Save $2400 get back $800 = 33% return ?

Someone asked this in a forum ...

Save RM200 a month for 21 years with 'Guarantee' RM 800 interest a year, payable every 3 years at RM 2,400.  

It sounds like saving RM 2,400 a year can get back RM 800 return GUARANTEE - that is 33% rate  !!  Is it a really a good deal ?

I always see this kind of question being asked, the answer is quite simply ... you have to plug in the number and run the analysis.  ( read about that here )

For above example, if you also take back all your saving of RM 50,400 then add together with your RM 2,400 x 21 / 3 = RM 16, 800.  You are getting a total return of RM 67,200 21 years later.

If you assume a FD interest of 2.65%, you will get back MORE THAN the mentioned return above !!!  

And it is not 33% return but only less than 2.65% return !!

Guess what ?  Today's FD rate is at 3% and most likely to rise for the next few years.

Take this rule of thumb with you ...

any kind of insurance guarantee return policy will provide you slightly less than FD return at that point of time !!

Treat Pocket Money as an Income in PFP

P F P - Personal Finance Planning

Above shows the whole Personal Finance idea I promote since the very beginning of this blog.  ( old blog link )

First you must have some sort of income.  Income can be obtained from business or employment or freely available.  

For example money received by house wife from her husband should be treated as some sort of her income.  A lot of time, 'smart' husband earning income may seems great and all but 80% of such husbands will face a trendmendous down fall in his life.  Employed managers may lose their jobs for 3-5 years during their 30s and 40s.  Self employ business men may lost everything they have and couldn't get back up for 5-10 years during their 40s and 50s.  Its almost a rule of thumb nowadays ...

Only a small fraction of them are able to get back on their feet on half of the time the others do.  Guess what their differences are ?

They have wives who treated their monthly merits as income and perform good finance planning on it.

And when their husband is no longer generating handsome income, basically they come to the rescue.  Instead of tons of hand bags, the smart wife only bought 1 LV etc.

There are many versions ... most of them actually just lend the money out and the husband was able to cross over the tough time and continue to earn the income with more cautious mind.  Some actually take over husband role to earn income.  Some also left their husbands and create a new world of their own.  

They are able to do it because they treated their pocket money as income and perform good finance planning on it.

Currency Turns Evil - part 3

Money was created to ease up buy sell transactions, you no longer have to take in 100 chickens just because you want to sell your diamond ring.

Since each country has its own system and seldom cross borders in the past, each of their money is different in unit called currency.

Then, country needs to do business with another country. They have to sychronize the value of their currency, they use gold for that purpose.

Slowly some smart 'finance' guy realizes that the 'impression of Gold' is as good as the real gold to increase value of their currency.  ( actually the impression is much better and easier to acquire than the real gold )

If the value of currency is just like the value of any traded goods - govern by supply and demand, why don't we trade the currency like the way we buy sell stocks ?

F O R E X is borned !

Before I proceed further, let me set the record straight that Forex is one of the most liquidated market which has Total Freedom.  Something I always pursue all finance institutions to go for.  So there are many good things about Forex.  However, there is one aspect that is evil, very evil indeed - and that is the part I am going to talk about here - its room for an unlimited speculative nature.

To Buy or Not To Buy ? JUST SAY IT  ...

So in Forex you buy sell currency like you buy sell anything.  And the item for sale is in the form of currency pair like this GBP/USD  (buying Pound with USD).  Says someone is selling 10 units at USD1.5125 each and you buy all 10 units.  Then the next seller is selling 5 units at USD 1.5200 and you buy all 5 units too, then the next seller is selling 1 unit at USD 1.5205.  So GBP value has just rised from USD 1.5125 to USD 1.5205 because you have bought the 15 units of GBP/USD.

correction :  You said you want to buy those 15 units but you actually don't.

like wise, the seller who said selling you the currency ... guess what ?  He doesn't have any Pound Steering neither !  He just said he want to sell you !

There is no real money involved !  What happened is the seller and the buyer have committed into a contract for the above transaction.  The contract stated a future date for the actual buy sell transaction.  So before the contracted date, you can resell what you have bought but haven't paid yet.

Remember just now you said you want to buy 15 units of 'goods' ?  If you sell them out at your purchased price before the contract expiry date, you will earn and lose Nothing - Zero !  But throughout the process, you have increased the value of GBP at that particular time.

