- Founding Prime Minister of Singapore, Mr Lee Kuan Yew has left us but his through his life work, we can learn some valuable investment lessons to build a successful portfolio.
- In Singapore’s early years, his wise decisions against the odds, diversification, and the ability to inspire confidence with his long-term outlook attracted MNCs into Singapore. MNCs were so impressed that they are willing to link their fate with Singapore.
- Singapore is still a growth story and investors can ride on this growth by investing in the STI ETF (ES3).
Lee Kuan Yew and Singapore
It is with great sorrow that I learnt about Mr. Lee Kuan Yew’s passing on Monday 23 March 2015. It is well known that Mr. Lee Kuan Yew’s work is Singapore. Through the intensive coverage from Channel NewsAsia, we knew more and more about his life and achievements against the odds. I would like to share some of it here before we head onto the investment theme. It gives us a sense of history, the footsteps that brings here today through the times of change in the 60s, 70s, 80s, 90s and without which there is no prosperous city today.
Mr. Lee Kuan Yew or LKY as fondly known in Singapore as the founding father of Singapore in his capacity as the first Prime Minister of Singapore in 1959. He built Singapore up in a dangerous era and went against conventional wisdom at that time to build a successful Singapore which other countries would later follow. In their sincerest form of appreciation and praise for his work, they tried to model what Mr. Lee had done here as much as their domestic circumstances would allow.
I would guess that the saddest person today would be our Prime Minister Lee Hsien Loong who lost a father this week and a good role model to look up to. I actually watched his interview on Channel 8 which he chatted about his father’s legacy. He cried during the interview as he described his father before composing himself and carried on the interview. On an interesting note, I noticed that the way he dried his tears is in the same exact manner which Mr. Lee Kuan Yew did when he sobbed on national television in 1965 announcing Singapore’s separation from Malaysia. The whole handkerchief is thrown over the eyes to dry it.
Even in his sorrow, our Prime Minister had some encouraging words to tell us in his first national speech to announce his father’s passing away:
“I am grieved beyond words at the passing of Mr Lee Kuan Yew. I know that we all feel the same way. But even as we mourn his passing, let us also honour his spirit. Let us dedicate ourselves as one people to build on his foundations, strive for his ideals, and keep Singapore exceptional and successful for many years to come.”
At the end of this article, I hope that you will have an idea of how to be an exceptional and successful investor. We may not have an opportunity to build a nation but we can certainly build a successful investment portfolio in this conducive environment. Even if your investment portfolio is in a state of disrepair now, take heart from Singapore’s transformation and use the lesson learnt here to supercharge it.
Investment Parallels From Our Singapore Story
Singapore was not born with a silver spoon and had to go through some tough times to get where we are near today. Channel NewsAsia’s interview with Deputy Prime Minister Tharman Shanmugaratnam highlighted this point. From an investment point of view, LKY would have been seen as a contrarian investor, someone daring enough to buy when everyone else is selling and willing to catch the proverbial dropping knife. This requires a deep conviction and faith in your own analysis and capability.
Let me give you an example which you can relate to. Suppose you bought SingTel at $4 on your calculation that it is intrinsically worth $5. A week later to your dismay, SingTel drops to $3.80 and one month later, it drops even further to $3.20. Will you start to doubt your initial assessment of SingTel and react by selling your stock?
Your friends and relatives might start to ‘badmouth’ SingTel urging you to sell because something insidious must be going inside. If not, why would the price fall by 20% in a month? As I have mentioned in my earlier Warren Buffet article, if you have done your homework and think that $5 is the intrinsic value of SingTel, you should start to buy more when it hits $3.20 instead of panicking. Of course, this is easier said than done. How many times have we sold a stock only to see it rallying back up and say that life is not fair? We have no one else to blame but ourselves for being our lack of self control and conviction.
If you want to a real life example of resilience, you don’t have to look far, just look at how LKY dealt with losses. Many Singapore leaders including PM Lee in his interview yesterday, have repeatedly said that the period pre and post-independence were the crucial years for Singapore.
Singapore in 1969. Photo credit: Singas.co.uk
When Singapore joined Malaysia in 1963, it was full of promise to create a common market after two years of intense negotiation. When Singapore was forced to leave Malaysia in 1965, the future seemed bleak. Unemployment was high in Singapore, people saw no future but LKY was promising to build Singapore into a bustling metropolis and not many people believed him especially outsiders. Then the British announced that they are going to withdraw their military bases on 18 July 1967. These military bases accounted for 20% of Singapore’s GDP then and many thousands of people would have been jobless overnight when it happened.
