Sunday, February 28, 2010

go on without a goal, but for how long ?

One of the weird concepts presented by this site is that you don't have to have a goal in your personal finance. It would be like an anti good finance practice, as guilty as Rich Dad asking us NOT to save in his Conspiracy publication.

Lets get straight to the point then. If I really don't know what I want in life or always fail to stick to the same goal, does that help if I keep on searching my goals and therefore should do nothing about my personal finance until I find the right goal ?

I think the hint should be clear. There is really nothing wrong or as a matter of fact, much better if you also start saving and save automatically while you are looking for your goal.

You may not understand exactly what Warren Buffet is doing but if you were to just follow exactly what he has been doing, what do you think you will end up with? Well, Berkshire Hathaway investors can tell you that they are very happy with exactly that situation ( at least historically ).

If you have found your goal, congratulation and good for you! Unfortunately due to the way our education system is set up, most of us might just spent our whole lives looking for what truly meant to us. At the same time our lives go on as usual and as real as it could hit us hard. So even if you haven't found your goal, go ahead and ;

MalPF doesn't say you don't need a goal. It says having one goal is better than not having any. And don't procrastinate while you haven't found your goal yet, start some actions. And if you don't know what actions to take before having your own goal, stick to what MalPF gives you, the wealth pyramid.

But there is always a line to draw, differentiate those with goals and those without. If you do not subscribe to Dollar Cost Averaging, stay within Bond Fund and Fix Deposit. If you do not follow some of the stock market investment principals, do not invest in stocks if you don't have a clear goal yet.

So you don't have to have a goal to start something, but eventually you will need a good goal to end great.

Thursday, February 25, 2010

What's In a Name, You Ask. It Depends, I Say.

Bloomberg reported that Bernie Madoff’s daughter-in law, Stephanie, has filed a formal request to have her surname, and those of his two children, Audrey and Nicholas, legally changed to Morgan.

My compliments to Stephanie, not so much for the move itself but for the choice of the name. In preserving the family’s ties to finance, however indirectly, and keeping the children’s options open in the future, the name Morgan trumps Rockefeller or Carnegie any time.

But no matter how smart Stephanie is, she is the second best in the Madoff orbit as long as one Sonja Kohn is around. This latter woman even fooled me, and let me tell you, not as a boast, but as a tribute to her skills, that I am not easily fooled in matters of finance.

Yet, I was fooled, which is to say, completely, totally misled, upon reading that among Madoff’s “investors” were three Bank Medici funds.

Now, gentle reader, what would you have thought upon reading the same news?

If you knew anything about economics, finance, banking or European history, you would recognize the Medici name at once. It is synonymous with the rise of institutional banking

So, you would have thought exactly what I thought. Knowing that no institutional investors had a penny in Madoff funds – because everyone knew it was a sham operation – I said to myself that even the Medicis could not resist the temptation of high return in capital markets, however dubious the source of return.

That’s what you would have thought too and, if you read the story, you no doubt did.

It turns out the Medici Bank is the brain child of Ms. Kohn. In a nutshell, she returned from New York to Austria, and learned, to her delight, no doubt, that the Medici name was not protected. She registered it and started the “Medici Bank” which, after it had substantially grown, had a total of 16 employees. And, as to leave absolutely no doubts about her intentions, she commissioned a coat-of-arms for the new enterprise. That's how a Medici Bank with a coat of arms became a feeder to Madoff funds.

According to The New York Times, Sonja got money from Israel, Ukraine and the Russian “oligarchs”. In June 2008, she told The Voice of Russia “our history is a very conservative one”.

Our history.


You really have to read the whole article for yourself. One day, if the items on my do-list are reduced to a manageable number, I will return to Sonja Kohn and her world in detail. It is a fascinating story.

For now, here is a follow-up:
Prosecutors are looking into whether Mr. Madoff paid more than $40 million to Mrs. [Sonja] Kohn in exchange for turning three Bank Medici funds into feeder funds for his business … Mrs. Kohn received about … $11.5 million for research reports for which prosecutors were unable to find receipts … A spokeswoman for the former Bank Medici said Mrs. Kohn was “shocked” by the accusation that she received personal payments from Madoff and reject such assertions “vehemently”. Mrs. Kohn has not been charged with wrongdoing but Bank Medici surrendered its banking license in March.
She was shocked at the allegations. SHOCKED.