Buy A Million with A Dollar

Another unique thing in Forex is what forex guys normally called it 'leverage'.  Basically you can say you want to buy 3 million of GBP with only USD 1,000 capital.  

Since there is no real currency involved and it is all about what the seller and buyer said, the real profit and lost is the difference of the movement.  For example, changes from USD 1.52 to USD 1.53 is only 1 cent difference.  So you don't have to have USD 1.52 to buy anything.  As long as you have 1 cent, you can say you want to buy the thing but as soon as you make a lost of 1 cent, the system automatically sell your contract out and deduct your 1 cent.

Lastly ...

Sorry if this write up is a bit boring.  This is a topic that cannot easily get agreement and I am trying my very best to express this in my laymen view ...

So by now you can see how you can use a minimum capital to speculate the value of a country's currency at ease - just say it !

Says you are an USA international trader.  You are buying 10,000 phone booths from England.

England quoted you GBP 1,000 each.

Currency Exchange at that time is 1 GBP = 1.50 USD

So your total payment is USD 15 millions

If you know forex very well, you can speculate sell GBP at lower price or buy USD at higher price until 1 GBP = 1.40 USD

If you managed to do that, you have just saved USD 1 million !!  

And your seller has just lost an equivalent amount !! 

This is actually happening every day !  A lot of 3rd world international wholesale businesses do not use forex in their finance management, their business profit range at 5-15%.  And their business contracts are usually renewable in 3 and 6 months and mostly in 1 to 2 years.  Everytime when the currency exchange flutuate more than 15-20%, they will lost all their profit ... no matter how smart they sell, no matter how much they mark up the selling price, no matter how much cost saving they did .... a cunning business counterpart can easily overturn all their effort just by Saying It !!

Guess what ?  There is no such thing as MYR pair in Forex trading.  MYR is so small that one single investor like George Soro can brankup a whole country simply by trading currency.

So the next time you are trading currency ... you are most probably NOT trading to bring up the value of your own country's value.  Instead you are most probably just helping USA and Britain ...

You can earn a lot in Forex no doubt ... but beware at what cost.

Part 1 Part 2 Part 3

Safe less EPF, pay more TAX, You are now still poor and has no saving !

Full article on http://www.malaysiakini.com/news/93624

Da Mook: Let' assume your monthly basic salary is RM4,000.

If your monthly EPF contribution is 11% (RM440), then your taxable income = RM3560, and income tax payable = RM77.

If your monthly EPF contribution is 8% (RM320), then your taxable income = RM3, 680, and income tax payable = RM109.

Conclusion? If you choose to contribute 8%, you will end up paying more income tax to the government which will make the government richer.

Finance Minister Najib Abdul Razak said this measure was meant to boost the slowed down market, but from this example we see that the money does not go into the market.

Instead the money goes directly into the government's pocket through the greater amount of income tax that we will have to pay.

Obviously this measure does not help the market at all. Do we still want t...

Currency Turns Evil - part 2

At first money is invented to facilitate buy-sell transactions which is the best invention of all time.  Then value of money is tighted to gold as a standard (what I called Big Bang in Finance World).  

Then some greedy person use war to conquer and take over other people's gold ( click here to see old post about this )

But very soon "WAR" becomes a very costly way to acquire gold to print more money.

( but its not costly to launch war against petroleum - another story)

But very soon some smart people figure out that they don't have to follow the standard of gold-money-value.  Afterall, that is just a standard set for more stupid people to follow.  In reality, like everything else, the value of an item is driven by Supply and Demand.

So USA quickly set ONE standard - use US Dollar in inter-country transactions.

Whenever USA take over a country, they set USD as the standard global currency before they leave.  When USA lends money to a country, they set USD as standard there.  Whenever you want to buy and sell with USA, you HAVE to use USD.  These are all fine ... because afterall, its their right to request so.

The sad thing is everyone else followed blindly.

Says country A and B deal with USA using USD which are perfectly fine.  However, because the banking systems in A and B were greatly influenced by USA, all the transactions are FIX (hard coded) to USD.  

Hence when A and B are doing businesses, they use USD as standard even though it is NOT their home currencies.

