THE INTELLIGENT SINGAPOREAN

Powered by the Plogosphere

Rising costs in Singapore? Capitalism to the rescue!

Posted by intellisg on July 12, 2007

This independent article presents a solution that a capitalist would choose against rising costs.

“Not again !” said Geraldo Gan, 34, “The last time we have transport fee hikes, now I have to pay more to watch the sports channel on Starhub and it doesn’t change the fact that some special matches are still pay-per-view !“ The voices calling for a boycott of Starhub grew louder as more people reacted negatively towards the news. The company defended itself by citing evidence that prices have not risen once since 1995 and this adjustment, in view of past record, is a reasonable one compared to many other cable operators around the world.

11th July 2007 marks the day Starhub will increase subscription fees for its cable services. The basic group package monthly costs for cable subscription will increase by $4 every month. The sports channel subscription package will have its cost increase by a fairly substantial amount of $10. Like all previous price hikes, news alike this are often greeted with a lot of unhappiness and accusations of Starhub being a monopolizing entity hell-bent on squeezing every little penny from the consumer is flaying all over the Internet forum.

The truth of the matter is that all Singaporeans have to live with price hikes from time to time. Nothing ever gets cheaper with time. (If it does, we would have a deflationary economy and that’s not something people would like.)

A common approach to dealing with increased costs is by whining about it. But history has shown that this does not make things better. If it does, we will not be facing a GST of 7% today and runaway inflation of medical costs over the past 10 years.

How capitalists deal with increasing costs

Not everybody can afford to be a capitalist but in Singapore some of us can use our hard work to become a shareholder instead of becoming a consumer. When you make a stock purchase, you pay GST on the brokerage (about $30) that was charged to you but when you purchase a consumer item, you pay GST based on its full cost. Clearly, successful Singaporeans should take into account this wonderful loophole.

The solution to fee hike I’m proposing here is a simple one – own the company stock to respond to hike in fees and collect dividends to offset increases in subscription fees.

Starhub as an equity holding

At the time of writing, Starhub costs $3.10 a share. This means that it costs slightly more than $3,100 to own a lot of Starhub shares ( additional fees come from brokerage costs ).

Let us look at Starhub dividend yields in 2006. Starhub gave 2.5 cents in May, 2.5 cents in June, 2.5 cents in August and 3 cents in December. That yields about 3.4% at current prices at the low-end because the dividends do not account for increased subscription fees that have just been declared this year. A 3.4% yield is not fantastic but it is reasonable given that it exceeds fixed deposit rates and Singapore government bond yields (3%).

Let us look at the sustainability of dividend yields using 2006 figures annual report. Cash flow from operations is $582 million, we deduct investments in new equipment of $248 million to get a very rough estimate of free cash flow which is $334 million. Compare this with dividends paid amounting to $216 million, we can conclude that the company can sustain these dividend payments because dividends paid is much less than the free cash flow. So at least in 2005 and 2006, we can safely conclude that the company is one which generates not just revenues and sales, but cold, hard cash. (What can you expect from a cable provider which has a virtual monopoly in a country which is aiming for a 7 million population through a liberal immigration policy?)

Without actually quantifying the growth potential of Starhub, we can safely say that a $3,100 lot of Starhub shares can provide a fairly consistent $105 of dividends a year. This will more than adequately cover the cost of all the annual price increases to subscribers of the basic package.

And it gets even better!

If you purchased 2 lots of Starhub, that will cover the price increase which comes from subscriptions to the sports channel. Four lots of Starhub shares will generate enough dividends to cover a year of basic subscription with all 6 groups thrown in as channels.

Now imagine what happens if you accumulate 10 lots of Starhub. Not only would you cease to complain about rising costs, fare hikes will be accompanied by the popping of champagne.

An alternative case for capital ownership

Admittedly, the above analysis is insufficient to conclude that we should buy or sell Starhub shares (that is because we’ve not looked at the earnings trends.). It illustrates a possible philosophy towards dealing with the frustrations in urban life – Capital ownership can be directed towards coping with rising costs and analyzing a stock based on potential yields can possibly create a new payoff when prices of consumption rise.

In other words, if transport fares take a hike – let’s look at SMRT and Comfort Delgro shares; when some drunkard spills beer on your lap, it’s time to examine Diageo and Anheuser Busch stocks; when a belligerent Ah Beng blows second hand smoke in your face, its time to invest some money into Altria.