But it gets better.
Mrs. Kohn is now trying to rebuild her reputation in the Austrian banking industry. She renamed the bank 20.20 Medici, using the term with which optometrists describe perfect vision. Keeping the Medici name is a sign that Mrs. Kohn is not trying to “rid herself of what happened in the past,” [a lawyer for the bank] said. At the new venture, Mrs. Kohn plans to offer advisory and research services.
I do not know what has become of late of 20.20 Medici, but the name has stuck in the back of my mind. Perhaps because it sort of rhymes – in English, anyway. Perhaps the juxtaposition of a modern medical term with the name Medici is so stupid, so vulgar, so offensive – so Sonja Kohn – that it lodges itself in the subconscious, like the memory of a terrible accident.

Who knows, next time I need some objective, independent financial advice – say, about the value of some credit default swaps – I might give 20.20 Medici a ring.

P.S. (Mar 4, '10) - It was brought to my attention that the link to the Bloomberg story in the opening sentence is no longer valid; Bloomberg has taken out the story.

No matter. Here is a link to the aolnews. You want more, google "madoff name change morgan".

Wednesday, February 24, 2010

The Complexities of Interconnectedness

The social problems are difficult to solve because they are social. Each problem is related to a slew of others that, combined, comprise the social system in its entirety.

Take the topical issue of health care in the U.S. Why are there about 50 million people without health insurance?

The answer is cost. People have no health insurance because they cannot afford it.

Why is health insurance so expensive? Anthem Blue Cross in California just sent a rate increase notice of about 39 percent to its customers. Can anything be done about these spiraling costs?

Well, many factors contribute to the high cost of health care in the U.S., the bureaucracy and dead weight of the private health insurance companies being one. One other factor is obesity. According to the Center for Disease Control, obesity costs the U.S. health care system about $150 billion a year, enough to cover the premiums for all the uninsured. To control healthcare costs, the epidemic of obesity must be controlled.

Why are people fat?

The answer is that: 1) they do not exercise; and 2) they eat junk food.

Why don’t people exercise in the U.S.?

That is lengthy subject. There is the country’s “car culture” where everyone drives because distances are long and driving is often the only means of getting from here to there. Many people could not walk even if they wanted to because in many cities there are simply no sidewalks. Many others could not walk even if they wanted to because they have no time. They leave home early in the morning and by the time they get back home, they are exhausted. So they vegetate in front of the TV with some junk food.

Why do they eat junk food?

In four words: because it is cheap. People eat what they can find and afford. Good quality food is expensive and will drive up the cost of maintaining the labor force – wages and salaries, that it. So it is not the matter of the fast food and processed food industry – and industrial hog farming and poultry and fish farms, what have you – producing unhealthy or mercury-laden food. It is that they produce cheap food which, like Walmart producing cheap clothes and other cheap stuff, helps keep the wages low. Where did you think the legendary U.S. labor productivity come from?

That is why about 50 million Americans do not have health care insurance!

I mention this because today the SEC announced some restrictions on the short sale of stock. If a stock falls 10 percent from the previous day’s close, until the next day, the short sales could only be executed on an uptick. This was the Depression era rule in effect the SEC abolished it in 2007.

The rule is not particularly radical or complicated. But its impact will go beyond the equities market. When triggered, it would bring options trading on the stock to a halt. That is because all option valuation models work on the assumption of continuous trading of the underlying stock without any restrictions. Absent that condition, the neutral hedge cannot be formed, which means that the option cannot be valued. From Vol. 2:
Years later, in their search for a solution to the option valuation problem, Black, Scholes and Merton were forced to abandon the contrivances of economics and financial theories and adopt an approach that was grounded in real-life. That change of approach shows itself in the methodology of derivation of the Black-Scholes model, which is based on arbitrage: constantly, in fact, continuously, buying and selling.
Recall one of the most critical problems of the crisis that continues to date was determining the “fair value” of securities. Setting aside the arguments for and against short selling and focusing on options only, the SEC’s decision might or might not prevent the downward spiral of stock but it will surely introduces more price uncertainty to an active and technically unrelated segment of the market.

I am neither defending nor criticizing decision because it – it being the decision – matters little. I just note, in confirmation of what I have already written – here and here, for example – and what I will write about systemic risk, that the complexities of interconnectedness at the advanced stage of the reign of finance capital are real, daunting, and not susceptible to being cured with band aids.

What can I do when bully by the Big Boys ?

Some of the most read articles here is when some of the big finance institutions' bad intentions are exposed.

Like wise, Robert's "Conspiracy" and a few other gurus who talked about how sick today's finance systems are, also receive major big hits. Its just fun, eye opening and jaw dropping to learn these news!

So what can we do about it ? Robert's suggestion is to join the big boys playing the debt game and his instrument is property investment. Obviously that is not the 'solution'. That is just him sharing what he does best. Unfortunately property investment is NOT an instrument that can be used by mass market ( everyone ). Just take a statistic of all Robert's subscribers and see how many get what they want. Do pay attention to his early franchisees results.

