Friday, October 31, 2008

Dollar Cost Averaging

I thought I already shared this before but apparently a lot of people thought they knew but yet they DO NOT apply this method correctly to earn profit ...  

Dollar Cost Averaging or Ringgit Kos Purata basically says you should invest the SAME Amount of money Periodically

Just to remind all that in fundamental investment, you Buy Low Sell High

So this is the Key Message :
when you don't know
when is the Lows and
when is the Highs
then you simply invest in
using Dollar Cost Averaging method
( wait for the next part )

Even if we don't know anything, we probably know an interesting market is either going up or down.  

Let's say we invest $1,000 monthly into a dropping market from $10 to $1 in 10 months, we will lost a total of $7,071.03

Do the same in a rising market from $1 to $10 earns $19,289.68

So if you 'think' the chance of market going up and down is 50-50 ( meaning you don't know the market), then you are deciding between losing $7,000 and earning $19,000 from your $10,000 capital.

For some of you who invested before, you would know normally there is not such thing as invest $1,000 monthly.  Most investment vehicles count in units.  Meaning you can buy 200 units every month by "Default" but not the fix amount of money.

Let's see what happened,

1) your capital sum is $11,000 not just $10,000
2) you either lost $9,000 or earn $9,000

so if you think the up and down chancees are 50-50 ie. you don't know the market, then the decision to invest into this particular finance vehicle is still 50-50

( continue from above statements )
is lower risk than simply doing anything
and better than doing Nothing
and better than investing in constant units

Lastly you can further test the scenarios ie.
1) market goes down and then up
2) market goes up and then down

and the numbers tell me that I either lose $2,000 or earns $12,000

Put in your own scenarios that you think is related to you, then sum up all the "potential" returns or lost.  In above spreadsheet, you can see that I have a chance of earning $22,000 even if I don't know the timing and simply invest in $1,000 monthly for 10 months. 

If you are VERY EXCITED about the large numbers then don't be, it is unlikely to have any investment tool that goes from $1 to $10 or $10 to $1 in 10 months.  In practice if you apply Dollar Cost Averaging correctly, you can expect 6-12% from Mutual Fund and 8-15% from Stock Market.

Thursday, October 30, 2008

The Group That Time Forgot

I had planned to write about Nobel Prize in economics and its latest recipient, Paul Krugman, but got distracted and the news got stale. Just a brief comment so I could scratch this one off of my to-do list.

The most telling part of the choice was the formal statement of the Royal Swedish Academy of Sciences explaining the choice. It said, in part:
Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars.
So, the ladies and gentlemen of the Prize Committee who must have been locked up incommunicado in the basement of Ricardo household since the 18th century think that everyone thinks that Japanese are supposed to export rice; Americans, car; Germans, beer and French, cheese. Naturally, Krugman who has “shown” that they all could and do export cars is an outstanding economic mind.


Wednesday, October 29, 2008

Stock vs Gold vs Property

Below I share some historical trends for Stock Market, Gold and Property.  They are not directly correlated but each is good enough to represend some form of global historical trend.  So they are good enough as an overview and for layman entry level comparison.
Stock market
Comparison 1 - 1975 to now

Gold has earned 3.5x
Stock market 8x
Property 10.7x

Comparison 2 - origin to now
Gold 28x ( since 1930 )
Stock 800x  ( since 1944 )
Property  16x ( since 1960 )

normalize above return by the difference in years become
Gold  35.9% 
Stock  1250%
Property   33.33% 

However, stock starts at 1 in 1929 and therefore give too large a gap in above comparison.  So I decide to use 1960 where stock index is at 20.  If I use this 20(1960) instead of 1 (1944 ) for stock, then I get

Gold  35.9% 
Stock  83.33%
Property   33.33% 

Gold Trend in Longer History

Comparison 3 - lowest valley to highest peak

Gold's peak at 1000 at 2007
Property peak at 181 at 1996
Stock dip to 1 in 1984

Gold  40x ( min 1923 max 2007 )
Stock  800x  ( min 1984 max 2008 )
Property  22.6x ( min 1960 max 1996 )

Gold  47.62% 
Stock  2352.94%
Property    62.85% 

Like wise stock's number is too crazy so I use 20 instead of 1 for stock and result this:

Gold  47.62% 
Stock  117.65%
Property    62.85% 

I am not too excited about any of these return rate because past performance does not guarantee future profits.  However, after looking at these graph I am very excited because I think I see some repeated trends in stock market.  It seems QUITE predictable from this graph alone.  However, I cannot figure out any "Patterns" for Gold and Property.  Therefore I am quite sure what I need to do for stock investment, but not the others.


so my final word on this comparison is you should only read this for 'fun' or at most a guide only.  Remember that global trend and all these 'overall' figure does NOT really affect you.  Because you will NEVER buy the whole world.  You will only buy a few stocks or just 1 or 2 properties.  The unique buys you make for yourself determine the REAL profit for your very self.  Global trend does NOT mean you have no chance to out beat it.  

Tuesday, October 28, 2008

What Creates Volatility?

Gillian Tett of the Financial Times is one of the better financial journalists, perhaps the best. She was the first to make heads and tails of the structured investment vehicles before many who should have known better had any idea what an SIV was.

But reporters only report what they see and hear. And that, when it comes to the analysis of financial events, is not sufficient. The outward appearance of events has a driving force that remains hidden from the naked eye.

So there she was in her today’s column, writing about the return of unprecedented volatility which “has left many investors and bankers utterly dazed and confused”. Throughout the article, her focus remained entirely on people: “[The situation] remains a delicate war of investor psychology and computer models.”

The subject of finance is not people. It is capital in circulation. So, how do we explain the volatility if the people are taken out of the explanation?

