Financial Intelligence – Part V

BUY ASSETS! NOT LIABILITIES!

Today’s lesson on Financial Intelligence is darn simple! And like all simple lessons, we tend to IGNORE IT! I just want you to focus on the definitions of the two items above:

ASSETS: ____SOMETHING THAT PUTS MONEY INTO YOUR POCKET
LIABILITIES: SOMETHING THAT TAKES MONEY OUT OF YOUR POCKET

Got it! Yes, you say! Nothing could be simpler…
Yeah right, you only THINK you got it.

Let’s have a quick quiz and see how much do you really understand.

QUIZ:
1. Which of the following is an Asset?
(a) Your car
(b) Your house
(c) Your collection of books / antiques / gadgets
(d) Your money in the Current Account

2. Which of the following is a Liability?
(a) Your car loan
(b) Your housing loan
(c) Your credit card loan
(d) Your loan to your brother-in-law

3. When is an Asset a Liability? [Fake Assets]

4. When is a Liability an Asset? [Fake Liabilities]

Answers:
Make sure you have answered all the questions in the quiz first! Remember the definition of ASSETS AND LIABILITIES? Yes? All right, ready? Please highlight the text below and here we go:

1. NONE OF THEM
· Your car takes you to work so you don’t have to waste time waiting for the bus. However, does it put money into your pocket? No! It’s not an ASSET, period.

· By staying in your house, you save on your rental expense. But does it put money into your pocket? No!

· Sure, you might think your collections are priceless. However, your wife might think they are a pile of junk. Besides, is it really putting money into your pocket? If might give you loads of happiness, but NOT MONEY!

· Oooh…money in the Current Account! Surely that’s an asset right? WRONG! Your money in the Current Account doesn’t earn you a single SEN! It’s not an asset! It’s actually a liability because the banks are going to charge you banking charges to maintain your Current Account facility.

2. ALL OF THEM EXCEPT FOR (D)
· Sure, interest rates on car loans are cheap. For those of you who can afford posh cars, interest rates are approximately on 3% per annum or less. Hey, that’s cheap right. It’s lower than the Fixed Deposit rates of 3.70% per annum the bank are giving. Hmmm… let’s think about it again. By taking out a loan of say RM100K, you are paying the bank RM3,000 per annum. Wait a minute. Does the car loan fulfill the definition of a liability to you? Is it taking money out of your pocket? Yes! Then it’s a liability. Who cares what interest rates of Fixed Deposits are? What you should be concerned is how much you are donating to the bank from your monthly salary!

· Ooohhh, you are buying a house. So what, if you are taking out a HUMUNGOUS LOAN to buy the house, you say! It’s an asset right, so the HOUSING LOAN IS NOT A LIABILITY. Really? Let’s see, you took out a loan worth RM300K at an interest rate of 8% per annum to purchase that house. You are currently paying interest of RM24K per annum (or RM2K per month). Well, you rented out the house to your tenants for RM2K per month. That's before deducting the insurance, quit rent, legal fees, maintenance and repairs on your house. So, is the housing loan a liability? Why YES! It’s taking money out of your pocket isn’t it? Even though you can finance the housing loan with your rental income, what about the other expenses? You might argue: What about the CAPITAL GAINS on your house? Are you sure you will make a capital gain by selling the house? Just ignore that since you haven’t sold your house…like they say – don’t count your chickens until they are hatched.

· Your credit card loan! Ooohh, I just LOVE the banks motto! SPEND MORE, SAVE MORE! Now, that’s an OXYMORONIC statement that sounds so good! How can you save more by spending more? Here’s the bank’s logic: Spend RM5,000 a month and I’ll give you 500 points. You can cash the 500 points for a gift worth RM50. In the meantime, since you overspent your budget, you can't afford to pay your credit card on time. Pay interest on the credit card debt amounting to RM75 (RM5,000 * 18% * 1/12). Fantastic! Thank you for donating to our local banks and stimulating our economy. So, is your credit card loan taking money out your pocket? Yes? Well, it’s a liability then!

