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360 review - SRS, CPF and Saxos

I have recently completed my 360 review on what I want to do with my various investment accounts and this will be my final post on this topic. 

The various 360 topics are:

Today's will be a bumper edition of topics on CPF, SRS and SAXOs. 

360 review - CPF accounts

After reviewing the cash balances in both our CPF accounts and the various restrictions imposed on using it for investments, such as the 35% limit on what you can use to invest in stocks and shares, I decided not to touch them. Given that it is risk free and earns a 2.5% interest, I have decided to keep CPF as a buffer for my home's "mortgage" emergency fund. 

In the unfortunate event that if I loses my job or decided to take a sabbatical, the cash in the CPF accounts will be used for our monthly mortgages. Based on my computation, this emergency fund can support my home mortgages for about 4.4 years.  

One important action item resulting from the CPF review was that I decided to speed up the mortgage repayment even though the all-in cost of borrowing of 1.5% is lower than the 2.5% interest which I can earn in the CPF account. At the end of the day, a debt is still a debt. I think I would rather owe money to my CPF account then to owe money to a bank.  

While I acknowledge that housing is a good inflation hedge, my aim is to pay off my remaining mortgage by 55 years old. I intend to do that by either increasing my monthly repayment or do a lump sum payment and reduce the "CPF buffer" to around 18-24 months instead of the current 52 months. 

360 review - SRS accounts 

I recently top up the SRS accounts for me and wifey. The combined balance has now reached $160,000.  In addition to the tax savings and squirrelling some savings year by year, the good thing is that I finally decided what I should be doing with these accounts and hopefully I have the discipline to stick to the strategies. In case you wonder why Post Office Savings Bank uses a squirrel as well, the nature's answer is here.

I have decided to use the SRS accounts for long term strategies, for dividend or rental income and hopefully with no cut loss levels. I hope I can pass on that portfolio to the next generation. With the breaking down of minimum board lots from 1,000 shares to 100 shares, it will become easier to build up a portfolio of blue chips from January next year. What do I hope to see in that portfolio? 
  • Iconic blue chips. I want to build up a portfolio of iconic Singapore blue chip portfolio that has a strong Singapore Inc flavour and still likely to grow for the next 20-30 years. In that regard, following the weakness in the market, I have recently added Keppel Corporation to my SRS account. I will probably add some banks and telcos but will avoid airline stocks for now.  
  • Strong local brands.  It's hard to describe to you what such stocks are but to give you a flavor of what i am thinking about, it will be stocks such as Osim and Breadtalk. 
  • REITs, Business Trusts and Dividend-paying businesses. I will start adding REITs with good office and retail locations to the SRS portfolio. I want to start thinking of myself as landlords collecting rental every 3-6 months. I may add business trusts if the business model has sustainable and recurring earnings. I would consider toll road operators such as China Merchant Holdings or education provider Overseas Education in this category
360 review - Saxos

I have classified all my other accounts under the topic Saxos. This will include Futures and CFDs as well. I have decided to start focusing more attention on US markets as well given the breadth and depth of the markets there. With the advance of technology, I no longer need to limit myself to the Singapore market that really "cannot make it" 

I will use the Saxos account for a few purposes:
  • Investing and/or trading in global iconic stocks such as Alibaba, Google and Apple. 
  • Use local CFDs and Futures to hedge my positions in SRS in the event of a major crash.
I would like to build up a portfolio of global iconic stocks over time as well. 

360 review - Time 

My time is limited. This will be my last post on 360 review and you can see that it is a long post as i want to save time and squeeze everything into one post. hahaha 

Given my heavy work load, frequent travels and the retirement plans, I find it difficult to blog too frequently. As such, I will not be able to update my investments and trades on a real time basis. However, rest assured, I will continue to review all the IPO companies here and give you my chilli ratings. :) 

Before i sign off, have you watched the video from NTUC Income recently. I thought it was rather thought provoking. While i am not a fan of insurance products, it might serve to remind you to do your own retirement planning and the future you will thank you for that

Here is the video below for your enjoyment. ~ Mr. IPO

360 review - Pre IPO investments

I spent a while thinking what the subject header should read like. Should it be a sensational one or just a boring 360 review....zzzzz... make sure you read till the end of the post....

What are pre IPO investments?

You can find the definition here. In lay man terms, it is to invest in a company just before it goes for listing, usually 6-12 months prior to listing. For early stage investing, it will be called venture investing, so don't confuse a VC investing, with growth investing with pre-ipo investing. They are all different and has different risk reward profiles. The strategies are very different as well. You can have a quick comparison between the various strategies i mentioned above here in terms of risk profiles and returns.

Is Pre-IPO investing a high risk game?

Is pre IPO investing risky? Of course! In fact it is so risky that SEC actually has some advisory on it. The link is here.

If the Company fails to be listed or fold up, you will lose the invested capital. 

Have i invested in pre IPO company before?