By way of answer, here are a few quotes from Vol. 1 of Speculative Capital:
We use the term “speculative capital” to refer to capital employed in arbitrage. Such capital is not a single entity. Nor does it have a command and control center. A large number of private fund managers and institutions control various pools of speculative capital. They all have access to the same information. When a profit opportunity opens up or is created, they direct their capital towards the same target. If the British pound, for example, seems vulnerable, hundreds of funds would bet on its devaluation using swaps, forwards, options and futures.

The rush of fund managers to position themselves in a profitable arbitrage situation overshadows the mathematical exactness of the arbitrage, with the result that the target is overshot; the undervalued currency becomes relatively overvalued. So the process is repeated in reverse. As a result, we have the constant ebbs and flows of money directed from one market to another that seeks to arbitrage the spreads and, in doing so, restore “equilibrium” to the markets.

But if the equilibrium is restored, there can be no arbitrage opportunities and speculative capital must sit idle. Idleness brings no profits and speculative capital cannot self-destruct in this way. So it looks for new “inefficiencies” and in doing so, it disturbs the prevailing equilibrium and creates volatility. Volatility is the result of the attempts of speculative capital to restore equilibrium to markets.
That was the theoretical development. As for the evidence from the markets:
The spreading of volatility from one market to another–from foreign exchange to stock market–is the logical consequence of the operation of speculative capital. Speculative capital is born in the currency market. This market is large, liquid, and lends itself easily to arbitraging: buying the stronger currency and selling the weaker one. But no market is constantly turbulent. So speculative capital probes other markets and, finding arbitrage opportunities in them, invades them. In the US, the intrusion of speculative capital into the equities and fixed income markets is a fait accompli, with the result that the volatility in these markets has drastically increased. The New York Times reports on the increased volatility in mid-1997:
The [stock] market acts as if it is confronting storms blowing every which way. One day prices soar; the next day they sink just as fast. And then they lift off again…So far this year [1997], 31 percent of trading days have seen 1 percent moves based on closing figures. If that continues, this could be the most volatile year since 1987.
The Wall Street Journal picks up the same story early in 1998:
Last year [1997], there were 80 trading days during which the Dow rose or fell by more than 1%, up from 18 in 1995 and 43 in 1996. In January [of 1998] alone, 1% price swings were seen on eight trading days, or an average of two of every five trading days.
The trend continues. The same paper reported about the rise in volatility in the last trading month of 1998:
Stock price volatility is getting downright scary…”The sentiment swings in this market are making everybody’s head spin,” says [a technology stock trader]. “It is leading to exceptional volatility. Unprecedented volatility.” … James Stack of InvesTech Research … says that by his calculations, intraday volatility is at its highest level in 65 years.
Why has volatility increased? The Wall Street Journal tries to explain:
While there is a sharp division of opinion on what volatility means for the market’s direction, analysts largely agree on its causes. Topping the list: the quest for new investment ideas … Quick dashes in and out of individual stocks and sectors as fickle investors try out, then discard, new investment ideas has fueled volatility.
“Quick dashes in and out of individual stocks” are the signature activity of speculative capital. But the paper does not know that, so it attributes the problem to “fickle investors.” The tone of the article, furthermore, suggests that the surge in volatility is a passing phenomenon, an anomaly perhaps fueled by a bull market. The issue is further muddled by the frequent nonsensical comments such articles elicit from experts. In the same article, one fund manager dispenses wisdom about the cause of the volatility in the stock market: “Volatility is the price of admission [!] when you buy stocks offering good returns in this environment.”

In the absence of an understanding of why the volatility has increased, decision making becomes increasingly difficult and even seems arbitrary:
When stocks or sectors move in and out of favor in a matter of days, its becomes harder for professional money managers … to cling to their convictions that a stock is a good long-term investment … says … [an] equity strategist: “The fundamentals are very, very hard to understand and analyze, so the market becomes more emotional, and emotion translates into volatility at the micro level.”
The strategist quoted in this story is correct when he observes that an incomprehensible market makes the participants uneasy and emotional, and thus, ultimately, exacerbates the volatility. But the emotional behavior is not the cause of the volatility. Voltaire observed that incantations could indeed kill a flock of sheep if administered with a dose of arsenic. Money managers becoming emotional is the consequence of the operation of speculative capital which creates volatility that money managers do not understand.
These lines were written in 1996-98. A decade later, speculative capital is alive and well, with the credit market as the latest addition to its theater of operations.

The Blog’s Target Audience

A friend with marketing bent pointed out that despite infuriating gaps between postings, the readership of the blog was increasing. He asked who the target audience was.

The target audience is an advertising concept – like “teenager”, for example – devised to help sell products of one kind or another.

This blog has no target audience. Or, rather, everyone is its target audience. It is intended for everyone. If you must, think of it as an intellectual bell. Ask not for whom it tolls, for it tolls for thee.

Malaysia Stock Market - Foreign Fund

Everyone already knows but this data just to assure it - Foreign Fund already leave Malaysia share market, all you need to consider now is if the company you invest in can substain this crisis. 

EPF/KWSP/401K is causing you to lose money because of their own stupidity

sorry I hadn't posted much these few days and I need to earn some extra money to substain this upcoming school holidays :)

Anyway, I receive an email which I have personal experience with.  I think its important for all Malaysian to know too .... and I would guess USA goverment may have done the same.  Good luck with your obama votes :)

Subject: SCAM by KWSP / EPF / 401K

This is another method for KWSP to steal our money!