One of the concepts preached by this site is Scoping. For example;

It is important to understand that Income is a pre-requisite of Personal Finance but NOT a part of it. Hence it does NOT matter how much you earn, you should have a good Personal Finance Profile.

Personal Finance is personal, its NOT economy, its NOT company finance etc. Its just You.

So no matter what is happening around you, if it didn't affect you. You just read, learn and have some fun cursing them. If some of the big boys did bully you, stay cool, play victim contacting them and minimize damage as soon as possible before stay away for good.

It may sound sad or passive but its really not. Its just about being smart and get things done. When the big boy forces you to pay RM50 credit card fee, you can stop the credit cards. When EPF wants to scam your home loan money, you can choose lump sum payment. When government tricks your EPF, you can submit request to continue contribute maximum. It is as straight forward as that.

Get the scope right that your personal finance is all about you. Do something for yourself first. Then when you still feel like wanting to do more for the greater self. Then by all mean, gather a group, sign a petition, run a parade whatever etc. But that is NOT your personal finance duty. Its the greater you. Don't let the greater you ruin your personal finance. Because the journey of greater you is long and tedious. You will need multiple recharges before you reach the end of the journey. And keeping the scope clear will allow your personal finance to comfort and pamper you along the journey.

Sunday, February 21, 2010

A Letter to Mr. Baxter

Dear Mr. Baxter,

I just read your testimony before the House committee investigating the financial crisis. You delivered a long, carefully prepared text to defend the Fed's bailout of AIG. As the executive VP and general counsel of the New York Fed, nothing less was expected from you.

Did I get your approach, your strategy, right?

Your strategy, I think, was to deliver a one-two punch wrapped around a coma-inducing narrative. One, you talked at length about the threat of a looming, apocalyptic crisis, which made the bailout necessary, almost a patriotic duty. Two, you said that it was all for the benefit of taxpayers. You used the word “taxpayer” 16 times, as in the Fed “protecting taxpayer interest”, or the Fed “securing both downside protection and upside participation for the U.S. taxpayer”.

Now, the Fed creating funds electronically from thin air and transmitting them here and there has nothing to do with taxpayers. But I am not writing to criticize you for using catch words that you thought would score a point with your audience. That would be missing the point, like criticizing a B-movie director for including too many sex and car chase scenes.

As for the length of the speech, may I say it was a benumbing case of too much transparecny and “putting everything on the table”, where you omitted what was necessary but included everything else, as in this gem:
The first 8-K was filed by AIG on December 2, 2008, after Maiden Lane III purchased the first group of CDOs. On December 18 and 22, 2008, Maiden Lane III purchased a second group of CDOs. Also, an agreement struck in November in conjunction with the original transaction, known as the Shortfall Agreement between Maiden Lane III and AIG FP, was amended as of December 18th. These events required the filing of a second 8-K on December 24, 2008.
Good performance. My compliments.

And, yet, sir, talking too much was an error. When you talk too much, even deliberately, you reveal things that you did not intend. If you want to de-emphasize something, or skip over it – if you want to hide something, in short – the less said the better. Ask any mobster or petty criminal who would tell you that unsaid favors you.

So what did you reveal?

On the question of the authority of the Federal Reserve to rescue AIG, nothing. You said not one word on the subject. And that was the revelation. I will return to that intriguing point in the next post because it goes to the heart of a matter that is dear to me. But before then, allow me to make a few comments on what you said about the Fed forcing AIG counterparts to accept less than par for their credit default swaps (CDSs). You said:
The Federal Reserve has been criticized by some for not using its regulatory power to force the counterparties to accept less money for the CDOs. The critics overlook a number of key factors.

First, there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of November 10th.

Second, the Federal Reserve had little or no bargaining power given the circumstances. This restructuring negotiation was taking place in November of 2008, less than two months after the decision to rescue AIG from insolvency and the infusion of tens of billions of dollars.

Finally, even if we had had bargaining power, the rating agencies, as discussed above, were closely examining AIG for signs that it would not be able to address its financial situation. If they saw the Federal Reserve take any action that seemed to suggest a lack of full support, in particular a bankruptcy threat, it might well have led to an immediate downgrade and the irreversible destruction of AIG, with the attendant consequences on the financial stability of our economy.

Some have said that, in the absence of other bargaining power, the Federal Reserve should have used its regulatory power ... to make regulated counterparties give up or compromise their contractual rights. We see that as an abuse of regulatory power.
Dear Tom,

In consideration of your first and second points – no time left for action and the Fed having no bargaining power – may I suggest that you refrain from playing poker in the future. When you voluntarily tip your hand, you will, of course have no bluffing/bargaining power.

