Wednesday, December 24, 2008

FREE GIFT : Suggest a new URL for this blog !

I have been writting this blog for a few months now.  I think this blog has enough content in it to deserve a URL at its own.  So whoever read this please suggest a URL name by leaving a comment.  If I pick your URL I will be sending you a book "Top Money Tips for Malaysian" for FREE if your receiving address is in Malaysia, else I will be sharing some of the great ebooks I have with you.  If you already have kclau's book, then I will try my best to come up with another great book for you.  You can leave as many comments as you want.  Some reasoning with your suggested URL is greatly appreciate too !

These are what I have done trying to find a good URL but without success yet.
malaysiaPersonalFinance.com - too long, first time visitors have to type too long. typo etc.

then I tried some myPF.com mtPF.com myMoney etc but all these domains are no longer available.  To see if your suggested domain is still available, you can use whois.ws

then I was hoping to try with some branding like meshio.com, so I was thinking to start with some pronounciation that will not be ambigous.  So I listed down all the possible pronounciation and found out that most of them would still lead to miss-intrepretation like B is like P, D is like T.  Very soon, I was left with only C, F, H and Y.  So add 5 vowels to these 4 letters I have 20 options.  However, quite a lot of these 20s are also ambigous like YE is like YI, YU is like U etc.  So the best matches I can come up with this exercise is haha.com, fafi.com alike.  Most of them are also not available and doesn't really sound good anyway.
So now you can see that I really need your help, its not just a year end give away thing ... please please please ask your friends to come suggest too !

I have tried my best to provide useful content for the past few months, I hope it has been benefitial to some of you.

2008 was an interesting year for me considering the downfall and how I dealt with it ... Merry Christmas to you all and may 2009 be a better year for us all !

Traffic of this blog is shown in below graph : top 90 visitors / day, average 38, recently drops to 20s due to my trips away.


It will need a permanent URL before bringing it to its next height.  I am counting on you ....

just in case above FREE gift does not excite you, there are a few hundred stuff that I trade ... you may also pick from that list once I select your suggestion.  

Monday, December 22, 2008

Anything Goes

Read this December 18 news flash from The American Banker:
A New York private equity firm has agreed to invest $250 million in Flagstar Bancorp, gaining 70% ownership of the thrift company. But the deal’s completion hinges on Flagstar receiving an additional $250 million from the Treasury Department’s Troubled Asset Relief Program.
I do not know the specifics of the transaction. But note the gist of the story. A private firm and the U.S. Treasury are both to invest $250 million in a bank, with the private firm getting 70% of the company.

That is why I called this entry Anything Goes. If you are a U.S. citizen, you can also read it as Your Tax Dollars at Work.

Saturday, December 20, 2008

Experts to the Rescue

Here is why I constantly emphasize the importance of theory:
A complete overhaul of banking regulation is needed in the wake of the global financial crisis, and one of the aims should be to insulate the real economy from the effects of future banking crises, according to some of the world’s top economists ... Robert Solow, who won the 1987 Nobel prize for economics, said: “I would like to see a regulatory system aimed at insulating the real economy from financial innovation in so far as that is possible”.
There you have it. Some of the world’s top economists, including at least one Nobel prize winner, think that the “real economy” can be insulated from banking and finance, and they are proposing to do just that in order to contain the financial crisis – “so far as that is possible,” of course.

One has to go back to the Middle Ages and the views of the priests about the solar system to find so great a chasm between the reality and its false reflection in human mind. But those priests at least did not attempt to correct the course of the heavenly bodies. The high priests of finance, on the other hand, are adamant in curing a crisis about which they know nothing. Between them and the pragmatic men of the Treasury and the Fed, whatever is left of the U.S. financial system is about to receive a new round of experimental shock treatments.

Wednesday, December 17, 2008

Red Indian Winter Stock Market

It was autumn, and the Red Indians asked their new Chief if the winter
was going to be cold or mild. Since he is young and being a Red Indian chief in a

modern society, he couldn't tell what the weather was going to be.

Nevertheless, to be on the safe side, he replied to his Tribe that the yes

winter was indeed going to be cold and that the members of the village
should collect wood to be prepared.

But also being a practical leader, after several days he got an idea.
He went to the phone booth, called the National Weather Service and
asked 'Is the coming winter going to be cold?'

'It looks like this winter is going to be quite cold indeed,'
the weather man Responded.

So the Chief went back to his people and told them to collect even
more wood. A week later, he called the National Weather Service again.
'Is it going to be a very cold winter?'

'Yes,' the man at National Wea ther Service again replied, 'It seems it is
definitely going to be a very cold winter.'

The Chief again went back to his people and ordered them to collect
every scrap of wood they could find. Two weeks later, he called the
National Weather Service again. 'Are you absolutely sure that the
winter is going to be very cold?'

'Absolutely,' The Man replied. 'It's going to be one of the
coldest winters ever.'

'How can you be so sure?' the Chief asked.

The weatherman replied, 'The Red Indians are collecting wood like Crazy.'



This is basically how Stock Markets work ! and how we have so many half-past-six gurus.

Tuesday, December 16, 2008

More on Merton and the “Collapse of the Whole Intellectual Edifice”

A couple of readers wrote to ask how I could blame one man for a such a large-scale financial collapse. Had I not said many times that the subject of finance is capital in circulation and not people? How could that assertion be reconciled with the claim that Merton single-handedly – whether consciously or not – brought about the downfall of the so-called Anglo-American financial system?