· Assuming your brother-in-law will eventually pay back the loan with INTEREST, is it an asset? Yes, it is! Is it a good asset? That depends on how much interest your brother-in-law is paying you. If he’s paying you less than the Fixed Deposit rate of 3.70%, then forget it! The banks will pay you automatically and it’s virtually risk free. Your brother-in-law may need numerous reminders and nudges before he finally pays up.

3. An Asset may become a liability once it STOPS putting money in your pocket. For instance, your loan to your brother-in-law may stop becoming an ASSET if he decides to stop paying back to you, your principal and interest. ALL ASSETS can become LIABILITIES, so you need to monitor your assets carefully, especially investments in shares.

4. A Liability may become an Asset once it stops taking money OUT of your pocket and puts money INTO your pocket. Example, if you move your money out of your Current Account into a Fixed Deposit, you start earning FD interest on it. Another example might be if you have an interested buyer in your antique collection and can sell to the buyer at a higher price than you bought it for.

CONCLUSION:
Before you buy or spending unnecessarily, remember: BUY ASSETS! NOT LIABILITIES!

Fundamentals of Investing - Part VI

IMPLICATION OF THE BLACK SWANS CONCEPT

Yesterday, I talked briefly about the Black Swans Concept introduced by Nicholas Taleb. Today, we shall review the implications of this simple, yet often overlooked fact of life. Simply put, NOTHING IS CERTAIN IN LIFE.

It’s strange; sometimes our lives are so routine and mundane, it seems that every day will be just like the day before. Just like the Turkey, we tend to think that just because something has happened for the umpteenth time previously; it’ll be the same today. Ah-hah, maybe today will be the day you’ll be led to the slaughterhouse, just like our Turkey.

In the world of investing, this has astounding implications. For instance just before the stock market crash in 1998 in Malaysia, I believe almost all of the so-called experts, investment analysts, brokers, stock market punters etc. were raving about the Malaysian Stock Market and how it would go higher, Higher and HIGHER! Well, in 1998 the Malaysian Stock Market did move all right… Just in the OPPOSITE direction, it moved DOWNWARDS :( and went lower, Lower and LOWER!!!

Black Swan events such as the Tsunami that hit Aceh on 26 December 2004 can happen instantly without warning. These can have severe implications on your investments, so you need to have contingency plans for your investments. Otherwise, you may be caught flat-footed. So, what can you do about it?

KEY INVESTMENT STRATEGY: ALWAYS CASH OUT AND RECOUP YOUR CAPITAL
When the stock market is booming, there is always the tendency to be GREEDY. Once you are hit with the fever, you might sell off all the assets you own, including your house and borrow to the hilt to invest in the stock market. After all, it is easy money right? Invest RM100K and see it grow by 30% the next day. All that without even lifting a finger!

Well, that’s true. Don’t forget however, that the converse is also true. You could just easily lose the RM100K in the blink of an eye. Think about Enron and Bear Stearns. Shares worth over USD90 per share can become almost worthless overnight (see the charts above).

I am not saying, sell all your shares once you make a 5% gain. What I am saying is, please review your investments periodically. If you make a capital gain of approximately 30%, why don’t you sell half of those shares and lock in your gain and recoup part of your capital.

Remember, the shares you hold are merely pieces of SCRAP PAPER. They are literally WORTHLESS unless someone else is willing to buy them for you. So, always have some CASH in the bank. Don’t put all your eggs in one basket, especially in the SHARE MARKET basket.

CONCLUSION:
ALWAYS CASH OUT SOME OF YOUR CAPITAL GAINS FROM THE STOCK MARKET ONCE YOU HAVE MADE A HANDSOME GAIN. REMEMBER – THERE ARE ALWAYS BLACK SWANS SWIMMING AROUND READY TO RELIEVE YOU OF YOUR MONEY! (AND TURN A BULL RUN INTO A BEAR DIP)

LEAVE SOME OF YOUR SHARES IN THE STOCK MARKET DURING A BULL RUN. IF THE STOCK MARKET KEEPS GOING UP, YOU’LL STILL PROFIT FROM IT SINCE YOU STILL HAVE SOME SHARES LEFT :)

Fundamentals of Investing - Part V

BEWARE OF THE BLACK SWANS!