In case you are wondering, my first pre IPO company was in a Chinese S chip in 2008. I have to say that I was quite lucky to get out unscathed despite the financial crisis due to a personal put option we had against the founder and we opted for cash instead of shares when the company was listed. The share price tanked post IPO (See chart below) but luckily the returns was locked in at around 1.66x with high teens IRR (based on my recollection) after 4 years. The share is still listed today but is languishing below its IPO price due to lack of investors' appreciation for Chinese stocks. It was a small investment which i co-invested with my ex colleagues.

How you make money in a pre-IPO investment?

This is a pictorial view in an "ideal" world where you invest at a lower valuation before the IPO and the Company's business plans progressed as planned and managed to list at a higher valuation 6-12 months later. Hopefully, the Company can continue to grow its earnings using the proceeds from the IPO.

You might ask why the Company even want to have Pre-Ipo investors in the first place. There are a few reasons for this.

1.The picture always look clearer with hindsight

At the point of investing for Pre IPO investors, the Company may be at an inflexion point where success or failure is a binary outcome. As such, pre IPO investors are assuming quite a bit of risk in return of a higher return. If things are so clear, investors would have piled into Alibaba, Google or Facebook way before they became 'big'.  Even the so called experts can missed it. I will just share with you some interesting articles in case you are interested in this private equity world.

2. The Company does not want to get diluted too early

By having a pre-ipo round at a lower valuation, the Company can issue less shares to tide their finances till the next big sale or milestone. This is less dilutive than having a full blown IPO. If the business plans did materialize as planned, the Company can sell its shares for a higher valuation in an IPO later.

3. The Company may want to have some 'quality names'

The Company might open a pre-ipo round to investors who can bring 'prestige' to the IPO later. For example in QT Vascular, the Company managed to get EDB and JnJ into the pre-IPO round.

The pre-IPO round can also be one way to 'incentivized' the 'who's who' to support the actual IPO later given that they would have a lower cost base. It can help to ensure a good IPO debut later. 

Some pre-IPO investors can also add value by helping to open doors and create new business opportunities for the Company.

What are the things a small pre-IPO investor should look out for?

This will be the things which i will look out for prior to investing.
  1. A sustainable business model in an attractive sector.
  2. A good story line at IPO and post IPO. 
  3. Reputable co-investors. Obviously i don't belong to this category but if i am investing alongside reputable companies and co-investors, it will be more assuring for me.
  4. Downside protection. There must be adequate downside protection to ensure the Company is able to redeem my shares in the event it can't be listed. 
  5. Upside. There must be adequate upside with formula crafted into the agreement on the conversion formula. In Singapore, it is usually based on a discount to the IPO valuation that ranges from 25% to 50%. 
  6. Lock up. There will always be at least 6 to 12 month lock up requirement. This is inevitable and usually unavoidable. One way to mitigate this risk is to sell some shares at IPO price and be subject to lock up for the remaining shares. In other cases, you just have to keep your fingers crossed that liquidity and valuation will continue for the next 6-12 months and allow you to exit from the investment safely.
Rubbing shoulders with the who's and who

Here comes to the crux of my post today if you bother to read till here. :-P 

Recently I invested in a pre IPO company alongside the who's who in the local investment scene. Those type of names who I know them but they don't know me. Haha. It's quite a key "milestone" for me to invest along side A.Wang, T.Goh and some other familiar names. Of course I ranked at the rock bottom of the list of investors in terms of the amount put in and has to practically "beg" my way in. I will not embarrass myself with the quantum here but in terms of milestone, I will regard this investment as my first official investment into the pre-IPO world. Wish me luck! :)

Mr. IPO is going to be famous !?

If the company is successfully listed next year and my name appears in the prospectus as a pre IPO investor, I am going to frame up the prospectus and hang it in my study room or create a tombstone from it hahaha. In case you are wondering, a tombstone looks like this....

Happy pre IPOing

SRS Portfolio - 30 Sep 2014

Here is the portfolio summary as of 30 Sep 2014. 

There is only one portfolio company remaining and that is CM Pacific. I have also sold off Overseas Education when the 90c support level gave way. It was executed by my broker when I was travelling. 

I am back to almost 100% in cash and it is sitting at $116,620. 

If you have followed my blog for a while, you will know that I never hesitate to cut loss when the positions turned against me. I would rather preserve the capital than to sit through the unrealised losses. I will also set protective stops that let me get out at a profit then to see it turn into a loss as what you have seen my japfa position. My only "regret" is i should have sold it at 96c. :-P

This is just an extension of my character and personality. I don't like to hold on to losing positions and hope for the best. There is no "hope" in my investment or trading portfolio.  I wouldn't be happy if I am still holding to Japfa or QT Vascular now. You will have to find a style that suits your personality. Protecting the downside is important to me. 

360 - SRS Account

I am still thinking hard on how my investment strategy for SRS account should be. I haven't got a "landing" yet. Should it be focused on passive income or should it be for more aggressive growth stocks? Every time I think about it, I get a "headache". 

The reason why it is difficult is because I am a risk taker and to invest for dividend or for distribution income just don't sound right but at the same time I also recognize that having a steady stream of passive income is important towards achieving "financial freedom".

Let me give a further thoughts and see if I can get a landing. I will also share what I invested recently in a separate post.  

December is approaching soon. It's time to think about squirrelling some cash into the SRS account...

Till then. Happy SRSing.