The time to have forced a deal with AIG CDS counterparties was on the morning of September 15, when Lehman filed for bankruptcy. I will return to this point in a moment.

Regarding the final point, about the rating agencies closely examining AIG, come now, Tom. The purpose of the Fed’s intervention, as per your testimony, was to annul the CDS contracts. That is what the rating agencies were looking for. They would not have cared whether you paid 60 cents on a dollar to annul them, or full dollar, which you did. “Full support” does not, and did not, mean full payment.

Then, there is the question of authority. You brought up the issue the abuse of authority, which I found funny. I don’t mean ha ha funny but funny in the sense that you mentioned it in a hearing convened to examine the question of the Fed’s abuse of its authority to give $180 billion to AIG. But I know you did not realize it. (There was a ha ha funny part, though: a presentation by the boys in BlackRock where they told you that AIG counterparties would not acccept anything less than par. When I read about it, I actually laughed. Whose idea was that one, and what was the subject/title/agenda of the presentation?)

I will return to the question of authority in the next post. Let me now tell you when the Fed would have had tremendous bargaining power over all AIG counterparts without restoring to threat of abuse.

On Monday, September 15, 2008, Lehman filed for bankruptcy. That is when, according to you, hell broke loose. Le Monde said it was the day that Capitalism stopped functioning.

On that day, a meeting was held between Mr. Blankfein in his capacity as the CEO of Goldman Sachs and Mr. Timothy Geithner is his capacity as the president of the Federal Reserve Bank of New York.

  • Who proposed the meeting?
  • When was the meeting proposed – what day and what time?
  • When was the meeting held and for how long?
  • Was the meeting, to use that dreadful corporate word, “minuted” – is there a transcript of the meeting?
  • If not, why not?
  • Who else was at the meeting?
  • What was the agenda?
  • What topics, if any, were discussed in addition to the main agenda?
  • Did the AIG name come up in the meeting?
  • If so, in what context?
  • Did the issue of the AIG CDS come up?
  • What points were agreed upon at the end that were open in the beginning?
I remain.

Monday, February 15, 2010

Money, Capital and Art

The Appeal of the Walking Man generated heavy email feedback. If this were a commercial site, responding to the “customer demand”, it would have to be renamed Dialectics of Art. But it is not. More to the point, the dialectics of finance is the starting point of making sense of art, so we are on the right track.

This touches upon a point I made to a friend who wanted more about the role of money in influencing art. I said that the role of money is too easy to discern, and gave the example of one Eli Broad, a disagreeable boor who has become the arbiter of art in LA by virtue of having money to throw around.

But the role of capital in shaping art is more complex. I discuss the point at some length in Vol. 4 of Speculative Capital. In A Brief Commentary On a Picture I quoted a passage from the manuscript on the importance of the visual. Here is more, by way of proof that Vol. 4 is in the works.
The rise of the visual is a new cultural phenomenon; it has no precedence in either the Eastern or Western cultures, both of which persistently warned against trusting the eye as the instrument of reliable judgment. That appearances are deceiving or that treasure is buried in the ruins is a constant refrain in both cultures.

The Impressionist School in the West rose precisely from the recognition that appearances, as the observer saw them, do not correspond to the reality of the phenomena. The paintings of Cezanne, Degas, and Monet, among many others, reflect this ambiguity of the outside reality that comes into our ken.

Islam forbade painting of faces and discouraged painting in general, so the matter was expressed philosophically – and forcefully and categorically …

But in the land of salesmen, the demand of salesmen – expressing the anxiety of capital in circulation that must be converted from commodity form to money form – destroys long held social beliefs and creates new yardsticks of personal appraisal which gradually become social norms. Those most attuned to the business world carry these demands across culture the way insects pollinate flowers.

The salesman, nota bene, is not wrong. It is just that his concern and focus are different. Cezanne and Rumi were looking for the Truth. The salesman wants to sell. For his narrow but well defined purpose, judging from the appearances will do. Let others worry about the false reflection of reality in the human eye.

As sale assumes an ever more crucial role in the economy and the salesmen increase in number, the reliance on the visual becomes the standard practice and eventually, the social norm. The “visual arts” rises. Color, exaggeration and “flash” that define this art are all stock-in-trade of the salesman. They accentuate the visual and by virtue of being pronounced, create the impression of boldness, confidence and certainty. These, too, are in line with the modus operandi of the salesmen who must at all times show confidence in whatever it is that they are peddling.