Imagine you are sending money from Malaysia to China, you cann't use MYR ( or RM ) and you cannot use CNY ( or RMB ), you will have to buy USD using your MYR in order to send the money over.

So whoever you are, wherever you are, if you are transacting globally, you will have to BUY USD.  As mentioned before, when demand rise, value rise.

The increase of this Demand alone allows USA to continously print more money almost forever without the need of gold at all.  Because there is no sign of over hauling our global banking system at all.

Some people are still wondering if World War 3 will occur one day.  What they didn't know is WW3 is way over and USA has conquered world economy many years ago simply by implementing one global standard in currency.

The only smarter people who were able to protect their own territory is Britain.  And some better light shed among all these is the creation of Euro - where the smaller players group together 'trying' to break away with the permanent damage cause by this currency standard WW3 domination.

Up until here, its still history, although recent history.  We cann't blame USA for playing this trick because who wouldn't want to print more money, especially when all I need to do is just to ask the other party to use my standard ?  My standard is better than no standard isn't it ?  

Most of the 3rd world countries were in deep shit that time.  Imagine we didn't even have enough food to eat, how could we be smart enough to say NO to a non-intrusive USD standard ?

The next part is the last part.  Like before we didn't eat enough food, today we don't really get fed enough neither spiritually.  Which is also the part when currency really turns evil .... stay tune ...

Part 1 Part 2 Part 3

Most Cost Effective Insurance in Malaysia

If you are buying insurance for the first time or considering topping up protection to your life, there are some facts you should know :

1. each product ( insurance, FD, Mutual Fund) has its own strength ( see this post )

2. a hybrid product may give the best of both worlds

  2a. some hybrid products are called "Link" products  ( read here for varies type of insurance )

  2b. if you build your own hybrid, its called Buy Term Invest The Rest 

Not by conincident, 2a is usually offered by insurnace companies while 2b is usually offered by mutual fund companies.  Its just a matter of approaching the same purpose from 2 different angles.

If you are in Malaysia, I would like to share with you A number : 328 !!

You can 'buy' a life insurance of MYR 328 with MYR 1 only !!

Therefore a MYR 50,000 Life insurance would cost about MYR 150 / year !!

So whatever extra cost you are paying for your insurance, you should expect them to provide you extra services and / or provide a good investment return.  Else you will need to relook into your portfolio because you are paying too much for your own ignorance.

note : 328 is the number for group term life and TPD protection only, its the most fundamental and simplest element I can find in local insurance industry here.

Stock fee is cheaper than mutual fund

Quite frequently I heard that many people do not buy mutual fund because its 5.5% fee is too high comparing to stock investment where each transaction is charged at 0.42%.

( see old post what you should consider with mutual fund high fee )

It is no doubt a valid concern. When buying stock, there is only one broker who is earning your commission. While there is a huge team working in your mutual fund, hence cost much more.

However, there is a catch to that concept.

There is a minimum fee charged to each stock buy-sell transaction. Lets say its $40. And you have just purchased a low price stock of a total of $400. You have just paid 10% commission fee for that investment, not 0.42% !!

In order to really enjoy the low fee, you will need to have a larger capital. For example, if the minimum fee is $40 and the normal fee is 0.42%, then each of your buy-sell transaction should be more than $9,524 or else you are paying more than 0.42% charges.

So no matter if you are buying

a 1 cent stock or

a $100 stock,

your minimum buying price

shoud be at least $10,000 !!

So unless you are already transacting stocks above 10K in each transaction, you should still go back to your mutual funds ....

Currency turns evil - part 1

I shared before money is tighted to gold in an old post.  That was the good side of money, here comes the later part ...

... soon earth is seperated politically into countries.  Some countries grows stronger, 2 particular ones are E and U.  They used their strength to conquer other lands and take possess of the gold there.  More gold means they can print more money.  

However in reality you cann't simply conquer other people's land and take away the gold for no reason.  For example, U claims that country I is violating human's right and therefore U is acting as world police to take over country I in order to instill 'fair' human right policies there.  With that as official reason, U can slowly take over the golds they found behind the curtains.  However, it is still Not Easy to move the gold from I to U because the world is watching.  So instead of taking the gold out from I into U, U hide the gold in I but declare that U has more gold and start printing more money in U currency without devaluation.