The ideas in this post are based mainly on the book entitled "The Black Swan" by Nassim Nicholas Taleb, so feel free to check it out.

In short, the main idea in the book is that, there is NO SUCH THING AS A SURE THING! Sure, we would like to believe that we can predict the future, but that's a make believe world. So what has uncertainty to do with Black Swans, you ask?

The Fairy Tale:
Once upon a time, in a land very very far away, there lived a kingdom with many brave and courageous explorers. They journeyed far and wide to all manner of countries and exotic kingdoms. However, in all their journeys, these explorers noted that all swans were WHITE! Naturally, over time, all the people assumed that SWANS MUST ALWAYS BE WHITE! Why? Because collectively, over a period of several centuries, no one ever saw a Black Swan.

Unfortunately one day, there came a stranger who proclaimed he saw a Black Swan in a far far away kingdom. Imagine the laughted and derision he faced... "YOU MUST BE F*CKING CRAZY!" remarked one explorer from the Kingdom. Being astute, the stranger played to the gallery and bet all his money with the disbelievers. Now, several months later, they landed in a strange land called Australia!

HOLY COW BATMAN... I see (& I don't believe it!) BLACK SWANS! OF COURSE, THE STRANGER WALKED AWAY SEVERAL MILLION DOLLARS RICHER AFTER WINNING HIS BET :)

Morale of the story:
Just because you have observed something happen in a particular way for one million times, it doesn't mean that things will NOT turn out differently on the 1,000,001 time.

The Turkey Analogy
Another more interesting analogy is the Turkey Analogy (see chart above). You see, when the turkey gets hatched in January 2008 at the Turkey Farms, he has no idea where he is. He only knows that come each day, there are some benign beings called HUMANS that are there to feed him everyday.

So he becomes more and more contented everyday, since he's being fed every month. Why? Because these HUMANS have fed him so consistently so often, it's a certainty they will feed him tomorrow, right? So, just when he's at his happiest in mid October 2008, oh dear...the HUMAN says "OFF WITH HIS HEAD!". Next thing he knows, the Turkey is being sent to the slaughter house :(

Now, the owner of the Turkey Farms knows well what will happen, since he has all the relevant facts on hand. Unfortunately, the Turkey doesn't and won't realize what's going on until it's too late.

So who are you going to be? The Turkey or the one eating the Turkey?

CONCLUSION:
Beware of the Black Swans! They are the HIGHLY IMPROBABLE EVENTS which have a HUGE REPERCUSSIONS ON THE GLOBAL ECONOMY and on your investments. The September 11, 2001 New York attacks are one of them. My next post will analyze the impact of Black Swans and how to prepare for such contigencies in our investment strategies.

Fundamentals of Investing – Part IV

CAVEAT INVESTIRE (LET THE INVESTOR BEWARE!)

Leave it to the Experts!
Now that’s a phrase that’s becoming more common by the day. Just like peddlers of yore, that go from town to town selling snake oil, you have all manner of experts telling you how to invest your money.

There are so-called Certified Financial Planners, Chartered Wealth Managers, Chartered Financial Consultants, Chartered Financial Analyst, Insurance Agents, Unit Trust Agents and etc. etc. Let's call them "Investment Agents", for the moment.

Whose interests do they serve?
STOP! Think for a minute! If these Investment Agents are so good at investing other people's money, why don’t they invest their own money in the products they are selling to you? If they are as good as Warren Buffett, do you think they'll even waste their time talking to you? In other words, why don’t they put their money where their mouth is?

