Wednesday, August 13, 2008

Analytical Review 101 - Part XV

An Investor’s Dilemma: Choosing between Mother Theresa & Angelina Jolie

Before one decides to invest in the share market, try answering the following question:

‘If you won a contest and could go out on a date with either Mother Theresa or Angelina Jolie, which one would you choose?’



[For ladies, try choosing between Gandhi and Brad Pitt]


If you ponder long and hard enough, it may be illuminating to realize that parallels can be drawn between the vastly different emotions Mother Theresa & Angelina Jolie evokes, and the world of investing.


Mother Theresa, founder of the Missionaries of Charity in Calcutta spent over forty five years of her life ministering to the poor, sick and dying while guiding the Missionaries's expansion throughout India and other countries. In 1979, she was awarded the Nobel Peace Prize for her work and contributions. Her very name evokes an idealism based on compassion, selflessness and loving kindness.

Angelina Jolie, conversely, has been cited as one of the most beautiful woman in the world. She is an acclaimed actress and has won three Golden Globe Awards, two Screen Actor Guild Awards and an Academy Award. Mention her name, a sensual, sultry and sexy image comes to mind.

Have you answered the question yet? If so, please read on…

Fixed Deposits are equivalent to Mother Theresa
In the world of investment, Fixed Deposits are equivalent to Mother Theresa. Both are stable, secure and strong. Why do I say that? This is because Fixed Deposits exhibits the following characteristics:

1. Principal Guaranteed
The principal that you invest is virtually secure. There are veryminimal risks involved when you put your money in Fixed Deposits. If you invest in RM10K in an FD, rest assured that one year later, you SHALL see that RM10K still in the bank.

2. Returns Guaranteed & LOW
When placing a FD for a period of time, the interest income receivable is stated up front. True, the returns are paltry. Yet, the great thing is that they are GUARANTEED. There are no IFs, ANDs or BUTs… It’s a sure thing, PERIOD!

3. High Liquidity
If you ever need cash urgently, there are no problems whatsoever in withdrawing out your principal even though it’s being placed in FD. In a worst case scenario, you may have to forfeit a certain portion of your earned interest income.

Angelina Jolie and the Sexy World of Shares
Everybody wants to get on the bandwagon these days and invest in shares! Who doesn’t drool over a hot looking sexy babe? Same thing with shares, just dump your money and watch it fluctuate…One day it’s up, the next it’s down. Just be careful and don’t get yourself burnt! Investments in shares are risky and I’ll explain why:

1. Principal Guaranteed to Fluctuate
When you invest in the shares of a company, you must understand that the only thing that is certain is your investment SHALL fluctuate! Once you dump in RM10K, a month later, it may grow to RM15K or shrink to RM5K. If you are the type of person who cannot live with any risk, then don’t invest in shares.

2. Returns Guaranteed to Fluctuate
Returns in the form of dividend payout by companies are also uncertain. Usually the discretion whether to pay dividends (and the quantum) or otherwise, lies solely with the company. As minority shareholders, one does not have much leverage to request for dividends. So, unlike FDs, don’t be surprised if you don’t get a single sen out of your investment until you sell it.

3. Highly Liquid IF YOU ARE DETACHED
Yes, shares are highly liquid. Unfortunately for you, if the RM10K you invested shrunken to RM5K, are you willing to sell it off? That’s a 50% loss on your capital! Conversely, if the stock market is booming and your RM10K has ballooned to RM20K, are you willing to cash out and let go of your shares? Or are you going to hold on and hope it goes up further…???

Analytical Review
With this in mind, let’s look at the Financial Dashboard below. As discussed above, we can compare FDs to Shares although there are vast differences:

FD Interest Income = Earnings
The FD Interest Income is a certain and guaranteed. However, earnings for companies are susceptible to competition, economy and a host of other factors. Interest rates are certain and are computed in advance during FD placement, whereas the current earnings of a company is largely uncertain at the time of investment.

FD Principal = Share Price

The Principal that you invest in FD does not fluctuate. However, share prices fluctuate daily depending on the mood of Mr. Market and the global economy.

FD Interest Rate = Earning/Market Price %
Whilst the FD Interest Rate is a sure thing, historical Earnings/Market Price % is not always, a reliable indicator of future returns. Firstly, we are never sure of the earnings at the time of investing. as we are relying on historical information. Secondly, the market price fluctuates daily making it difficult to quantify the probable return we can make on our investment. Depending on the competition and economic situation, a profitable company in the past may turn out to be unprofitable in the future. This is a risk for all businesses and as investors, we have to bear with it.

With this in mind, let us look at Nestle’s Earnings/Market Price %. It is hovering around 4.5 % to 4.8% for the past three years. As Nestle is in a stable industry with a strong brand name, this appears reasonable. Yet, FD rates are approximately 3.7% per annum, Nestle only offers an additional return of 1%. Is it really worthwhile investing? Although there is an upside in terms of capital appreciation (i.e. share price goes UP!), perhaps one should consider whether there are other companies yielding a higher rate of return.

Conclusion:
It is important to note that investment in shares is like dating a hot babe! Yes, it’s alluring at first sight, but exercise wisdom and caution, and hopefully you’ll avoid getting burnt. So, look before you leap!

7 comments:

Anonymous

Hi Avatar, interesting analogy.

This is true of life as well. Shall we follow the path that is straight and true and that's paved with gold or that narrow stone path that's off the beaten track? Shall we lay up for ourselves treasures on earth or treasures in heaven?

That's why most of us will settle for a cross between Mother Teresa and Angelina Jolie. We want some of the excitement but not expose ourselves to too much risk. We try to choose a middle path (while there's one). That's where investment diversification comes in so that we get the best of both Mother Teresa and Angelina Jolie,right?

Paladin

Avatar

Dear Paladin,

I see that you've recovered from your mighty and arduous battles for the past fortnight.

True enough, the wise man will seek a middle path. Although Heavenly treasures may await at the end of one's sojourn, we must still save for our old age and for our children, to the best of our abilities.

Investment diversification is indeed good. However, problems usually arise due to human greed. During a bull run, how many can resist the temptation to put all their savings into the stock market and watch it double overnight?

Rgds

Black Zedd

Great use of analogy!

Therefore the calm Mother Theresa should complement Angie's erratic behavior while Angie can provide more money for Mother Theresa's work.

Using both different risk and return rates is the best way to ensure world peace and harmony. By this, I mean us being rich.

Avatar

Dear Zedd,

That's not exactly what I had in mind, but what can I say, except...

'I like!' :)

Rgds

Ah Keong

anyhting for Jessica Alba? Nice and sweet. For those who are in the older age (50+), can consider to go for annuities products. We have it here in Malaysia edi

simple term = put in $100k, they provide withdrawal benefits guaranteed. If you survive until 20 years, life time income for you.

Yours Truly

Mmmmm...Angelina...great site, Avatar, especially for guys learning all about managing wealth. Send my regards to Black Zedd, will ya?

Search Engine Marketing

That's not exactly what I had in mind, but what can I say, except a good post.

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