So does U really "OWN" the gold to justify the extra currency they printed ?  Yes if they still own the land in I.  But when stories like U's gold in I has been stolen etc. would have cause U currency to drop.  When U finally leave I, U would have claimed that they have already 'transfer' the gold back to the land of U, but ofcourse I would claim that the gold is still in the land of I because I wanted to print more currency too.  As you may guess, the same gold has been used twice to justify printing more money.  While no one actually have seen the actual 'gold' ....  

Hence the value of money is NO Longer tighted to real existence of gold but the impression of having gold ...

.... this is only the history because the world No longer welcome war and would not accept the excuse of world police ... part 2 will show how U become even smarter to print more money without gold at all ...

Part 1 Part 2 Part 3

Low Risk High Return ?

Seems like still quite a number of people do not agree that Risk is dealing with something you don't know (read the post about risk here).

So I would like to repeat that yes while Low Risk Low Return and High Return High Risk are TRUE but if you think it that way, you may just settle for "whatever it is, it is !"

For example, you may think you are not a risk taker, therefore you will never get a high return !!

My 'additional' point made to above truth is that, you should still make effort to learn the next risk in your portfolio so that the more you know, the better you can manage that risk until it becomes insignificant compare to its potential return.

Property as an investment

Just a reminder that Car Loan interest rate is about 1.9X more than the House Loan.  Meaning a 3% car loan is almost as high as a 6% house loan.  Think again if you think car loan has a lower interest rate.  (click here to read more).

The fundamental of investing in property is not much different than buying a business to earn you passive income.  However, the nature of brick and mortal business is an Active Income generator, not a passive one.

VS

So you would need to be extra careful when using property as your finance tool to gain "Passive Income".

In simplest term, you HAVE TO make sure

1. you can rent your property out to fully pay for the monthly loan repayment
   
2. you budget in the fee you pay for professional to maintain your property including

Lawyer

Real Estate agents

Renovation

Interior Design if needed etc.

Without these 2, you cann't start property investment at all.  With this, there is no guarantee you can win big yet but at least you would at least pay less to learn the lessons.

The right way to lower down price

Generally it is a BAD idea in economy sense for a goverment to influence hypermarket to lower their price ( more on that here ).

Because the ultimate great thing that can happen in our market is FREEDOM to trade.  Whoever smarter will think of better ways to save cost and therefore lowering their sale price, those who are not will not survive.  Eventually all the creative ones remains and we will have 'smart' business men in our society.

Hypermarket doesn't really care about slashing prices.  Because it doesn't hurt them at all.  Its their suppliers who are affected.  First of all hypermarkets don't pay suppliers cash.  Second, hypermarkets don't pay suppliers in full.  Third hypermarkets don't hold responsible for lost and damage goods.  

Imagine a supplier barely survive getting pay check 3 months after the goods are sold and now due to price slashes, the supplier receive only part of the payment.  So at the end, the remaining ones are the ones who did not give discount ?  Or those who already monopoly the market remains stronger ...

However, out of all these smoke screen ... some lights do shed.  Air Asia slashing their fuel surcharge mainly to counter MAS recent 'Net Price' advertisement, not so much of  because minister said so.  Like wise, BAT who started cigarette price war are purely business competition oriented.  These 2 are great price reduction examples, compare to the terrible hypermarket price reduce.

Has your daily lunch price reduced yet ?

Stock selection - management

I have shared before how to calculate how much a stock is worth and therefore knowing when to buy at what price.

However, that is just one of the methods.  The one shared above is a quantification method using calculation.

In real world, when you buy a business that is NOT run by you, the ultimate Single Main Factor is

Who Is Running The Business ?

The company may did great or terrible in the past, what really matter is who is running the business now and what he or she is going to do about it.  So the more and closer you know about the management of the company you are buying, the better position you are in.

I have seen many times stock buyers simply buy in blue chips because the company was doing great.  Without realizing the successful CEO has left replaced by a half empty manager.  Needless to say, all things go downward since then.

So when you are ready to buy a particular stock, spend a little bit more time to find out who is running the company.  Check and see if there are any hanky panky stories came out from google.

If possible, try writting them a letter or email and see if you get any reply.  Try to meet and talk to them.  Usually the really great successful CEOs are friendly while those blood sucker CEOs will just slamp door on your nose.