Remember during Budget 2008 announcement last yr, our Finance Minister (cum PM) announced that in order to assist KWSP members to reduce the burden in housing load repayment, KWSP will allow monthly withdrawal from members' A/C II for the purpose?
Sounds like a nice goodies!
When you apply for the monthly withdrawal, you only need to provide KWSP yr housing loan & instalment details
from yr bank and the bank a/c # you like KWSP to bank the monthly
withdrawal into it. KWSP will approve yr
application based on the available amt in yr A/C II and compute the withdrawal period by dividing the approved amt with the monthly instalment amt. Application process takes about a month and you will receive the monthly payout promptly into yr bank a/c!
Well everything appear to be nice and good. It was indeed a noble plan until you take to close look at yr KWSP Statement!

The withdrawal plan is actually a SCAM!

This is how the KWSP SCAM works.......

Assuming you have RM100,000 in yr A/C II and yr housing loan's monthly instalment is RM2000/mth.
KWSP will approve yr application of withdrawal from yr A/C II of RM100,000 and pay you RM2000/mth for the next 50mths.
Everything appears to be in order BUT.......

What KWSP didn't highlight to you is that when the application was approved, the TOTAL AMT (RM100,000) is removed from yr A/C II! It appears to be transfered to an unknown a/c to effect the monthly payment from therein.

The impact to the member are as follows :-
1. You just lost RM100,000 from yr A/C II. Assuming the KWSP Dividend is 5%, you will lose >RM4,000 in dividend during the 1st year. Based on the above example you will will lose >RM10,000 over the 50 mths period!
2. There is no statement to account for the amt approved vs amt paid, hence you would need to keep the monthly payment voucher to reconcile against the approved amt over the 50mths period to ensure there is no missing amt!

Assuming there are 100,000 members who innocently fell prey to this SCAM, based on the above example, KWSP would have cheated the members of 100,000 X RM10,000 = RM1,000,000,000 (that's RM1 BILLION) over the period!

Furthermore, if you discovered this SCAM early and intend to stop the plan, KWSP would not allow any cancellation of the plan until at least 1 year. That would mean, once the application is approved, based on the above example, you would have lost >RM4,000.
100,000 members would have lost 100,000 X RM4,000 = RM400,000,000 (RM400 MILLION) in One Year!!!

If you're a victim of this KWSP SCAM, would suggest you call yr MP to raise hell in Parliament! (BN MPs won't do it)
For others who have not fallen into this SCAM, pls continue to watch out and alert yr family & friends about this.


Pls spread this message around.

Monday, October 27, 2008

Genuine Insights, Bold Recommendations, Expressed Resolutely

Speaking of T. S. Eliot, he disdains the intellectual vanity, of the kind his Mr. Appolinax exhibits: “There was something he said that I might have challenged.”

Now read this from a commentary by Larry Summers in today’s Financial Times:
In retrospect, the fact that 40 per cent of American corporate profits in 2006 went to the financial sector, and the closely related outcome – a doubling of the share of income going to the top 1 per cent of the population – should have been signs something was amiss.
That doubling of the share of income going to the top 1 per cent of the population could conceivably be a problem – something “amiss”, he says – this ex president of Harvard and ex Treasury secretary has realized only in retrospect.

He then offers his recommendations.
Therefore we need to reform tax incentives that encourage financial risk taking, regulate leverage and prevent government policies that give rise to a toxic combination of privatised gains and socialised losses. This offers the prospect of a prosperity that is more firmly grounded and more inclusive. More fundamentally, short and longer-term imperatives come together with respect to policies that seek to ensure that any future prosperity is inclusive.
On the same page, FT was promoting a special forum in which “several of the world’s most influential economists discuss Lawrence Summer’s regular monthly column.”

At times like this, I miss that nabob of nonsense, Oracle Alan.

Sunday, October 26, 2008

A Market “Walking, Loitering, Hurried”

What kind of a card game is being played if the lower card trumps the higher card?

Low poker, of course. That is an easy one.

What kind of a credit game is being played if subordinated debt trumps senior debt?
The auction that settled figures for the senior and subordinated bonds of Fannie Mae and Freddie Mac, the US government mortgage agencies, has led to widespread confusion and some participants losing out. In both cases the recovery rate for the senior debt – which in real-world defaults get first claim on all assets – came in lower than for the subordinated debt.
Now you are totally confounded and dumbfounded by this because you know that:
  1. With the US government guarantee, there is not supposed to be a “recovery rate” – how much a bond pays on a dollar. That should be par, or 100 cents on a dollar.

  2. The recovery rate for senior debt cannot be lower than the subordinated debt because by definition, senior debt gets paid ahead of subordinated debt.
Yet, there it is, the Financial Times article in black and pink reporting the results of the auction. The paper did not mention it but we will see later that (2) above is the consequence of (1).

In his book “T. S. Eliot”, Craig Raine quotes a line from Eliot – “I met one walking, loitering, hurried” – and explains that Eliot is telling us “gently that things aren’t exactly normal.” Eliot often creates paradoxes in the narrative to “dislocate the language into the meaning” – “savagely still”, for example, in reference to souls who are corroded by inaction.

Markets, too, create “paradoxes” that tell us things aren’t exactly normal. The Dialectical Reason recognizes such paradoxes as the “logical” result of what is taking place in the real world because it can see the complex interplay of the part and the whole. That is what Hegel meant when he said that what is real is logical.

Analytical Reason, by contrast, sees a paradox – characterized by incomprehensibility – precisely because it cannot see the course of the development of the phenomenon it is observing. Analytical Reason is static. Its frame of reference is an inventory, rather than an organization, of knowledge, because it cannot collect the experience of individual events into a synthetic whole. In consequence, when compelled to take action in the position of authority, its actions seems lacking in the “systemic” depth. They seem “disjointed”, “Whack-A-Mole approach”, “moving goals”, and always “one step behind”. The Analytical Reason itself finally throw up its hand in despair.

