Sundew

Sundew is a carnivorous plant which can be found on every continent but Antarctica. Mucilage which is drops of sticky substance could be found on the leaves of the plant. The mucilage attracts the insect to the plant tip because of its dew-drop appearance. The insects get stuck in the mucilage and become entangled. The substance then digests the helpless insect. The tentacles on the leaf bend toward the captured insect in about an hour time

This phenomenon posses a close similarity in a human world. In the investment, there are many sundews awaiting for the naïve insects trapped into their trap. The sundew proclaims themselves are Buffett disciples and follow Value Investing principles in their investment portfolio. When insects believe on them and pour out their hard earned money to the so-called “Value Investing”, sooner or later, they will find out that the truth is not as sundew proclaimed – following Value Investing principles. The sundew who proclaims himself as Buffett disciple make an investment in an lousy company where there is no profits, bad business prospect, stressing on form over substance and practice funky-punky corporate exercises. The exercises could be a beverage company get involves in aquaculture business, poultry farming company get involves in telecommunication business….etc for the sake of diversification. (or should I say DIEversification?)

People who know partially but not all are the most susceptible insects exposed to the danger of sundew. They are intelligent but without or lack of proper knowledge. Remember that intelligent does not equivalent to knowledgeable. Sir Isaac Newton is a highly intelligent person but still he falls in prey of South Sea mania which cost him a lot. People who know Warren Buffett is the world 2nd richest man in the world and his fortune is derived through investment admire of his fortune and look forward to follow his step. But, they might not even know HOW he invests. As long as there is a talk with a tag of “Warren Buffett”, “Value Investing”….etc, they would lure to it. The talk might be free of charge and even provide with food and beverages with some free goodies such as pen, umbrella and so forth. When the talk starts, it might begin with Buffettology investment principles. When they proceed further, their real motive revealed: with the help of their powerful software, it helps you to make “Value Investing”. Of course, they will show you with the help of the software, it achieves 100, 200 or even 500% return. The is no brainer logic of it: with over 1000 or even 10000 equities listed in the exchange, for sure there will be 1,2 or even 10 equities with the superb performance in short term. Whether the high growth rate could be sustained is another problem. But, they are smart enough to show you only the best of one or two while at the same time hundred or even thousand out there which perform poorly will not be shown. Since they show you with the superb result, you will enticed to purchase the “powerful” software and subscribe their service which always cost you not a dime. Who earns the most? Whether you could really earn from the investment is another story – money first dropped into the pocket of the software / talk promoters.

“What Wall Street gives with one hand, it usually takes away with the other.” How true of this. It applies not only in Wall Street as well as Main Street.

Technorati Tags: Investment, Sundew, Mucilage, Insect, Warren Buffett, Value Investing, Diversification, Corporate Exercise, Sir Isaac Newton, Wall Street

Is Mutual Fund a Good Investment? III

Mutual fund promoters always highline the fund is managed by professionals. The first impression you get when you talk about professionals is they are truly professional, meaning that they are devoted their time for the fund management as well as they are equipped with necessary knowledge and skills. This should at least beat down average Joe result in the investment. But, the impression we get not always represent true reality. Checking back to the history and you found out that they are so many fund managers who do not perform, not even by laymen in the street. The reasons? There are too many and I just want to highlight few.

1) Peer pressure
There are 4 variables for the investment results and its outcomes:
i) You are right, others are right: that’s great! You deliver the results as expected.
ii) You are right, others are wrong: that’s even superb! You are among the top of the tops who delivers superior results.
iii) You are wrong, others are wrong: hmmm….. because of unforeseen circumstances such as 9-11 Tragedy, Hurricane Katrina, Tsunami…etc that could not be avoided, thus, delivering the poor results. Since everyone delivers same poor results, no one will blame you.
iv) You are wrong BUT others are right: oooooops…. That’s disastrous. Why you deliver such poor performance while others could deliver a handsome return? Everyone pinpoint at you and you are no way to hide because figures show everything. How? How do you avoid such phenomenon?

