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5 PROVEN WAYS TO INVEST FOR HIGHER RETURNS
Sunday, June 10, 2018 at 4:29 AM
It began with a handful of academics, notably William Sharpe.
Sharpe won the Nobel Memorial Prize in Economic Sciences in 1990, based on his research on Capital Asset Pricing Model (CAPM). The CAPM attempts to explain the expected returns of a security (stock, bond, etc.).
I will avoid the technicalities as much as possible and make it comprehensible for the layman. I wanted to share this because it could have a significant impact on your investment strategy. So be sure to read on.
First, we know that most, if not all, governments issue debts. For example, the Singapore Government issue bonds of varying maturity dates. These bonds pay out coupon rates to bondholders and are deemed as the least risky asset in the entire country. Typically, the government’s 10-year bond interest rate is used as an indication of the risk-free rate for the country.
The significance of the risk-free rate is that any investments of a riskier nature are expected to give a higher return. Else, why take the risk? If the 10-year interest rate is 2.5%, you should expect to get more than 2.5% when investing in stocks.
Second, we understand a security such as a stock, can fluctuate in price. We also understand a stock index is used to indicate the general movements of the stock market of a particular country. We could then benchmark the movement of a stock against the stock index, to tell us if the stock is more, or less, volatile than the index.
If we set the index at a value of 1, a stock would be more (less) volatile if it has a value more (less) than 1. This value is known as Beta.
Those are the first two factors of the CAPM equation. The expected returns of a stock are hence, based on the prevailing risk-free rate and the volatility against the index. Since the risk-free rate is the same for all securities, the only difference is the degree of volatility of a stock. The more volatile the stock, the higher the expected returns.
But this isn’t useful at this stage.
The next significant breakthrough was when Eugene Fama and Kenneth French broke down the Beta into two more factors – Value and Size. It started a chain reaction of further divisions of Beta found by other notable academics. The findings were significant for finance quants who could tap on these anomalies to make above average investment returns. I would like to share these Factors with you now.
1. Value – Low Price-to-Book Ratio
Value investing is a popular strategy among investor, and many excellent results have been achieved. But what defines value differs from person to person.
Most would agree that buying good earnings as cheap as possible is a value play. That is true. But not useful enough if it cannot be quantified.
Fama and French were very precise with their definition, and that was to rank stocks based on the book-to-market ratio, or more commonly known as Price-to-Book (PB) Ratio. The study found that the lowest PB ratio stocks (cheapest) tend to give higher returns than high PB ratio stocks (expensive).
You probably cannot imagine just one PB ratio could increase your investment returns.
It is simple but not easy.
The problem with this Value Factor is that you will face mostly unfamiliar stocks. Moreover, they are likely to have problems going on with their businesses. It is counter-intuitive since our belief is to invest in good businesses. Hence you will find it uncomfortable to invest in them and shun this approach even though it gives you potentially higher returns.
2. Size – Small Companies
Fama and French also discovered that smaller-size companies tend to give higher returns than bigger-size companies.
That is again, counter-intuitive, as most people would believe larger companies are going to perform better than the smaller ones as the former are well capitalised and have more power to determine pricings and grow earnings. They are more stable too.
Fama and French explained that smaller companies are indeed riskier and hence investors have to be compensated with higher returns.
I would prefer the reasoning from the angle of behavioural finance. Most investors prefer big companies because of the perception we described above. When more investment capital flows to the bigger companies, it created an unequal distribution resulting in price discrepancies. Stock prices of big companies tend to trade at a premium because more investors buy them.
Investing in smaller companies would make most investors uncomfortable and hence, shun this group of stocks despite potential higher returns.
3. Momentum – Price Goes Higher (Lower), and Higher (Lower)
Another group of academics found the Momentum Factor. One of the most cited ones was Mark Carhart. He found that stocks that have gone up (down) the most in the past 12 months tend to go even higher (lower). These suggested stock prices have momentum.
That is contrary to the Value Factor. I believe that the Momentum Factor happens in shorter periods (months) while the Value Factor happens in longer periods (years).
The Momentum Factor was well captured by a trading strategy called trend following.
The problem with the Momentum Factor is that it can be fleeting. It is known that trend following is a low accuracy but high payoffs strategy. It means that most traders have to cut losses most of the time to preserve capital. That is very unnatural, and many people do not have the discipline and emotional detachment to do it persistently. Most would give up before the strategy starts working.
Why momentum exists? I would reason that investors have the herd instinct and would find it easy to invest when a stock has gone up in price. A recent example would be the red hot property market in Singapore, whereby more investors, not less, piled capital into houses.
4. Beta – Low Volatility
Beta can be put simply as a relative volatility of a stock to an index. A low Beta stock has a low correlation to the market index and lesser degree of price fluctuations. It was found that low Beta stocks tend to outperform the high Beta stocks.
Of the Factors discussed in this article, this is the most unexplainable Factor because academics have long said that volatility is a measurement of risk. Higher Beta stocks are essentially having higher volatility and hence should have higher returns to compensate for additional risk. But the findings have flipped the whole argument around.
A paper was attributing part of Buffett’s superior performance to his exposure to low Beta stocks.
5. Quality – Higher Gross Profitability
Last but not least is the Quality Factor. One indicator of quality was Gross Profitability (Gross Profits / Total Assets) as expounded by Robert Novy-Marx.
By buying the highest Gross Profitable stocks will give you higher returns than the lower Gross Profitability stocks.
That is intuitive as investors prefer profitable stocks than less profitable ones.
Conclusion
I had heavily summarised and simplified the last 40 years of research on investment returns. What we have gone through is known as Factor Based Investing, and it has been gaining acceptance within the finance industry.
The more important question is whether it can work in reality? Can investments be reduced to a few Factors?
I strongly believe in these Factors and getting exposed to at least one of them would provide a higher chance of etching out higher returns than most people. The studies are evolving, and of course, history is not a good predictor of future returns. It is equally important to ask if some of these Factors could disappear. I think behavioural finance has an answer – as long as the anomalies are caused by humans, and humans continue to make investment decisions, we can have a higher degree of confidence that such Factors will continue to work.
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5 PROVEN WAYS TO INVEST FOR HIGHER RETURNS
Sunday, June 10, 2018 at 4:29 AM
It began with a handful of academics, notably William Sharpe.
Sharpe won the Nobel Memorial Prize in Economic Sciences in 1990, based on his research on Capital Asset Pricing Model (CAPM). The CAPM attempts to explain the expected returns of a security (stock, bond, etc.).
I will avoid the technicalities as much as possible and make it comprehensible for the layman. I wanted to share this because it could have a significant impact on your investment strategy. So be sure to read on.
First, we know that most, if not all, governments issue debts. For example, the Singapore Government issue bonds of varying maturity dates. These bonds pay out coupon rates to bondholders and are deemed as the least risky asset in the entire country. Typically, the government’s 10-year bond interest rate is used as an indication of the risk-free rate for the country.
The significance of the risk-free rate is that any investments of a riskier nature are expected to give a higher return. Else, why take the risk? If the 10-year interest rate is 2.5%, you should expect to get more than 2.5% when investing in stocks.
Second, we understand a security such as a stock, can fluctuate in price. We also understand a stock index is used to indicate the general movements of the stock market of a particular country. We could then benchmark the movement of a stock against the stock index, to tell us if the stock is more, or less, volatile than the index.
If we set the index at a value of 1, a stock would be more (less) volatile if it has a value more (less) than 1. This value is known as Beta.
Those are the first two factors of the CAPM equation. The expected returns of a stock are hence, based on the prevailing risk-free rate and the volatility against the index. Since the risk-free rate is the same for all securities, the only difference is the degree of volatility of a stock. The more volatile the stock, the higher the expected returns.
But this isn’t useful at this stage.
The next significant breakthrough was when Eugene Fama and Kenneth French broke down the Beta into two more factors – Value and Size. It started a chain reaction of further divisions of Beta found by other notable academics. The findings were significant for finance quants who could tap on these anomalies to make above average investment returns. I would like to share these Factors with you now.
1. Value – Low Price-to-Book Ratio
Value investing is a popular strategy among investor, and many excellent results have been achieved. But what defines value differs from person to person.
Most would agree that buying good earnings as cheap as possible is a value play. That is true. But not useful enough if it cannot be quantified.