The events we are witnessing in the financial markets are driven by speculative capital – capital engaged in arbitrage. I discussed the characteristics of this force and the laws of its motion in the preceding volumes of Speculative Capital. In the next several entries, in response to a friend who wants to know the “real reasons of the turmoil”, I will look at the events in the financial markets in light of the Theory of Speculative Capital. You will then see that paradoxes will disappear. The fog will clear. That has been the intent of this blog all along; recall the 10-part Credit Woes series. But that format was too restrictive, too scholastic. I need “space” to develop!

In Masnavi, Rumi begins a story and in the midst of it branches into another story and then yet another story within the second and so on; you would not know digression until you have read Masnavi! Finally he “catches” himself, saying that it is time to return to the original story. He then corrects himself, saying that when did he ever leave the original story? That is Rumi’s way of saying – showing, rather – that everything in the universe is connected, coming together towards the “Totalized Spirit” – the Absolute Spirit in Hegel.

So, if the subsequent entries in the blog do not appear sequential, bear with me. There is a method in the disorder. In them, you will also see a glimpse of what is to come in Vols. 4 and 5 of Speculative Capital.

Friday, October 24, 2008

Case Study : middle income group

This morning I over heard a case study from radio station 988 :
A young man earning $4000-5000 a month. $1000+ pays to house loan, $500+ pays to car loan etc and every month he has a remaining of $500 for saving. His question is what he should do with all his loans. He also has some credit card debt.
The answer given by the expert on radio is :
Use the $500 to clear all credit card debt, then car loan and then only start talking about money earn money.
While the answer given is typical and 'correct' by the standard of Personal Finance Planning, but I would want to add a few points :

1. The way the guy asked the question has a flaw. He deducts all the payment and then only come up with a saving of $500. The correct mentality is to Save First Use Later ( see old post ) If he HAD the Right mentality at the first place, he would most probably not getting into the credit card debt he mentioned. A very small difference made in approach can bring a whole different result, and that is why all I want to emphasize ( and the only thing ) is to setup a System to Automatically do saving for yourself without you having any control over it.

2. The answer given shows one of the common limitations of Finance Consultants. He also said,
Credit card is charging one of the highest interest in the market, NO finance consultant CAN GUARANTEE you ANY FINANCE return of 15% or above. Therefore, you can NEVER get any tool to over take this Credit Card Charges, therefore you HAVE TO settle it ASAP.
Again, first of all above statement is correct and what I am going to say is only an addition to it. What he was referring is FD, Insurance and Mutual Fund would probably NOT ABLE to provide you a return of 15% Consistently. If you refer back my Finance Pyramid, there is a "Stock" or share market on top of the pyramid. I leave it there to break this 15% barrier.

Many finance consultant leaves Stocks out of their portfolio due to its speculative nature and leave those to the stock broker. But
we are in charge of our own life,
and we get any 'tool'
that we can handle
to achieve any target
we want to set,

else there is really no point planning if 15% is the 'proven' limit.

The 2nd thing the finance consultant missed is ... Income. Below is one of the VERY FIRST picture I posted in this blog. This same picture is actually printed on my name card too ( coz I think all the answers are all covered in this simple picture )

Credit Card Debt is something one shouldn't get into at the first place. If you do the ONLY first 2 things I stress everybody to do ( earn an income and save automatically ), you would have a much less chance to get into credit card debt.

If you already get into such debt ...

Actually Ah Long's Debt
is the SAME as Credit Card Debt,
both are charging at 18% a year
and calculated Daily !!

Ok, if you already get into such debt, you should very well realize its a Personal Finance MISTAKE. Most often, the mistake is made because you have a GREED to be satisfied - you wanted to own something first BEFORE you have the ability to own it -

a Personal Finance Mistake is not necessary a Personal Mistake

A mistake like this DOES NOT eat into the "Automatic Saving" system I setup. It actually eats into your income. Basically if you use your future income, then you will have less income in future. Therefore,

If you get into credit card debt,
you MUST increase your Future Income

So other than paying it up, these are the potential solutions too :

1. Dispose the item to reduce debt if appropriate
2. Get a Pay Raise ( if the credit card debt is initially to increase the chance of this, then its a good call isn't it ? )
3. work 2 or multiple jobs
4. Become creative and innovative to earn more ...

In short, don't forget Income is the ENTRY stage into Finance Planning. When all else IN your finance plan can't earn you the 15% to cover up the 18% credit card charges, then you will have to RETURN to your Income and work on IT !!

Like wise if you are one of those who can never increase income, then you should very well know what to do with your scissors and credit cards. And come borrow money from me please, you may as well be my finance slave than others ... isn't it ? :)

Buy Term Invest The Rest

In one of the old post I shared how to best use of your money among insurance, fix deposit and mutual fund ( click to see old post).

Basically it says if bad thing happens within the first 5 years, insurance is the better choice because you get $100,000+ while your FD/Mutual Fund saving is only starting to accumulate at $10,000+. However for the next 10-20 years FD and mutual fund are clearly better choices because they are more flexible and provides better returns, $300,000 and $600,000 respectively.

So the answer is to build your own portfolio !

I went back to insurance company P and asked for a Term Insurance quotation for $100,000 which costs only $313 a year for 5 years. So I minus out $313 from my yearly saving $17,920. On year 1-5, I would only save $17,607. And because I am greedy so I pick mutual fund over Fix Deposit as my saving vehicle.

Wa lah ! If I die within the first 5 years, I will get more than $100,000 which is slightly more than the insurance plan earlier - actual amount would be $ 119,016 even for the 1st year where $100,000 paid out by the Term Insurance, and the rest is from my own saving.

If I survive through the 10-20 years period, I will still have all my saving plus its earned interest !!

Best of BOTH WORLD !! Isn't it ?