If you are the fund manager, which one would be preferred and which one you try to avoid far away? Since the management fee is not based on performance merit, isn’t it PLAY SAFE a better idea? If I could deliver a handsome results, that’s the desired outcome. But, if to deliver such results posses a risk of delivering a poor result compared to others who don’t, I’m better protecting my position first. After all, management fee is sure thing while to be a super star might risk me losing out my rice bowl!

2) Ego
Many fund managers are graduated from Ivy League. They are full of titles and they might be a Nobel Prize winner as well. Take an example, 2 Nobel Prize winning economists with other elite academic traders manage Long Term Capital Management (LTCM). Even with so many highly educated and intelligent people, the fund still failed. As mentioned by Warren Buffett, to ensure a successful investment result, you do not need a rocket scientist, but a Grade 6 mathematics with a rational business thinking.

Next time, whenever mutual fund salesmen try to persuade you to buy from him, ask him about Sales Load, Management Fee, Trustee Fee and so forth and their impact to your investment result. Are they care about the impact? How about their net worth? Are their majority net worth placed where they promote? If not, then why? All in all, is up to you – what’s your objective of your investment in mutual fund? To please somebody, buy it because of relationships, such as family members, friends or colleagues? Or because you really look for the one who could preserve your asset as well as creating value for you? After all, it’s your money and it’s your responsibility to take care of it, if not you, who else?

“Be a man. Place your money where’s your mouth is.” This is what I want to share with all fund managers….

Technorati Tags: Investment, Mutual Fund, Unit Trust, Professional, Peer Pressure, Ego, Play Safe, Ego, Ivy League, Long Term Capital Management, LTCM, Nobel Prize, Warren Buffett, Sales Load, Management Fee, Trustee Fee, Man, Money

Is Mutual Fund a Good Investment? II

People tend to think that their investment made in mutual fund is 100% of their money invested. This assumption is totally out of the reality. In real life, what you invest is lesser than the money you pour out. This means when you invest $10,000 in SDF fund, the money managed by fund manager for the investment purpose is not $10,000 but lesser. You would be amaze and ask if it is not $10,000 then how much is really for investment purpose?
People invest in mutual fund should be aware there are 2 different prices, ie: selling price and buying price similar to currencies exchange rate. The selling price of the fund is ALWAYS HIGHER than buying price. For example, selling price is $1 while buying price is $0.935. What is this means? That means fund management sold you the fund for $1/unit and if you decide to sell it back to them (providing there is no fluctuation of the prices), you only get back $0.935. Say, if you bought the fund for $10,000, then you will only get back $9,350. Where is the remaining $650? Evaporate in the air or taken by the Martians? Nope, that is the cost paid to the pretty or handsome guys who persuade you to invest in his fund, the fancy sales booth….etc. The difference of the prices is called Sales Load.

What’s the impact of Sales Load and management fee (note: mutual fund normally incurs 1.5% of NAV as yearly management fee) to your investment in the long run? It’s huge! Let me show you the example. There are 2 investors, namely, John and Tom. John invested his money amounting $10,000 in SDF mutual fund while Tom invested his money, same amount as John directly to equity market. Assuming both investments bring them same return rate, ie: 12% per annum. What’s the end result after 10, 20 or even 40 years?

Year 0 Year 10 Year 20 Year 30 Year 40
John: $10,000 $24,966 $66,665 $178,008 $475,315
Tom: $10,000 $31,059 $96,463 $299,599 $930,510

As from the table shown, the difference of investment result for John and Tom in term of percentage after 10, 20, 30 and 40 years are 24.41%, 44.70%, 68.31% and 95.77%. This means, although the return rate for both are same, ie:12% per annum but after deducting hidden cost by mutual fund, it brings a disastrous result to its investors. As you notice, the difference could be as huge as double after 40 years!

Please bear in mind that the calculation is based on consistent 12% per annum return rate. The difference could be further if in particular years, there are negative return rate. Remember that, mutual fund management fee is Asset Based Commission (ABC), which means no matter how’s the performance of the fund, 1.5% of the ENTIRE NET ASSET VALUE will still deducted from the fund. What do you think about your fund manager performance? Do you believe they are so superior that they could register consistent high, positive return rate for you in the long run, ie: 40 years? Or is it makes sense that they somehow might make some mistakes and bring negative return to the fund? How about switching from SDF fund to ASD fund, you might ask. It is truth that this is what people normally act if one fund does not perform, they will switch to another fund. My answer? Unless you are sure the fund you switch to is by high probability they are superior than others, otherwise, don’t do it. The reason? SALES LOAD.