So the next time you are upset by something, instead of screaming about these increases, do ask yourselves this question:

Am I generating enough capital to turn this situation into an advantage?

Note: The author of this article has no vested interest in Starhub.

——————-

Christopher Ng Wai Chung, 32, is an IT Project manager who dabbles in personal finance and wealth management. His books, Growing your tree of Prosperity and Harvesting the Fruits of Prosperity meld his philosophical ideals with the realities of seeking financial independence in Singapore. His books can now be found in all major bookstores in Singapore.

His personal blog is treeofprosperity.blogspot.com He can be reached at waichung.ng@gmail.com.

Advertisements

21 Responses to “Rising costs in Singapore? Capitalism to the rescue!”

  1. inspir3d said

    “So the next time you are upset by something, instead of screaming about these increases, do ask yourselves this question:

    Am I generating enough capital to turn this situation into an advantage?”

    Ooo yeah. Let’s turn all Singaporeans into capitalists. LOL

  2. pissoff said

    Oh yeah, let’s talk money because Singapore is just make of, simply, MONEY.
    No money no talk. Have money also cannot talk. Must see how much first before can talk.

  3. Actually, if you read the gist of my article with more care. The less money you have, the more talk you will engage in because you are more limited in terms of options.

    People who own capital in such case will talk the least when confronted with fare hikes.

    Thus, got money = no talk.

    Regards

  4. shoestring said

    Is there anything else in life to talk about other than money?

  5. Shoestring,

    My options are limited as I’m here largely to promote my book which has’nt been given the best spots in the local bookstores.

    What kind of articles are you looking for anyway ?

    Regards

  6. inspir3d said

    “Is there anything else in life to talk about other than money?”

    well i think whether we like it or not money is a very important part of Singaporean culture and it’s not going to change anytime soon. but i guess if u need a break from worrying about money u can go read the B’hood’s travelogues. https://intelligentsingaporean.wordpress.com/tag/travelogue-series/

  7. scb said

    Can we talk about the Society getting more cruel and vicious ? In view of the increasing cries, curses and whinnings.

  8. Scb,

    That’s actually rather good feedback.

    There are some issues to address when a writer writes about cruelty in Singapore. The first is that there are already plenty of blogs with such material. The second issue is that even if I were to write an article showcasing the cruelty of some people, somebody out there will politicize my writing and will blame the PAP for the cruelties of this society.

    It’s always the fault of the men in white.

    I’ll see what I can do.

    Regards

  9. Gerald said

    There is an alleged quote from me in the first para. Where did the author get that quote? I don’t recall ever saying that. I don’t subscribe to cable and I’m not 34 years old. I’d be grateful if you could remove my name from the article (unless there is someone else with the same name in Singapore, which I don’t think so).

    Thanks.

  10. comic reader said

    I know of at least two Gerald Giam’s a third one spelt Ghiam, 3 Harry Lee’s and at least 5 Mr Wang’s and they are not even remotely related – should I ask them all to change their name?

  11. shoestring said

    I was referring to the equation:
    got money = no talk

  12. Christopher Ng said

    Gerald,

    I made the name up to protect the identities of the real folks that I know. It’s purely coincidental and I do not know of anyone actually called Gerald Giam other than yourself. Please forgive me.

    I’d be more than happy to change the name if you insist.

    To ensure that mistakes like this will not be repeated, shall I suggest the name Lobtsang Ramadingdong, one of my D&D characters ? 😉

    Regards

  13. Gerald said

    Hi Chrisopher,

    Yes, if you don’t mind please. My name is still in your article.

    Comic Reader,

    If you had an unusual name like mine, you wouldn’t like seeing misquotes attributed to you. Btw, I’d be keen to meet my namesake. Or are you making things up too?

  14. Gerald said

    Sorry, I meant Christopher.

  15. eve said

    eee… Lobtsang Ramadingdong doesn’t sound nice
    use a more local name?
    but avoid common surname like Tan & Lee :p

  16. a.singapore.economist said

    Putting aside your advice, which is ridiculous and dangerous(Funds are always a better choice than individual stocks. Picking individual stocks is very risky.), this is also dead wrong:

    The truth of the matter is that all Singaporeans have to live with price hikes from time to time. Nothing ever gets cheaper with time. (If it does, we would have a deflationary economy and that’s not something people would like.)