This is called
Buy Term Invest The Rest

Wednesday, October 22, 2008

Capital Guaranteed Saving ...

Nowadays, more and more people complains about drop of their investment value.  This would be a good learning experience that you may not be able to take the risk you thought you could ...

A few days ago, I came across this Capital Guaranteed Saving Plan by Prudential called Pru-Retirement something.  May be this kind of plan is suitable for those who cann't stand recent market crashes ...

click on the image to view in bigger size

Basically this example is like this :

1.  You save $500 every month for 20 years.  So you have save a total of $120,000
A - if market drops
2a. If market crashes and your investment value is less than $120,000 then the Guaranteed value is $120,000
3a. This particular plan adds some extra value to the $120,000 so what you get is actually slightly more than what you have saved, ie. $139,200
4a.  As a result, the Minimum you will get back is $580 every month for 20 years !!
B - if market is good
2b. If market is good and your investment value worth more, ie. $230,000 or 6% increase every year.
3b. Calculation is the same except your capital is now higher.
4b. In this case, you will get $1,111 every month for the next 20 years - comparing to your initial saving of $500 only.
The good things about this kind of plan are :

. You will NEVER lose less than what you have put in !
. Better still, you will at least get back slightly more than what you put in !
. In good time, you still get to Earn More with the up trend !

Super Great and Perfect isn't it !?  Well, do your homework, future post will re-look into this kind plan with its pros and cons.

will Injection $ into stocks work ?

Frequently we heard people 'inject' money into stock market to 'support' it.  Sometimes they put in more flowery words like, "we will buy in good businesses at low price.  At one hand, we will earn in long run, and it also increases people confidence, so its double the benefits !"

Will it work ?

Well ... its quite simple really.  If the market turns out to be the bottom when you inject the fund and the market goes upward since then, then it works.

If the market continue to trend down  A F T E R  fund injection, then it doesn't work, does it ? 

The Thing Is ....

Day 4 :  Don't worry ... there is Nothing Wrong with the Market !!
Day 5 :  We will inject 5 billion to the Market !!  Don't worry ....
Day 6 :  People think 5 billion is not enough ...
Day 7 :  Don't worry ... we will inject 10 billions into the Market !!!

Will you worry ?  I wasn't worry initially.  But after hearing all these 'stage plays', now I worry ...

Doesn't Seems Like 
He Knows What The Hell
 He is Getting Into 
At ALL !!

Monday, October 20, 2008

Insurance vs Fix Deposit vs Mutual Fund


I search around and found this, one of the best Endowment Insurance Policy I can find.  

Just a reminder that "Endowment Insurance" is a type of insurance you go for when you are aiming at SAVING !  ( read old post for more info )

Basically this plan says if you save $18,000 for 10 years, you will get $300,000 by the year 20th.

That is about D O U B L E your investment, not to mention the F R E E benefits you get from the insurance side.

There is a GUARANTEE payment of $100,000 to your loved ones should you not live through the period ...

Fix Deposit

If you save the same amount of money every year for 10 years .... you will have $18,547 by the end of 1st year ( assuming 3.5% Fix Deposit rate ).  That alone, is triple of what you get on above plan.  Like wise, every year onward is ALWAYS higher than the insurance plan above.  

Pink graph is Fix Deposit @ 3.5% and Blue graph shows the return from insurance return above (P).

By the end of year 20, both FD@3.5% and Endowment Insurance provide similar returns at $300,000

Mutual Fund

My personal past 15 years of mutual fund return is 8-12%.  So lets says my next 20 years of mutual fund return is at 8% ... 

Yellow graph (return M) shows the potential mutual fund return ...

A whopping of $600,000 return by end of year 20 !!!  That is D O U B L E again for the other $300,000 !!!  By Doing NOTHING but choosing a different finance tool !!

So from the perspective of saving, Mutual Fund and Fix Deposit are clearly better option ...

However ...

Should things don't go as planned and you are no longer able to save ( passed away ), the insurance will pay $100,000 immediately in year 1 comparing to $18,000-$20,000 on the other 2 options.

So from Unexpected Incident point of view, Insurance clearly win over Fix Deposit and Mutual Fund.

At the end, what should you do ?  Answer to be revealed soon but actually has been hinted before ...

Goal ? Just set one ... its better than None

Sometimes back I mentioned one should start saving even without a goal  (old post).  

However, having a goal is still better than having none.

Because the journey is easier
when you think you know
where you are going.

If you really cann't find yourself a compelling goal to pursue for, just set a generic one.  Like you are aiming for $1 million and that could get you ...

1) a good lengthy trip to Mount Himalaya ...
2) build your own winery farm ...
3) shop all over Asia ...
4) etc ...

if you still don't know
just pretend you do
(its called the NLP method)

Thursday, October 16, 2008

Cut Loss, Cut Lost or Cut Loose ?

Many have asked if Cut Loss is within my fundamentals and why I purposely avoid talking about them when I could have.  Well, because that is also another myth about it ... :)

Cut Loss basically refers to a situation where you get on a finance vehicle hoping for X return but turns out a Y loss instead.  Therefore you get out of that vehicle hoping to minimize the loss.

"I would sell when it gains or loss 20%."

The missing thing is "Time".  If you set an expectation without time, its like a dream never comes true.  You will end up letting your emotion makes decisions.

The 2nd major thing is ... what will you do with the money after you cut it loss ?  Says if you are lossing 10% now and may expect to loss another 10% further, but if you get out of that situation and get into another one that loss 20% eventually, its still a terribly bad deal !

If you know where you go Next,
then yes you may get out of the old lane.

Some may says if you just take it out and do nothing with it, 0% loss is better than lossing 10%.  Actually if you really understand the fundamentals of investment, doing nothing is the number 1 biggest mistake.  Doing nothing is actually much worse than lossing in an investment.  You may relate this to how to judge a good fund manager.