With a Good management, 

a bad company has a chance 

to be great again !

Without one, 

the best company 

will eventually sink indefinitely ...

tiny Personal Finance Survey Result

A personal finance survey was conducted on http://klsmihosting.com/pfp/survey20080919b.asp/ for about a month.  People who participated range from 19 - 46 years old, with mostly under 30 years old.

They were asked where they put their money in right now and what worry them most in their future.

See below pie chart that most people keep money in bank which is quite common.  Follows by insurance, mutual fund and stock market.  This is quite consistent with general public risk profile.  So this is a good allocation.

(click the chart to view larger picture)

In the question of "what do you worry most" is actually prioritizing one's personal finance need.  Where priority 1 is the most important ( most worry ) and 5 is the least.

See below 3D chart for the result.  It shows that Most People want to Get Richer ( Wealth ) and the least concern is Live Too Long.

Most said : "I'll be happy if I live 'too' long ...  "

This result is consistent with human psychology where people are mostly thinking about 'Current Needs' and tends to under estimate 'Future Needs'.

(click the chart to view larger picture)

Derivative - Options

Just to emphasize, this is not the FULL picture yet ... so dont make impulse decision that you want to go trade options straight away ... it will require quite long a study ...

source from http://teraoptions.com/stock1.html

Reduce EPF from 11% to 8%

Recently Malaysia "New" finance minister aka "Next March" prime minister announced some measures to "Save" our economy, shortly after he said our economy didn't need to be saved.  Anyway, this time around I don't have much complains.  Most of the measures are acceptable for the purpose to 'Improve' economy.  Although not perfect and some measures are "Arguable" but nevertheless none is definitely stupid.

One of the measures is to allow salary earners to reduce EPF contribution from 11% to 8%.  This particular announcement has attracted quite some debates.  Basically general public response is that we should save for our retirement and should NOT use our future money.  I cann't held to be so delighted when this respond comes from the public.  It shows that we are indeed having better senses and sensitive in planning our future.  ( But there is a higher chance that people just want to complain no matter what the announcement is ) 

I over heard from radio this morning that if 50% of the people does reduce contribution, we will have $24,000,000,000 to circulate in market which will help 'simulate' the market.  The radio hosts talk with excitement and as if that is the solution of all our problems.

if ALL reduce 3% would give $48 billions

so that means total salary drawn is $1.6 trillions or $1,600 billions

Malaysia population is 24,821,286 as of July 2007.

So even if we assume all population are working and the 24 billions are allocation for 2 years, then average montly income of a person is $2,778 

Actually working population is about 18 millions which comes to an average salary of $3,074

So it is quite obvious that the figure of 24 billions fund to 'boost' economy is a false figure.  This is not the first time this radio host publish wrong figures.  She tends to be very self center and simply announce figures that comes in her hand without proper analysis.  I am fine if she is just announcing it.  But the thing is she use that figure to justify the conclusion and reject all other callers opinion. 

So ... whatever offer you get or numbers you heard, do the math ... you will soon discover many things that seems to be 'Right' are actually ambigously 'Wrong' ...  

Compare by numbers, not the rate

Sometimes ago I share a "Capital Guarantee Investment Link Insurance Plan" that sounds almost perfect :

. Your Investment Capital is Guaranteed to increase even at Bad times,

.  At good times, you will get all the extra returns,

.  Free insurance covers.

There were 2 scenarios shared in that post 

1) When market drops, you get back $139,200 out of the $120,000 you invest in.  And this $139,200 is paid out monthly in next 20 years.  If you run the numbers, you will discover this is equivalent to a compound interest rate of 0.75%.

That's right !  Instead of 5.8% or any big return numbers you see, the actual rate of that deal is 0.75%.

2)  Like wise, if your investment is accumulating at 6% for the first 20 years, then the whole 40 years plan return rate is actually 4.08% !!

However, don't be too negative yet.  Insurance is not All About return but its main objective is about Protection ( read this old blog ).  So if you really want to compare with a FD rate, you should deduct some amount from your saving to buy an equivalent insurance protection.