Merton’s idea about riskless portfolio earning riskless rate pertained to a definite point in the historical development of finance capital in which, thanks to its continuous growth and eventual dominance of financial markets, it claimed “recognition” on par with the full faith and credit of the U.S. government. Merton was simply the vessel for that expression. He was, you could say, chosen by fate. Like Oedipus, his deed was inflicted upon him rather than committed by him.

(In saying that finance capital claimed recognition on par with the full faith and credit of the U.S. government, I am not creating mysteries. I am talking about the functional form of equality that finance capital had won organizationally almost a century ago in the form of the establishment of the Federal Reserve. University professors perennially point to the appointment of the chairman of the Federal Reserve by the U.S. president as the proof of the “regulation” of the banking by the government. The opposite is true. The process is about elevation of private finance to the inner sanctum of the government. I will have more on this in Vol. 4.)

Sunday, December 14, 2008

Book : Top Money Tips for Malaysians by kclau.com

I am one of the lucky ones who started finance planning even when I was a teenager.  Ofcourse when I put my money into mutual funds at that time, I didn't really know what I was doing.  However, starting early does give me a strong advantage 10-20 years down the road.  I was able to choose the jobs that suits my long term plan;  I was able to change job duties within a multi national company; I was able to change job at my own pase and finally I was able to start my business without too much worry of losing monthly salary income.

However, the curse for this kind of 'smooth path' people is that we tends to stay in the 'well plan' zone too long until we get carry away.  We 'thought' we are all ok and therefore we got relax and start to make some fatal mistake in our personal finance plans.

That is the good thing about reading habit.  I realize my pitfall when I read kclau latest book "Top Money Tips for Malaysians".  There are so many tips in there that I once know but forgot to practise them ...

You can view more details at kclau's blog or buy a copy from me at this link.

Friday, December 12, 2008

western 2009 prediction



Some predictions are made in this link, summary as follow

1. Yahoo! will trade higher in 2009 

2. Sirius XM won't file for bankruptcy 
Losing 95% of its price this year, writer think it will still go on.
3. Tech will lead the market recovery 
writer thinks Apple and Google will make a big Come Back.
4. Chinese stocks will outperform stateside equities 
writer recommends NASDQA:BIDU a google equivalent search engine in China called Baidu

Danger of Technical Analysis

If you know charts, then you probably should know there is a X and Y axis.

In technical charting, X axis is usually Time.  The Time can be month, week, day or even minutes.

Understanding the reasons behind technical chart is tough, but using it is very simple.

For example, chart below has 3 graphs in it.

1.  the top graph show the price info, its called candle stick ( don't worry, will be shared more later )
2.  The below 2 graphs are analysis telling you when to buy and when to sell
3.  when the red line cross above, BUY.  when the red line cross below, SELL.

Now back to the danger part.  Below chart is shown in a 5 minutes X axis.  Both signals are asking you to BUY


However, below is another chart showing exactly the same stock but in 1 minute duration.  In this chart, the signal is telling you to SELL !


Although this may be confusing but even the best Technical Analyst in the market sometimes make mistake forgeting to counter check the X axis and recommend wrongly.

Thursday, December 11, 2008

Technical Analysis vs Fundamentals

I have shared some methods to invest before ...
Those are within the category of fundamental analysis.  Basically you are trying to understand what a business is doing and how it 'may' perform in future.  Fundamentalist is trying to differentiate the big and important factors from the smaller factors or rumors ...
Sometimes even though the fundamental of a business is strong but its stock price may still go down if the demand is suddenly drop while the supply remains the same.  So even a totally rediculous rumor can affect stock price seriously in a particular time, as long as the demand believes it.  As the description of this blog mention, 90% of the people will take silly rumors as truth.

Fundamental also include effect of news.  If a company announces good year end result, its stock price may most probably go up.  However, you may observe that the stock price actually go up even before the announcement is made - its called react before the news.

As you may see now, fundamental analysis is great for long term wealth accumulation from time A to time B.  However, there may be a lot of ups and downs in between.  If you are able to catch the ups and downs in between you may be able to gain more, like wise if you 'guess' wrong, then you may lose more than what long term gain can get you.
You may NOT be able go guess right the lowest and the top points EVERY times, but there is a SYSTEMATIC / Statistical way to identify (1) end of the lowest point and (2) the end of the highest peak.

In other words, you may use Technical Analysis to catch the
(1) after lowest point and
(2) after the peak

The idea is this ... no matter if it is rumor or insider news, it will be reflected on the actual buy and sell price.  That's why Technical Analysis can NEVER catch or predict the actual bottom or peak, but it can usually catch the after effect.

If all these are TRUE, this is what you can do to lower your risk while maintaining your reward.
1.  use fundamental to filter out which stock to buy ( can keep long term )
2.  use technical analysis to 'further' narrowing the 'in' and 'out' timing.

... stay tune ... you are able to reach the 'sure win' arena ...

Tuesday, December 9, 2008

Wiki : Usury

Usury (pronounced /ˈjuːʒəri/, comes from the Medieval Latin usuria, "interest" or "excessive interest", from the Latin usura "interest") originally meant the charging of interest onloans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest. As such, the term is largely derived from Abrahamic religious principles; Riba is the corresponding Islamic term.




I have posted many storiesabout how money turns evil ...

many people may says that capitalism is not good because the rich gets richer ... actually its not the capitalism, its just the way the money is defined.

Again ... its all about a large population of under educated public being abused by a small group of smarter people.

This problem has been known LONG ago and well documented almost in ALL kind of religions ...

