they unfold, not as an afterthought.
Beyond the virtual real time trades we made in InvestingNote Dividend Portfolio, we do the same for our personal Moneyball Investing Portfolio with real money at work.
REITs investing vs Growth investing or…?
When done appropriately, REITs investing can lead to growth investing, where there are good dividend yields and high capital appreciation potential. It does not necessarily mean that money must grow very slowly with REITs investing. A potential upside of 20% and beyond with 5-6% yield is what we are likely to be staring at from here.
And likewise the profits from growth investing can lead to more injections into your REITs portfolio. Neither is better than the other but learn how to make use of each of them for the benefit of each other and for your bigger financial goals and dreams.
And sometimes, part of your money doesn’t have to be invested at all times. Cash is king in times like this. In investing we need to constantly balance our cash holdings against the attractiveness of the opportunities and not go all in at one go. A high likelihood of 20% return on say 60% of your portfolio is better than a 10% return on 100% of your portfolio with a low likelihood. Think in terms of probabilities and payoff. In any case, the cash is generating returns through money market funds while waiting for opportunities, although these returns are merely keeping pace with inflation.
Respect the cycles and be ready
As investors, we must understand that economies, companies, and markets operate in patterns or cycles. Having a better sense of when to stay in or exit the markets allows us to be less blindsided by unexpected events. We can use technical analysis to stay alert for the next up or down cycle.
Most investors will almost always choose to avoid the entire risk of no rate cuts happening and stay out of REITs or continue to remain cautious until things are less murky. The same goes for the people who simply commentate on the markets but those insights are not going to help us to be profitable. Most people are afraid to make a stand with their analysis. Or to take a position with their money. Because that’s where they can be wrong. Whether publicly or financially.
Don’t expect your portfolio to be consistently positive during certain stages of the cycle. Be prepared to be underwater for extended periods, as long as you understand your strategy. Often, these periods present buying opportunities, even though the P/L may look unfavorable before it improves. This is why it can be challenging for the average investor to continue buying, but it is the right course of action.
The whole point of investing is to be able to reduce risks meaningfully and the upside will take care of itself. This entails a considerate approach with fundamental and technical analysis coming into play together. Most investors simply seek to reduce risk by buying different REITs, or simply buying the ETF and doing it on a regular basis. Now that’s not saying that it is not a good way, but this will work better for like the S&P 500 or the US markets relatively but it can be a huge drag on performance for Singapore REITs. With a different animal altogether, we have to adjust our game plan and strategy.
As an investor, the most important thing isn’t just knowledge—it’s how we act on that knowledge. We must be able to take a position independently, without external prompts. We need to make probabilistic assessments to determine which options are more worthwhile and if the odds are in our favor. It is a matter of how much you lose when you are wrong (oh our England bet) and how much you win when you are right.
Lastly, we leave you with a quote from the late Charlie Munger: the investor needs “this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.” It takes significant effort to identify which companies to buy and the discipline to wait for the right purchase price and when it finally happens, to pull the trigger decisively.
About Kathy
Co-Founder of The Joyful Investors and Manager of The Moneyball Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. We believe that investing can be astoundingly simple and want to make financial education understandable for everyone.
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This document is for information only and does not constitute an offer or solicitation nor be construed as a recommendation to buy or sell any of the investments mentioned. Neither The Joyful Investors Pte. Ltd. (“The Joyful Investors”) nor any of its officers or employees accepts any liability whatsoever for any loss arising from any use of this publication or its contents. The views expressed are solely the opinions of the author as of the date of this document and are subject to change based on market and other conditions.
The information provided regarding any individual securities is not intended to be used to form any basis upon which an investment decision is to be made. The information contained in this document, including any data, projections and underlying assumptions are based upon certain assumptions and analysis of information available as at the date of this document and reflects prevailing conditions, all of which are accordingly subject to change at any time without notice and The Joyful Investors is under no obligation to notify you of any of these changes.
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