The above plan's protection is $84,000 Sum Assured.  Someone quoted me a Term Insurance of $505 for that.  So I should deduct out $505 from my $6,000 yearly saving (see Buy Term Invest The Rest method) and then see what return rate do I required in order to get paid $580 monthly from 21st to 40th year.  The return rate is 1.55%.  So its not as bad as 0.75%

Likewise, in good time, the return needed is 4.73% and not 4.08%.

If you think someone has eaten your pie, that is true but lets be fair.  These pie eaters also helped you reduce some hassles;

1. No need to seperate payment of $505 to insurnace company and then the rest to other company,

2. No need to worry about the timing of payment,

3. No need to get different quotes, different analysis from different parties

etc.

So they get paid for all these work they did for you.

And you ... your decision is whether you want to pay someone to do the job for you.  If not, then you better buckle up and do all those work yourself.  Don't ask for both world ... pay nothing and ask for all the services ...

Calculate Future Living Cost

I mention before that the Real Inflation you should care about is Your Own Inflation Rate, not those published by goverment or experts ... ( read here for old post )

In other to calculate future living cost, first you list down your living cost now.  The 4 basis of living standard are Cloth you wear, Food you eat, Place you stay in and Transport that brings you around.

Then determine your own inflation rate.

Lastly using the FV formula to calculate your future living cost.

PV - Present Value ie. $570 x 12

i - interest rate ie. 3% or 0.03

n - number of years ie. 17 and 20

FV - Future Value, ie. the results I shared below

( more on FV formula )

For exampe, using above figures, the cost of living for

17 years later is $11,305.48

20 years later is $12,353.80

instead of only $6,840 a year today.

if you don't have calculator at hand, you can also use Rule of 72 to do a quick estimation in your head.

where to get EPS, PE ?

Where to get historical data like EPS and PE you used in your stock valuation example ?

1.  As I think buying stock is like buying a business, where is the best place to get information about the business before I invest into it ?  Yeap !  From the business owner itself !  If the current business owner is NOT able to give you the data you ask for, probably this business is not the one you should invest in.  I was searching for Genting data and within 1-2 minutes, I got this link http://www.genting.com/financial/images/2007_gb10years.gif

2.  All companies listed in stock exchange needs to submit their financial data periodically, so you could also obtain all listed companies data from your stock exchange, ie. KLSE.  Some may not have it online but most definitely have compiled a publication and sell them at a small fee.

3.  If you trade stocks using brokers, online trading site etc.  You should ask for these data from them too.  All these form part of the services you get and why you pay the fees for.

4.  Some business news web site provide some data too.  I was searching for Genting from The Star and this is what I get http://biz.thestar.com.my/marketwatch/fundamentals.asp?searchstr=3182

Sometimes I get the data from different sources to cross check their data too.

why EPS, PE in stock valuation ?

Earlier I shared How to value a stock and decide when to buy at what price, and then give a real life example.

There are 2 main factors why a stock price goes up and down:

1) fundamental strength of that business ( Strong or Weak )

2) general public view points ( Positive or Negative )

So there are 4 combinations:

Weak Company Negative Views : Price Drops Continously

Weak Company Positive Views : Price Up and Fluctuate

Strong Company Negative Views : Price Drops to substanable level

Strong Company Positive Views : Price Up and Substain

You BUY Strong Company 

during its Negative Views time (3)

and 

You SELL during Positive Views ( 2 & 4 )

EPS or Earning Per Share shows you how much the business earn during a particular period.  Over the years, the EPS growth rate shows you how 'STRONG' the business is.  A consistently grown EPS shows that the business is able to conduct good business despite good or bad times.

PE or Price Earning ratio basically describes how many times a stock price is traded comparing to its earning.  For example, a business may be earning $1 now but its stock price is traded at $10, PE = 10x.

One of the usefulness of this PE is to show confidence level.  For example if I compare 2 businesses of the same nature, one is traded at 10x while another is only 5x.  That shows that general public is more confidence with one business than the other.

I can also examine all the PE numbers for all plantation stocks ( same industry ) and come up with an average or normalize PE, says 8x.  Then compare to the PE of the particular stock I am planning to buy, says 10x.  Then I know many others are also interested in this stock compare to other stocks within the same industry.

If I keep a historical record of PEs, I can also understand the stock price trend better.

So that is why I use EPS and PE, this combination tells me both the company strength and what the market thinks about this business.