In this way, doubt is removed from art. The ambiguity of Impressionist paintings gives way to the in-your-faceness of Warhol’s flashy illustrations. And the content becomes subjugated to the form: the question of what to paint, which is always the more difficult question of painting, is decided by the demands of the form. Hence, the purposefully commercial nature of the visual art’s subjects – a can of a soup, the face of a Hollywood sex symbol – which leaves no room for contemplation. Nay, it discourages contemplation. After all, what is there to contemplate about the packaging of a can of soup? A glance would be sufficient.

This development affects both art and its “consumers”. Consumers conditioned to make rapid judgments, gradually lose their habit – to say nothing of ability – to concentrate and ponder. Thus, the rise of the visual ironically leads to the debasing of the visible real life. This is the well known shrinkage in the “attention span”, whose extremity in the form of attention deficit syndrome is recognized for pathos that it is. Warhol’s perceptive comment about the “15 minutes of fame” captures this shrunken attention span that befalls on the observed, as well as the observer, at the age of the primacy of the visual.
I will return tomorrow with a discussion of a dry legal subject: the Fed’s bailout of AIG.

Sunday, February 7, 2010

Weekend Musings: The Appeal of The Walking Man

The sale of Giacometti’s Walking Man I for a record $104 million was the main “art” news of the past week. The picture of the sculpture made the front page of the major papers, including the Wall Street Journal. Tout le monde was talking about it. So many that I did not know the art appreciation bug had bitten so many.

There was no word on the buyer. Rumors that he was a financier, probably a hedge fund manager, made sense. Only the financiers have that kind of money to throw around. I know of some hedge fund managers who buy masterpieces wholesale.

But lest we forget, for the “hegdies” the acquisition of art is strictly a matter of investing and capital appreciation. Working hand in glove with the gallery owners and auction houses, these merry men of finance accumulate art based on venture capital or takeover model. They either buy the works of relatively unknown artists and then promote them so the works would automatically appreciate – that would be like investing in a start up and taking it public – or do downright acquisition of established companies (artists) in the hope that the ensuing publicity will bring even higher bidders later.

Yet, the expensively acquired piece demands a commentary. What was about it that attracted the attention of a hedge fund manager or a takeover artist? Why this sculpture and not some other?

According to the Wall Street Journal, “the six-foot-tall bronze depicts a wiry man in mid-stride, his right foot jutting forward, his head erect and his arms hanging at his side.”

This description just about sums up the understanding of the art establishment of artworks. It is a description of an auctioneer, of a clerk taking an inventory, which, by the way, is how art is generally taught and interpreted in the West. It is not per se wrong, but irrelevant. It cannot help us understand the work or the secret of its appeal.

Walking Man is an abstract statue. The walker is skeletal, bereft of any particular characteristics. In that regard, he is the universal man. But the height could not be abstracted away. At 6 ft tall, it could not be that of a Chinese, or a Middle Eastern, or even a Latin man. In 1960, when it was created, only the Western man could be represented as being 6 ft tall.

What is about this Western man that attracts our attention?

Look at the pose of the Walking Man and compare it with the poster of a movie that came out the very same year, in 1960.

If you strip away Burt Lancaster’s gun, take away the rifle in his left hand, air brush the woman who is at his feet, strip him of his clothing and eliminate the vengeful expression on his face, you will get close to Giacometti’s Walking Man. In both cases, the upper body is bent forward, indicating a forward motion. And both stare at not what is under their feet but in the horizon.

We readily understand the poster’s message because conveying a succinct message is the function of posters. They do it by creating a context. So we know that Burt Lancaster is hell bent on shedding blood. It is probably revenge; surely the other guy must have started it. Pursuing that righteous fury, he will not heed the cries of the weak Audrey Hepburn trying to stop him. A man’s gotta do what a man’s gotta do. In this way, the poster defines the context of the picture.

Returning to construct the context of the Walking Man, we have several problems.

One is the matter of bent right leg. Lancaster’s forward leg is bent because he needs support, as he is dragging Audrey Hepburn.

The Walking Man’s forward leg is not bent, indicating that he is not carrying any load which he indeed does not. But then why bend forward? No one walks like that, certainly not a slender figure with long strides.

Then, there is the matter of hands and arms. When we walk, the left (right) arm and right (leg) leg move forward in unison. Such synchrony is dictated by gravity and the laws of dynamics. But the Walking Man's arms do not follow this rule. They are hanging beside him with a little forward lean. This posture is in contrivance of the laws of dynamics, which is why we feel the statue's pose is somehow not right.

Why would anyone assume such a posture in “mid stride”, as the Wall Street Journal describes the pose?