Fama and French were very precise with their definition, and that was to rank stocks based on the book-to-market ratio, or more commonly known as Price-to-Book (PB) Ratio. The study found that the lowest PB ratio stocks (cheapest) tend to give higher returns than high PB ratio stocks (expensive).
You probably cannot imagine just one PB ratio could increase your investment returns.
It is simple but not easy.
The problem with this Value Factor is that you will face mostly unfamiliar stocks. Moreover, they are likely to have problems going on with their businesses. It is counter-intuitive since our belief is to invest in good businesses. Hence you will find it uncomfortable to invest in them and shun this approach even though it gives you potentially higher returns.
2. Size – Small Companies
Fama and French also discovered that smaller-size companies tend to give higher returns than bigger-size companies.
That is again, counter-intuitive, as most people would believe larger companies are going to perform better than the smaller ones as the former are well capitalised and have more power to determine pricings and grow earnings. They are more stable too.
Fama and French explained that smaller companies are indeed riskier and hence investors have to be compensated with higher returns.
I would prefer the reasoning from the angle of behavioural finance. Most investors prefer big companies because of the perception we described above. When more investment capital flows to the bigger companies, it created an unequal distribution resulting in price discrepancies. Stock prices of big companies tend to trade at a premium because more investors buy them.
Investing in smaller companies would make most investors uncomfortable and hence, shun this group of stocks despite potential higher returns.
3. Momentum – Price Goes Higher (Lower), and Higher (Lower)
Another group of academics found the Momentum Factor. One of the most cited ones was Mark Carhart. He found that stocks that have gone up (down) the most in the past 12 months tend to go even higher (lower). These suggested stock prices have momentum.
That is contrary to the Value Factor. I believe that the Momentum Factor happens in shorter periods (months) while the Value Factor happens in longer periods (years).
The Momentum Factor was well captured by a trading strategy called trend following.
The problem with the Momentum Factor is that it can be fleeting. It is known that trend following is a low accuracy but high payoffs strategy. It means that most traders have to cut losses most of the time to preserve capital. That is very unnatural, and many people do not have the discipline and emotional detachment to do it persistently. Most would give up before the strategy starts working.
Why momentum exists? I would reason that investors have the herd instinct and would find it easy to invest when a stock has gone up in price. A recent example would be the red hot property market in Singapore, whereby more investors, not less, piled capital into houses.
4. Beta – Low Volatility
Beta can be put simply as a relative volatility of a stock to an index. A low Beta stock has a low correlation to the market index and lesser degree of price fluctuations. It was found that low Beta stocks tend to outperform the high Beta stocks.
Of the Factors discussed in this article, this is the most unexplainable Factor because academics have long said that volatility is a measurement of risk. Higher Beta stocks are essentially having higher volatility and hence should have higher returns to compensate for additional risk. But the findings have flipped the whole argument around.
A paper was attributing part of Buffett’s superior performance to his exposure to low Beta stocks.
5. Quality – Higher Gross Profitability
Last but not least is the Quality Factor. One indicator of quality was Gross Profitability (Gross Profits / Total Assets) as expounded by Robert Novy-Marx.
By buying the highest Gross Profitable stocks will give you higher returns than the lower Gross Profitability stocks.
That is intuitive as investors prefer profitable stocks than less profitable ones.
Conclusion
I had heavily summarised and simplified the last 40 years of research on investment returns. What we have gone through is known as Factor Based Investing, and it has been gaining acceptance within the finance industry.
The more important question is whether it can work in reality? Can investments be reduced to a few Factors?
I strongly believe in these Factors and getting exposed to at least one of them would provide a higher chance of etching out higher returns than most people. The studies are evolving, and of course, history is not a good predictor of future returns. It is equally important to ask if some of these Factors could disappear. I think behavioural finance has an answer – as long as the anomalies are caused by humans, and humans continue to make investment decisions, we can have a higher degree of confidence that such Factors will continue to work.
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15 Years of Difference
Colors of Life
It was over a cup of late night coffee at Kopitiam 15 years ago that the idea of establishing a group took root. 6 people, 1 shared vision, and a hunger to do better. With their aspirations and dreams aligned towards one goal, a "coffee shop dream" became a reality.
