Tuesday, April 7, 2015

RP Ratio - Application to Singapore STI


I am sure you are aware of the famous joke about two economists who see a ten dollar bill on the street of Chicago. In case, you have not, you can read the joke at the link below.





There is a better version of this by Larry Swedroe.


By now, you might be thinking, hey, I am reading this stuff to see what I can do to make money, if I wanted to read jokes, I would read Dilbert (http://dilbert.com/)

So, without further ado, here is the boring stuff.

Hat-tip to Foolish fools for this strategy.

The Foolish Four looks for likely turnaround stocks with a way to combine the effects of low price and high yield.

The actual procedure is to divide the yield by the square root of the price. This gives you a ratio for each stock. Rank the Dow stocks by this ratio highest to lowest. (If you find the math easier, you can square the yield and divide by the price instead. The numbers will be different, but the stocks will be ranked in the same order.) Dump the stock with the highest ratio. Then buy the next four stocks in equal dollar amounts.

Why drop the first stock on the list? Sometimes being #1 is too much of a good thing -- in the past, stocks with both the highest yield and lowest price (lowest price of the 10 high yield stocks, not the entire Dow) have usually turned out to be in serious trouble. You are better off just dropping it in favor of the #5 stock, although technically, as long as the stock with the highest RP ratio isn't both the highest yielder and lowest priced, you could pick it instead of #5.

Applying this to the STI, the share prices and the dividend yield as on date i.e. April 8, 2015, this is the table.

Stock Dividend Yield (%) Stock Price RP Ratio
Hutchison Port Holdings Trust 7.66% 0.68 0.09289
Golden Agri-Resources 2.31% 0.44 0.03482
Ascendas Real Estate Investment Trust 5.62% 2.62 0.03472
CapitaMall Trust 4.97% 2.25 0.03313
Sembcorp Marine 4.45% 2.94 0.02595
Thai Beverage 2.25% 0.77 0.02564
Singapore Press Holdings 5.06% 4.16 0.02481
Singapore Technologies Engineering 4.58% 3.5 0.02448
SIA Engineering 4.73% 4.04 0.02353
StarHub 4.73% 4.38 0.02260
SembCorp Industries 4.67% 4.41 0.02224
Singapore Telecommunications 3.92% 4.41 0.01867
Olam International 2.53% 1.985 0.01796
Keppel 4.75% 9.12 0.01573
ComfortDelGro 2.62% 2.91 0.01536
Wilmar International Limited 2.32% 3.25 0.01287
Singapore Exchange 3.47% 7.93 0.01232
Capitaland 2.23% 3.55 0.01184
Noble Group 1.06% 0.915 0.01108
Genting Singapore 1.06% 0.955 0.01085
Global Logistic Properties 1.74% 2.65 0.01069
Hongkong Land Holdings 2.55% 7.63 0.00923
Oversea-Chinese Banking 2.95% 10.64 0.00904
DBS Group Holdings 2.87% 20.37 0.00636
United Overseas Bank 3.07% 23.57 0.00632
Jardine Cycle & Carriage 3.63% 42.38 0.00558
Singapore Airlines 1.34% 11.69 0.00392
Jardine Matheson Holdings 2.31% 62.33 0.00293
City Developments 0.79% 10.3 0.00246
Jardine Strategic Holdings 0.78% 35.22 0.00131

The four stocks are Golden Agri, Ascendas REIT, Capitamall Trust and Sembcorp Marine.

With about 1,001 SGD, one can buy one lot in each of Ascendas, Capitamall and Sembcorp and five lots of Golden Agri.

The STI Index is at 3459.97 and the STI ETF at 3.46

The way to measure this is one year later, 

a) what is the return for this equal weighted investment vs STI vs STI ETF?
b) Has this outperformed?

I have created a portfolio to track this.



Disclaimer :- 

I am not an investment professional.

I encourage you to do your own independent "due diligence" on any idea that I write about, because I could be and probably am wrong.

Nothing written here is an invitation to buy or sell any particular stock.

At most, I am handing out an educated guess as to what the markets may do.

The market will always find a new way to make a fool out of me (and maybe, even you!).

Even the best strategies of the past fail, sometimes spectacularly, when you least expect it.

I am not immune to that, so please understand that any past success of mine will probably be followed by failures

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