The answer is that no one would; maybe a robot, or an automaton, but our subject is a man.

The only way to explain the suspension of the laws of dynamics is to realize that the laws do not apply because there is no motion. The Walking Man is not walking at all. He has just stopped, almost suddenly, because he has seen something on the horizon. His look is without any expression, almost as if he were a cretin, but what is on the horizon is sufficiently worrisome to make even cretins pause in the mid stride and take note.

The name is not a tease. The sculpture we see is that of a walking man. Any other name would be incorrect. It is just that we are seeing a walking man at the instant of coming to a halt.

The Walking Man is Hank Paulson realizing that “the world is falling apart” and rushing to call his wife. He is Dick Fuld on the eve of Sunday, September 14, 2008, realzing that Lehman was doomed. He is Alan Swchartz, learning suddenly that cash hemorrhaging of Bear Stearns cannot be stopped. He is Alan Greenspan, realizing that everything he knew was wrong. And Sandy Weill, half-understanding that all was vanity and for naught.

The Walking Man is the cocksure man of finance. You will see him confidently talking in cocktail parties, with his mistress, as the special guest in MBA seminars, charity fund raisers and the Congressional hearings. He puts on a brave front day and night. But he knows that one day, something will appear on the horizon that will make him stop cold.

The Walking Man speaks to that uncertainty. That is its appeal to the hollow men of modern finance.

Friday, February 5, 2010

Numbers for Ron's case

Ron's story is in previous post. Basically his is a all look good case. See below blue circles that he is going to have multi millions to collect even if he stops working now. And all he shorts is only less than $1 million ( red circle ) for his kid's education.

But if you run a proper cash flow analysis. His EPF money is not touchable until age 55. So his main source of income is from KLSE investment but all those money will run dry before his kid can graduate.

One of the things he can do is to sell his house 1. Doing so may allow his kid to finish with a degree. But that will only prolong the kick-out-of-retirement scenario for a couple of years only. He still cannot last until he gets his EPF yet. As a result, still have a cash flow problem.

It turns out that if he stops working now and if his kid really go oversea to study, he will have to sell his new bigger house 2 and move back to the older smaller house 1 when his kid go abroad. It will be his own judgement whether this is a good retirement arrangement or would it be a reduction life style he wishes not to occur.

Ron isn't my contact, I just read his case from kclau's blog. So assumptions used in this spreadsheet may or may not apply to him.

One of the potential pitfalls is that I assume he said he earns $6,500 and I assume his current expense is $3,000 a month. But seeing his case, it is most likely that his expenses needed is $6,500. If that is true, he will still be kicked out of retirement even if he sells his big new house when his kid only goes to a university that costs only $1.2 million

One interesting way to solve this could be to rent out the new big house instead of the small one. If the rent can cover the repayment amount, it will be perfect. But even if he can rent for $3,000 and assuming his repayment amount is $3,723 he will still be able to cover his kid's 4 years college cost without selling any of his houses.

When you are serious about your future, make sure you don't forget 2 aspects of the analysis;

1. draw a proper and definite Time line, not just some lump sum comparisons.
2. year to year Cash Flow analysis

I search "cool man" in google image and kclau's picture pops up ...

Ron from KC Lau : case study

This is a case stolen from kclau's blog, I am just busy body giving my view point without anyone asking ... so I apologize first for whatever offence I could have brought. But my intention is just to share my thoughts, nothing more than that.

Ron is 40 years old married with a 10 years old kid, earning $6,500 a month? He has 2 houses 800k with 470k loan and 300k renting for $850 monthly. 840k in KLSE and 460K in EPF. He is asking if (1) he can retire, (2) his kid education plan ok and if he should (3) sell his house to buy stocks ?

kclau basically says (1) yes he can retire, (2) his kid's education is at good hand and (3) don't sell house unless Ron is really good with stocks.

I only agree with (3) respond because a 840k KLSE has already out weight 300k property by almost 3x, so there is really no point to further make it imbalance.

My immediate respond reading Ron's story is that it sounds too familiar. Familiarity with an alarm that is.

I am guessing ....

Ron moved in to his new house only recently ( less than 8 years ). He wanted to get higher loan amount but couldn't due to his income level. He may feel financially quite capable but he also find himself selling his stock investments at times for cashing out purposes.

These are the signs of overspent without consciously knowing it.