15 years later, as the founders look back on that moment that birthed what is now a strong and dynamic group known as Advisors' Clique, it is more than just a fond memory. It marked the beginning of a journey that they collectively embarked on and strived tirelessly for. These individuals are the original pillars on which Advisors' Clique grew from strength to strength, both in revenue and total headcount.
Advisors' Clique is now a successful group of financial consultants representing Great Eastern Financial Advisers Private Limited (GEFA), with a strong culture and unique identity. These were not accomplished overnight. Efforts were made over the years to establish what Advisors' Clique really stands for and represents, beyond just the vision belonging to the founders. As generation after generation of new blood came on board, it became evident—"to leave a legacy by paying it forward" was a common desire.
It is a vision that is befitting what we stand for professionally, and the core mission to be committed to thinking in your best interest, be it in providing sound financial advice or grooming future leaders, came almost naturally. Finally, the 7 core values were established to serve as guiding principles in our careers and our personal lives.
We remain united in our identity, just like how the founders came together to forge a shared dream. We are unique only because everyone truly believes in this journey spearheaded 15 years ago. Having come a long way now with a strength of 350 associates and 15 directors, and still counting, we continue to evolve to stay ahead of the game. After all, change is the only constant.
The journey ahead is bright and promising. And it is one which we choose to go on together as the "AC Family". A family that stands by each other through thick and thin, and see each other through ups and downs. It is proven; it has stood the test of time; and the best is yet to be. Hold on to your seats for the next chapter of the AC story.
DIRECTORS OF ADVISORS' CLIQUE
The Directors of Advisors' Clique play a pivotal role in guiding the vision of the organisation. These directors lead by example as they continuously strive for excellence in their delivery of sound financial advice to their clients, above and beyond their role of agency building. They also collaborate closely with Great Eastern Financial Advisers to bring greater value and growth to the agency and the clients they represent.
HEAD OF DEPARTMENTS
Apart from sales and recruitment, the Advisors' Clique Head of Departments and their members set time aside to voluntarily serve organisation.
With more than 20 departments, their aim is to support, improve and ensure an operationally smooth agency. Such are their selfless contributions in “giving back” to the agency; through Advisors' Clique multitude of talents and its smorgasbord of creative streaks and styles.
OUR PHILOSOPHY
We believe that a successful life is a planned journey, not just a destination.
This is an adage we adhere to with our clients and our associates. That is why we are constantly evolving to stay ahead of the curve; for in doing so, can we then be progressive leaders in the financial planning industry and serve our clients with excellence. Only then can we keep our promise to all who share the same goals and values system to bring them to greater heights of a worthwhile journey.
We believe in being committed.
We are committed to delivering the best financial advice and practices to our clients. Because your dreams matter. We are committed to our dedication towards the continued growth of a positive, long lasting relationship with all associates served by us. Because team matters.
We believe in value-based practices and system.
Traditional values are equally if not more important than professional values in our fast-paced, ever-changing financial landscape. We thus focus on understanding and preserving a set of values with the aim to achieve sound financial objectives for our clients and to ensure that every member of the distribution group continues to do what is best for the team.
WHO WE ARE & HOW FAR WE'VE COME
Advisors’ Clique (AC) is a group of financial consultants representing Great Eastern Financial Advisers Private Limited (GEFA). GEFA is a wholly owned subsidiary of Great Eastern Holdings Pte Ltd, a member of the OCBC Group.
Founded in 2001, AC is now a group of close to 600 financial consultants with a strong culture and unique identity.
In 2011 a consultative exercise involving all consultants was undertaken to establish what AC stood for, beyond the original thinking of its founders. This helped define a new collective vision which bound the team closer together, and renewed a service pledge to their clients.
With many new associates coming on board in the last 5 years, it has once again became evident that the desire "to leave a legacy by paying it forward" was prevalent.
“Thinking In Your Best Interest” is an important value which continuously guides the organisation in giving quality financial advice to their clients. This is reflected in the number of AC associates qualifying for the coveted Million Dollar Round Table (MDRT) recognition as well as the prestigious Great Eastern Achievers’ Club award.