Technorati Tags: Investment, Mutual Fund, Unit Trust, Asset Based Commission, Sales Load, Net Asset Value, NAV, Equity,

Is Mutual Fund a Good Investment? I

Before we jump into a conclusion, we should examine how’s Mutual Fund (known as Unit Trust in English Commonwealth countries) works.

Promoters and salesmen for the mutual funds are very friendly, some even hire only pretty ladies or handsome guys to lure the investors. This is not a bad thing since every one likes beautiful things and people. Everyone likes to be pleased. Remember when you shop in the jewelry shop, whatever you choose, you will be praised by the salesmen that your taste is very unique – that gives you an impression that you are the only one in the world, you are superior. Because of the feeling, it is naturally that you would pour out money to buy the jewelry. Whether the praise mentioned by the salesmen is truth or not is not important. After all, what lies in the salesmen mind is to sell you out the jewelry and earn the commission.

Business is business and for sure there is no free lunch in this world. Everything incurs cost. By setting up a fancy sales booth, hiring friendly yet pretty sales people, or even drives directly to your house or office to promote his funds all incurs cost, being it directly or indirectly. People naïvely think that it does not cost him single cent are doomed to be manipulated. While it is legal and makes sense that business needs to earn in order to sustain its operation, it is VITALLY important that the place you invest should at least protect your asset value for the first place and then enhancing its value for the later part. If the investment you made could not meet its first role of protecting its value, not mentioning of enhancing its value, it is worthwhile thinking of whether you make a sound investment or not. The case is worse if the investment you made not only does not protect its original value but bring you a negative value.

The problem lies in the mutual fund industry is its management fee is based on Asset Based Commission (ABC). That means no matter what’s the performance of the fund, being it good or bad, it will deduct 1.5% of the ENTIRE NET ASSET VALUE (NAV) of the fund. Put it an example, say Fund JKL NAV is $1 billion. Thus, at the end of the year, the fund manager will deduct 1.5% of NAV, that’s $15 million from the fund as management fee. Whether the fund performance is positive or negative is not the prime consideration. It is no wonder fund managers are looking for the biggest fund – the bigger the fund, the more they earn. This problem happens in almost every industry where the managers manage Others People Money (OPM) and this scenario is known as Owner-Agency Conflict.

How to prevent us from falling prey into this Owner-Agency Conflict? First of all, ask yourself what’s the objective of the investment you made? To please someone? Cannot resist because of pretty ladies or handsome guys persuasion? Or to create value to your asset? If the answer is the latter, then you need to choose carefully your fund manager. He should be the one whose his management fee should be Performance Based Commission (PBC) rather than Asset Based Commission (ABC). If his performance is poor, there is no reason he still receiving a handsome pay check. On the other hand, if he delivers, we should share some of our profits with him. Doesn’t it fairer?

Technorati Tags: Investment, Mutual Fund, Unit Trust, Asset Based Commission, Performance Based Commission, Net Asset Value, NAV, OPM, Owner-Agency Conflict

Blue Chips or Potato Chips?

Often, when we invest in equities, people told to invest in Blue Chips for the sake of stability. The Blue Chips normally stand for the companies who are the market leader in their industry. For example, General Motor (GM) in car industry, Dell in computer, Microsoft in software industry, Wal-Mart in retailing and so forth. Are the Blue Chips really a good investment? Why not we examine some to get some ideas?

Google, the world top leading search engine as per 23rd March 2006 has market capitalization of $101.04 billion ($341.89/share). Its Price Earnings (PE) stands at 68.09 with Earnings Per Share (EPS) at $5.02. No dividend paid out so far.

What does it mean? With PE of 68.09, it means when you invest in Google at the current price, you need to wait for 68.09 years to get back all the dollars you invested. The inflationary factor not calculated on this matter. Say, you invest a share of Google with $341.89 in 2006, you need to wait until 2074 to get back $341.89. Please note the value of $341.89 in 2074 is TOTALLY DIFFERENCE with the value in 2006. Of course your invest return period could be shorten if there are some positive progress. For example, for the coming years, Google earns spectacular earnings years after years which mean its EPS more than $5.02. It might be $10, $30, $75 or even $300! Who knows? One things for sure is high growth normally will not long last. It could grew at the rate of 20%, 40%, 80% or even 200% per year. But, to continue such high growth rate for 10 years, 20 years or 50 years, there is only one route: OUT OF THE PLANET EARTH.

Baidu, Chinese top search engine saw its price drop since its 1st day closing price at $122.54. As per 23rd March 2006, its price stands at $50.60. Is it a bargain since its price drops more than half of its peak? To answer the question, let’s look at its fundamentals. Its PE is 273.51 with EPS $0.19. No Dividend paid out before. Even tough its price drops more than half from its peak, its PE seems at the sky rocket end with only tiny earnings. Is it a good investment choice? Ask to the RIGHT candidate – RATIONALITY.

VA Linux, once a darling star of the dot com mania who is tagged as “Next Microsoft” peaked at $320. The price quoted in 23rd March 2006? $3.65. The lost of almost 99% of its value. Enhancing shareholders value? Yes, it is but with reverse direction. At 3.65, its PE stands at 32.88 and EPS of $0.11. No dividend ever paid out.

Wal-Mart Stores listed in New York Stock Exchange (NYSE) since 1970 is the world top retailer. It outpaces its rival such as French Carrefour, UK based Tesco and German Metro. Its price on 23rd March 2006 was $48.54. Its PE stands at 18.10 and EPS at $2.68. Its dividend paid out translates to 1.40% yield.

How about a legendary “Oracle of Omaha”, Warren Buffett’s holding company, Berkshire Hathaway Inc.? Its price as in 23rd March 2006 was $90,000. Yes, $90,000 per share! Its fundamental? PE at 16.25 and EPS of $5,538.47! There is no dividend paid out since its listing. (Note: the price quoted here is Class A share. There are 2 classes of Berkshire’s share: Class A and Class B where the price of latter is 1/30 of the former.)
Though the examples, I believe RATIONAL investment judgment could be made. After all, what we need for our investment portfolio is the REAL blue chips which are always there but not the potato chips which its destiny to be eaten up.

Technorati Tags: Investment, Blue Chips, Wal-Mart, VA Linux, Baidu, Google, NASDAQ, Microsoft, New York Stock Exchange, NYSE, PE, EPS, Oracle Of Omaha, Warren Buffett, Berkshire Hathaway Inc., Potato Chips,

IPO Stars

Google's share pirce quoted in NASDAQ since listed.


VA Linux price quoted in NASDAQ since listed.


Baidu price quoted since listed in NASDAQ.

Technorati Tags: Investment, Initial Public Offering, IPO, VA Linux, Baidu, Google, NASDAQ, Microsoft, China

IPO, Initial Public Offering or??

IPO which was a sure gain scheme during a boom time in 90s became an urban legend that you will definitely rewarded with handsome gain if you apply it. The legend happened most of the times during 90s. There were people lining outside the brokerage houses overnight in order to get the IPO form. Some even pay out some money in order to get an application form.

Euphoria against IPO made investors act without rationality. Take an example, VA Linux. When it was 1st day trading of the shares (9th December 1999) in NASDAQ, there was no trading that morning until the price soared $290 against its IPO price of $30. The stock peaked at $320 and closed at $239.25, a gain of 697.5% in a single day! What is its underlying value? It valued at a total of $12.7 billion ($12,700,000,000) when it reached its peak price on day one. The company history? Less than five years old, it registered a cumulative total of $44 million in revenue with loss of $25 million! If you are an investor looking for private company, will you invest in the company with lousy performance like this? Definitively not!! But, it happened in equity market!! What’s its price on 21st March 2006? $3.71.

While billion of dollars lost by the average Joe who handled their hard earned money to invest in “Next Microsoft”, who gain from this frenzy mania? The money invested would not evaporate in the air unless there are Martians who take it out, so who is the beneficiary of this IPO euphoria? The answer is very clear here.