From Shanmugaratnam’s accounts, it was noted that LKY had to grapple with the issues of high unemployment and he did something which everyone asked him not to do but being the rebel was, he did it anyway — he invited the multinational corporations (MNCs) to Singapore.
Latin America had bad experiences with MNCs and the conventional wisdom at that time was to shut MNCs out of the domestic market. That strategy was to substitute imports with domestic production. This way you can protect your own country and give as many jobs as possible to your own citizens.
LKY saw the nascent trend of offshoring by American MNCs during his visits to America and opened the doors for them when everyone around us was shutting them out. Singapore, a small country, started to deviate from the well-trodden path taken by Malaysia, Indonesia and Thailand. China and India went a step further and closed their economies. It was this act of bravery and brilliance that enabled Singapore to stand out of the pack economically. This is a prime example of being forward-looking.
Not Chasing The Market, Diversification and Confidence
MNCs can come and go but Singapore did not chase after them desperately even when we are in dire circumstances. We instead focused on making ourselves attractive to these MNCs and upgraded our skills. As our skills set went up, our wages went up under a fair triparate system where the government, employers and labor unions come together to negotiate a win-win situation.
MNCs can come and go like how share prices can go up and down. If you are so greedy to chase the share price when it goes up and so fearful to chase the share price when it goes down, then you are probably on your way to stock market losses. A wise investor would upgrade his own skillset and not be affected by these changes. Remember that Warren Buffet said something along the lines that in the short term, the markets is a voting machine and can go crazy sometimes. Over the long run, the markets are a weighing machine that will price securities according to their worth. This is also applicable outside of investing in our lives and from how Singapore carries it weight internationally.
The second strategy was diversification. The US is the friendly economic superpower so American MNCs were the focus of the Economic Development Board (EDB) efforts to lure them in. However the EDB also went on to lure European and Japanese MNCs across different sectors and industries. This is because one big MNC can fall in bad times or an entire sector can be replaced (think of Kodak and its photos) but Singapore cannot fall when they fail. Needless to say, diversification is the core principle of investments. While it will be slightly more expensive to create a diversified portfolio due to the transaction fees involved, it would be relatively cheap to buy a diversified Exchange Traded Fund (ETF) which I would recommend later in the article.
Lastly and most importantly, LKY gave foreign investors the confidence to invest in Singapore. To put it into perspective, if I were to propose that you invest your net entire worth into a close-ended fund with a focus in Nigeria and it would be locked up for the next thirty years, would you do that even if I promise that you will make 1000 times your money? The answer is self evident.
In 1965, Singapore had the same status then as any other third-world nation in a volatile region now. Expats would demand a premium to work in Singapore or a hardship allowance as they expect to be kidnapped and killed on the streets. This may seem laughable now but it was a very real threat with riots and other crimes on the streets.
So how do you inspire confidence in MNCs to bet their future in Singapore? I have spoken a lot so let me quote our Deputy Prime Minister Tharman Shanmugaratnam who said it brilliantly and succinctly:
“Every major investor who came to Singapore went to see the Prime Minister, and spoke to him. They sussed out the place based on their conversations with him, the confidence he could give them in the future – that Singapore meant business for the long term, and we’re going to be a partner for the long term. That was important. For a country that was this small, with nothing except people who are hard-working, on a piece of granite, confidence was everything.”
The fact that LKY had successfully instilled confidence in the future can be seen in the long-term investments which would only be profitable over thirty years such as oil refinery and pharmaceutical research. MNCs also placed their mission critical investments in Singapore and essentially betting their survival with Singapore because if these investments fail, they fail as a company too. How much confidence is needed to achieve that? How much would that confidence be worth? Priceless.
To use a parallel analogy in investing, it is the homework that you do in determining the intrinsic value of the security that will determine your confidence during times of price volatility. Don’t bankrupt yourself by moving in and out of the market on every little rumor or price movement in the market, you are just making your brokers rich from the transaction fees.
If you are not capable of doing it right, then the right thing to do would be to pass your money on to more skilled investors whether through active fund managers or passive ETFs. You have to remember that you are paying more fees to active fund managers than ETFs so they have to beat the market return for your investments to come out ahead. However if you are bad investor, you will earn more returns regardless of whether you turn your money to an active or passive manager provided that he is reasonably skilful of course. This may be self-evident but common sense are often missing when people look back on their own investment decisions.
The Singapore ETF
Let us now move to a more profitable subject on investment today and take an objective look at whether it will be worth investing in Singapore from a macroeconomic perspective. We shall begin with Singapore’s growth as seen in the chart below. After all, the value of a country can be measured by the goods and services that it produce.