OUR FOUNDATIONS & FRAMEWORK
CORE VALUES
TRAILBLAZERS
"The future belongs to those who see possibilities before they become obvious."
—John Sculley 2011
INTEGRITY
"Doing the right thing even when no one is watching."
—C.S. Lewis 1898 - 1963
EXCELLENCE
"If better is possible, good is not enough."
—John Buchanan 2009
GRATITUDE
"A duty which ought to be paid but none has the right to expect."
—Jean-Jacques Rousseau 1712-1778
ABUNDANCE
"To add what we can to life", in giving and in spirit.
—Sir Dr William Osler 1849-1919
PEOPLE MATTER
"To be successful in a profession or in a business, to become wealthy cannot be compared to making the lives of your fellow men better."
—Lee Kuan Yew 2004
COLLECTIVE INDIVIDUALISM
"Each member doing what's best for the team and himself, ultimately for the betterment of the entire group."
—Colin Ong (OLJ200081689) 2002
OUR VISION & MISSION
From the time that Advisors' Clique was conceived, it has been all about contribution, real impact, professionalism and team before self. Through the years of growing from strength to strength, we have remain guided by our vision and mission to blaze new trails of excellence as one big family.
Vision
"To leave a legacy that impacts lives by paying it forward."
Mission Statement
We are committed to thinking in your best interest.
We empower clients through quality financial advice.
We groom leaders, not managers.
We forge new frontiers.
AC GIVES BACK
AC Cares
At Advisors’ Clique, we subscribe to the tenets of ‘The Whole Man’ concept. As we strive for excellence in our role as a financial consultant, we also seek to be active citizens and give back to society in as many ways as we possibly can. In 2004, we collaborated with the Red Cross to raise funds for tsunami victims. Recently, we initiated a partnership with World Vision under the Child Sponsorship Programme, which attracted heartening support. Each Director's Group also initiates their own community projects to support causes they are passionate about.
The desire to share love and bring hope knows no boundaries. Our efforts have extended beyond the shores of Singapore to Rewatha in Sri Lanka, an orphanage in a previously war-torn area.
WHAT THE FUTURE HOLDS
A FORCE TO BE RECKONED WITH
“The best way to predict the future is to create it. Advisors’ Clique shall always stay true to our trailblazing culture and constantly reinvent ourselves towards the best version of us!”
—Principal Founder of Advisors' Clique
FUELLED BY PASSION, DEDICATION AND INNOVATION
“Advisors’ Clique’s future will be paved by our young leaders and our Associates who go beyond their call of duty to serve in our committees guided by our core values. They will be the heartbeat of Advisors’ Clique!”
—Current Chairman of Advisors' Clique
FORGING NEW FRONTIERS AND REACHING GREATER HEIGHTS
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PERSONAL FINANCIAL SERVICE
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Advisors' Clique Financial Services
1. Life Insurance
Lifelong protection for you and your family's financial needs
2. Hospitalisation & Surgical Insurance
Your basic medical insurance that covers costs resulting from sickness and accidents
3. Asset Accumulation
Making the most of your investments and savings
4. Mortgage & Debt Planning
Using Insurance to provide protection for your loans so that you can have the peace of mind.
5. Child Protection & Education Planning
Enjoy parenthood by planning ahead
6. Retirement Planning
Investing and maximising your funds to build your golden nest egg
7. Estate Planning
Preserving the value of your estate for the next generation
CORPORATE FINANCIAL SERVICES
1. Group Insurance: Group term policies and group Hospitalisation & Surgical services
2. Keyman Insurance, Golden Handcuff & Buy-sell Policies
3. Work Injury Compensation Insurance & Foreign Worker Medical Insurance
4. Business & Office Insurance
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SERVICE
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CAREER
Experience a unique & rewarding career at Advisors' Clique
JOIN US
We are always looking for good people at all levels to join the team. Being a financial consultant can be a highly rewarding and life-changing experience. Every member of the Advisors' Clique family is distinguished by his or her tenacity, perseverance, willingness to push the envelope and dedication to serve.
If you seek a unique career proposition that combines the flexibility, excitement and challenge of running your own business backed by a robust system of processes and practices, and the support network of a team, this is for you.
Ready to journey with us towards a common focus and vision? Get in touch with us here.
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