When you made a decision to invest into anything, you are actually testing your own belief, knowledge and ability to judge.  If result goes opposite of what you expected, that means you made mistake.  A mistake you made, is a  golden opportunity knocking on your door - either to save you huge amount of money in future, or increase the likelihood to reach your finance goal (conversion ratio, to be shared in later posting). 

Do nothing in investment basically also means learn nothing and therefore reach no where.

Not to forget, the fundamental way to buy into an investment vehicle is as if to start a business yourself. A good business owner does not just close down the business the first moment it lose money. When result goes opposite way, a good business owner will first re-analyse his initial assessment.  If he has done good fundamental assesment before, they should normally still stand firm.  Then he will assess current situation, "is it because the situation has changed and he needs a new assessment ?"  Eventually he will find out exactly why the result goes the other way.  If the cause is also fundamental and continue to exist in that investment vehicle, then yes, cut loss may be required.  If the cause of loss is something out of the business control like a global recession, the you should compare the loss with other similar type of businesses that you didn't invest in.  

A good business will loss less when everybody else are lossing.

So you cut loss when;
1. you realized you have made a mistake in your previous decision, you have learned from it and you will never repeat that mistake.
2. you found out some new information that you can no longer fine tune your investment method to cater for that.
3. you have found another better finance tool and you need more funds.

So if you really read above GOOD reasons to cut loss ... you may realize, cut loss has Nothing to do with LOSES at all !!  You may have to Cut Loss from time to time, no matter if it is earning or lossing.

Cut Lost is like Get Lost or Go Away, Leave me Alone !  Either you have earned enough and really get fed up with it, you just want it to get lost ...

Cut Loose is temporary let it go for a moment knowning that you will come back to it again.

So which route are you taking ?


I mentioned insurance is not in my pyramid but acting as a support pilars to the pyramid I build.  ( read old post for more info )

I categorize insurance into the following ;
1. Term Insurance
2. Whole Life Insurance
3. Endowment Insurance
4. Hybrid
Term Insurance is the most basic type of insurance.  You pay a certain amount of money to the insurance company and in return should something unexpected happen, insurance company will pay you a lump sum of money.

This works base on probability and statistic.  Says the insurance company has a statistic showing that only 0.1% of people age 25 will pass away.  So when a 25 year old guy buy a RM 100,000 insurance for his life, the cost would be RM 100.  Because when 1,000 people buy the same insurance, the company would have collected RM 100,000.  And out of these 1,000 people, 1 people will pass away, so the RM 100,000 is paid out to this unfortunate person.

Whole Life Insurance is a term insurance that has a contractual period up to a very old age, ie. 100.  This age is also determined by the statistic.  ie. if 'most' of the citizen in your country live up to age 82, then insurance will pick an age that is much larger than that age and then call it 'whole life'

Endowment insurance marks the slight deviation from the original meaning of insurance.  Endowment insurance contract period is within the time that you can enjoy the benefit itself.  The main purpose of endowment is provide a safe saving with good return, and along the way, provide free insurance.

endowment in insurance is like FD in bank.  Bank actually earns much more than FD but only promise you a lower return so that they can play safe and earn more.  Likewise, insurnace company earns quite a lot and in turn can 'guarantee' you some form of lower interest return.

The last one is Hybrid.  Which is a new category I added into my Personal Finance not more than 5 years ago.  Basically it can be part Term, part Endowment and part Whole Life.  Most of the time, this also refer to "Link" insurance.  Which is a combination between mutual fund and insurance.

However, I predict that in near future, insurance will also combine with other form of investment vehicle.  So intead of calling it mutual fund insurance, I called it Hybrid.

Dealing with the complicated, confusing and constant changing types of insuranc is rather simple.  

If you are the type of person who love to learn and able to tell the difference of finance tools in this market, then you probably will ignore all kind of hybrid and only buy term or whole life insurance.  

If you are the type of persons who never get a clue about what in the world am I talking about here, then most probably you should just pick one of the hybrid products or endownment.

Wednesday, October 15, 2008

Mutual Fund Interim Report

This is one of the oldest fund I have kept - Public Index Fund from Public Mutual.

This particular one is Interim Report - published 6 months after last annual report.

This parts below shows how much return this fund gives for the past years.  A few highlights are
  • Financial Year Ended 31 Jan
  • Lipper method  
Normally I ignore this part because unless you purchase the fund on 31 Jan, else those return doesn't really mean much to you.  Another use of these numbers are to compare with another fund that also has financial year ended on 31 Jan and also used Lipper method to calculate the return, else these numbers really don't mean much to normal investors.

This part is one of the most popular questions in this blog.

When you have invested into a mutual fund, their interim or annual report would include something like this.  It lists down some of the businesses it invest into.

Here I should also explain that in real life, fund manager has to change the ratio and buy sell stocks quite actively.

That also means they may or may not be able to list down all the stocks they transact.

In below graph, the black line is the fund, the red line is the index the fund compares to.  This is also something that is ambigous and normal investor shouldn't hold too strong on to.

Basically this says, since 2003 this fund has gain 70% to date, 10% more than the index gain.

Again, the pick of 2003 is the key.  If you bought this fund in 2003 then this graph is very relevant.  Else no.  For example, if you draw the same graph using mid 2007 as the starting reference point, then you would get 

So basically if the reference time is relevant to you, then you want to make sure the fund outperform the index in up trend and drop less during down trend ( earlier post talked about that )

This is the part saying who manage this fund.  Unfortunately, for big company it would usually just say the fund manager is a company.  So its quite hard to determine exactly who is the person you should follow.

Sunday, October 12, 2008

What's Wrong with Mutual Fund ?