Overall Singapore grew by 2.9% in 2014 and we are a country that is very much affected by global economic conditions. You don’t have to do a detailed calculation to know that our growth trajectory has slowed over the past two years. There is massive uncertainty in the market of the growth prospects of major economies in the world, including Japan and Europe. The US may be a bright spot economically but it is not without its weakness in certain aspects such as housing. Being an export-oriented economy, we are greatly affected by all of this.
Another area where we are affected by the global environment can be seen in the inflation figures which are affected by energy prices. Our deflationary environment has deepen since I wrote about it last month as seen in the chart below;
We now have had four conservative months of deflation including February 2015. Now deflation is seen economically as a net negative. While it would increase the purchasing power of consumers, it is seen as a negative because of the Japan experience. Japan’s experience with deflation tells us that deflation will lead consumers to delay their purchase of goods and services as they will become cheaper tomorrow. When this happens, businesses respond from the lack of demand by simply reducing its production capacity. This will mean retrenchment and lower wages for those who stay. This will encourage the population to save more to tide over a difficult period. The economy would contract and slowly writhed off. This is why Central Banks around the world target a 2% inflation as a measure of price stability.
The recent US experience is seen somewhat differently. The US sees that its current deflationary environment as a positive as it increases consumer welfare when they have to spend less on gasoline. It is seen as the equivalent of a tax cut. On the other hand, the belief that the current deflationary environment will pass in the medium term (two years or so) as US experience shows that the period of low energy price cannot be sustained for a long period of time. Hence consumers would want to keep up their purchases when they know that prices will be higher in the future. The US economy continues to grow robustly and wages have not declined even if they are not growing by much. It would appear that the Japanese bad experience with deflation has not infected the US economy for now. Hence there is a chance that the conventional wisdom about the ills of deflation could be due to individual aspects of the Japanese economy.
The key point to ask is if the Singapore economy will grow given the deflationary environment or will it wilt like Japan in the 90s. In order to answer this question, I would rely on credible external organizations for answers. The Asian Development Bank (ADB) forecast that Singapore will grow my 3% in 2015 and 3.4% in 2016. ADB forecast that the main drivers of growth would be in the finance, insurance and business services sector in Singapore as labor intensive sectors such as construction slows amid the tight labor market. In addition, the Ministry of Trade and Industry forecast that Singapore will grow from between 2.0% to 4.0% this year despite the challenges to the economy and according to SGX, it is forecast that the financial sector will grow by a strong 7.5% this year. Hence despite the deflationary environment, it might still be a wise choice to invest in Singapore through a diversified ETF such as SPDR STI ETF which tracks the Straits Time Index as seen below.
Source: SPDR Singapore
STI ETF (ES3) happens to be heavily weighted towards the banking sector with almost 1/3 of its portfolio. It is also highly diversified that contains the most blue chip of Singapore companies with the likes of DBS, UOB, SingTel, Keppel and Capitaland all in one ETF. This is not a stock where you will get rich overnight but it is a good security that will hold its value well and grow along with the economic growth of Singapore.
Summing it Up
Let me end this article with a story that Education Minister Heng Swee Keat told about Mr Lee Kuan Yew after he lost his wife. In his grief, he still thought of Singapore and that is dedication and attention to details for you. This is a key reason why Singapore can be so successful and this is something to keep in mind as we remember his contribution.
“As Mr Lee walked slowly along the bank of the Singapore River, the way he and Mrs Lee sometimes did when she was still alive, he paused. He beckoned a security officer over. Then he pointed out some trash floating on the river, and asked, “Can you take a photo of that? I’ll tell my PPS what to do about it tomorrow.” Photo taken, he returned to the hospital. I was no longer Mr Lee’s PPS at the time. I had moved on to the Monetary Authority of Singapore, to continue with the work to strengthen our financial regulatory system that Mr Lee had started in the late 1990s. But I can guess that Mr Lee probably had some feedback on keeping the Singapore River clean. I can also guess that the picture and the instructions were ferried in Mr Lee’s red box the next morning to the office. Even as Mr Lee lay in the hospital. Even as Mrs Lee lay in state.”
I hope that this article will be helpful in your investment decisions and also to reflect upon the great contribution of Lee Kuan Yew to Singapore. Sometimes when people ask us, how did Singapore get to where we are now economically. We can now tell people that we got here through the attention to detail, dedication, confidence, wise decisions and forward looking inclination of our leaders that moulded Singapore into the great city it is today. If we can apply it in our investment process, we will be financially independent before long.