Tuesday, June 30, 2009

Pray Tell Me, Are Derivatives Good or Are They Bad?

For the past 30 odd years, derivatives have acted as the barometer of popular sentiment toward markets. In good times, they are praised as ingenious inventions that allow companies to save money in their finances. In bad times, they are scorned as the mysterious devices created to game the system. At all times, they are not understood. The level of discussion never goes beyond the derivatives-are-good/derivatives-are-bad platitudes.

This appalling insubstantiality is in full display again in the latest round of talks about the regulation of markets that, naturally, involves derivatives. In its latest research paper, the Bank of International Settlement likens markets to “pharmaceuticals” and argues that more potent drugs – that would be derivatives – should be made available only by prescription. (The analogy cannot be carried any further because that would imply that only very sick companies could use complex derivatives.) Sage of Omaha is on the record with this gem of a thought that derivatives are the “financial weapons of mass destruction”. George Soros thinks that some derivatives are good and some are bad and should be outlawed, exactly the sort of penetrating analysis one would expect from a money manager who wants to be known as an intellectual and a philosopher.

This past Friday, Floyd Norris of the New York Times picked up the subject. “In the world of derivatives, profit for dealers comes from complexity and secrecy.” After that dramatic lead sentence, he went on to assert that “even when derivatives do allow financial risks to be transferred, that is not always a good thing” because, he quoted a finance professor, derivatives in fact “shift risks from those who understand them a little to those who do not understand them at all.” Norris is among the more perceptive of the business reporters.

Speaking of those who do not understand derivatives at all, here is what I wrote in the opening paragraph of the Foreword to Vol. 2 of Speculative Capital:
Derivatives are the functional form that speculative capital assumes in the market. This form is fundamentally a bet. But like the bodies of the damned in Inferno whose deformity corresponds to the sort of sin they have committed, the particular composition of each derivative corresponds to the sort of opportunities that speculative capital intends to exploit. Arbitrage opportunities are many and varied; hence the confusing array of derivatives and the tortuous legal documentation that must accompany each.
I then added:
The subject of risks of derivatives is a virgin territory. That is not due to the dearth of attempts to exploit it. Quite the contrary; the mountain of material on the subject has few rivals in any discipline. But the territory of concern to us is in the realm of theory and thought, into which unthinking material cannot penetrate no matter what its size.
These lines were written over a decade ago. They remain as valid now as they were then.

Meanwhile, the crisis goes on.

Index Fund or Malaysia Stock Indics ?

You may see in below graphs that in long run, FBM30 and Hijrah are the top 2 performing indexes from 2003 to 2008 ( 5 years ).

Top 10 stocks in Hijrah index ...

Top 10 in FBM100 ...

source : FTSE
Putting all these together, what can you get out of it ?

First of all, if halal investment performance is important to you then the TOP 3 business you can invest in are :
Sime Darby : SIME 4197 $7.10
IOI : IOICORP 1961 $4.70
Telekom : TM 4863 $2.94
else, your ranked choices are :
Public Bank : PBBANK 1295 $9.05
Bumi Commerce Bank : COMMERZ 1023 $9.10
MISC 3816 $8.60
As you may see, any of the stocks above is less than $10 each. 1 lot size in Malaysia stock market is 100 units. So each of your investment transaction amount can be as low as $1,000 each.

Minimum brokerage fee $8 would apply in this case. Adding other fees like stamp duty and clearing fee, it sums up to about 1% of total stock fee. This applies to both buy and sell transactions, totalling one complete trade to 1.84%.

Each stock price may have a different 'tick' size, below table shows their equivalent percentage. You may see the actual percent loss is different in each stock depends on the price you buy. However, we can use 0.5% as the average.

Sum up the 1.84% fee and 0.53% gap loss rounds up to about 2.4%

So in comparison to investing on an index fund which charges 5.5% fee, one can also buy one of the largest business from the same index portfolio for only 2.4%. In both cases, Dollar Cost Averaging of putting $1,000 every month can be applied.

The biggest loop hole in this comparison ofcourse depends on which stock you ended up buying. The largest and best business at the moment may still under-perform as well as out-perform the index itself despite how big a portion this stock occupies the whole index portfolio. The beginning part of this article is an example of 'trying' to pick a business that can out perform the index it is in.

$8 is not always the minimum brokerage fee, other common numbers are $12 and $40. So the brokerage fee alone can be as high as 4%, in which case you shouldn't buy stock as a comparison to buying index fund with only $1,000 in each transaction.

However, in stock investment, you should also know what a MOTS (Minimum Optimized Trading Size) is. If the minimum brokerage fee is $8 or 0.1% then the MOTS is $8,000. So instead of $1,000 now we fix each of our investment amount at $8,000. That way, instead of the 1.84% stock fee, now it becomes 0.46%. This bring the total charges of buying an index stock to less than 1% !! In contrast to the 2.4% in the $1,000 example.


1. In addition to investing in an index fund, you may also buy one of the best stocks from that index portfolio. Espeically when you think you know which one will outperform the index itself. Doing so may help you save 50% of investment cost. ie. Apply Buy-Sell technique in this stock is better than doing so in the fund.

2. Investing in stock market would require a larger capital to optimize your strategy and investment positions.

Monday, June 29, 2009

Guest Post : Property as Passive Income

This is a guest post by Boon Ping. He is showing how one can turn property investment into long term passive income generator. This is actually a very common methods used in Australia, one of the world best property investment country. Altough recent down turn did affect Australia as well, but nevertheless still an area very active in this respect.

Do raise questions if you have any doubts in the comments area.

When we start in 2009, we put in $100K, buying an investment property at $500K with rental $25K per annum with loan amount $400K. Every year, we top up the loan based on its new market value to release equity(look at the Equity Released column on how much we get each year). We use the equity to cover any shorfall in mortgage repayment and also fund our income lifestyle. You see the equity balance keep increasing even though we keep spending.

You put in $100K, after 10 years you got $637K, 6x ROI. Remember this equity is tax free. What will you get after 10 years if you put in $100K into mutual fund? How much is left after tax?

Even we don't top up the loan each year, means the loan remain at $400K, the increase in rental is still sufficient to cover everything at the end, but this is not the strategy but just as worst case scenario.

This is with 1 property, what if you have 5, 10, etc.....

Basically the summary is in the excel file, noted that it's really a brief summary.

1) You start investing in a property worth $500K in 2009
2) Average annual capital growth = 10%
3) Average interest rate = 8.25%
4) Average inflation = 3%
5) Loan amount = 80% of market => Starting cost = $100K

Columns Definition:
Year => You know what it means
Value => Market value at that particular year
Original Loan => Loan amount when you first purchased the investment in 2009
Interest => Interest payable per annum based on ORIGINAL loan amount, ie loan amount x interest rate
Surplus => Rental - Interest - Maintenance
Equity => Different between current market value with ORIGINAL loan amount
New Loan => Loan amount based on 80% of the current market value
Equity Released => Different between current market value with NEW loan amount
Interest on New Loan = Interest payable per annum based on NEW loan amount
Maintenance => How much normally it need for maintenaning the property, eg council rates, management fee, repair, etc, 1% normally
Rental => Normally it's average 5% of the market value
Shortfall => How much you need to come out of own pocket money to pay for interest, maintenance after rental
Income => This is the passive income I am taking about, the income you need for living, spend, etc, increase each year
Total Spent Equity => How much equity that you spent
Equity Balance => Different between equity released and spent

I believe you sure got questions, feel free to fire back.

Sunday, June 28, 2009

the Khong and Khong ... the future mutual fund service provider ...

Malaysia is a small developing country. Personal Finance is a very small topic here. There are some people selling insurances, less in mutual fund. Almost noone to talk purely on Personal Finance without touching on what products to sell.

So in a land of not many choices, it is NOT easy to find talent or people with genuine interest. If by chance we meet some, it is our duties to share and spread despite any personal differences.

Taxsaya and Wangtool were mentioned before in software arena but today's story is the Khongs.

Khong and Khong ( not their real business name, just the way I call them here ), is a Father and Son team. Father Tony has been in Mutual Fund industry since the beginning of mutual fund in Malaysia. His experience, contacts and network is unspeakable influential. Son Jason is a handsome young man dedicated to doing what he loves.

What caught my interest is the chemistry within this team. Although older with experience, Tony is not stubborn when it comes to implementation where Jason has the competitive edge. And although young and energitic, Jason is able to iron out some impractical fancy ideas while setting the right priority on what to do first. Truly a scenario where legacy experience is re-maximized and applied in today's web solution for everybody's benefits.

Within a short 15 minutes random chats, Tony was able to pick out some very small ideas that could be useful for his project, shared it with Jason and thats it ! Another idea to expand market has just been initiated!

Because of Tony's experience, most of the Khongs services are provided in relation to mutual funds. They have ;

1. fundprice.my : a widget site to show the most recent fund prices from all companies by popularity. There is also a small graph next to the price showing the latest trend of the price movement, which I find rather interesting. You can also use their service for FREE and put this widget on your own web site. The Best Rate widget created by MalPF is inspired by fundprice.my

2. If you are one of those who have been buying many mutual funds from different companies, you will appreciate SingalInvest.com. Very often agents from one company always over emphasize their own fund performance while even discredit other companies with the hope you will put more money with them. All these bias talks actually make you very hard to compare the funds performance from one company to another. This is where SignalInvest.com comes to handy. You can track all funds from all companies yourself.

3. The most successful venture for Khongs does not come from above two. Remember Father Tony was an agency manager himself before ? He had to manage so many investors until it is almost impossible to do it manually. So Jason built a solution for him. After being tested in real life for real business for many many years, the solution is now also available to all other agency managers too.

invest.com.my is a solution for agent who has a large pool of investors to manage. Unlike solution provided by the fund manager's company which only track its own funds, invest.com.my can track ALL funds. Its an added advantage for agent to help his client to track all the client's funds, walk the extra miles so to speak.

Actually I haven't used any of these systems in depth yet. As mentioned in the beginning of this article, I am not here to promote their services. I am just sharing that I met someones who are genuine to provide useful services to mutual fund industry.

Not all of what they have is useful to you now but if you have something in mind please do share with them, I am quite sure they will value your input. And if anyone can help implement a solution for you, its this team !

I truly believe they can go far looking at their experience, passion and genuine interest to help.


Here in below showing their widget ...

What Michael Jackson has contributed to MalPF ?

The concepts that MalPF preaches which were influenced greatly by Michael Jackson ...

In the past 27 years, MJ has earned 120 billions. At the time he passed away, he left 12 billions while carrying a 14 billions debt. Resulting a net of owing 2 billions debt.

If even 120 billions is not enough to let one person simply spend as he wishes, do you still think getting rich is the key solution to TRUE financial freedom ?

But wait, guess what saves Michael's finance status ?

The change of his living status ultimately update his royalty tax status as well. Just the past few days alone may have already gathered more than 2 billions, not to mentioned an estimated collection of 100 billions in time to come.

Can you see the differences between active and passive income yet ?

source : 988 Radio

Saturday, June 27, 2009

Mutual Fund, Buy-Sell or Buy-Keep ?

There are mainly 2 different schools in mutual fund believers.

1. Apply Dollar Cost Averaging, (DCA) put in money consistently for a long long time. Never take it out until you die, retire or you initially planned to. Lets call this Buy-Keep technique.

2. Buy Low Sell High, when market is bad, buy more, when market is good, sell them to take profit then buy again when market is low again. This way you maximize your return, the more you roll the bigger you get. Lets call this Buy-Sell technique.
There may be some simple answers : (a) Its really a personal preference; (b) If you know DCA you use DCA, if you know the market, you use Buy-Sell techniques. But at the end of this article, there may be a distinctive answer NO MATTER if you have a preference or understand anything on DCA and the market.
DCA is boring. All it says is you save a FIX amount of money PERIODICALLY. It doesn't tell you when you can take profit, when to withdraw. It doesn't care what the market is doing now. It just say save, save save ...

The good thing about DCA is it is simple. You just need to know (1) the amount and (2) the period. And both of these parameters are 100% under your control. You decide the amount and you decide the period. Another good thing about DCA is it is usually 'cheaper' - as low as $50 or $100 for each transaction.

The good side of DCA's simplicity can also be viewed as its disadvantage. Simple may also be viewed as lack of abundance, or in this case, ignorant. Admit it, its kind of stupid to think that if I want to earn money, all I need to do is to decide the amount and period !? Having said that, DCA is not really easy to implement neither. Simple concept is NOT always Easy to execute persistently. Unfortunately This has been statistically proven.

The good stuff about Buy-Sell technique is its exciting. You may read news, find info, analyse finance data or even play with charts in order to know the up down of the market. You may even be very well verse in some particular industries that you have secretive insider knowledge. Either ways, it is exciting. You may be able to gain big profit when your decisions are right.

The unhappy moments of Buy-Sell technique is when your intrepretation of the market is wrong. Or may be you are still right, just that the market goes the other way. It could be big guys play you out, natural disaster or simply that you thought you knew but actually you didn't. On this method, you will need to spend some effort to analyse the 'timing'. You need to know when to buy and you need to know when to sell. If you spend too much time on the timing, it may be disqualified as a passive income generator afterall.

If you are reading sequentialy, there may not be any apparent answer yet. It still seems like a preference issue.

Lets look at the risk-reward of both techniques. In long run, DCA seems like to be able to cushion the risk, but it would also provide lower return. So relatively, it seems like a lower risk lower return. Buy-Sell on the other hand is very investor dependant and therefore high risk high return.

Athough a weird dude run some numbers and said that in DCA, when you lose, you lose less and when you win, you win more. But in this context, Buy-Sell technique would still provide higher return than DCA while carrying more risk. Buy-Sell technique can also claims that the longer one practise it, the more experience one will gain and therefore, the longer it is the higher chance one may win. ( hardly a truth neither )

Ok, by now can you see any distinctive answer yet ? If not, then we will have to run some numbers again ...

Says you use DCA method and put in $1,000 a month for 5 years. You would have put in $60,000 in total. If you are paying 5% charges, the total fee you have paid is $3,000 through out the 5 years period.

On the other technique, lets say you buy-sell twice a year, that would be 10 times in 5 years. Assuming the average of each transaction amount is the same as your initial capital, $60,000. The total fee you have paid would be $15,000. Equivalent to 25% of your initial capital. Comparing to 5% from DCA method, this method is disadvantage by 20%, not in practice, but in strategy.

So if out of the 10 times you buy and sell, your total lost-win ratio is 50-50, then you would most probably ended up with performing 20% lower than DCA method ( not really, read on ). In other words, in order to eliminate this potential strategy short fall, your lost-win ratio should be at least 40-60 in order to break even. ( Conceptually, not exact by numbers because other parameters are needed for full calculation ).

Another way to put it, if you earn the SAME return in both techniques and you have a net profit of $1 in DCA, Buy-Sell technique would have given you $0.80 only.

If we go back to the fundamental in mutual fund is that we pay HIGH fee for professional services. If after paying them such a HIGH fee, you turn around making your own calls. It would be equivalent to wasting all the HIGH fee you pay them at the first place, wouldn't it be ?

No doubt Buy-Sell technique is a good method but why would you ever want to pay 5-6% fee comparing to other tools that charges less than 1% and yet allow you to buy sell much easier ?

So no matter if you have a preference between Buy-Sell vs Buy-Keep, no matter if you really understand DCA, no matter if you know the market, you should NEVER apply Buy-Sell techniques in mutual fund.

If you still insist to Buy-Sell mutual fund, then please understand this formula ....

The only scenario where Buy-Sell mutual fund is NOT strategically disadvantage is when you found a particular fund that already has a large number of stocks that you planned to invest into anyway. In that case, there is a chance that the 5-6% high fee is average down by the number of stocks until it is even LOWER than the stock invetment fees.

Mutual Fund is the highest return passive finance tool

Mutual fund is one of the personal finance vehicles that can provide us highest return with managed risk and yet do NOT require us to really know much about it.

According to malpf's wealth pyramid, Mutual Fund is at the top part of the pyramid, only below Shares or stock investment. However, the distinct difference between mutual fund and stocks is that stock would require you to REALLY learn 'something' about it before you can "consistently" gain from it. While in mutual fund, you can still gain from it no matter if you know or don't know much about it, almost like a Fix Deposit (well, not exactly).

Basically when you put your hard earn money into mutual fund, you are 'trusting' the fund manager who is certified as profession by your country, will help you maximize return for you. Although such certification could be questionable, but the chances to go wrong is way less than those who are NOT certified.

The key component in a successful company is the boss, the key to a stock is its CEO so the key to a mutual fund is its fund manger. It has been emphasized before that you should follow the fund manager, not the fund itself.

There are only a few key components when investing in mutual fund;

1. Fund Manager : who make the decisions for this fund, have they been performing well ?
2. Objective of the fund : what this fund will and can invest into ?

So if the fund manager or the company is 'somewhat' reputable and the fund's objective matches your own personal view point, you can rest assure to put your money into that fund.

Not as easy as Fix Deposit where you don't need to worry about above 2 questions but 8-12% potential return (mutual fund) is very much higher than 2-5% return (FD). So the effort needed could still be considered low, while the return could be high and continous - as a passive income.

Even if you do not know the fund manager NOR the objective of a fund when you invest into it, it is still NOT as bad as in stocks or businesses. When the right strategies are applied, what you have got yourself into is just lower return as the price of ignorance.

Having said that, its not a totally worry free finance vehicle. These are the common problems of mutual funds which are valid;

1. Expensive or High Fee Charges .... 5.5% is charged when you invest into equity mutual fund, as compare to stock's fee at 0.7% and Fix Deposit at 0% or NO charges. ( read here for comparisons of mutual fund with FD and stocks , compare mutual fund and stock's fee)

3. Unit price can still go down as well as up, so the so called 12% return may not be realized after all.

... and many more ...

There are also many different views on mutual funds ...

1. People who want to get rich, had experience in stocks or properties usually distrust on mutual fund.

2. Some active mutual fund investors buy and sell as often as they can, "keeping the fund will NOT earn us anything", they think.


However, ALL issues raised on mutual fund can be settled with only TWO strategies ...

1. To buy or NOT to buy

... more will or may be posted on each of the concern above ....

Other related articles

Tuesday, June 23, 2009

KLSE:KNM 090623

Stock market is exciting again ... :)

Observe below that on 8 June, all the big guys are dumping KNM ... guess what ?

8 June also marks the END of KNM up trend which has been going up since March. Then the trend finally broke the support line on 15 June and trumbling down. Why do you think they bulk sell on that day ?

The next support line is 0.75 as shown above supporting by 7, 18 and 22 May. This support line is actually touched TODAY at 11am ( see below ) and instead of breaking it, it bounced back all the way to 0.825, that is 10% jump in a day.

Because of this sudden 10% jump, Stochastic 14-3-3 shows a Buy signal by EOD. The signal will be stronger if it also cross above the 20% line tomorrow.

MACD 26-12 however did not react. Half day rebounce does NOT really show a True rebounce. So it may take a few more up days to see effect in MACD.

On the other hand, if 0.75 is really broken, the next support line seems to be at 0.55 which is a 27% drop.

The ceiling is 0.95, also a 27% raise. A 50-50 win-lose ration is kind of a 'good bet' for speculators, thats why strong rebounce is observed today at 0.75

Speculation wise, what to do now ?

bought some today : Keep and wait for 0.95 ceiling, but also keep a trailing profit at -3%.
haven't bought yet: You still can get in below 0.84 for this short term speculation

Long term investment wise, don't forget KNM is worth buying below MYR 1.10 and it should give you 15% compound return for the next 10 years where its price will hit above MYR 2.00 during next10 years period.

KNM is one of the very few financially very sound businesses but with a lot of fishy smell ( see 1st paragraph above ). Its one of the few golden reference points if a financially sound business can make it or will it flop like some developed country's business. However, as long as Petroleum is in demand, I don't forsee KNM turns into Oilcorp in any near future.

Monday, June 22, 2009

who can challenge my Will and what I can do about it?

Writting a Will conceptually makes a person to think about how to allocate his wealth. It is also commonly thought that a Will can speed up the process of handling down the estates faster. Malpf actually teaches that Will is NOT the ONLY, NOR the Best solution in this regard. However, writting a Will is still one of the Easiest ways on this regard due to vast availability of market service providers and the direct implication of Will. ie. you don't need to take a class to learn what a Will is for.

Also because it is easy to understand, many people may have some miss-conceptions on it too. Some may think once you have a Will, your estates are Guaranteed to be distributed in the way you planned for. At least that is what the estate planners market talk about. But in real life after you are dead, your 'plan' can still be challenged! Below shares a couple of common scenarios when a Will can be challenged with high success rate;

1. If your family members have reasons to believe that you didn't have a clear mind (sound mind) or were forced (pressure or duress) into making a Will, they can appeal to disqualify your Will. Family members include those who are beneficiary and those who are not. So if you are setting up a Will in a hospital, it is best you get your doctor to be one of the Witness who can later certify your sanity at the time the Will is made.

2. If you didn't allocate anything to your dependents especially spouse, single daugher, retard or ill child to take care of their daily living needs, your Will can be challenged. If you intend NOT to give ANYTHING, specify clearly your reasons in your Will. The reasons will be used by the judge to determine if the challenges will be accepted as a court case. There is NO simple full proof Reasons for this arrangement, you may need to prepare proof and get a proper lawyer to draft using sensitive terms but the challengers can still find better lawyers to find loop holes in your reasoning. If you can have an apparent reason, that is good. Else just allocate Simple Living Needs to them. Challenging un-adequote is harder than leaving nothing to them.

Other than challenging your Will, one can also raise a dispute by claiming your Will is NOT the latest Will. Since each New Will Voids all Old Wills, authentication checks will be performed upon the so called 'New' Will.

A will written by under age 18 automatically invalid the Will.

If the witness did not actually see the Will being signed, invalid! (attestation clause)

Challenges will NOT void your Will automatically. When someone raises an issue on your Will, the judge will need to consider it. So your Will may still get executed eventually anyway but it is almost certain that the process will be delay.

My left over for my Legacy ...

Related articles
Write your own Will forFREE ( coming in future )
Trust - better than Will ( coming in future )

Sunday, June 21, 2009

An Excerpt from Vol. 4: A Primer on Bond Mathematics (2 of 2)

In its original form, the equation FV = PV (1 + i) assumes nothing. It merely takes the facts of the transaction – $100 lent at 4% for one year, in our example – and calculates how much money is due to the end of the term. Of course, the lender, like all lenders, assumed that he would be paid back in full, otherwise he would not grant the loan. But that is the lender’s assumption and does not affect the equation. Even if the borrower defaults, the validity of the relation would stand, as it only calculates what should be due to the lender.

Things change when we solve the equation for the present value, PV:

PV = FV/(1 + i)

Mathematically, all we did here was to rearrange the equation, a simple operation familiar to 6th graders. But that technical operation shifted the focus to the present value.

This emphasis and the name “present value” would confuse our borrower and lender. “What do you mean by the ‘present value’ of the loan?,” they would demand to know.

– “The present value is the current value of the loan: how much it is worth today.”

– “What do you mean by the ‘worth’ of the loan”?

–“That is how much the loan is worth! How can we say it? How much it cost the lender to finance the loan”

–“That is $100. It is the loan’s principal. Why do you call it the present value?”

But the present value is not the same as the principal. The new vocabulary is telling us that we are no longer in the private world of borrowing and lending between two individuals. Rather, we have entered the world of securities and markets. The relation PV = FV/(1+ i) expresses relations in the markets and presupposes them. Only then the concept of present value becomes meaningful.

To presuppose markets is to presuppose buyers and sellers. The new form of Eq. (1) assumes that when the creditor takes his IOU to markets, he will find Moneybag waiting for him, ready to buy the note at its “fair value”.

What happens if there are no buyers?

To answer that question, we must ask why and under what conditions would there be no buyers?

There could be two reasons; one particular, the other, general.

The particular reason has to do with the perceived “credit risk” of the individual security, credit risk being the risk that the borrower will fail to pay back the loan and interest on the due date. If there are concerns about our borrower’s ability to pay back the loan, Moneybag, like other potential buyers, will stay away. No one comes to market to suffer a loss, and with many securities to choose from, there is no reason to risk one’s capital on a risky bet.

Our creditor would react to this situation the only way sellers all over the world react when the demand for what they are selling softens: by discounting the price. Instead of asking $100, which is the note’s original “fair price”, he marks it down and offers it at say, $98.

In itself, this act of discounting is unremarkable. But something interesting happens on the technical side, when we substitute the new price in the PV equation. With the future value unchanged at $104 – it is the defining characteristic of the bond and cannot be altered – the one variable that must change is the rate i:

PV = FV/(1 +i)

98 = 104/(1+i), or:

i = 6.1%

Technically, this was expected. In equation FV = PV (1 + i), the bond price (PV) and interest rate i are inversely related. If rate increases, the price will decrease. Changing the order, it stands to reason that if price decreases, the rate will increase. This is no different than saying that if the area of the rectangle remains constant and its length decreases, then its width must increase.

Meanwhile, we have said nothing about interest rates in general. That is another way of saying that we assumed they remained unchanged. The increase in rate is therefore something specific to our particular security. That something is the borrower’s potentially deteriorating finances.

What is this rate? That is, what does 6.1% a year correspond to, or represent?

In the nomenclature of modern finance it means that if the borrower were to ask for additional loans, he would not be able to secure it at 4% and would have to pay 6.1%.

This conclusion is counter intuitive. Even primitive societies treat their vulnerable members with extra care. Certainly in the liberal democratic societies we are expected to see senior citizens, for example, on account of their reduced income, receive special discounts for a wide range of social and private services from transportation to movies. “Give me a break” is the cry of the hurt and vulnerable that demands a more lenient treatment. Obama administration’s Helping Families Save Their Homes Act fell squarely into this category before it was gutted out by the lobbyists.

In the case of the financially vulnerable, though, the fundamental relation of the bond mathematics dictates the opposite: if a borrower has trouble meeting his obligation, then interest rates on him must rise.

Such a “remedy” at once reveals the viewpoint of Eq. (1), which is that of finance capital. Far from being an abstract, neutral relation expressing a general truth, Eq. (1) expresses the power relation in a social structure in which finance capital dominates.

Under these conditions, the well being or survival of individual borrowers is not of concern – not because finance capital has “no heart” but because such matters are irrelevant. “So says the bond,” finance capital’s spokesman, Shylock, declares, further demanding that the judge second his view: “Doth it not, noble judge?” And when the judge asks him to bring a surgeon to attend Antonio's wounds lest he bleed to death in consequence of giving a pound of flesh, Shylock inquires: “Is it so nominated in the bond?” Therein lies the basis of the contract law which is the centerpiece of the Anglo-Saxon jurisprudence. All the learned erudition the law scholars at Yale and Harvard and the pompous musings of the U.S. Supreme Court judges on the subject of contract law never go beyond the self-serving utterances of this usurer.

As finance capital tightens its grip on the economy, its viewpoint is presented as a universal truth: the less credit-worthy the borrower, the higher the interest rate he must pay. Michael Milken’s junk bond operation in the 1980s was based on this idea. A straight line connects him to the recent sub-prime mortgage fiasco.

(A reader in the comment section asked whether interest rate is always positive. That, too, is the question that finance capital floats. Setting aside some technical exceptions such as when a security “goes special” in the repo market, the interest rate is always positive in the sense that the lender will always charge the borrower; a negative interest rate means that a lender will pay you interest to borrow his money. This is prima facie absurd. However, if the rate is 4% and inflation is running at 5%, the lender presumably loses 1% when lending. It is in that sense that the interest rate for him is negative. That, needless to say, is also the viewpoint of finance capital.)

The subject of the borrower’s deteriorating finances has been extensively researched in finance. The borrower’s probability of default (PD) and the lender’s exposure at default (EAD) and his loss given default (LGD) are extensively studied. Google these terms to see what I mean.

But then there is the general case of why there might not be any buyers in the market. In the aftermath of the Lehman bankruptcy in September 2008, the commercial paper market completely shut down.

Under this condition, no security, regardless of the financial health of the issuer or borrower, would find a buyer. The creditors holding the IOUs would cry in frustration: “But this security of mine is absolutely guaranteed to pay back $104 at maturity.” To which the market would reply by quoting the oft quoted line from The Godfather: It’s not personal Sonny!

Modern finance has nothing to offer on this topic. You will sooner find Taleban mullahs writing about distilling single malt whiskey than finance scholars of the Western liberal democracies writing about this subject – and for a good reason. The main pillar of modern finance, Equation (1), does not lend itself to even considering the question of the absence of buyers. Why there would be no buyers, i.e., why markets would break down, is something completely outside the realm of its consideration. In fact, the entire theoretical edifice of modern finance and economics is based on the assumption that every seller brings his own buyer to the market, a preposterous assumption that is refuted thousands of times a day every time a commercial is aired, an advertisement is posted, a sales call is made and a price is discounted. So in the aftermath of Lehman bankruptcy, when the CP market shut down, all the best and the brightest of finance in business and academia could offer was that buyers had “gone on strike”!

Why and under what condition buyers would disappear en masse from a market is the subject of Vol. 4 of Speculative Capital. The condition is the prerequisite for the realization of systemic risk, its trigger point.

It is under these conditions that the role and activities of the Federal Reserve call for a brief comment.

For the past several months, the Fed has been trying to reduce the interest rates and particularly, the mortgage rates. To that end, it has been buying Treasuries – that is called “quantitative easing” – and the agencies, the latter being the IOUs of Fannie Mae and Freddie Mac. The logic is that buying the securities would increase the demand for them and thus, their price. (Remember supply and demand! If the price of IOUs increases, “their” interest rates would decrease.) The understanding of the members of the Board of Governors of the Federal Reserve of the nature and role of interest rate in the country – and hundreds of analysts, economists, policy makers, ex-banker, MBAs and quants that they employ – boils down to this embarrassingly crude logic. Therefore, in the face of rates behaving in the most unexpected manner, they have nothing to say. “Learned helplessness” has become de rigeur.

The Fed, at the same time, is being assigned the role of supervising the financial system with the purpose of preventing a systemic collapse. But with its mechanical view of how markets work, it would not know why buyers might suddenly vanish. The subject of finance is not the psychology of buyers and sellers but the laws of movement of finance capital. This subject is not simply within the Fed’s theoretical ken.