Monday, December 8, 2008

“The Collapse of the Whole Intellectual Edifice”

Things were moving at last, the Colonel said; as for himself he was putting every cent he could scrape up, beg or borrow, into options. He even suggested that Ward send him a little money to invest for him, now that he was in a position to risk a stake on the surety of a big turnover; risk wasn’t the word because the whole situation was sewed up in a bag; nothing to do but shake the tree and let the fruit fall into their mouths.
John Dos Passos in 42nd Parallel

You have no doubt noticed the theoretical bent of this blog. I refer to Rumi and T.S. Eliot, share my philosophical musings and write about the descent of man and the philosophers of our time. In the midst of a financial crisis, such seeming detachment from the events in the world of finance from a blog dedicated to finance could seem odd, the kind of stuff that gives Ivory Tower intellectualism a bad name.

But the underlying theory here is both serious and necessary. It is serious because its aim is to drag the reader into the sunlight and open his eyes. It is necessary because the full scope of this crisis can only be understood at a theoretical level; well-thought-of essays and considered opinion pieces would not do. That is another way of saying that the cause of the crisis cannot be given. It must be arrived at.

Nothing illustrates this urgency of theoretical understanding better than the travails of Hank Paulson. After his various plans failed to gain industry support and had to be abandoned or drastically altered, he has become the subject of universal scorn and ridicule, a financial Rumsfeld of sorts, ignorant of the matters of both strategy and tactic.

I am no defender of Paulson or his regulatory cohorts within the federal government. But he stands on a different plane than a bumbling fool like Rumsfeld. Everyone warned Rumsfeld against doing what he was about to do; the end result was so plainly evident. Paulson, on the other hand, received no such advice. The same Financial Times which now calls Paulson to task was the sycophantic promoter of anyone and anything related with the new financial “paradigm” – from Iceland’s “miracle” to Blythe Masters’ genius in inventing credit derivatives. Google them and see for yourself.

Under the circumstances, Paulson’s claim that he knows more than anyone comes across as a bombastic boast. But within the limits of his discourse, the man has a point. The extent of resources available to a U.S. Treasury secretary is too easily forgotten. Setting aside his long experience and extensive industry contacts, Paulson has access to all the public and non-public regulatory data of all the financial institutions in the U.S. as well as the collected wisdom of a legion of analysts, quants, consultants, and past and present officials. But is is not the quantity of knowledge that stands in his way. It is, rather, the quality, the kind of things he knows. If you have the wrong kind of knowledge, adding quantity will only take you further away from the solution.

Many of you must be familiar with Rashomon, Kurosawa’s seminal movie on the meaning of the knowledge. Four witnesses to a crime tell widely contradictory stories of what took place. No one is lying. They all agree on the evidence: a dead body, a dagger, a scarf. Yet they completely contradict one another. At the end, we learn that the narrator of the story, a juror in the trial who was expressing surprise at the contradictory stories, himself got the story wrong. The point of the movie is not so much that people have different points of view; it goes beyond that. Kurosawa, rather, is exploring the relation between the narrative and knowledge: what do we need to know about something so we could say we “know” it?

At heart, that is a question of the incompleteness of the knowledge, a philosophical subject that even pragmatic societies such as the U.S. have recognized in popular adages like “little knowledge is a dangerous thing”. The final word in this regard perhaps comes from Sa’di, Iran’s great 7th century poet/philosopher whose poetry about the brotherhood of man graces the general hall of the UN assembly. In a stanza too succinct and mastery to be translated here, he says that an Indian sword in the hand of a drunken slave – the Indian sword being the sharpest and most lethal, and a drunken slave being the epitome of ignorance and lack of self control – is better than knowledge falling into the hands of the unlearned.

His choice of the word unlearned makes us pause. An unlearned person could come to possession of material things by hard work or accident. But how could he come to possession of knowledge, which, by definition, needs pursuing? How could an unlearned person pursue knowledge, get it and yet, remain unlearned? What gives?

Sa’di, too, is warning about the dangers of “little knowledge”, but in masterfully shifting the focus to the possessor, he is telling us that it is not the insufficiency of the quantity of knowledge per se that is dangerous, but the possessor’s ignorance of the full impact of his knowledge. Such “impact”, you realize, could only be social. Thus, in a roundabout way, Sa’di injects social consideration to knowledge as its necessary component. Without this component, the possessor of knowledge is “unlearned”, no matter how complete his commands of the technical aspects of the knowledge.

The most common, perhaps because the most obvious, example of this genre of danger comes from the world of weaponry – which Sa’di also uses – with the gnome biology and cell engineering in recent years being added to the list. Endless articles have been written about the dangers of man’s technical skills dulling or overwhelming his social sensitivities.

No one has mentioned finance. But that is where we find one of the most fascinating cases of one man’s “little knowledge” – little precisely because the technical skill trumped everything else – creating a global financial catastrophe. The man is Robert Merton. The deed is option valuation.

Merton is not a household name. Even among those familiar with the Black-Scholes model, few know that he is the man behind the breakthrough that led to the creation of the model. That his name is missing from the Black-Scholes is one more irony among many ironies of option valuation that I detailed in Vols. 2 and 3 of Speculative Capital.

Here, I want to focus on the breakthrough.

The Black-Scholes has an imposing form. But that is due to the complexity of modeling the underlying stock price and has nothing to do with the option valuation. Focusing on the options, two critical insights led to the Black-Scholes.

One is that by combining a stock and its options we could create a riskless portfolio.

The other is that a riskless portfolio must earn the riskless rate of return.
.
The first insight came from the practical wisdom of option traders.

The second insight is due to Robert Merton.

Stay with me.