    The first example that occurs to me are computers but there are others.

  17. Singapore economist,

    I hope you don’t sell funds for a living.

    You are right. Computers do get cheaper with time. But as an economist you should be able to understand the context by which my statement was made. I was referring to a positive inflation for most of recorded memory in Singapore. So my statement is applied to goods and services in aggregate.

    But I do have a contention to your claim that “funds always a better choice than stocks ?”. I have not advised readers not to diversify in my essay and you can be refuted mathematically.

    Suppose I break up a fund into individual stocks and buy all of them. I would most definitely have the exact same performance of your fund but I will not incur the management fees of about 1.5-2.5%.

    So in such a case, funds are not better than stocks because funds are composed of stocks with an added annual penalty. I will concede that having a diversified portfolio is better than holding to one to two stocks.

    And I thought only engineers like myself are literal minded.

    Regards

  18. a.singapore.economist said

    Christopher,

    Nothing ever gets cheaper with time

    I don’t see how this statement can be taken as anything but literal. You whole post is about prices of particular items, not prices in aggregate.

    I hope you don’t sell funds for a living.

    No, I don’t but it irks me when people pass off bad advice about stock-picking.

    I have not advised readers not to diversify in my essay and you can be refuted mathematically.

    You advised them to buy individual stocks of companies whose prices have increased. For 99% of people, this is a terrible strategy. Even most professional stock pickers get beat by the market over the long run.

  19. Christopher Ng said

    Economist,

    I’ve clearly clarified my position to all the readers here. If you insist in having your interpretation, there is nothing much I can do to convince you otherwise.

    Tell you what, why don’t you post what you may consider good advice for stock picking and I’m sure all the readers would be happy to compare your approach and mine. Even I have a lot to learn to figure out how to make my portfolio work harder.

    I did not advise people to buy individual stocks whose prices have increased. I advised people to take capital ownership as a means of dealing with price hikes. Even so, mutual funds underperform passive indices most of the time and owning a diversified set of individual stocks is not as bad a picture as you paint.

    You might want to show me in what way owning individual stocks are a bad idea 99% of the time. You may also wish to show me figures of professional stock pickers getting beaten by markets over the long run. You used the word ‘most’ and the words ‘beaten’. What do you mean by that ?

    You call yourself the Singapore economist. I’d be happy to concede that I’m wrong if you can show me empirical evidence of the points you raised.

    Enlighten me please, I’m sure the readership would be grateful if this spirited debate can yield more money making ideas.

    Regards

  20. a.singapore.economist said

    This is my last post because I don’t want to argue with you — I want to tell people that picking stocks is very risky and that index funds are better. This is from research sited in Charles Wheelan’s book, naked economics:

    “According to Morningstar, a firm that tracks mutual funds, roughly half of the U.S. actively managed diversified funds beat the S&P 500 over the past year. Look what happens as the time frame gets longer: Only 30 percent of actively managed funds have performed better than the S&P 500 over the past five years, and only 15 percent of such funds have done so over the past twenty years. In other words, 85 percent of the mutual funds that claim to have some special stock-picking ability did worse over two decades than a simple index fund…” (his emphasis)

    I don’t call myself “the Singapore economist.” Are you really a writer? You don’t seem that good at it.

  21. Christopher Ng said

    Singapore Economist,

    It is amazing that we can talk about the same thing and yet still be in contention at the same time. In one of my replies, I wanted to prove that choosing stocks can be better than funds because management fees could be avoided. You then mentioned the example of mutual funds to show that they underperformed ETFs.

    But you’re smart. You did not explain to the reader why 85% of them underperformed the indices.

    Turns out they underperformed for the same reasons I mentioned – management fees and expense charges.

    It means this. You’re arguments are incomplete. You’ve only established that buying unit trusts is a sub-optimal strategy compared to owning index funds.

    You need to use your example to prove that owning stocks is just as bad as picking up unit trusts or far worse than having index funds. In the absence of management fees and expenses, your task is daunting because even SPDRs have about an expense fee of 0.1% a year.

    I have never advocated unit trusts in the original article.

    Too bad you are not participating in this conversation anymore. I’ve yet to see justification for that 99% that you’re talking about and readers will mourn the loss of being able to pick the brains of a Singaporean economist.

    Regards

Sorry, the comment form is closed at this time.

 
%d bloggers like this: