Tuesday, October 27, 2009

What We Learn From the Financial Journalists

This past Tuesday, The New York Times was plugging the new book by its “merger and acquisition correspondent”, Andrew Ross Sorkin, big time. The book is called, Too Big to Fail: The Inside Story of How Washington and Wall Street Fought to Save the Financial System – and Themselves. That long and yet empty title is what you get when you try to include all the “hot” issues of the day in a single phrase. But the gimmick apparently works, or it could have been the heavy promotion: the book sold out in New York’s Barnes & Nobles.

I have not read the book, but from the excerpt in the Times, I know what is inside. Here is a passage:
Increasingly desperate that morning – “I feel like I’m playing Whack-a-Mole,” he complained to his peers – Mr. Fuld decided to call his old friend John Mack, the chief executive at Morgan Stanley, the second-largest investment bank after Goldman Sachs. After dialing Morgan’s New York office, Mr. Fuld was transferred to Paris, where Mr. Mack was visiting clients in the firm’s ornate headquarters, a former hotel on the Rue de Monceau.

After some mutual disparagement of the markets, the rumors and the pressure on Fannie Mae and Freddie Mac, Mr. Fuld asked candidly: “Can’t we try to do something together?” It was a bold question and Mr. Mack had suspected it was the reason for the call. While he didn’t believe that he’d be interested in such a prospect, he was willing to hear Mr. Fuld out.

“We’ll come over to your offices,” Mr. Fuld, clearly anxious, said.

“No, no, that makes no sense. What if someone sees you coming into the building?” Mr. Mack asked. “We’re not going to do that. Come to my house, we’ll all meet at my house.”

On Saturday morning, Mr. Fuld pulled up to Mr. Mack’s mansion in Rye, N.Y. Despite the beautiful weather, he was tense. He could already imagine the headlines if it leaked.

The Morgan Stanley team had arrived and was socializing in the dining room, where Mr. Mack’s wife, Christy, had put out plates of food she had ordered from the local deli.
What we learn from the above is that:
  • When Fuld called Mack, Mack was in Paris, in Morgan Stanley’s ornate headquarters, which was a former hotel on the Rue de Monceau.
  • Mack and Fuld knew each other.
  • Mack and Fuld did not like – or understand – what was happening in the markets.
  • Mack had a sixth sense, certainly a strong intuition. When Fuld reached him in Morgan Stanley’s ornate office in Paris, he “suspected” that Fuld was calling him for something important.
  • Fuld who had reached Mack in Paris to talk about his firm’s survival had not prepared a proposal or even an opening pitch. “Can’t we try to do something together?” is what he said, by way of proposing a merger involing about $2 trillion in assets.
  • Fuld was a simpleton, suggesting to go to Mack’s office. A child would know not to do that. (Paulson met with the Goldman Sachs board in Russia – when he was the U.S. Treasury secretary.)
  • Fuld was a quick learner. On Saturday morning, in front of Mack’s mansion, he was tense (although the weather was good) because he had learned that it was not good for him to be seen with Mack
  • Mack’s wife, who goes by the name Christy, had ordered takeout food from a deli in Rye, New York which is where she and her husband, Mack, live in a mansion – Mack Mansion, presumably.
Perez Hilton, meet financial journalism.

It serves no purpose to comment on this trashy, gossipy writing masquerading as financial investigative journalism, except to point to the way it is intended to drum up the sale. The tidbits that permeate the narrative send the subliminal message that the author is close to the center of power and hence, privy to knowledge and inside information. That association is the source of his authority; he knows the cause of the crisis because he knows the players whose actions influenced it. That it is precisely the opposite, that businessmen and traders could shed absolutely no light on the cause of the crisis, that the more nonsensical tidbits you hear or read about the less you would know, is something that neither Andrew Ross Sorkin nor those who bought his book will easily believe – or understand. The milieu in which these events take place stands against such understanding.

I caught a glimpse of Ross Sorkin on Charlie Rose. The host and guest agreed that the main lesson of the crisis is “ultimately” about the human failure. You know about this the-fault-is-not-in-the-stars thing, akin to saying that an airplane crash was “ultimately” due to the gravity. The author is a young man. He talks fast and confidently, the way confidence men do. He has no qualms or doubts about what he knows; how could he, having heard the behind-the-scenes drama from the movers and shakers, knowing what a lawyer was wearing to a weekend meeting and which highway Fuld's driver took on the way to New York?

Not to be too harsh on him, but he, too, while also a victim, is at the same time a part of the fraud that is continuously perpetuated on the citizenry.

If the young lions of financial journalism are bad, the old timers are scarcely better. On Friday, Ron Chernow, the author of a confused history of J.P. Morgan, wrote an Op-Ed Page piece in the New York Times in which he compared the current financial crisis with the crash of 1929. Here are three sample statements, followed by my comments:
For many participants, a whiff of sin only enhanced the stock market's seduction. Small investors imagined that the large speculators who dominated the exchange could, if necessary, levitate the market and prevent unpleasant crack ups.
The modern markets, too, thrived on the whiff of scandal. All Madoff investors were told – and passed it to others – that the “New York people had a system.”
Margin loans equivalent to one-fifth the value of listed stock poised the market on a tall but shaky scaffolding.
In the current criss, while the margin on stocks was one-half, the firms as a whole had margins in excess of thirty to one, six times higher than what was allowed for the individual stock investors in the late 1920’s.
Unlike the 2009 crash, the 1929 debacle didn’t topple major banks or corporations. It simply wiped out a generation of speculators.
The crash of 1929 only toppled speculators and not banks because in 1929, banks were not involved in speculation. In 2007, they were.

Chernow has no central argument, he has no point. His writing is a hodgepodge of anecdotes and false parallels and analogies that ultimately leave the reader frustrated and exhausted.

What these men want to offer, but cannot, is a coherent narrative of a crisis that has devastated much of the world's economies in the past two years. I explained the crisis in some length in the Credit Woes series. Since Lehman’s case, for good reasons, is intricately linked with the crisis, let me once again use it to highlight the things we need to know. Only then we will be able to understand the crisis. This is not a “case study” approach, but an analysis of a part that contains some critical aspects of the whole.

Lehman had $1 capital, its own money. It then borrowed $32 and use all the money to buy securities worth $33. The securities were pledged as collateral for the loan, the way you would pledge your house for mortgage. Unlike your mortgage, though, Lehman’s borrowing was short term; it had to be refinanced, i.e., renegotiated, every day, or every week or every month.

In 2007, the securities prices dropped – crashed, really. (As an example of the severity of the crash, Merrill sold some of its securities for 22 cents on a dollar.) The securities that Lehman had purchased for $33 were now worth, say $20. The lenders did not accept holding $20 worth of collateral for loans totaling $32. As per terms of the loans, they demanded that Lehman pay the shortfall, the $12. Lehman had only $1. It could not pay $12.

Under these conditions, the die was cast. Short of a government bailout – the Fed or the Treasury giving Lehman the life-saving $12 – there was no way the firm could survive. Paulson and Geithner refused. The firm went under.

Three questions must now be answered, one specific to Lehman, the other two, general:

1. Why was Lehman allowed to fail?

To the extent possible, I answered this question here and here.

2. Why did Lehman follow a suicidal business model, borrowing 32 times its capital?

The answer is that it had no choice. Had it not pursued that specific business model, it would have been forced out of business or taken over many years prior to 2008. That was the case with all broker/dealers; Lehman was by no means an exception. So it is nonsensical to speak of management failure, as the decision to increase the leverage was conscious and deliberate.

Now, why is this so, i.e., why are financial institutions forced to behave in this way, is the subject of Vol. 4 and especially, Vol. 5, of Speculative Capital.

3. Why did prices drop?

The answer does not involve buyers going "on a strike" or the market being flooded with the securities or irrational exuberance. It has to do with the transformation of values to prices, something very objective. It is a fascinating subject that must be developed from the ground up and followed to its logical conclusion. That is the subject of Vols. 4 and 5 of Speculative Capital.

Stay tuned.

Monday, October 26, 2009

MYR 300 FREE money for self employed

Budget 2010 has been around for a while now, but I wonder why many have not made a big deal about this yet. If you are a Self Employed in Malaysia, you can open an EPF account yourself and save MYR 100 into it every month. In return, Government will add MYR 5 into your saving too. This is expected to start next year and 5% top up will continue for the next 5 years.

Although $60 a year is a small money but are you sure you want to pass on any FREE money ?

Assuming EPF declare a dividend of 4%, you will get more than MYR 10,670 5 years down the road out of the MYR 6,000 you have been saving. MYR 100 x 12 months x 5 years.

If you save the same MYR 100 monthly else where, it will need 22.01% interest rate to obtain the same return 5 years down the road.

22% passive return is not something available readily anywhere in the market. The only con side of this offer is its limit of MYR 300 contribution from the govertment in the next 5 years. Which is pathetically little. Then again, it also means it doesn't hurt at all to save the extra MYR 100.

Comes to think of it, is Someone intentionally trying NOT to pay out this FREE money by NOT promoting it as it deserves ? So they may declare a good policy change but keep things quiet and then at the end they can say, "it's you who didn't take our offer!"

Proceed with care and patient, EPF department does NOT know how to handle this yet ... their typical responses are, "Come back next year ..."

Zero Sum = Nothing ?

Zero Sum theory says that if one earns an amount of money, there MUST BE another one lost exactly the same amount of money. Bundle with Buddhism (空, 无), one shall NOT care about money ... as all will go back to dust eventually, anyway.

Malpf would like to introduce this sign "=", an EQUAL sign.

Basically an equal sign separates out the left and right sides. The sum of left side IS EXACTLY the SAME as the sum of right side. For example,

0=0, A=A, $=$

So when you were born, you had nothing, its 0=0 .... when you die, you will have nothing left ... its again 0=0.

So you begin with Nothing and you end with Nothing. But does that necessary means you should have Nothing in between ?

One of the rules to keep this equal sign functional is that whenever you add or subtracts something from the left side, you HAVE TO do the same on the right side. For example;

(1) + 0 = 0 + (1)
so its
1 = 1

If you spend some effort (+1 left side) on something, you will always get something (+1 right side) back.

Some people's life can stay 0=0 their entire lives. Some goes up to 10=10 before getting back to 0=0. Some lazy bumps goes down to -10=-10. Some extraordinary folks reach their 100=100 targets.

When you dig deeper, there are always some stories. some are

1 + 2 + 7 = 5 + 5

while others are

2 + 5 + 3 = 1 + 9

different paths, different methods but either way, they are 10 = 10

The thing is ... it doesn't really matter or more correctly speaking, it doesn't really bother the Universe. As long as it is kept balance; the left side equals the right side, the Universe allows it to happen.

Guess what ? It is REALLY UP TO YOU what you want the equation to be. Just work on one side, the other side will automatically equal out.

So do you want to believe in Zero Sum, 空 and do nothing
or do you want to decide what to put on the left side of your equation ?

Sunday, October 25, 2009

MYR 50 credit card fee - Solve debt with more debt !?

Seeing that credit card debt has reached a serious and dangerous level, Malaysia government will start imposing MYR 50 fee on each credit card hoping people will reduce the use of credit cards and therefore reduce debt.

Although it may sound rational to some people, but its actually somehow a bit funny ...

For those who keep credit cards in closet, they actually use the cards as emergency loan facility. Admitting to hospital will go through smoother with a gold card etc. These people did not owe any credit card debt, they were NOT part of the problems to start with. But now they are affected and has to cut off some of these FREE loan facilities. Credit card debt NOT reduced, good people's personal finance affected.

Some pay off their credit cards in full every month. They use card so that they don't have to bring lumps of cash around. They were NOT part of the debt problem but now they need to take more risk bringing more cash with them. Credit card debt NOT reduced, good people's personal finance affected.

Then there are those who owe money - who have long winding credit card debt. They just can't pay off the debt. They are the target group to be help with this policy. How can adding MYR 50 on top of their debt help them ? They can't just simply stop the card, they will have to pay their debt. As long as they haven't finished paying their debt, the account is running and MYR 50 will be added every year ... as an encouragement fee to 'help' them reduce debt !? Credit card debt INCREASED, bad people's personal finance PENALIZED.

Lastly there are these group of people who haven't had credit cards yet. So when they apply for one, they will think twice. But these people are NOT part of the debt problem to be solved to start with ! Credit card debt NOT reduced, good people's personal finance instilled.

Call me dump and crazy, how can this MYR 50 fee help reduce credit card debt again !? There may be some good points identified but NONE will reduce Today's credit card debts !!

After all, do you think a credit card debt person wouldn't pay a small fee of MYR 50 to get a new card from this lady ? After all, he can pay off this MYR 50 in his next 30 years which is only less than $1 a month.

Friday, October 23, 2009

Case Study : How to use Money ?

Starting at age 24, Daniel can save $1,000 a month. Plan to buy a $30,000 car at age 30, get married at 29 and buy a house at age 30.

He is also repaying $150 monthly to a $48,000 study loan. Only 10 more months left to pay for a $300 motorcycle loan. The $1,000 is net saving after deducting all these debt repayment.

"How to use money after I save them ?" Daniel asked.

Daniel has some goals to start with, so its best to draw a life line first.

Then Daniel should learn Future-Present Value finance formula. (He may also check out Rule of 72) With that he can come up with these figures. With $1,000 a month at age 24;

1. He can save in 2% fix deposit, he will have about $24,500 at age 26
2. In order to get $30,000 at age 26, his target investment return has to be 22%
3. If he didn't use the saving at age 26, it will accumulate to $76,400 at age 30 using 2% FD return
4. If he buy a car with $24,500, he will have $50,000 at age 30 using 2% FD return

So overall there is not much Daniel needs to worry about because

1. An used car of $25,000 or $30,000 are within similar range
2. Marriage may cost a few thousands typically
3. $30 to $50 thousand is enough for down payment for a typical home

Within the next 2 years, Daniel should mainly focus on cash flow control,

1. $300 motorcycle loan will end in 10 months time, by then he "should" save more every month i.e $1,300
2. He may spent only $350 for food as a student, but a working employee generally may spend more. He needs to watch that in order to achieve the $1,000 saving a month as the target he sets for himself.
3. Phone bill may increase too.
4. New spending category may also be added like entertainment, broadband, bad habits like smoking and drinking etc. Watch the friends you make, the girls you like, the bosses you kiss ass to ... make a good judgement if it is worth doing so.

After that if Daniel really buy a car, that will significantly change his personal finance;

1. Road Tax
2. Car Insurance
3. Petrol increase, usually by 4x from his previous motorcycle usage
4. Maintenance fee - a bad purchased used car may need frequent foreman visit

With only a target salary of $3,000 to $5,000 .... the car he will own may be his First biggest challenge.

Overall, this is the recommendation for Daniel,

2. He has 2 years before buying the used car, learn more about car mechanic, how to buy an used car, make more friends in car businesses etc. so that he can target buying an used car worth $X but he only pays $X - $Y for it. High Value for Money. Also read about other ways to get cars.

3. Learn Wealth Pyramid as tools to achieve MeM (Money earns Money) concepts. Goes up level by level from FD to Bond Fund to Mutual Funds to direct stock market investment.

4. While increasing investment return, understand that risk is something you don't know or you thought you know but didn't. So ability to learn, learn accurate and learn fast is your biggest asset now.

5. Marriage is not necessary a liability, it can be a happy event that earns positive cash flow sometimes. Daniel has 5 years from now to start explore what marriage ideas that can achieve such goals.

6. Daniel has 6 years to learn about property investment before buying his first home.

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Tuesday, October 20, 2009

What We Learn From the Businessmen

If you did not recognize the style of Death of a Deal Man, you do not know John Das Passos. If you are an American, that is doubly unacceptable. His is the only name you can utter when an anti-American foreigner claims that your country has not produced a single writer or artist of international standing. Das Passos’s U.S.A. trilogy is a masterpiece of fiction in form and content. Once in this blog I asked the philosophical question: What do we need to know about something so we could say we know it? When it came to people, Das Passos knew the answer; he gave it to us with an impossible mix of brevity and completeness that approached poetry. Read the biographies in the U.S.A. and judge for yourself.

I thought of Das Passos when I was reading Wasserstein’s death notices. Even the man’s obituaries were hurried, as if rushing to complete an about-to-expire deal. Deal making alone drove the narrative, as in this gem in the Wall Street Journal (Oct 15, p. C3):
A former editor of the school newspaper at the University of Michigan, Mr. Wasserstein long has had an interest in media deals.
Do not blame the reporter for bad writing. The corollary is absurd because it captures the absurdity of a life whose focus on deals distorted all the relations. Eugene O’Neill perceptively captured this affliction in Hughie’s small-time gambler, Erie Smith. In the dinner party of a puritan hostess, with her children present, Erie recounts the story of one his wagers in a horse race, reasoning that the children would love “animal stories.”

The unintended humor is not confined to the dearly departed. In the same week, I also read the news of the retirement of James Simons, the founder of Renaissance hedge fund who made billions in trading. The Times said that “many on Wall Street” still believe that Mr. Simon has a “supernatural talent for making money.” Now that is a juxtaposition of spiritual and the material that only a Rumi could pull off. How life’s extremities give rise to poetry!

And there was John Mack, the outgoing CEO of Morgan Stanley, telling a TV interviewer on Friday that “our focus” must be on the job creation. This, from a man known as “Mack the Knife” for his relentless cutting of workers always and anywhere he went.

Now that a few market indexes are up and the immediate danger of a collapse seems to have passed, the men of finance are returning to the limelight, assuming Rodinesque poses and availing themselves to awe-struck financial reports for insights about “what went wrong”. They might even be right about the direction of the dollar or the yield of the 10-year Treasury by next year.

But that is not finance as discussed in this blog. We will learn nothing about finance from these men because what they see is always the appearance and never the substance. We will learn nothing from a mouse about the working of the cosmos, even though it could consistently find the cheese, as if by a supernatural talent.

If you are a student of real finance, you are in the right place. Stick around.

I have earned 67% in a day !! can it be TRUE ?

Have you ever heard people said he made a profit of 67% in a day ? And then continue to show a few more 'proof' that he often earned incredible profits all the times. Then in order to be more realistic, he shows you a few small lost he made. Do you think he tells truth ?

Well, yesterday was a good day. I earned 67% in a day! Not just paper gain, I actually initiate and end the transactions on the same day to realize the 67% profit. No kidding ! But can it be TRUE ?

While the 67% could be true. Most people would be able to catch the first pitfall.

  1. One day earning doesn't really mean much. As shown in this article, another day of 67% lost would not only not break even but actually making you some loses. The average return for the whole year is more important so that it is comparable with other rates like BLR and fix deposit interest rate etc. Persistency over the years would also become more important as time goes. Be reminded that Warren Buffet average annual return is 15.6% ( details in Greatest Investors of all time ).
  2. It is also not too hard to catch the 2nd pitfall. Actual amount matters. Earning 67% from $1,000 is very different than earning 67% from an investment of $100,000. I can easily turn $1 to $2 earning 100% return but I would be happy if I can get 10% return from my $1 million investment. This is the part that says size does matter and a big percentage number is only exciting when it works together with another big number.
  3. Another pitfall is one that some may overlook. Investment return should be calculated based on total capital, not the transaction amount itself. For example, I have allocated $1 million for a particular investment. In one particular transaction, I invested $100,000 and earned 67% return while the rest of the $900,000 sits somewhere doing nothing. My overall return is actually 6.7% only. Meaning I have earned $67,000 with $1 million. This is particularly important when judging fund managers performance.
So while it may be TRUE I earn 67%, but it may NOT be THE ENTIRE TRUTH on the perception of making such statements.

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Sunday, October 18, 2009

Case Study : Property Investment Opportunities are Rare ?

Tammy achieves his financial freedom through property investment. Recently he bought over a property that looks too good to be true.
Purchase Price : $4 millions
Bank Loan : 100%
Loan Rate : 6%
Monthly Rental : $30,000
The property is sold at $ 3.8 millions but he lumps all the other fees in to make it $4 millions as his total cost. His net asset is way more than $4 millions so there is no problem to obtain that amount of bank loan. Loan interest is actually 5.XX but we round it up to 6% for this article. There are only 3 tenants, all are national and listed companies.

His monthly repayment is $23,982, fully paid by collected $30,000 rental, with a net cash flow of $6,018 every month. He didn't fork a single cent out because his bank is fully behind him in his deal.

Lucky him, just another rich guy gets richer, it has nothing to do with me, you may think ?

Well, every story is a lesson to someone. Its just a matter of what you get out of it. This opportunity did not just knock on his door and call it a deal with no reason.

It started around mid last year when the seller approached Tammy. Tammy made an offer but seller thought he had a better buyer and didn't take it. Then by last year end, seller took Tammy's offer but Tammy's offer has already expired. And Tammy met other better sellers. After beating around bushes and some silences, finally the deal is made this mid year. The whole process took around a year.

Can you imagine an opportunity of $6,000 net cash flow floating around in the market for one whole year and no one grab it like a crazy dog ? Well, that is the fact of life.
  • Many people want to buy it but not all of them have 4 millions
  • Many people do not qualify for a 4 millions loan
  • Some people CAN buy this but this may NOT be their only choice
  • Some people WANT to take this kind of opportunity but NEVER found this particular one!
  • Both seller and buyer may have personal preferences ... etc.
Yes the 1st two points may rule out almost 90% of the people, the Rich does get Richer easier. But that is because they have built their fortune faster and ahead of others. Not because it was taken for granted.

Don't forget this mentioned opportunity has been floating around publicly for one whole year, you and I didn't really know it until the deal was done. So it wasn't a matter of how rich other people are, its a matter of what you have done so that you can get what you really want.

Yes, again this is in Australia.

Other related articles

What We Learn From the Nobel Laureates

I had never heard of Oliver Williamson and Elinor Ostrom until they won the Nobel Memorial Prize in Economics this past week. So, what I know about their work is what I read in the papers. But that is sufficient; somewhere in this blog I wrote that everything you need to know is always right in front of your eyes!

Let us begin with Elinor Ostrom whose research, The New York Times tells us, led her to believe that something called the “tragedy of the commons” was inaccurate.
Ms. Ostrom concluded in her research that the “tragedy of the commons” was an inaccurate concept. Particularly in 17th- and 18th-century England and Scotland, the concept described villagers’ overgrazing of their herds on the village commons, thereby destroying it as a pasture. The solution often invoked was to convert the commons to private property, on the ground that self-interested owners would protect their pasture land.
Setting out to show that the tragedy of the commons is inaccurate is akin to setting out to show that Santa Claus does not exist. It is a curious starting point.

The idea of the “tragedy” came from a half-wit Texan by the name Garrett Hardin. His Wikipedia biography lists his “research” interests: overpopulation, immigration, race and intelligence – you get the idea. The Tragedy of the Commons is his magnum opus in which he argued that a shared social resource is doomed to exhaustion because the individual users will maximize their own interest at the expense of the long term social good. His conclusion: to avoid the ruin, the common property had to become private.

You see the angle. The Tragedy was published in 1968, just about the time when Milton Friedman was being pumped up to bamboozle the nation with his drivel.

So the good Indiana University professor wasted a good deal of time refuting something that did not merit a response. But what did she, herself, have to say on the subject?
Her most recent research has focused on relatively small forests in undeveloped countries. Groups of people share the right to harvest lumber from a particular forest, and so they have a stake in making sure the forest survives. “When local users of a forest have a long-term perspective, they are more likely to monitor each other’s use of land, developing rules for behavior,” Ms. Ostrom said in an interview.
Note the reference to “the relatively small forests in undeveloped countries” and earlier to the 17th- and 18th-century England and Scotland in the Tragedy.

The social system in a pre-Capitalist community is based on barter. In such a system, the members of the society use the common resource to satisfy their personal (including family) needs and not more. So, the common resource survives. Rules merely codify the individual uses that never exceed the capacity of the common resource.

With the rise of Capitalism, the society moves from barter to commodity trading. Now, the objective is no longer the satisfaction of the personal needs but the sale of the commodity for money – an open ended process that is limited only by the number of buyers. If the commodity happens to be fabric which is made from sheep wool, then to satisfy the demand for the expanding British fabric manufacturing, ever more sheep will have to be introduced to the pasture – far above and beyond its capacity. The result is first, overgrazing, and then the replacement of people by sheep. That is what caused the protracted Irish famines starting in 18th century. I thought this was known even to school children – but apparently not.

The Nobel laureate, who, by the way, is a social “scientist”, de-contextualizes the social system she is writing about, as if observing it in an imaginary Mister Rogers’ Neighborhood. That is why what she says comes across as simplistic, to the point of being childish. It is certainly irrelevant to our lives. Imagine we the people approaching Verizon or Chevron to ask for the management of our common resources, airwaves and oil!

For an adult’s take on the subject of the individual’s approach to a common resource within the given conditions, see Pontecorvo’s 1957 Wide Blue Road. You will learn more from this perceptive movie that all the works of all Nobel laureates in economics combined.

The work of Oliver Williamson, by contrast, is on a strictly contemporary phenomenon: the corporation. He discovered that, in the words of the same Times article, “large corporations exist because, under the right conditions, they are an efficient way to do business.” The Wall Street Journal (Oct 13, p. A19) explained his work in more detail:
Mr. Williamson showed that horizontal mergers of companies in the same industry – even those that increase market power and even those where the increase in market power leads to a higher price – can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price.
So Bruce Bid’Em Up Wasserstein was the agent of social efficiency. Also note Professor Williamson’s point of view in using the work “efficiency”. I earlier wrote about this view which is that of finance capital.

The most interesting part of the prize was the citation of the Award Committee that, perhaps innocently, but revealingly all the same, put the utterly incompatible works of Ostrom and Williamson next to each other to produce an anti-regulatory manifesto:
Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.
Bernie Maddoff could not agree more.

Thursday, October 15, 2009

Wall Street and the “Real Economy”

A never-ending subject of thoughtful deliberation among economic and finance professors is the relation between the “Wall Street” and the “real economy” – whether the woes in the realm of finance spill over to the “real economy”.

You can see why the simple question remains an impossible puzzle. The very first step in answering it would be to define finance and explain what is meant by the real economy – without quotation marks. That, the university economics cannot do. Hence, the endless discussions and points and counterpoints.

In Vol. 4, I take up this question in detail. Before then, here is a news item from the New York Times to highlight the relation between finance and the real economy. The article is about the massing of lobbyist to influence the new law overhauling the financial industry.
But since virtually every imaginable company could be touched by the comprehensive legislation proposed by the Obama administration, the surprisingly broad array of lobbyist trooping to Capitol Hill also includes advocates for airlines, pawnbrokers, real estate developers, farmers, car dealers, retailers and energy and telephone companies. They want to make sure any new oversight of the financial system does not lead to tighter regulations of their businesses or make it more expensive for them to finance their operations or hedge their risks.
By far, the most direct link between finance and industry is through money markets, where hundreds of billions of dollars of the corporate working capital are parked to earn a few basis points. Any loss of this capital directly impacts the production and could even disrupt it, as we saw in the aftermath of the Lehman bankruptcy.

The Death of A Deal Man

Bruce ‘Bid’em-Up’ Wasserstein was born a deal maker. He was born in Brooklyn, went to the University of Michigan, studied business and law at Harvard, did a stint at Cambridge, became a Knox Fellow and authored a book, but his true love was deal making. He was called smart, driven, a chess player, a strategist, a tactician, but all he wanted to do was make deals. “In the deal world, there was Bruce, and then there was everyone else,” people said. He thrived in the deal making frenzy and he made deals always and everywhere so everywhere he went turned into the Deal World – the Hamptons, his Midtown office, home, planes, trains, automobiles. “Let’s make a deal,” he would say. And he made deals fast and furious, so fast and furious that once he overloaded First Boston’s phone system. His deals were many and varied: Philip Morri’s purchase of Kraft and General Foods; Ichan’s assault on AOL Time Warner; Kraft’s potential takeover of Cadbury; KKR’s takeover of RJR Nabisco; Texaco’s acquisition of Getty Oil; ABC’s sale to Capital Cities. Sometimes things did not work out. KKR’s takeover of Nabisco was a fiasco. Texaco’s acquisition of Getty led to a $10 billion court judgment. But through the thick and thin Bruce remained undeterred. He made deal making an art, made it a street fighter’s game, made it lucrative for himself and corporate raiders and greenmailers. He created the “Pac-Man defense” and “front-end loaded two-step tender”, built his own firm, sold his own firm, tried merchant banking, returned to deal making and accumulated immense wealth, but his true love remained deal making. On Wednesday, Bruce died. He left a wife, 3 ex-wives, 8 children, a tangled estate and an untold number of undone and as yet to be conceived deals behind.

Wednesday, October 14, 2009

Financial Regulation, Theoretical Poverty (2 of 2)

In a perceptive line in The Critique of Dialectical Reasoning, Jean Paul Sartre writes that “the future comes to man through things in so far as it previously came to things through man.”

The idea is not new, but Sartre expresses it more eloquently than others. What he is saying is that, in the course of his material activities, man creates tools and organizations whose very presence compels him to act in a certain way, thus shaping the course of the history. Sartre’s example is a machine. “Thus, the machine demands to be kept in working order and the practical relation of man to materiality becomes his response to the exigencies of the machine,” he writes. Man is the product of his product.

As with machines, so with the financial systems. They, too, demand to be kept in working order. But unlike machines which are built on well-understood principles and can be relied upon to work in a precise manner, the working of financial markets remains hidden from the view because they are created in response to the exigencies of finance capital. Finance capital cannot itself create markets. It employs the regulator, the trader, the professor and the banker as its proxies to the do job. These men are endowed with a free will, but, unbeknownst to themselves, they do the bidding of speculative capital, building the markets to its needs and specifications.

Speculative capital is capital engaged in arbitrage. In Part 1, we saw how it logically and seamlessly develops from trading and hedging. Vol. 1 in its entirety deals with this particular question.

Arbitrageable differences are never large enough to allow for a comparable return with other forms of capital; it would be a gross inefficiency in capital markets if they were. So, speculative capital boosts its return through leverage, i.e., borrowing. Wall Street Journal, Oct. 16, 1995:
Before [February 1994], speculators had been borrowing at a short-term rate of like 3% and buying five-year Treasury notes yielding around 5%, a gaping spread of two percentage points that enabled some to double their money in a year. The math was tantalizing. Using leverage, an investor with $1 million could borrow enough to acquire $50 million in five-year Treasury notes. And the spread of two percentage points could generate about $1 million in profits on the $1 million investment.
There is, however, little money to be made in Treasuries; the article makes it clear that the golden opportunity was arbitraged away some time ago. To make money through arbitrage in the bond market, one has to go down the credit ladder. But the lower-rated securities could not be pledged as collateral for borrowing. Could the Fed, perhaps, help? The WSJ, April 1996, describing what the Fed called “one of the most significant reductions in regulatory burdens on broker-dealers since 1934”:
The final rules … will eliminate restrictions on a broker-dealer’s ability to arrange for an extension of credit by another lender; let dealers lend on any convertible bond if the underlying stock is suitable for margin; increase the loan value of money-market mutual funds from a 50% margin requirement to a ‘good faith’ standard … and allow dealers to lend on any investment-grade debt security … the Fed will allow the lending of foreign securities to foreign persons for any purposes against any legal collateral … It will also expand the criteria for determining which securities qualify for securities credit, a change that will sharply increase the number of foreign stocks that are margin-eligible.
This is saying that many securities that were not eligible as collateral could now be pledged as collateral – for more borrowing. What follows is not merely predictable; it is inevitable. WSJ, Sept 22, 1997:
Everyone who has even thumbed casually through the books of securities firms recently agrees they are more highly leveraged than ever.
You see the loop-feedback mechanism at work. Every phase of the process, from the rise of speculative capital, to broker-dealers borrowing more than 30 times their equity, takes place rationally. Even the collapse is rational, as it is the necessary outcome of the operation of a self-destructive force.

What would you do if you were the Fed chairman or the Treasury secretary under these conditions? The “practical” answer is that, Lehman aside, pretty much what they have done in the past two years. There was, realistically speaking, no other option.

Speculative capital, you see, not only eliminates the arbitrage opportunities but the policy options as well. Men can boast of their free will. But what defines freedom is the availability of choices. As the choices narrow, the freedom is curtailed. A man without choice is a condemned man. Speculative capital limits the choices by creating conditions in which any action not in accordance with its interest looks naive, irrational or radical.

Such an environment is ripe for the rise of men most concerned about looking naive, irrational or radical. They are the functionaries and palan-doozan whose policy decisions at all times remain preordained. When they deviate from the prescribed course, not so much due to courage but incomprehension, the ensuing storm publicly chides and corrects them. Lehman bankruptcy was the Exhibit A in that regard.

Nothing illustrates this subjugation of man to the dynamics of speculative capital better than the option valuation theory. As I showed in Vol. 3, the entire option valuation literature is fundamentally incorrect and based on a misunderstanding. An option is not a right to buy or sell. It is right to default. This is the very “scientific-mathematical outlook” which Paul Krugman pompously called “the true glory of our civilization”.

Under these conditions, when the actions of the players are influenced by a hidden force, the regulation of the financial industry can proceed on only two paths. It must either be in conformity with the needs of speculative capital, such as creating a living will for the institutions to go out of business without complications, or skirt the issue altogether, which is just about everything else, including executive bonus and consumer protection. If any provision of the law currently being written contradicts this general outline, the matter will be worth a second look. But do not bet on it.

But is it possible to “do something”, Mr. Saber, anything at all, about the situation? After all, you criticized Godard for being nihilistic. Between not succumbing to speculative capital and destroying the system altogether, do you have any bright ideas?

To that hypothetical question, I had a modest answer a while back. I humbly suggested that shorting Treasuries be disallowed. This would be tantamount to turning a floodlight on a vampire. It will not kill the beast but temporarily paralyze it.

Given the reality around us – the amount of trading that is centered around Treasuries, for example, and the liquidity that such trading provides to the financial markets – the proposal is too radical and thus, naive.

Sunday, October 11, 2009

The Biggest Chunk of Insurance Cost

Every time you buy an insurance, some ones get their commissions and that is usually considered the largest part taken away from your money. In life insurance, this fee may start at 20-50% and slowly drop to 0% in 6 to 10 years time.

This fee structure turns out to be the most crucial part why Insurance becomes the most dedicated finance tool for personals. The whole agency and distribution forces have made insurance well accepted by general public because they are paid well. In addition, it becomes one of their most solid passive income streams.

It is really hard to sum this up in a word of good or bad. No one will like to be taken away $400 from their $1,000 savings or investment what ever you call it. But then again, if such commissions scheme did not exist, many people may still be under-insured and even more people did not save anything at all.

Although it starts at a HUGE chunk, it does reduce over time. Generally the total payout is within the range of 160% to 200% over a 10 years period. So the longer you keep your insurance policy, the less effect it has on you ;
10 years old policy has an effective commission cost of 20% = 2 / 10
20 years : 10% = 2/20
40 years : 5%

It is really hard to sum this up in a word of good or bad FOR YOU.

If you bought other products that have similar features but paid lower commission, then you are alright.
If you ended up NOT saving any money anywhere else, its bad for you.
If you have to pay high medical fee later, then it could have been better if ...
If your loved ones have cash flow problem after you die, perhaps the 40% 30 years ago doesn't seem like that much after all.

It is good we keep on searching for better solution all our lives. But before we find better ones, its crucial we engage with whatever available at the time.

Commission fee structure is the biggest chunk in insurance cost. There is probably NOT much we can do to change that in near future. What we have full control in, is to assess the value we receive in return. As long as we receive services and advices that is worth more than we pay, its a lesson well learn.

After reading this, will you

(1) be more eager to buy insurance,
(2) hate insurance more now or
(3) doesn't change much of your opinion on insurance ?

What happen after Automatic Saving ?

Once you have Automated Saving System or ASS setup and running for a while. ( I bet not many of you yet ) You may wonder, "What a crap! I am not financially free yet!"

Thanks to a case study reminding me to move on after ASS is setup. Also inspired by a silent guru - Meshio - somehow some reason I started scratching on a piece of paper when I review that case study. So in short, this may represent what happens after ASS ...

  1. Choose an account that gives highest interest you can find for your ASS account
  2. Decide how much emergency fund you need in your ASS ( usually in number of months or years of your monthly expenses )
  3. Once achieve the emergency fund amount, the overflow should goes into investment
  4. Your investment potential return should be significantly higher than your ASS return
  5. move the emergency fund to FD, Bond Fund or Money Market Fund if interest is higher than your ASS account.
  6. Continue looking, learning, categorizing and revising until your investment return is Passive and higher than your active income.
Finally the most important one #7, comes buy me a bottle of wine and tell me how MalPF can be improved based on your experience.

God did rest on Sunday didn't he ?

30% LOST is MORE than 30% profit ?

Have it ever occurred to you that 30% profit is NOT magnitude-wise the same as 30% lost ?

When your $100 investment earns a 30% profit, it goes up to $130 = 100 x 1.3. Pretty straight forward, no problem there. Then it makes a 30% lost. Instead of going back to $100, it actually drops to $91.

130 x ( 1 - 0.3 ) = 91

The calculation above is not deceiving. A 30% discount on any market item is actually calculated the same way.

So you have just made a lost of $9 !

Sounds tricky ? Lets see what if it moves the other way round.

This time you lost 30% from your $100 investment, it become $70 = 100 x ( 1 - 0.3 ). No problem here. Then it earns back 30%. This time you got 70 x 1.3 = $91. Again you lost $9 !!

There you go, sometimes 30% earning is NOT necessary the same as 30% loses. Get your numbers right in both your business and investment, 9% strategical lost due to a not-so-well-setup strategy could be killing.

Saturday, October 10, 2009

Married : Combine or Seperate Account ?

One of the common questions asked by recently married couple is "should we combine our bank accounts or keep them separate ?"

The quick answer is to have combined accounts when you are newlywed. Later down the marriage path, you may want to keep them separates. As jokingly as it may sound, you may eventually find it very truthful too.

The longer or more philosophical answer is to keep some accounts private and some other accounts joint.
Your account is Yours,
My account is Mine,
Our account is Ours.
All 3 are DIFFERENT ENTITIES, they are NOT suppose to get mix up. Suppose each person already has her own account before marriage. So yours is yours and mine is mine, there shouldn't be any confusion there to start with. After marriage, each individual just add a new Automated Saving Stream into the newly created joint account. Thats about it.

Friday, October 9, 2009

Web statistic - a different era for MalPF

MalPF goes global, 1st step ... http://malpf.savingadvice.com/

MalPF is ranked the no. 27 million-th most visited site. Or in layman term, one of those sites that no one knows and will never find out about.

Malaysia Personal Finance blogspot is slightly better rank at 2.6 million-th and 47,902th in Malaysia.

There are a lot of NEW and great Malaysian personal finance blogs setup recently but kclau and meshio still top the list as covering all rounder topics

kclau - 378,988th most visited in the world or 5,290th in Malaysia.
meshio - 664,893th

( in ranking, the lower the number the better it is )

A few other bloggers who may not cover traditional full range personal finance topics but has been providing great tips and latest news, hence rank quite well within Malaysia visitors. One of them is AlanTan, rank 5,133th and DavidLee, 2,414th in Malaysia.

In contrast to Personal Finance Malaysia, MalPF is lacking at 10% or in other words, needs to play a catch up game of 10X.

Out of finance topics, KennySia is rank 408th in Malaysia and 51,274th in the world. Liewcf is still the father of all bloggers, rank and stay high at 27,101th in the world.

On this comparison, MalPF needs to spend 100 times the effort to catch up from existing 1% of Malaysia's Internet pie.

Most of the world best personal finance sites are also ranking at liewef's level :

GRS - Get Rich Slowly @ 22,132th
SA - Saving Advice @ 33,576th

Sorry this post may be a bit geeky, random and irrelevant. But I guess this means its time for MalPF to do spell check, write in full sentences and start some internet marketing ...

or will that corrupt its originality ? What do you think ?

Non Money Oriented Personal Finance Style

A few real life stories were told before;
Gabriel is the one who is NOT that RICH but financially quite independent and freedom he has.
Ahmad fights inflation by growing his own needs
Ah Dung is the RICH guy who didn't really get hurt by inflation
Mathew is the typical Average guy who is shocked by an effective inflation of 24% !!
In promotion of successful personal finance without money or at least without MUCH money, here is the story of Ah Yung.

Ah Yung is almost 70 years old now. At first glance, she has been earning her daily income from her morning market stall all her life. She made noddles when she was young and now she is only reselling whatever items she can carry ie. not so heavy. She never went to school. She has no idea what personal finance is. She doesn't have much insurance, no investment and only 1 or 2 saving accounts. She couldn't even tell if her business is earning profit. She just knows she has been surviving fine with what she does so far.

Her daily revenue ranges from $30 to $300. With a profit from $5 to $20, she is able to keep her stomach filled. Sometimes friends drop by and invite her to varies gathering which has a lot of fun and .... food. Sponsored by varies society clubs and semi-political parties, most of these events are FREE.

She lives in a house left by her belated husband, where the $40,000 loan has been fully paid off. The house is worth $160,000 now but she insists the house is the LAST thing the family has so it is there to stay "no matter what".

She traveled to work, the market, with her 30 years old bike. Almost everything she needs are obtained from the market too - cloth, food, drinks, fun stuff, blankets and business materials.

Despite living expenses day to day, she thinks she is quite alright. Although sometimes complain about politics and unfair treatment from the authorities etc. generally she thinks she has what she needs.

She has many friends. She is very generous to all her friends. Whenever friends need help, she is there. Even when money is needed, she lends as much as she could. Sometimes until she has to skip a meal or two. At her age, she has gone through quite a large number of weddings, birthday parties and funerals etc. She always shows up and she always bring present or whatever suits the occasion, by using up whatever money she has at that time. She has many friends, who call her friend as well.

Once she was in finance trouble. She lend all her money out and sales were slow. She had been eating plain buns for days. On the 4th day, her friends knew and they came to cheer her up. They had breakfast together right next to her stall. 2 weeks later, Ah Yung was backed on her feet. All friends were happy too as it was quite a good reunion for a couple of them actually.

Another time, she faced a robbery, fell down and her bike was broken. News spread so the local people and neighborhood found and captured the criminal in less than an hour. A mechanic helped her fix her bike with a very small fee. The Chinese practitioner in the market helped cure her health condition.

When her husband passed away, she didn't know what to do but about 200 good friends showed up and helped. 1000 to 2000 people showed up the funeral and helped her through the financial tough time.

Ah Yung doesn't earn much, doesn't save much, doesn't have a clue about finance planning. But through out her life, she made friends. Her human network is as big as a marketing company out there. When needed, friends will come buy from her stall even if the price is slightly higher than Carrefour. When needed, helping hands are just around the corner. There is no need to ask, people will just come to help. The same way as she has been helping so many others in her past.

Ah Yung is actually financially independent. She doesn't really go to her stall everyday. Now she and her friends always go out to parks to work out, then they go to new places to try out new food. When she is not working at her stall, someone will rent her place automatically paying her a net profit of $10-$20. A very strange passive income, no contract, no agreement, it just happen and it has been happening like that for more than 10 years. From time to time, her friends and her travel locally and overseas. Most of the trips are sponsored, either with some marketing purposes or simply privileges given to golden years people. She has friend who can get the linkage to get all these FREE stuff. Some other times when she feels bored, she visits her friends in another state or even country. She just need to get on a bus or a plane, her friends will settle the rest. Like wise, sometimes her friends come visit her from neighboring countries and she will take very good care of her friends too.

Ah Yung has ONE asset and no liability, a net worth of $160,000 and growing. She doesn't earn much but she doesn't spend any, resulting a long term positive cash flow. The only thing she has ever invested seriously is her time and dedication to the people she knows. And now she is receiving the return.

Ah Yung is a happy old lady. She has been having her financial freedom all this while.

Thursday, October 8, 2009

Financial Regulation, Theoretical Poverty (1 of 2)

One of the issues being debated these days is the regulation of over-the-counter derivatives, the privately negotiated, customized contracts that exist in a legal world parallel to their standardized, exchange-traded cousins. The Financial Times was surprised that even the European industrial companies had come out against the regulation:
Some of Europe’s industrial companies have warned they could shift their financial hedging away from Europe if proposed reforms of the vase over-the-counter (OTC) derivatives markets go ahead as proposed by the European Commission ... The comments show that opposition to a key part of US and European proposals for reform of the financial system is gathering from an unexpected quarter: industrial companies.
The paper gave the reason for the opposition without, naturally, understanding the centrality of the issue to the current crisis:
Many companies use OTC derivatives, such as interest rate and currency swaps, to hedge routine business risks like fuel purchase and future pension liabilities.
This need of industrial companies for hedging is the genesis of the speculative capital, the latest and most versatile form of finance capital, that is born from the marvelously dialectical transformation of defensive hedging to predatory arbitrage. I was first to explain this metamorphosis in Vol. 1:
The most important point in the rise of arbitrage trading is that the practice develops logically from hedging and, on paper, is indistinguishable from it.

The purpose of hedging is preserving the owners’ equity. The hedger begins with an existing asset (liability) and seeks to find a liability (asset) which will offset its adverse price changes. The purpose of arbitrage, by contrast, is profit. The arbitrageur has neither an asset nor a liability. To that end, he looks for any two positions which will enable him to “lock in” a spread. The two acts are mathematically indistinguishable. What logically separates them is the purpose of each act which translates itself to the sequence of execution of trades. When done sequentially, the act is defensive hedging. When done simultaneously, it is aggressive arbitrage. Otherwise, the transformation of one to the other is seamless.
The sole subject of finance is studying the laws of movement of finance capital and its various forms such as speculative capital. The role of individuals, to the extent that it exists, is incidental.

The centrality of finance capital in studying finance is acknowledged – if only unconsciously and unknowingly – by the mouthpieces of the orthodox economics. They, who never tired of sounding off on the primacy of the individual and his supposed “free will” as an “economic agent”, these days talk of “jobless recovery”. Google the phrase and see how through sheer usage it has become an accepted term of discourse.

Writing in his column about the expanding army of the unemployed, Bob Herbert of The New York Times condemned this point of view without understanding its roots.
The Beltway crowd and the Einsteins of high finance who never saw this economic collapse coming are now telling us with their usual breezy arrogance that the Great Recession is probably over. Their focus, of course, is on data.
In the phrase “jobless recovery”, the news pertaining to the people is grim; there are no jobs to be had. Yet it contains “recovery”. So, what is it that is being recovered? The answer is: the agreeable rate of return of capital. The “data” measures the pulse and performance of capital, which the university professors study and comment about without ever understanding the larger issue surrounding it.

The outward appearance of the phenomena in economic life is deceiving. In fact, the appearances tend to show the opposite of what is actually taking place. Hence, the authority of the great thinkers of the classical economics who showed us the way.

The story-telling school of economics and finance that is in currency now concerns itself with the most immediately visible. Naturally, it gets everything wrong. Here is a full time professor of economics and finance at Yale explaining a crisis that has paralyzed much of the world for the past two years:
“The fundamental problem, as Franklin Delano Roosevelt said in 1933, is fear”, [Robert] Shiller, a Yale University Professor said. The great depression was deepened by a “sense of lost confidence and animal spirits that was a self-fulfilling prophesy. The worry is that we will have the same kind of issue rising again,” he said.
Even academics are beginning to see the superficiality of their theories; the long-present elephant in the room can no longer be ignored. The policymakers always knew it, which is why they practiced “pragmatism”. But in markets dominated by finance capital, pragmatism – doing the “proper” thing given the circumstances – is nothing but yielding to the diktat of finance capital. That is the part that neither the policymaker nor their critics who accuse them of “taking the side of their banker friends” understand. Like the focus on the data that Herbert criticizes, the problem goes much deeper.

I will return shortly with the second and final part of this piece.

Bursa Malaysia teaches Don't Buy And Hold

This is one of the Golden Rules from Bursa Malaysia teaching people how to trade Malaysia stock market.

This is the topic content and my highlight in RED.

The Malaysian stock market is one of the strongest and sometimes most dynamic markets in the world.

While the market has always recovered from falls, the same cannot be said for individual companies. Even during a booming market, some companies can suffer significant losses.

Trade only on an uptrend and sell the poor performers, this will make it impossible to experience a large loss. This is the secret to outperforming the market and achieving a consistently superior return.

Undertake some research on the Bursa Malaysia or in a local investment paper. List three shares that have showed decreased performance recently and three shares that have showed increased performance recently.

Did you get that ? "IMPOSSIBLE to LOSE A LOT" !! What a way to set GOAL in stock investment !! Furthermore, making MANY small loses is as bad as making ONE big lost. As a matter of fact, many small loses may actually be worse because you didn't feel the pain and didn't realize how much you have lost. As in Boiling Frog story.

Compares that with the Number 1 TOP stock investor in the world ...

What they should have said is to Employ A proper Stop Loss Strategy. Aim to be right and learn until you make more correct decisions, that is what the game is all about. But just in case you are wrong, preserve your capital allowing you to 'COME BACK' by adopting a stop loss strategy. When investing in a fundamentally strong business, it takes patience and sometimes ignorance to just buy and hold.

Why does even Bursa make such a bias education ? Well, buffett has said it above. Bursa needs brokers, brokers need money, so Bursa also wants you to buy and sell as much as possible so that you pay them more transaction fees.

Sell it ! Don't Hold ! Else Bursa will DIE !!

Ya right ! You may just as well donate your money to Bursa ....

Guest Post: Student Loan As An Investment and Student Loan Debt Consolidation

Sharell Crawford is currently working for Debtconsolidationcare. Having a lower debt amount will mostly improve your chances of getting lower interest rates for most of the purchases you made.

A student loan is considered to be a good investment since it is taken out to establish the career of an individual that helps him earn his livelihood. However, sometimes it becomes impossible to prevent debt arising from student loans. Debt consolidation plays an important role over here. Student loan debt and mortgage loan debt are considered as “good debts” because of their positive aspects. On the other hand, credit card debt and car loans are regarded as “bad debts’” since they signify lavishness. You don’t acquire student loan debt by extravagance. These loans can be obtained more easily from federal sources than private lenders. You can get useful returns from utilizing a student loan. The more you become educated, the more is your earning capacity. However, you must not forget that you have got to pay it off.

The anxiety of paying back multiple student loans can be annoying on certain occasions. In addition to this, procrastination is a normal feature of the college life of a student. This does not spoil your results but not paying your loans when they become due for payment would certainly have a bad impact on your financial future. The most effective option for a student to drive away his financial concerns and get pleasure from his college life is a student debt consolidation loan. This type of a loan combines all your student loans into one loan that is simple to handle. You basically take out a bigger loan to manage your various smaller student loans. As a result of the affordable and competitive interest rates, you can save some money. By stretching out the repayment terms, your monthly payments are reduced considerably. You also have the opportunity of locking in an affordable rate.

At present, the last thing that you want to happen to your finances is piling up a huge amount of student loan debt. A student debt consolidation loan can be the right solution to conquer your debt problems. You have to keep in mind that private student loans cannot be consolidated with federal student loans. If you’re suffering from student loan debt, you have to consolidate your federal student loans and private student loans separately.

notet from Doroth, Financial Helpdesk.

Monday, October 5, 2009

BEST rates in Malaysia - update 2009 10 06

This is a comment update to FREE Info on Best Rates in Malaysia :

Car Loan
Maybank still tops the list after many months offering starting from 2.7%. The trick is that not everybody can get that rate and further more its mostly for national cars only. So the way they published their car loan rate has successfully made them the best choice over the past few months.

2nd runner up is Bank Muamalat whose car loan rate is only 2.85% but charges a RM 600 admin fee.

House Loan
Affin bank still top the list with BLR - 2.3%, the trick is that they don't approve many loans. They have this self image that they are the 'high quality' house loan processors ...

2nd runner up is Standard Chargered BLR - 2.25%, who is relatively more flexible and more marketing oriented. That means they may listen to what you need, try their best to request benefits on your behalf, with the hope of getting your business.

Fix Deposite
FD rates haven't changed since the recession staying at 2% which really puzzle me. If the recession is really over, why isn't the saving rate goes back up yet ?

BLR is generally staying at 5.55% with a few exception where foreign banks are offering slightly lower rate.

Sunday, October 4, 2009

Malaysian Personal Finance Part 1 - EPF

If you earn a salary in Malaysia, 8% of your salary goes to EPF (2009-2010) - Employee Provident Fund - before you can ever see it. This saving scheme is enforced by law and happened automatically, so this makes it a perfect ASS - Automated Saving System.

Your employer will add another 12% to it making it a total of 20% contribution. If your monthly salary is RM 2,500, RM 200 of your money goes to EPF. Your company adds another RM 300 to it so you will have a total of RM 500 in your EPF account.

Effectively you only receive RM 2,300 cash before tax. But the value you are receiving every month is actually RM 2,800 and not your salary amount RM 2,500. A 20% enforced ASS is absolutely NOT a bad thing at all especially during your mid life.

The lowest dividend EPF can declare is 2.5%, generally higher than most bank saving accounts for such a small amount of money. Again makes it a great ASS.

Sounds too good to be true ?

Indeed government force saving scheme like this is one of the greatest thing happen to one's personal finance. Most of the poverty in this country, not by chance, turn out to be those who didn't contribute to EPF.

Are everyone off the hook then ? Well, not exactly. If you have been following this site long enough, one of the fundamentals of ASS is in R E L A T I V E. Most of the people are in debt today, so if you are not in debt and have some saving, you are better than others. That is what ASS is all about. It is the Minimum one HAVE TO DO for his own personal finance. And one of the biggest effects of ASS is its psychological stop on getting into bad debt.

ASS does not make you rich, ASS does not fight inflation, it just give you a good start.

So if everyone has ONE ASS account and you have ONE ASS account then you are just like everyone else. Still in rat race that is. The status quo in the beginning of 21st century, is to create another ASS account yourself without the help of government enforcement. If you are able to setup an ASS account yourself consistently through out the years, you have just strengthen your personal finance from a merely 10% to above 60% !! . . . . . simply because most people fail to do so now.

If you have this 2nd ASS, you have increased your chances of success by 6x ! Because this 2nd ASS account will psychologically tune you into a secure investment in future. So a real personal finance starts at RM 2,300 in above example, not RM 2,500 or RM 2,800. EPF has already been setup and we should just forget all about it, our jobs starts at RM 2,300 !!

What's wrong with EPF then ? Well basically other than above generalization of EPF, everything else doesn't seem too right.

You cannot access the money until you are old, ie. age 55. So practically they are NOT your money. If you die early, it would just be a high premium low sum assured life insurance, paying out to your beneficiary.

In a good ASS, you are supposed to setup the saving system up and forget about it. Let it accumulate by itself over the time. But in real life, everyone is trying their best to get money out from EPF. Why do people need to withdraw from EPF prior to age 55 ? Because they do not have their own ASS accounts !

While it is really arguable if one should or should not withdraw from EPF, but the psychological effect of relying on EPF money is seriously damaging your ability to earn the income you could have been. If you want a house, you setup an ASS for the down payment. When you want a bigger house, focus all energy to increase your income. When your personal finance is setup right, a small increase in your income streams can have double effect in your finance world.

Last but not least, although government setup such provident fund at the name of people, the real intention of such fund management is really questionable. The real target of EPF is to fight inflation. There are some well known inflation hedgers such as stock markets and properties but EPF has less than 25% exposure on these 2 areas while more than 60% are channel back into govertmental mega projects. Generally speaking securities, bonds and loans pay out higher than Fix Deposit rate but still lower than inflation.

So generally we have a great system to start with in Malaysia, ASS is enforced using EPF. However, transparency and ability for EPF to function as it should, may take slightly longer to realize, if it happens at all. People's ability to use EPF in their favor, is still a long haul educational evolution.

Part 1 : EPF