The options traders in the ‘60s had noticed that a properly weighted long-short portfolio of a stock and its call options maintained a constant value no matter what the stock price, as any decrease in the stock price was offset by a corresponding increase in the option price, and vice versa. I quoted one such observant trader in The Enigma of Options, who told the exciting story of his discovery (he uses warrant instead of options):
One evening as I studied my chart of the possible price relationships between the Molybdenum warrant and common stock, I realized that an investment could be made that seemed to ensure tremendous profits whether the common rose dramatically or became worthless. I would win whether the stock went up or down! It looked too good to be true.
What he is describing is this. He has noticed that the price of an at-the-money option changes $.50 for every $1 change in the stock price. Combining 1 share of stock and 2 short options would then create a riskless portfolio, a portfolio whose value remains constant. If, for example, the stock price decreases by $3, each of the short calls will increase by $1.50, for a total of $3, offsetting the loss in the stock price. If, conversely, the stock price increases by $2, each call will lose $1, for a combined loss of $2. Again, the value of the portfolio will remain unchanged.

This practical observation and the attention-grabbing notion of a ‘riskless portfolio’ that followed from it finally put the quest for option valuation on the right track. But one more relation was needed for the puzzle to be solved. Merton provided it by saying that a riskless portfolio must earn the riskless rate of return. It seemed an inspired observation, genius in its simplicity and self-evident logic. It solved the option valuation problem and created an intellectual foundation on which the volume of derivatives increased exponentially year after year.

“The most innocent words are the most pernicious; they’re the ones you have to watch for,” wrote Jean Genet in Our Lady of the Flowers.

Look closely at what Merton is saying. His reasoning seems to have the inevitability of syllogism, of “Men are mortal, John is man, John is mortal” type. Of course a riskless portfolio must earn the riskless rate of return.

But what is riskless rate? We have not yet defined it. From the Enigma:
For an old school economist, the existence of riskless rate would be an embarrassing paradox. It would palpably contradict the idea of risk that he had labored hard to make the centerpiece of Western economic thought as currently taught. If the return of capital were the result of exposure to risk, should not the riskless rate be always “returnless,” i.e., zero? Evidently not, as attested by the myriad of the US Treasuries with very positive yields. But there are few old school economists around and the young lions of finance are merrily ignorant of the fundaments so no embarrassment ensues.

In reality, when the government taps the credit markets to borrow, it must pay the prevailing rate that credit capital – the capital earmarked for lending – demands. Credit capital would naturally want to earn the highest rate. But interest rates in market are set by interaction of various technical and macroeconomic factors, including the creditworthiness of the borrower; the higher the creditworthiness (the lower the possibility of default) the lower the rate that credit capital would accept. As borrower without the risk of default, the US Treasury pays the lowest rate. This is the riskless rate. It is riskless because it is the rate that credit capital chargers the borrower without default risk.
So by saying that a riskless portfolio must earn the riskless rate of return, Merton equated one riskless, defined as the absence of change in value, with another, defined as the absence of default. In doing so, he substituted a concrete thing – the yield of the U.S. Treasuries – for a concept, akin to presenting the picture of a U.S. Treasury security as the definition of the riskless. What would happen if there were no Treasuries, and thus, no “riskless rate”? Option valuation was, after all, a conceptual problem and independent of any particular econo-political parameter. Yet, Merton had introduced precisely one such parameter as a catalyst for solving the problem.

His theoretical sleight of hand “solved” the problem but, precisely because of the way it did it, in ignorance of basic tenets of economics, it introduced the primordial contradiction of the economic system into the option valuation process and, from there, to the new paradigm of finance. The contradiction is there, plain for everyone to see, in the insights that led to the Black-Scholes.

Portfolio is riskless so its value must remain constant.

Portfolio is riskless so it must earn the riskless rate.

The two statements cannot co-exist; they cannot pertain to one and the same portfolio. If a portfolio is riskless because its value is constant, it cannot earn riskless rate, because (in consequence of earned interest) its value would then change.

But this contradiction was not of Merton’s making. He merely uncomprehendingly captured it. To what, then, does this contradiction correspond in real life and what are the consequences of leaving it unresolved in a model that became the foundation of the new financial paradigm?

Imagine a man who has kept $1 million cash in a vault for the past year and now demands to be paid the accrued interest on that sum with the 1-year Treasury rate in effect over the last year. His logic is Merton’s: the money is riskless and must therefore earn the riskless rate of the Treasuries.

Before Merton, we would have laughed at such simple-mindedness and given the man a lecture on fundamentals of finance of which he was so clearly ignorant. We would say:

“Dear friend, what you have in the vault is money, not capital. Money does not increase quantitatively by an iota no matter how long it is tucked away – in a vault or inside a mattress. To expand, it must become capital, possible only if it is thrown into either a production or circulation circuit. But the moment that quantum leap is made, the newly minted capital is subject to market dynamics, meaning that its value cannot stay constant. So you cannot have it both ways; either you keep your money in the vault knowing that it will stay constant (we will say nothing of inflation here) or turn it into capital in the hope of expanding it, but with the knowledge that a part or even all of it might be lost.”

Merton contravened this incontrovertible economic fundamental. His message was that you could have it all. (He was the first yuppie scholar.)

Had he been an economist, working with the industrial capital, the intervening steps in the conversion of money to capital – hiring workers, buying raw materials and machinery – would have alerted him to the limits of such conversion and the qualitative difference of money and capital. But in the realm of finance capital, it seemed that money could turn into capital and grow without limit through the alchemy of derivatives, thanks to the genius of “quants” and rocket scientists who had conceived them.

Merton’s reasoning opened the floodgates of securitization. Assume a stock trading at $100 and a man who had $100 cash in his wallet. This man could buy the stock, sell an at-the-money call option (on the stock) and use the proceeds to buy an at-the-money put. The price of call and put would be equal as per put-call parity. As a result of these transactions, $100 in money would be transformed into riskless capital ($100 worth of stock) – riskless because the long put and short call would keep the value of portfolio constant no matter what happened to the stock price.

And since risk was not the word, one could leverage the position by a factor of 10, or 20, or 30 – multiples that would seem like madness to the traditional credit officers but was the logical extension of the new paradigm that everyone said was like nothing anyone had seen before.

That Merton and his colleagues got options completely wrong is not the main point here. The point is the conditions for the transformation of money into finance capital whose laws and limits Merton’s insight egregiously violated and, in doing so, put the Western financial system into the collision course with them. It is those laws and limits that Paulson does not know. So he bluffs, frequently with the weaponry terminology – a bazooka, a gun, a nuclear option – and sometimes with the declaration of unlimited bailout that as of this writing stands over $7 trillion. He fancies that a gesture of his will create a supernatural disposition that will neutralize objective economic relations.

He is far from the only one in this ignorance. Many times on this blog you have seen the appalling insubstantiality of executives and officials of highest rank. Here is Greenspan, speaking in a recent Congressional panel:
“This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”
What the Maestro does not suspect is that the “modern risk-management paradigm” he so cherished was a colossal misunderstanding from the get-go. It kept on going because it was “making money for everyone”, as the saying goes. But there was never any there there and the collapse was preordained.

I will return with more on the subject. But now you see why the bent of this blog is theoretical. Here, theory is not a diversion, or recreation; a Senate seat to a Caroline Kennedy. It is not a parlor game.

Stay with me.

Fund Managers Are Lousy !

I attended one pursuing session urging us to take their classes on technical stock assesment.  Half way through the following conversation took place :

speaker : You know who uses our services ? ( Technical Chart )
( pause a bit, no one answer, then speaker continue )
speaker : Profesionals ! ... You know who are the pros ?
( then he continued )
speaker : Fund Managers !
student : but .... its hard to say isn't it ?
student : all those mutual funds drop like hell so they are not any better than us.  How to say they are pros ?

The speaker didn't answer well and almost no one signed up with their offers.

Basically its a matter of size.


I used to sell lemonade when I was a boy.  I made about 100-200% profit a day.  Then when I grow up I built a factory to sell lemonade, I would be happy if I can earn 10-15% a year.

Selling lemonade from my garage required $100 capital while a facotry took up $1 million.  

Things get complicated
when size grows !

It is very hard for a $100,000 guy to understand how to handle $2 billions.

BIG guys like mutual fund managers do have some 'limitations' because they are BIG !
1) They cann't simply buy or sell too much funds by law, coz they may 'manipulate' the market at ease
2) They promised investors to keep '80%' of the fund in the market to qualify as 'quity' fund etc.

Sunday, December 7, 2008

emphasize on Automated Saving again

Some of you who has been reading my blog may have seen this picture below many times.


Basically this diagram is almost all about what I preach about in personal finance.

The first thing to do is not to buy insurance nor any investment plans.  The first thing to do is to transfer money from your income into a "Money earn Money" (MeM) acount.

It should have a few unique qualifying features:
1.  It always have a positive interest, no matter how low it gets.
2.  has limited convinience to withdraw money out from this MeM acount.

So it could even be just a normal saving account with low interest.

The 'flow' from Income to MeM should be Automated.  Once setup, you should forget about this MeM account too.  That way this MeM is really passive, definitely accumulating and safe from weak EQ withdrawal.

Friday, December 5, 2008

Another version of Money Crisis theory

OMG, after I posted up how Money Turns Evil ( Part 1 Part 2Part 3 ) , more and more people mentioned it too.  Below video is another version of it - speaking in Chinese.

Famous Successful Business man talk about Finance Crisis using his own theories.



The way he talks may be a bit bore but he actually suggested how to solve today's crisis !!

by having a modern day barter system !! One of the post I drafted but haven't posted up yet.

Money As Debt Video

I have told a long story how Money Turns Evil in the past.  ( Part 1 Part 2 Part 3 )  The last part was actually more like a basic tutorial to forex trading as a matter of fact.

Anyway, I read from Meshio blog about an interesting video - Money As Debt.  The story line may have some similarity to my story but this video is 10 times better !!

A 47-minute animated short by Paul Grignon (via BB) explaining how the monetary system used to be, and how the existing mo
netary system works


 

Have FUN watching !!

Thursday, December 4, 2008

I’m Still Around

My apologies for the longer-than-usual absence. Blame it on an event out of my control and a decision within my control. The event produced three fractured bones in my left arm. The decision pertained to a topic that proved difficult for a blog. I have discussed it in some length in the forthcoming Vol. 4 but had a hard time summarizing it for this space.

The pain in my arm is reduced to a tolerable level. The 3000-word entry is ready. After giving it a once over, I will post it tomorrow.

Thanks for understanding.

Book : Get Your FIRST car FREE !!

I mentioned before the biggest personal finance challenge in Malaysia is to buy car due to its rediculous high taxation (read this old blog here).

However recently I received a book from my sifu's sifu titled "TOP Money TIPS for Malaysians".


Written by KC Lau, one of the pioneers in Malaysia Personal Finance Blogging world !!

... guess what !

This books shows you HOW you can get your FIRST car FOR FREE !!!

It is totally mind blowing !

How could I have NOT thought of it myself !!  I regret so much that by now I already have had own 3 cars.

Why didn't I read this book earlier !  Argh !!!!

Don't make the same mistake I did.  You should go get this book now !  ( Click here to read more about it and BUY IT ! )

One more thing, this FREE CAR tip is only 3 pages out of the whole 208 pages !!  Imagine all the other tips that can help you Save More, Make More and Protect your Money !

Different types of Incomes

One of the famous income categorization is the one by Rich Dad, Poor Dad:



E is when you get paid when you do your job, usually within a fix amount of time or a pre-determined achievement list.  The good thing is your income is relatively consistent.  If you are the 9-5 type worker, even if you go to work and surf the net the whole day, you still get paid that day !!

S is when you think you are doing a business but actually you are not.  Basically you are still selling your time and effort in a linear way.  At the moment you cut down your time or your effort, your income drops accordingly.  The good thing is if you are a very hard working person, you are mostly likely to earn a lot.

B is when you have an idea and you get other people to make that happen.  You are Managing it but you are NOT Doing it.  Significant differences between S and B is that B is operated within a well established "system" while in S, you are the system itself.

I is when you keep your money in FD and every month your money increases.

The problem of Robert's first book 
is that he didn't say 
this Quadrant is a concept, 
NOT a finite categorization.
May be he did but not emphasized enough.

For example, a worker who goes to work everyday, just do whatever asked to do and waiting for month end paycheck falls under E.

However, if another worker is expanding his personal network during his career in order to move up the rank and also join better bigger companies could be considered as S.  He could be treating his employers as his customers, whom he pleases the customers in order to get paid higher and higher.

E worker works from 9 to 5, selling time for money.  S worker may not appear in office all the time but his mind is definitely 24 hours online thinking how to expand his 'business'.  Most CEOs operate their jobs like a Self Employed business.


Beggar who beg 9 to 5 can be considered doing a 'job' as E.  Beggar who analysed what places to be at what time to maximize his 'income' could be a S.  Beggar who gather other beggars to learn his begging strategy while he no longer go out to beg but share a commision of what other beggars have beg could be a B.

So wherever you are whatever you are doing now, you can do it the E way, the S way or B and I ways.  Its a matter of HOW you earn your income, NOT what you do.

One more heads up ... I also think Robert miss out one very important category.  There are a total of 5 income category types, not just 4.

Sunday, November 30, 2008

Save $2400 get back $800 = 33% return ?

Someone asked this in a forum ...
Save RM200 a month for 21 years with 'Guarantee' RM 800 interest a year, payable every 3 years at RM 2,400.  
It sounds like saving RM 2,400 a year can get back RM 800 return GUARANTEE - that is 33% rate  !!  Is it a really a good deal ?
I always see this kind of question being asked, the answer is quite simply ... you have to plug in the number and run the analysis.  ( read about that here )


For above example, if you also take back all your saving of RM 50,400 then add together with your RM 2,400 x 21 / 3 = RM 16, 800.  You are getting a total return of RM 67,200 21 years later.

If you assume a FD interest of 2.65%, you will get back MORE THAN the mentioned return above !!!  

And it is not 33% return but only less than 2.65% return !!


Guess what ?  Today's FD rate is at 3% and most likely to rise for the next few years.


Take this rule of thumb with you ...

any kind of insurance guarantee return policy will provide you slightly less than FD return at that point of time !!

Treat Pocket Money as an Income in PFP

P F P - Personal Finance Planning


Above shows the whole Personal Finance idea I promote since the very beginning of this blog.  ( old blog link )

First you must have some sort of income.  Income can be obtained from business or employment or freely available.  

For example money received by house wife from her husband should be treated as some sort of her income.  A lot of time, 'smart' husband earning income may seems great and all but 80% of such husbands will face a trendmendous down fall in his life.  Employed managers may lose their jobs for 3-5 years during their 30s and 40s.  Self employ business men may lost everything they have and couldn't get back up for 5-10 years during their 40s and 50s.  Its almost a rule of thumb nowadays ...

Only a small fraction of them are able to get back on their feet on half of the time the others do.  Guess what their differences are ?

They have wives who treated their monthly merits as income and perform good finance planning on it.

And when their husband is no longer generating handsome income, basically they come to the rescue.  Instead of tons of hand bags, the smart wife only bought 1 LV etc.

There are many versions ... most of them actually just lend the money out and the husband was able to cross over the tough time and continue to earn the income with more cautious mind.  Some actually take over husband role to earn income.  Some also left their husbands and create a new world of their own.  

They are able to do it because they treated their pocket money as income and perform good finance planning on it.

Tuesday, November 25, 2008

Currency Turns Evil - part 3

Money was created to ease up buy sell transactions, you no longer have to take in 100 chickens just because you want to sell your diamond ring.

Since each country has its own system and seldom cross borders in the past, each of their money is different in unit called currency.

Then, country needs to do business with another country. They have to sychronize the value of their currency, they use gold for that purpose.

Slowly some smart 'finance' guy realizes that the 'impression of Gold' is as good as the real gold to increase value of their currency.  ( actually the impression is much better and easier to acquire than the real gold )

If the value of currency is just like the value of any traded goods - govern by supply and demand, why don't we trade the currency like the way we buy sell stocks ?

F O R E X is borned !


Before I proceed further, let me set the record straight that Forex is one of the most liquidated market which has Total Freedom.  Something I always pursue all finance institutions to go for.  So there are many good things about Forex.  However, there is one aspect that is evil, very evil indeed - and that is the part I am going to talk about here - its room for an unlimited speculative nature.

To Buy or Not To Buy ? JUST SAY IT  ...

So in Forex you buy sell currency like you buy sell anything.  And the item for sale is in the form of currency pair like this GBP/USD  (buying Pound with USD).  Says someone is selling 10 units at USD1.5125 each and you buy all 10 units.  Then the next seller is selling 5 units at USD 1.5200 and you buy all 5 units too, then the next seller is selling 1 unit at USD 1.5205.  So GBP value has just rised from USD 1.5125 to USD 1.5205 because you have bought the 15 units of GBP/USD.

correction :  You said you want to buy those 15 units but you actually don't.

like wise, the seller who said selling you the currency ... guess what ?  He doesn't have any Pound Steering neither !  He just said he want to sell you !

There is no real money involved !  What happened is the seller and the buyer have committed into a contract for the above transaction.  The contract stated a future date for the actual buy sell transaction.  So before the contracted date, you can resell what you have bought but haven't paid yet.

Remember just now you said you want to buy 15 units of 'goods' ?  If you sell them out at your purchased price before the contract expiry date, you will earn and lose Nothing - Zero !  But throughout the process, you have increased the value of GBP at that particular time.

Buy A Million with A Dollar

Another unique thing in Forex is what forex guys normally called it 'leverage'.  Basically you can say you want to buy 3 million of GBP with only USD 1,000 capital.  

Since there is no real currency involved and it is all about what the seller and buyer said, the real profit and lost is the difference of the movement.  For example, changes from USD 1.52 to USD 1.53 is only 1 cent difference.  So you don't have to have USD 1.52 to buy anything.  As long as you have 1 cent, you can say you want to buy the thing but as soon as you make a lost of 1 cent, the system automatically sell your contract out and deduct your 1 cent.

Lastly ...

Sorry if this write up is a bit boring.  This is a topic that cannot easily get agreement and I am trying my very best to express this in my laymen view ...

So by now you can see how you can use a minimum capital to speculate the value of a country's currency at ease - just say it !

Says you are an USA international trader.  You are buying 10,000 phone booths from England.

England quoted you GBP 1,000 each.

Currency Exchange at that time is 1 GBP = 1.50 USD

So your total payment is USD 15 millions

If you know forex very well, you can speculate sell GBP at lower price or buy USD at higher price until 1 GBP = 1.40 USD

If you managed to do that, you have just saved USD 1 million !!  

And your seller has just lost an equivalent amount !! 


This is actually happening every day !  A lot of 3rd world international wholesale businesses do not use forex in their finance management, their business profit range at 5-15%.  And their business contracts are usually renewable in 3 and 6 months and mostly in 1 to 2 years.  Everytime when the currency exchange flutuate more than 15-20%, they will lost all their profit ... no matter how smart they sell, no matter how much they mark up the selling price, no matter how much cost saving they did .... a cunning business counterpart can easily overturn all their effort just by Saying It !!

Guess what ?  There is no such thing as MYR pair in Forex trading.  MYR is so small that one single investor like George Soro can brankup a whole country simply by trading currency.

So the next time you are trading currency ... you are most probably NOT trading to bring up the value of your own country's value.  Instead you are most probably just helping USA and Britain ...

You can earn a lot in Forex no doubt ... but beware at what cost.

Part 1 Part 2 Part 3

Safe less EPF, pay more TAX, You are now still poor and has no saving !

Full article on http://www.malaysiakini.com/news/93624

Da Mook: Let' assume your monthly basic salary is RM4,000.

If your monthly EPF contribution is 11% (RM440), then your taxable income = RM3560, and income tax payable = RM77.

If your monthly EPF contribution is 8% (RM320), then your taxable income = RM3, 680, and income tax payable = RM109.

Conclusion? If you choose to contribute 8%, you will end up paying more income tax to the government which will make the government richer.

Finance Minister Najib Abdul Razak said this measure was meant to boost the slowed down market, but from this example we see that the money does not go into the market.

Instead the money goes directly into the government's pocket through the greater amount of income tax that we will have to pay.

Obviously this measure does not help the market at all. Do we still want t...

Sunday, November 23, 2008

Currency Turns Evil - part 2

At first money is invented to facilitate buy-sell transactions which is the best invention of all time.  Then value of money is tighted to gold as a standard (what I called Big Bang in Finance World).  



But very soon "WAR" becomes a very costly way to acquire gold to print more money.

( but its not costly to launch war against petroleum - another story)



But very soon some smart people figure out that they don't have to follow the standard of gold-money-value.  Afterall, that is just a standard set for more stupid people to follow.  In reality, like everything else, the value of an item is driven by Supply and Demand.

So USA quickly set ONE standard - use US Dollar in inter-country transactions.

Whenever USA take over a country, they set USD as the standard global currency before they leave.  When USA lends money to a country, they set USD as standard there.  Whenever you want to buy and sell with USA, you HAVE to use USD.  These are all fine ... because afterall, its their right to request so.

The sad thing is everyone else followed blindly.

Says country A and B deal with USA using USD which are perfectly fine.  However, because the banking systems in A and B were greatly influenced by USA, all the transactions are FIX (hard coded) to USD.  

Hence when A and B are doing businesses, they use USD as standard even though it is NOT their home currencies.

Imagine you are sending money from Malaysia to China, you cann't use MYR ( or RM ) and you cannot use CNY ( or RMB ), you will have to buy USD using your MYR in order to send the money over.

So whoever you are, wherever you are, if you are transacting globally, you will have to BUY USD.  As mentioned before, when demand rise, value rise.

The increase of this Demand alone allows USA to continously print more money almost forever without the need of gold at all.  Because there is no sign of over hauling our global banking system at all.


Some people are still wondering if World War 3 will occur one day.  What they didn't know is WW3 is way over and USA has conquered world economy many years ago simply by implementing one global standard in currency.

The only smarter people who were able to protect their own territory is Britain.  And some better light shed among all these is the creation of Euro - where the smaller players group together 'trying' to break away with the permanent damage cause by this currency standard WW3 domination.



Up until here, its still history, although recent history.  We cann't blame USA for playing this trick because who wouldn't want to print more money, especially when all I need to do is just to ask the other party to use my standard ?  My standard is better than no standard isn't it ?  

Most of the 3rd world countries were in deep shit that time.  Imagine we didn't even have enough food to eat, how could we be smart enough to say NO to a non-intrusive USD standard ?

The next part is the last part.  Like before we didn't eat enough food, today we don't really get fed enough neither spiritually.  Which is also the part when currency really turns evil .... stay tune ...


Part 1 Part 2 Part 3

Most Cost Effective Insurance in Malaysia

If you are buying insurance for the first time or considering topping up protection to your life, there are some facts you should know :

1. each product ( insurance, FD, Mutual Fund) has its own strength ( see this post )
2. a hybrid product may give the best of both worlds
  2a. some hybrid products are called "Link" products  ( read here for varies type of insurance )
  2b. if you build your own hybrid, its called Buy Term Invest The Rest 

Not by conincident, 2a is usually offered by insurnace companies while 2b is usually offered by mutual fund companies.  Its just a matter of approaching the same purpose from 2 different angles.

If you are in Malaysia, I would like to share with you A number : 328 !!

You can 'buy' a life insurance of MYR 328 with MYR 1 only !!

Therefore a MYR 50,000 Life insurance would cost about MYR 150 / year !!

So whatever extra cost you are paying for your insurance, you should expect them to provide you extra services and / or provide a good investment return.  Else you will need to relook into your portfolio because you are paying too much for your own ignorance.

note : 328 is the number for group term life and TPD protection only, its the most fundamental and simplest element I can find in local insurance industry here.

Stock fee is cheaper than mutual fund

Quite frequently I heard that many people do not buy mutual fund because its 5.5% fee is too high comparing to stock investment where each transaction is charged at 0.42%.







It is no doubt a valid concern. When buying stock, there is only one broker who is earning your commission. While there is a huge team working in your mutual fund, hence cost much more.

However, there is a catch to that concept.

There is a minimum fee charged to each stock buy-sell transaction. Lets say its $40. And you have just purchased a low price stock of a total of $400. You have just paid 10% commission fee for that investment, not 0.42% !!

In order to really enjoy the low fee, you will need to have a larger capital. For example, if the minimum fee is $40 and the normal fee is 0.42%, then each of your buy-sell transaction should be more than $9,524 or else you are paying more than 0.42% charges.

So no matter if you are buying
a 1 cent stock or
a $100 stock,
your minimum buying price
shoud be at least $10,000 !!

So unless you are already transacting stocks above 10K in each transaction, you should still go back to your mutual funds ....

Monday, November 17, 2008

The Consequences of Efficiency (in practice)

Back in September I wrote about the flip side of “efficiency” in capital markets, singling out sec lending as a culprit.

Last month, A.I.G. asked for additional $38 billion in financing on top of the $85 billion it has already received, raising questions, according to the New York Times, “about how a company claiming to be solvent in September could have developed such a big hole by October.”

Here is a crucial part of the answer:
While about $7 billion of its quarterly losses … were connected with the insurance coverage ... a bigger share of the losses, about $18 billion, were incurred because the assets in A.I.G.’s investment portfolio had fallen in value. Of that total amount, losses of a little less than $12 billion were on investments made under A.I.G.’s securities lending program.
To understand what is taking place in the financial markets, on top of the theory, one must also know the nitty-gritty of the ways money is made. Only then theory could be deployed to connect the dots. Theorizing alone would not do.

Wednesday, November 12, 2008

Currency turns evil - part 1

I shared before money is tighted to gold in an old post.  That was the good side of money, here comes the later part ...

... soon earth is seperated politically into countries.  Some countries grows stronger, 2 particular ones are E and U.  They used their strength to conquer other lands and take possess of the gold there.  More gold means they can print more money.  

However in reality you cann't simply conquer other people's land and take away the gold for no reason.  For example, U claims that country I is violating human's right and therefore U is acting as world police to take over country I in order to instill 'fair' human right policies there.  With that as official reason, U can slowly take over the golds they found behind the curtains.  However, it is still Not Easy to move the gold from I to U because the world is watching.  So instead of taking the gold out from I into U, U hide the gold in I but declare that U has more gold and start printing more money in U currency without devaluation.

So does U really "OWN" the gold to justify the extra currency they printed ?  Yes if they still own the land in I.  But when stories like U's gold in I has been stolen etc. would have cause U currency to drop.  When U finally leave I, U would have claimed that they have already 'transfer' the gold back to the land of U, but ofcourse I would claim that the gold is still in the land of I because I wanted to print more currency too.  As you may guess, the same gold has been used twice to justify printing more money.  While no one actually have seen the actual 'gold' ....  



Hence the value of money is NO Longer tighted to real existence of gold but the impression of having gold ...


.... this is only the history because the world No longer welcome war and would not accept the excuse of world police ... part 2 will show how U become even smarter to print more money without gold at all ...


Part 1 Part 2 Part 3

Low Risk High Return ?


Seems like still quite a number of people do not agree that Risk is dealing with something you don't know (read the post about risk here).

So I would like to repeat that yes while Low Risk Low Return and High Return High Risk are TRUE but if you think it that way, you may just settle for "whatever it is, it is !"

For example, you may think you are not a risk taker, therefore you will never get a high return !!

My 'additional' point made to above truth is that, you should still make effort to learn the next risk in your portfolio so that the more you know, the better you can manage that risk until it becomes insignificant compare to its potential return.