If these Fund Managers are so Expert, why in the world they do not withdraw from the market before the market crash ?

A well establish mutual fund company normally has a large invesment sum of money to invest with.  Sometimes one mutual fund company alone can have more than all the money traded in the stock market one day.  That also means, a fund manager can put ALL money into a crashing market and still make the market trends up that day.  Like wise, when a fund manager pull out all the money, the market literrally collapse into Nothing left.

So when the goverment grant the license to the mutual fund company, certain limits are imposed too.  In generally there is a limit a fund manager can dispose off their stocks in a day.
So, let's say the limit is $100,000 per day.  And the fund manager has $1 million to dispose off.  It will take 10 days or 2 weeks before that fund manager is totally out of the situation they are trying to stay away from.
But nothing happen overnight !  Whatever the problem is, a good fund manager should have insider news and know things well in advance !  ( well, if not insider news then through other methods, they should have known ... )  That is true, they do know in advance but ...

Your fund manager promised you something ( prospectus ), and that something is usually achieved by putting your money into the market.  So a fund manager cann't simply take out all your money just because he thinks he knows the future.  Says if a fund manager does take out all your money when he predicts a drop.  But then it goes up indeed and you see your fund doesn't perform the up trend, you must have more questions, don't you ?

If all a fund manager does is to put your money into FD ( very safe) and then charges you 5% service charge, does that sound appealing to you ?  

So a Fund Manager must put maximum money into the market as much as he can at any one time.

All these factors combined, these are what you can expect when you invest into a mutual fund :

1. Best Fund Manager : the Fund outperform the market when it goes up and lose less when the market is down.

2. Normal Fund Manager : the Fund goes up together with the market up trend and lose less in down trend.

3. Bad Fund Manager : A fund that does not follow market trends or no activity.

Mutual Fund - service charge

Equity Mutual Fund is a fund that invests into stock market directly, usually either to (1) gain maximum capital appreciation or (2) receive constant dividen payout as an income.

The standard advice 
is to read the prospectus, understand the purpose of the fund before buying it.  Public Mutual is the largest private mutual fund company in Malaysia and this is a sample of prospectus.  All the important stuff are highlighted at the top.

First thing that put people off is the varies charges and fees.  The biggest chunk is Service Charge at about 5%.

Because I put mutual fund in between Fix Deposit and Stocks in my pyramid, I can compare mutual fund with either FD or Stocks.

Mutual Fund vs Fix Deposit

The way I understand bank is they promised me a FD return and then use my money to earn a bigger return.  But bank does not disclose how much their cost is.  So if mutual fund is doing the same as what bank does, and if they disclose 5% as their 'cost', its ok for them to charge me 5% as long as my final return is larger than FD.  

My FD return now is 3%.  So if they charge me 5%, then their fund return should be AT LEAST 8%.  So I browse each and every fund for their past 1 year return from this link.  

Unfortunately a lot of fund shows a huge drop in late May and I don't really know why.  Before I find out why, I also decided I should look for one fund that is as steady as FD and should have a Always Up trend.  ( a new requirment I add after I browse these graphs )

Finally I found one, like below.

So this seems like one mutual fund that I can use to replace my Fix Deposit.  From the chart itself, it seems like despite the current market down turn, its producing 50% return for the past 1 year.  So I would consider this to replace my FD.  

Mutual Fund vs Stocks

My stock invesment is charging me 0.7% each time I have a transaction.  Meaning each time I buy and sell a stock, I am charged 1.4% of its average price.  Mutual fund charges me at 5% which is quite high.  However, if I buy sell 4 stocks, then the total charges I have paid is 5.6%; which is quite equivalent to the charges I paid to mutual fund.  So if I can find one mutual fund that already invest into 4 or more stocks that I am interested in, then its worth while for me to buy that mutual fund, else I will pass.

Like wise, the factor is 4x.  Says if my normal stock investment practice is buy and sell within one year, then the only time I would buy that mutual fund is if I plan to keep that mutual fund more than 4 years.  On the other hand, if I buy sell a stock more than 4 times a year, then it may be worth while to buy the mutual fund and keep for one year instead.

So finally I come up with a formula for myself about mutual fund investment as an alternative to stocks, for my own portfolio :

Basically the formula says, instead of me buying and selling many stocks many times, I may as well leave it for the fund manager to do it.  The 5.5% charges is relatively low IF compare to my large number of transactions.

Like wise, if I am interested in one particular company and plan to buy its stock to keep for life, then I should NOT consider mutual fund at all.

I have 2 sets of stock invesment account, (1) one is long term where I plan to keep them forever, (2) the other is where I 'play' with the speculation using all kind of methods.  Account (1) has nothing to do with mutual fund.  But I use a lot of mutual fund as the 'base' for my Account (2).

In Account (2), one month alone may already have more than 20 stocks transations.  So the 5% charges in mutual fund does not really bother me that much relatively.

I also have many mutual funds before I learn to buy stocks and started my own businesses.  Most of my mutual funds are more than 15 years old.  So 5.5% / 15 years = 0.367% per year.  Agains, doesn't bother me that much, especially when I don't need to do anything about them - a passive generator.

When I was shopping for what mutual funds to buy, I also learn that buying mutual fund means buying an industry.  For example, I know that    - h a l a l -   business in Malaysia is a good business in the sense that they will produce good income regardless, due to varies specific reasons including the unique economy policy.  I personally pursue for absolute freedom in open market so I do not really support those policies.  Hence I really have no interest to learn nor understand those businesses.  As a result I will not be able to buy those stocks with informative decision.  But I do have the 'general' idea that they will earn money despite the market fluctuation.  So Ittikal fund is one of the biggest portion in my portfolio for the past few years.

When I have some GENERAL ideas 
about an industry or a trend 
but I do not have interest
to learn the details
I choose a mutual fund
that matches my GENERAL idea.

And personally I do not mind paying someone 5% to help me check if my general idea is correct or not, for the next 5-10-20 years.

Note :  Not all mutual funds are charging 5.5%.  Some are lower than the others.  You may shop of cheaper fee mutual fund but I don't really recommend that.  Because when a fund manager is using 'lower fee' to attract investors, that also implies that fund manager has 'no confidence' that his portfolio can do better than the other fund managers.  If he is 'not sure' about his return, then most probably he is more speculating than performing fundamental invetments.

Saturday, October 11, 2008

Stock : When to Buy at What Price

This explains how I buy stock, when to buy and at what price.  And why I don't really bother global recession and market fluctuation.  Actually that is not right, I do get very excited during down turn.  Its not often you get this kind of opportunity knocking on your door.

There are a lot of reasons and fundamentals behind this method but here I will just list down the practical steps now.  Explaination to follow in future posts.

Buying a stock should be EXACTLY like starting your own business !

1. find out the historical EPS ( for the past 10 years if available )
2. determine the EPS growth rate from #1
3.  by using this EPS growth rate, forecast to future EPS ( ie.10 years later )
4.  pick a reasonable PE for your stock
5.  use PE from #4 and the future EPS from #3 to calculate the Future stock price
6.  decide a return rate you want to achieve ( ie. 15% )
7.  Backdate the future stock price in #5 to today's price using interest rate in #6
8.  decide a safety margin ( ie. 50% ) and finally you have your target buying price !

There you go, When the stock price is lower than #8, BUY !!

example :
1. EPS is 0.28 to 1.12 in past 10 years
2. so the growth rate is about 15%  ( you can use rule of 72 )
3. 10 years later, the EPS will become 4.48
4.  PE = 10 from magazine/newspaper
5.  stock price = PE x EPS = 10 x 4.48 = 44.80
6.  15% means doubling every 5 years or doubling twice in 10 years
7.  44.80 / 4 = 11.20  ( 11.20 double twice in 10 years becomes 44.80 )
8.  11.20 / 2 = 5.60

So if the stock price goes below 5.60, I will buy.

Finance Big Bang Theory

I have this Big Bang theory about Finance ...

At First, there Was Nothing,
Then there is Everything !

Long long time ago, we exchange goods for a living.  Sometimes I asked for 4 chickens to exchange my 1 bag of rice, but some other times, my friend is only willing to give 3 chickens.  So as times go, more and more people do not like this constant changing of 'price' and they want standardization.  So 'Money' is born.

We look down and there are some stones on the ground.  First we 'define' the chicken as 10 stones, since my bag of rice is 4 chickens then my bag of price is worth 40 stones.  So we started collecting stones instead of keeping too many cows and sheeps at home to represent our wealth.

It was all fine within our own family and friends because we trust each other.  Then some stranger came and just pick up stones from the ground to buy my rice.  Soon I ran out of rice and he has all the rice, so basically he took over my rice business and started to control pricing in my town.

So we need some special way to identify our special stones.  I started marking all the stones that I used to buy and sell things.  The chicken guy did the same.  Soon all sort of marking stones are in the market and guess what ?  A stranger came in and arbituary do some marking on the stone and took over the chicken business.

Then we learn that we have to 'standardize' the marking on the stones and it is too big a task for us because we are already full time producing rice and chicken.  The stranger volunteer, "Since I am able to twist all the systems you guy come up with, apparently I am a smarter guy in this area.  So if you let me come up with a special marking stones for you and everybody use that stones, there will be no problem !"  He ended with a strong .. " Trust me !".

So the first 'modern day money' is born. It is a piece of metal with hard to replicate marking represending the value of the stones we used before - the stranger called it coin.  So all of us including the rice and chicken producers keep our stones in the stranger's house.  For each stone we deposit there, the stranger gives us 100 coins.  Since then our buy and sell activities are better managed.

In case you haven't figured out yet,

the stone is called Gold today
and the stranger's house is called Bank

Our Stones

The Stranger's House

Thursday, October 9, 2008

Personal Finance RISK - another Myth

A very common comment in Personal Finance is this ...

The Higher the Return,
The Higher the Risk !!

I agree with this if I am a general public.  I also like it if I am discussing this in a philosophical class.  But in practical life in Personal Finance, it doesn't help much.  It just tell me not to be greedy.  But it doesn't tell me what to do with my portfolio.  So the myth buster is as below ...
Generally higher return comes with higher risk,
For Those Who Don't Know ANYTHING !!
If you know exactly what you are getting into, has prepared for the worst and expecting the best from it, so ideally there is no risk at all.

For example,

standing expose in high place is dangerous,
especially if you are not used to it.

But high rise workers do that everyday,
they know very well what to do,
and what not to do.

They check all the safety cables,
before going up,
and look for secondary fall place,
before making the next step,
just in case they fall,
they have had enough compensation,
for their own or their loved ones.

Day in day out, they are used to it,
and they are not over confidence,

Its very risky for you,
Its not that risky for them.

Some may claims that the risk is the same to all, just that one has mitigated the risk and another not.  Well, again in practical, if you have already mitigated the risk, the risk is gone and there is no risk anymore - ideally.

Back into the high rise example, if you are an office worker and you think high rise is risky.  So you decided not to go to high rise building.  That is also one way to mitigate risk and there will be NO RISK AT ALL if you never go that place.

So the fundamental about risk is,

The more you learn and know about it,
the less risk it is to you personally !

So yes generally higher return higher risk but you are not a general public, you just need to know what you have to do for youself so that you can achieve higher return without the same high risk in your portfolio.  Thats why its called "Personal" Finance and not General Public Finance :)