The setup reminds me of an Iranian poem on the eve of the Mongolian attack on Iran. The poet wrote:

The king is drunk, the world is in chaos and the enemies are front and back;

It is well too obvious what will come out of this.

Write your own Will for FREE ?

You can write your own will. All you need is 2 witnesses. It will be as legitimate as any 'standard Wills' created by professionals. But if you think your will may be challenged, you should consult a real lawyer whose focus is on wills business, preferably also your 'real' friend.

Witnesses DO NOT need to see the content. Just get them to sign their parts, seal the envelop in front of them and thanks them.

Safe keep your will and only share with those need-to-know bases. Usually the Executor and/or the Beneficiary. Whoever they are, they are the ones who know . . . when you die.

There are many more tips and tricks but the relevancy really depends on your own specific situation. Consult wills experts to skip all the convoluted knowledge and convenient yourself. That is what the RM100-RM300 you pay for.




(Full Names and Surname)


( NRIC / Police Number / Army ID )




1. Declaration

I hereby declare that this is my last will and testament and that I hereby revoke, cancel and annul all wills and codicils previously made by me either jointly or severally. I declare that I am of legal age to make this will and of sound mind and that this last will and testament expresses my wishes without undue influence or duress.

2. Family Details

I am married to _____________________________ hereinafter referred to as my spouse.

I have the following children:

Name: ______________________ Date of Birth _________

Name: ______________________ Date of Birth _________

Name: ______________________ Date of Birth _________

3. Appointment of Executors

3.1. I hereby nominate, constitute and appoint _________________________ as Executor or if this Executor is unable or unwilling to serve then I appoint _______________________ as alternate Executor.

3.2. I hereby give and grant the Executor all powers and authority as are required or allowed in law, and especially that of assumption.

3.3. I hereby direct that my Executors shall not be required to furnish security and shall serve without any bond.

3.4. Pending the distribution of my estate my Executors shall have authority to carry on any business, venture or partnership in which I may have any interest at the time of my death.

3.5. My Executors shall have full and absolute power in his/her discretion to sell all or any assets of my estate, whether by public auction or private sale and shall be entitled to let any property in my estate on such terms and conditions as may be acceptable to my beneficiaries.

3.6. My Executors shall have authority to borrow money for any purpose connected with the liquidation and administration of my estate and to that end may encumber any of the assets of my estate.

4. Guardian

4.1. Failing the survival of my spouse as natural guardian I appoint _____________________ or failing him / her I appoint ______________________ to be the legal Guardian of my minor children named:




until such time as they attain the age of _____________ years.

4.2. I direct that my nominated Guardian shall not be required to furnish security for acting in that capacity.

5. Beneficiary

I bequeath the whole of my estate, property and effects, whether movable or immovable, wheresoever situated and of whatsoever nature to my spouse ________________________.

6. Alternate Beneficiaries

6.1. Should my spouse not survive me by thirty (30) days I direct that the whole of my estate, property and effects, whether movable or immovable, wheresoever situated and of whatsoever nature be divided amongst my children named in 2. above in equal shares.

6.2. Should my said spouse and I and my children all die simultaneously or within thirty (30) days of each other as a result of the same accident or calamity, then and in that event, I direct that the whole of my estate, property and effects, whether movable or immovable, wheresoever situated and of whatsoever nature shall devolve as follows:




7. Special Requests

I direct that on my death my remains shall be cremated and all cremation expenses shall be paid out of my estate.


I direct that on my death my remains shall be buried at _______________________ and all funeral expenses shall be paid out of my estate.

8. General

8.1. Words signifying one gender shall include the others and words signifying the singular shall include the plural and vice versa where appropriate.

8.2. Should any provision of this will be judged by an appropriate court of law as invalid it shall not affect any of the remaining provisions whatsoever.

IN WITNESS WHEREOF I hereby set my hand on this _________________ day of _________________20_____ at _______________________________________ in the presence of the undersigned witnesses.

SIGNED: _______________________________


As witnesses we declare that we are of sound mind and of legal age to witness a will and that to the best of our knowledge ____________________ is of legal age to make a will, appears to be of sound mind and signed this will willingly and free of undue influence or duress. We declare that he / she signed this will in our presence as we signed as witnesses in the presence of each other, all being present at the same time. Under penalty of perjury we declare these statements to be true and correct on this ________________ day of _________________ 20 __ at ________________________________.

Witness 1.

Name: ______________________

Address: ________________________________________

Signature: ________________________

Witness 2.


Address: ________________________________________

Signature: ________________________

Friday, June 19, 2009

A Wrong Way in Gold Investment - Pawning

Recently I came across a blog that teaches people in gold investment. Basically it is asking you to buy gold, then pawn it to get back 65% (Arahnu) cash, then use the money to buy more gold. It then shows you if the gold price goes up a little bit, you earn a lot more than just simply buy once. At the very end it also mention there is 'a bit risky' but absolutely in a misleading way.

Basically this is a method called Leverage. You have $10 and you know you can earn $1 out of it but if you apply Leverage techniques you can get more than $1. It is also the same way how Bank can lend out 10 times more than what they actually have. ( currency turns evil story )

However, his teaching is one of those 'seems cool' but Absolutely 'Digging your own grave' case! Which also shows how absolutely a nonsense fool can spread knowledge to make more fools. Also exactly the reason why there are still 90% of world population will NEVER achieve true finance freedom, while digging deeper to their own graves.

This so called Gold Pawn is a very common pratice among one of Malaysia's ethnic group. There is even a standard govern policy for it. Basically you can pawn your gold with them, get back 65% cash. Then you need to pay about 0.75% safekeeping fee per month. Usually You will need to repay your borrowed amount in 6 months.

If you have been following malpf, you may have known one key preaching topic is that 'you must look at the real numbers and NOT just the general concept'. To simplify this discussion, lets ignore the normal 4% price gap in gold trading. Lets just assume we only need to pay 0.75% for one month and the price move up down 10% in one month.

Case 1 : Buy Gold
You invest $10,000 and price moves up 10% in one month, you earn 10%

Case 2 : Buy Gold, Pawn Once and use the pawn money to buy gold again.
The price moves up 10% only, but after minusing the safekeeping fee and repawn back the gold to sell all, you will get 16.46% net return. (sample calculation)

Case 3 : Pawn twice so its as if you have 3 golds, but 2 at the pawn shop, 1 at your hand.
Price moves up 10% a month, your net earning would be 20.66%

As you can see, the total amount of capital is the same, $10,000 but you could earn 10% - 16% or 21%. That is the power of Leverage. But wait, lets see what happened when the price goes DOWN 10% instead.

Case 4 : Buy Gold once
Price goes down 10%, you lost 10%.

Case 5 : Pawn Once
You lost 16.54% (sample calculation)

Case 6 : Pawn Twice
You lost 20.79%

You may already observe that there is a slight difference between winning and losing ratio.
When you win, you win less and
when you lose, you lose slightly more.

Pawn Once : Win 16.46% Lost 16.54% Difference 0.08% Disadvantage
Pawn Twice : Win 20.66% Lost 20.79% Difference 0.13% Disadvantage

Basically there are 2 facts you can get out of this :

1) The longer you use this Leverage technique, the more you will lose.
2) The more number of times you pawn, the more you will lose.

Back to the beginning of this article, the Risk of this technique is NOT a bit but the Risk is DEFINITELY higher than the Reward. The best argument he can legitimately comes up with is the disadvantage rate is not that high. Ie. compares to casino gambling where the disadvantage is at the range of 4%.

Think you found a golden goose ? Look carefully next time ....

Wednesday, June 17, 2009

Mutual Fund vs Unit Trust

Practically both the terms Mutual Fund and Unit Trust can be used interchangeably in Malaysia but there could actually be slight differences between the 2.

Mutual Fund is more a USA term while Unit Trust is a UK term.

Instinctly implied, Mutual Fund is just a pool of collected investment money. The money is usually pooled for a specific purpose. Its also implied some special people are 'in charge' of the pool of money to achieve the purpose.

Unit is a special measurement method when there are more than one type of items to refer to; And yet one needs to use ONE system to measure all the items. So generally instead of gram, meter etc. 'Unit' is used instead. Trust instinctly implied confidence and someone who we can rely on. So Unit Trust is basically a 'system' you can rely on while it may consist of multiple elements in it. Despite its potential complexity, it should be easily understood by using its 'unit'.

As you may see by comparison now, Mutual Fund does not necessary have to have the Trust element in it. Unit Trust on the other hand, doesn't have to have more than 1 investor. In short, I can pool up all my friend's money and invest for them as a mutual fund. Nonetheless an illegal one because such activity require licenses in most part of the world. On the other hand, I can use part of my wealth to set up a unit trust to earn money from Melbourne real estates.

A little more than just layman talks

Trust is also a finance term where a 3rd party is brought into the transaction between 2 persons, acting as a balance entity fullfilling the interest for all. For example, Sandy has a oil mill that she wants to pass down to Benny but Benny doesn't know anything about it. So Sandy passes the ownership to Tan with the agreement that Tan will manage the whole operation but pass all the benefits to Benny.

Sandy is usually caleed the Settlor
Tan is Trustee
Benny is the Beneficiary

Usually Tan will charge a service fee and usually only large and stable finance institution can be considered as the real Trustee.

There are also some sayings that Unit Trust is part of Mutual Fund because Unit Trust is basically a Mutual Fund that has an extra element of Trust in it. The reason why both of these terms are used interchangeably is because all legitime Mutual Funds must setup a Trust in Malaysia. Which mean the fund company can manage the money but can NEVER take the money to their own possession as its own by the Trustee, not them. That way, the investors' money is safeguarded.

Frequently the corporate finance guys may also refer Mutual Fund and Unit Trust as Open End Fund. Which basically means investors buy and sell directly with the Fund Manager without the need to worry about other investors.

Tuesday, June 16, 2009

No Changes to FBM KLCI

extracted from OSK circulation - for full report, subscribe OSK services :)

FTSE and Bursa Malaysia announced in their half-yearly review yesterday that there is no
revision to the component stocks in the FBM30 index. As such, all existing FBM30 members will
make up the new FBM KLCI on July 6, ‘09. The weightage of the Banking, Plantation, Utilities,
Telco and Gaming sectors on the new FBM KLCI will go up, with Resorts, YTL Power and
Parkson being the biggest beneficiaries given that they are now members of the new FBM30
although they are not part of the present KLCI. IJM, Gamuda and Lafarge are the 3 biggest dropouts
from the new index. Over the next 1 month, stocks ranked 31st to 50th in the current 100-
member KLCI may experience the most selling pressure except for IJM, Gamuda and Lafarge,
due to portfolio rebalancing.

Sunday, June 14, 2009

An Excerpt from Vol. 4: A Primer on Bond Mathematics (1 of 2)

I am busy with Vol. 4 of Speculative Capital. Its subject keeps expanding because I digress. Each digression then proves to be the main subject. Here is a short excerpt on “bond mathematics” from the manuscript, with only minor editing for the blog, so you would see what I mean.


Consider a borrower who borrows $100 at the going rate of 4% a year for one year. As the evidence of his obligation to pay, he gives the creditor an IOU, a promissory note saying that, at the end of the year, he, the borrower, will pay back the original sum plus the accrued interest, for a total of $104. The calculus of the note is as follows:

100 + 100 x .04 = $104, or:

100 (1 + .04) = $104

The amount presently borrowed, $100, is the present value of the loan. The amount to be paid back in one year, $104, is its future value. If we designate these values by PV and FV, respectively, and let i stand for interest rate, we can generalize this relation as Eq. (1):

PV (1 + i) = FV

Eq. (1) is the fundamental relation of fixed income mathematics. It contains three parameters that uniquely define a debt instrument: principal, interest and maturity. In any lending and borrowing, you have to know how much you are lending or borrowing (principal), at what rate (interest) and for how long (maturity). (Maturity is hidden in Eq. (1) because we assumed it to be one year. This assumption has no bearing on our discussion.)

If, after lending the money, the creditor has a change of heart or suddenly needs $100, he cannot go to the borrower and demand the money. The term of the loan is one year. The borrower will not return it before the designated maturity date, before he had the full use of it, as contractually agreed. So the creditor’s $100 is “locked”, meaning that he has to wait one year before he could get back the principal and interest of his investment. His note, in financial jargon, must be “held to maturity”.

Thanks to the existence of capital markets, though, there is a way out for our creditor. He could sell his note there. What takes place in capital markets is the conversion of securities form of finance capital into money form. But these abstract concepts have as yet no meaning for us. For the time, simple buying and selling would do. So the creditor takes his IOU to market and presents it to a potential buyer, Moneybag.

– “How much are you asking for your note?”, asks Moneybag.

– “Well, the total amount due is $104”.

– “You have to stop trying to put one over us, my boy,” says Moneybag. “We the bond people are math savvy. Your note promises $104 1 year from now. Now is not "one year from now", if you know what I mean! You are selling your note today. The question before us is how much is the note worth today.”

We already know the answer. We only need to solve Eq. (1) for PV:

PV = FV/ (1+ i)

Substituting FV = $104 and i = .04, the PV of the promissory note is $100:

PV = $104/(1 + .04) = $100

We were expecting this result. In the absence of any change in the future cash flow, the term or the interest rate, the present value of the loan had to be what the creditor originally lent to the borrower.

Now, if Moneybag buys the note for $100, he would in fact be paying back the creditor and replacing him as the lender. The borrower need not even be aware of this change in his note's ownership. That is the critical function of financial and capital markets. They are the central pooling places for finance capital. In that regard, they provide capital at a scale beyond the reach of any single individual.

Note also the role of interest rate. If the rates rise to 5%, the creditor will not be able to get $100 for his note. Moneybag would pointedly remind him that he, Moneybag, could lend $100 with 5%, so he would be a fool to replace the creditor in a loan that only pays 4%. Under the new conditions, then, the creditor would have to accept less than $100 for his note. (Eq. 1) gives us the exact amount. We only have to remember that the future payment, $104, remains unchanged as that is all the borrower has agreed to pay. The overall rate, however, is now 5%. Substituting these into Eq. (1), we get:

PV = $104/(1 + .05) = $99.05

If the rates increase by 1%, the creditor will lose about 95 cents.

If the rate drops to 3%, the promissory note will be more valuable, as it pays 4% interest where others could only get 3%. The creditor will demand more for what, under the new circumstances, is a more profitable investment. The “extra” profit is 97 cents that we can calculate using Eq. (1):

PV = $104 /(1 + .03) = $100.97

This relation holds generally: Interest rates up, bond prices down, and vice versa. We see it in Eq. (1) as well. As interest rate i in the denominator of Eq. (1) increases, the present value of all promissory notes would decrease, and vice versa.

Eq. (1) is the fundamental relation of fixed-income mathematics, “fixed-income” being the universe of all the bills, notes, bonds, swaps, mortgages, accounts receivable, annuities – in short, any stream of future cash flows. The “mathematics” part is finding their present value , which should be the price at which the fixed income instruments is bought and sold.

You can take Eq. (1) and run amok. You could, for example, observe that a 1% increase in rates resulted in 95 cents fall in price while 1% decrease in rates resulted in 97 cents rise in price. So the price change of notes in response to a change in interest rates is not symmetric. You could spent a few years of your life studying the non-linearity of price-yield relations in bonds and then branch out and focus on the “convexity” issue, which is a second-derivative of sorts, dealing with the sensitivity of the sensitivity of price-yield relations in bonds.

Or, you could try to determine what happens if the borrower’s finances deteriorate. That, presumably, will increase the likelihood of the borrower's default, which should adversely affect the bond price.

Or, you could consider what would happen if the borrower could pay back his debt early. This “option” should obviously impact the bond price. That is a promising area of research worth a few hundred PhD dissertations on the subject of options adjusted bonds spreads/prices.

If you could do one or all these things, you would become a “quant”, a “rocket scientist”, a math wizard responsible for creating complex new products that would spearhead the globalization of finance. You could become a respected professor of finance at an Ivy League school of your choice. With a little luck, you might even receive a Nobel Prize in economics or become a policy maker at the Federal Reserve Board.

In short, in the realm of “mathematical finance”, you could be all you can be, and still understand absolutely nothing about finance, including its most fundamental relation in Eq. (1).

Let us look at it closely.

Eq. (1) belongs to a large class of physical, social and natural relations in the form of A = mB. These relations, without exceptions, have limits beyond which they are not valid. That is another way of saying that they are based on certain assumptions that limit their applicability. There is no ultimate equation of everything that is unconditionally valid across time and space.

Take, for example, Newton’s relation between force (F), mass (m) and acceleration (a), that is arguably the most profound relation in the universe. It states that

F = ma

The relation applies to all forces – gravity, electro-magnetic and weak and strong nuclear forces – and to all masses. In focusing on the seeming multiplicity of forces in nature and relating them to mass (matter), the equation defines the very discipline of physics which seeks to determine how the natural forces are related to one another and what is the nature of the matter. The equation is valid across the known universe, and helps plot the trajectory of satellites even outside the solar system.

Yet, it has limits. If force (F) increases, the acceleration (a) and, with it, the speed, will increase. But that is true only within “ordinary” speeds. As the speed approaches the speed of light, the mass also increases, countering the acceleration. At 300,000km/s, the relation is no longer valid. A different kind of physics governs.

What is the limit of PV = FV/ (1 + i)? That is, what are the assumptions and suppositions behind it?

First and foremost, this relation expresses a social relation, as evidenced by the presence of interest, i. That limits the applicability of the relation. Charging interest, for example, is forbidden in Islam. So in the Taleban controlled areas of Afghanistan and Pakistan, for example, Eq. (1) is not valid. If you try to enforce it, you would jeopardize your long term business prospects. Short term business prospects, too.

Shylock of The Merchant of Venice, by contrast, insists on interest. He lives by it. That is how relation (1) is a social relation, a product of historical development.

“That is an interesting observation, Mr. Saber. Very intellectual! But surely you realize that we do not live under the Taleban rule. We are citizens of Western liberal democracies where markets rule – the recent black eye they have gotten notwithstanding. So let us please focus on practical matters and leave the intellectual parts of finance to ivory tower academics.”

What else does Eq. (1) presuppose?