A 460k loan, be it been served for a while or new, would take 2,500 to 4,000 repayment monthly. That is 40-60% of the income level. A dangerous level. If the 800k is a typical resident judge, then its an over price of 20-25%. One should use only force sale value when assessing ones' personal finance health level. As a result, this new beautiful home is the main killing point in his personal finance but in return he has a home that he wanted, emotion return is priceless. But due to the same fact, he can NOT retire now. Paying off this repayment amount alone will kill off all his stock investment return in no time. ( check out the fact that even a 12% return is NOT enough to cover a 3% )

The 2nd pit fall is education plan. In 8 years time, at best his 300k education fund may become a 500k fund. But in 2018, a general 4-years-oversea-tuition-fee starts with a minimum of 1 million and above. At age 48, he can't really withdraw from EPF in full yet. Honestly, with this 300k plan, Ron's kid can only have the option to go to a local university ... which even a 100k is adequate. Should Ron not realizing this fact and stop working now, he will lose out all his retirement fund and get back to work at his 50s if his kid does want to go oversea.

The good part is 840k KLSE fund. There may be a few things we can tell from this figure. Ron is most probably an accumulator, he buys and keeps and doesn't sell as much as he buys. Although this is good but on the other hand, if the 840k value is today's valuation then 840k is most probably not a RIGHT value to use to assess his finance health. If he is an accumulator, then he doesn't have a consistent profit take strategy. So by mid year, his value may drop to 600k etc. Basically just like property over valuation, Ron's 840k KLSE value is questionable.

So at the end, my take is that (1) Ron should NOT retire yet, just keep working but keep his option open because now he can freely change jobs as long as the salary stays the same or higher. (2) His kid cannot go to oversea university yet, if that is the option he wants to keep open, he will need to beef something up, ie. allocate his stock investment fund as educational purpose.

Along with other 'typical' assumptions, Its important for Ron to accumulate another 800k in his liquid asset to further strengthen his portfolio.

To further obtain a more precise analysis, Ron needs to identify his family expense ratio and his very own personal inflation rate. Then he should also quantify the true potential capital gain of his both properties. The 300k one will do fine but the 800k one will remain flat. Finally his KLSE strategies and portfolio will play a critical role in his future too.

Hey Ron! You did great ... but not good enough for 21st century. Buckle up and keep doing what you were doing, it seems great so far ...

Don't ignore kclau's last part in insurance advises, your choices are Terms, whole life or investment links. Just in case you hit a "lottery" ... you would want the things still go the way they are suppose to be ...

Wednesday, February 3, 2010

The [Permissible] Boundaries of Bank Regulation

If you have been following current events, you are familiar with President Obama’s plan to “take on” banks. His plan, inspired by Paul Volker, calls for, among other things, the banning of proprietary trading by banks.

If you have been following this blog, you know that proprietary or prop trading is arbitrage trading – taking simultaneous long and short positions in two “equivalent” trades. That is the modus operandi of speculative capital which still, two years into a protracted crisis, dominates the markets.

The Theory of Speculative Capital posits that speculative capital would not, short of being forcefully subdued, accept any restraints or limitations on itself. From Vol. 1:
Speculative capital abhors regulation. Regulations interfere with the cross-market arbitrage that is its lifeline. If speculative capital cannot freely operate, it cannot generate profits and must cease to exist. The opposition of speculative capital to regulation is thus not a matter of some technical or tactical disagreement but a question of life and death.
So if my Theory of Speculative Capital is correct, then the President’s bank regulation plans, at least the part that deals with prop trading, should be dead on arrival, no matter what. From today’s New York Times:
The chairman of the Senate Banking Committee warned on Tuesday that the Obama administration’s new proposals to rein in Wall Street firms ran the risk of derailing months of delicate negotiations over overhauling financial regulations.“It’s not a movable feast,” the chairman, Christopher J. Dodd, told Paul A. Volcker, … who has become an influential outside adviser to President Obama, [adding] that the administration was “getting precariously close” to excessive ambition for the legislation.
There you have it.

Not to underestimate Congress’s ability to neuter any legislative proposal on cue no matter how ironclad the theory behind it, but the administration’s proposal, what President Obama called “Volker rule”, has a theoretical Achilles’ heel that makes it vulnerable to attack. The problem is the definition of prop trading. According to the Times, in answer to criticism that his rule was too vague, Volker said:
”Every banker I speak with knows very well what proprietary trading means and implies.” For example, he said, a pattern of exceptionally large gains and losses over time in a Wall Street firm’s trading book should “raise an examiner’s eyebrows.”
Sorry Mr. Volker, but large gains and losses or the intuitive recognition of bankers cannot be the basis of regulation; it must be made of sterner stuff.

Volker’s problem is theory. He cannot define prop trading because prop trading is arbitrage trading. And speculative and potentially ruinous arbitrage is, after the trade is made, indistinguishable from the “legitimate and conservative” hedging. That was my discovery in Vol. 1 that led to the Theory of Speculative Capital:
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. 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.
If you know Volker’s address, send him a copy of Vol. 1.