These Investment Agents don’t care whether your investments make money or not. For them, once they sell you the product, they immediately make a handsome commission based on the amount you have invested with them. Sure, they will tell you that this instrument is EXPECTED to make, say 40% return per annum. Ask them: Is it guaranteed? You may get a blank stare or a non-committal answer.

God helps those who help themselves!
In today’s time, PROFESSIONALISM isn’t what it used to be. In the past, professionals such as Doctors, Accountants and Lawyers used to take pride in their work and ethics. In this age, there is a tendency for professionals to take liberties with their clients’ and use their superior knowledge to take advantage (or even swindle!) their client’s monies.

And most of the so-called Investment Agents are definitely not people with extensive investment experience and knowlege. Their certifications only mean they have spent some time learning on the subject. However, are they good enough for you to trust your money to them? Remember, they are only interested in selling you their product to get their commission! Do you think they are interested in you and your well being? If you lose all your capital in the investments they sold to you a few months ago, do you think they will reimburse you? Pluuueeezzzzeee! I am sure they couldn't care less!

Some of you might not have time to manage your own money. If you don’t have time to take care of your own money, then make sure you can get someone with UTMOST integrity that can assist you in investing. However, when it comes to money, it’s hard to trust anybody these days. So my advice is, MAKE TIME to learn about how to make good investments.

Conclusion:
Before you start investing, you need to do your own research and brush up your knowledge on what factors to consider when investing in various types of investment vehicles. Don’t leave your investment strategies to the experts. Experts want to use YOUR money to earn money for themselves. Never expect EXPERTS to take care of your money for you! That’s something you’ll have to do on your own.

Fundamentals of Investing – Part III

A FOOL AND HIS (OR HER) MONEY ARE SOON PARTED!

I’ll be brutally honest today! Our fixed deposit (FD) interest rates are PATHETIC. They SUCK! Period! Getting 3.70% interest per annum is not even sufficient to preserve your capital after taking into account that inflation is likely to be around 5%.

And because of this, most of us are approached by a plethora of people telling you:
INVEST IN MY PRODUCT! IT’S GUARANTEED TO GIVE YOU A RETURN HIGHER THAN THE FD RATES. WHY ARE YOU KEEPING YOUR MONEY IN THE BANK / EPF ETC?

And you think? Hmm… Why not?

STOP! That’s the sort of thinking that will get you into DEEP SH*T later on, especially if you haven’t got a clue of what these people are going to do with your money.

Before you trust your hard earned money to unit trust / insurance / Chartered Financial Planner agents, why don’t you trust YOURSELF to invest your own money? Yes, I hear some of you groaning – I don’t have the time!

Fine! Well, just think about it. If you don’t have time or couldn’t be bothered to look after your own money, what makes you think that other people will?

Look, it’s really SIMPLE! You need to take an active interest in managing your own money and investments and not let someone do it for you. I’m NOT saying – don’t invest in Unit Trusts etc. etc. What I am saying is – do your own research first! Make sure that your investment vehicle is something you are comfortable with.

If the unit trust agent is saying, this Fund will earn 15% per annum on average, challenge her. Is this return guaranteed? What’s the risk involved? Why? Because even though FD’s suck, your principal and the 3.70% interest per annum is GUARANTEED by the bank.

Other investments may not be so safe, especially those promising high returns. Sure, you may get 40% returns per annum OR you might see all your capital being WIPED OUT!

Worst still are Ponzi Schemes (aka Skim Cepat Kaya)! They might promise you 1000% returns within one week and sure enough, your first RM100/= yields RM1,000/= back within a week. Next thing you know, you dump your whole live savings into the Skim Cepat Kaya and poof! There goes your money!

So, think carefully before you start venturing into the world of investing. You’ll definitely be taking some risks with your money once you move it out of your FDs. So what! Life’s a calculated risk – so you should set aside some money to invest in instruments with higher rates of return than FDs. However, there are always Black Swans lurking around, so ALWAYS keep some money in your fixed deposits.

Conclusion: Keep your eyes wide open and be careful who you trust your hard earned money to! You know what they say about fools & their money... :)