Why you should trust government fund ?

Should you tag along ? Well ... its always good to be a part of the 'main stream' .... :)

if you know when to get out .... before anyone else.

Tuesday, February 2, 2010

Monopoly - Why NOT Property in PF ?

Monopoly is one of the most popular board games. When Charles lost his job, he played The Landlord's Game and then created his own version of the game which later became Monopoly. Originally he was trying to include all the dynamics of property investment into the game but as time goes people find those are too complicated. Hence today's Monopoly is simplified until its a 8 years old game. Now new board games are developed everyday by adding back those left out rules - including Robert's Rich Dad.

Some who followed this blog long enough may already know that Property Investment is NOT a suitable personal finance tool.

Although there are ways to obtain guarantee income through property investment at personal finance level, but those who have never done it would think such method is ridiculous, impossible and paper talk only. Then when they use other approaches, they miss interpret active income as passive income. As a result they would do great at times but when the big boys swing another direction, they may get knocked so hard that they not only fell off the chair but they may enter a never return land. Even at this 21st century, generally people are still NOT able to digest stuff like strategy cost, personal finance scoping etc. Hence its just too 'risky' for anyone to simply use property investment as their personal finance tool.

We may get some resonances from some of the important key concepts which are still in Monopoly :

"Your goal is not just to get rich, you HAVE TO Bankrupt everyone else !"

In 21st century personal finance, we want to revert the 20-80 rule. We want most of the people to achieve finance freedom without bringing harms to the others. We want MOST of us to get what we want, we no longer want to just follow the big boys just for the sake of it-used-to-be-like-that. We may want to be rich but we have no interest to bankrupt anyone else in the process.

The nature of property investment is an active income. So its really a business. In business world, we do have to limit the ability of our opponents in order to grow big, stay big and be successful. But in "personal" finance, we don't have to.

But guess what, "Banks never run out of Money, they just print on plain paper ... " So you will NEVER able to bankrupt banks and banks will always be the winner.

On the more positive side, such problems only exist if the play ground is limited. ie. There are only so many lands, so many buildings, 4 stations and 2 utilities companies in Monopoly. In real world, New play ground is created all the time. As long as there are more play grounds created than the number of bankrupts, theoretically people who went bankrupt at one game can simply jump to another new game and play again.

Now do you understand why governments all over the world are creating Mega Projects all the time ?

Although Charles started Monopoly but now his whole thing has been "monopolized" by Parkers Brother where Charles was only one of the developers and Parkers Brother is the official owner. So much about monopoly huh ?

Monday, February 1, 2010

Hank Paulson On the Brink

A while back I criticized the book by a financial correspondent of the New York Times about the financial crisis as gossipy, trashy and not at all informative. Then, in today’s Wall Street Journal, I read an excerpt from Hank Paulson’s new book, On the Brink.

There is no doubt: on the evidence of his writing, the man is a cretin. In the half-page excerpt, he describes nonsensical and random details that would alarm a mad painter: leaving the Waldorf=Astoria Hotel early in the morning, speeding down a deserted Park Ave, getting to the Fed before 7am, riding the elevator to the 13th floor, wondering whether or not to take sleeping pills that were given to him in Washington D.C. (Being a Christian Scientist, he decides against it).

These details might or might not have been added for drama. But these are the things that he remembers precisely because he does not understand the crisis that is unfolding around him. He knows he is grossly out of his depth, so he does not dare/bother to pause, think, and contemplate. He merely moves – jumps really, like a headless chicken – from one scene of the crisis to the next. Naturally, then, after two days he is exhausted:
All weekend I’d been wearing my crisis armor, but now I felt my guard slipping.
And what does a former CEO of Goldman Sachs, now the Treasury secretary, do under these conditions?
I knew I had to call my wife, but I didn't want to do it from the landline in my office because other people were there.

”What if the system collapses?” I asked her. “Everybody is looking to me, and I don't have the answer. I am really scared.” I asked her to pray for me, and for the country, and to help me cope with this sudden onslaught of fear.
His wife, just back from the church, immediately quotes from the Second Book of Timothy, verse 1.7 which says that God “hath not given us the spirit of fear but ... of a sound mind”.

The objective conditions produced by this crisis enabled me to sharpen the Theory of Speculative Capital. The unintended humor produced by the various players in the crisis provided much needed comic relief after long hours of work. How many times, in the middle of the night, reading a seemingly serious piece on the crisis, have I burst out laughing!

Wearing one down and energizing him: that, too, I suppose, is a dialectical characteristic of the crisis.