Will same history repeat? I don’t know. Maybe it is worth while to look at the examples shown below:

Baidu (A 5 ½ year-old dot com company, the largest search engine in China) IPO which set on 5th August 2005 with the price of $27 per American depository share (ADS) saw its first closing price at $122.54. This translated to more than quadruples in its IPO price. On 21st March 2006 closing price was $49.40 compared to its highest price since IPO which was $153.98

Google (A 6 year-old dot com company) which was listed in NASDAQ (19th August 2004) with its IPO price of $85. On Tuesday, 21st March 2006 quote, its price was $339.92 compared to its all time high of $475.11. The pricing method of Google is a bit different. While most companies IPO price is set by their underwriters, Google used a Dutch auction to price the IPO. Such an auction lets potential buyers say what they're willing to pay and sets the price at the point where there are enough buyers to buy all the shares being offered. That's designed to make sure that sellers aren't settling for a way-below-market price and IPO buyers aren't getting a windfall.

Please bear in mind, investors are always look for the long term value appreciation, a short term price performance not necessary determined his investment judgment. It should be distinguished from the speculators. After all, speculators are looking for quick profit. To gain quick profit, there is no underlying business sense that determines its price movement. After all, as long as there are follies willing to pick up the stock at its sky rocket price, you are still gain. By investment judgment solely based on this merit doomed to be failed because you never know whether you are the last folly.
Should we change IPO from Initial Public Offering to Insiders Profit Only? Imaginative Profit Only? Or…..???

Technorati Tags: Investment, Initial Public Offering, IPO, VA Linux, Baidu, Google, NASDAQ, Microsoft, China

F1 Again….This time in Kuala Lumpur (KL)

Renault team once again won in the tournament held in Kuala Lumpur. As I mentioned in the previous post, in the tournament, the race team equipped with the best accelerating engine would not necessary guarantee the triumph. To be a winner, you got to finish 56 laps with some curve turnings along the way. The race car equipped with the best accelerating engine such as McLaren team has an advantage when the circuit way is straight, but its advantage diminished when it comes to the curve turnings. Along the race, the car needs to stop by in the pit stop for some maintenance and fuel pumping and the moment is critical. Once the decision made is wrong, it would ruin the entire race. That’s why the driver is always communicate with the team of controller in order to decide the best moment to stop by at the pit.

In the investment world, there is no difference. To determine the success of the investment is not judged by one or few times success. After all, for such short moment, luck plays an important role. For example, when there was a technology boom time, chip manufacturers enjoyed a handsome return. It also applies to other commodity type companies such as Steel manufacturer where it enjoyed a handsome return during 2004. The problem of this commodity type companies is they lack of competitive advantage and its boom solely depend on the cycle of the industry. They would spend much for the capital expenditure (capex) to expand their production when there is a boom time. With the products with enjoyed no loyalty by the customers, the only consideration by the customers is PRICE. Capex by manufacturers during booming time will flooded market with excess supplies for the same products. As a teaching of economics, when the supply is more than demand, ultimately the price will drop. This will put the suppliers into dilemma – the excess products they produced no where to go since the demand is less than supply. Thus, it will initial a price war that is never ending and erode the margin of the suppliers. The cycle repeat again and again. Same scenario could be seen in the racing circuit, the car which leads during 10th, 21st, 32nd….lap does not mean it is the winner of the race. The winner only comes out after it completes the entire race, which is finish all 56 laps.

That is why whenever salesman approaching you and promoting his fund and shows you outstanding 3 months, 1 year, 3 years or even 5 years results of the fund does not guarantee that the outstanding results of the fund will be continue for next 10, 20, 30 or 40 years. After all, there are many ways to boast the results for short term but the tricks used will not long last. The character of hoping to grab short term profit or is patience enough to grab the long term profit is the character that distinguish between speculator and investor. Both are greedy – Investor is greed for long term while speculator is greed for short term. Which character are you belong to?

Technorati Tags: Formula 1, F1, Kuala Lumpur, Investment, capex, Renault, McLaren

Dollar Cost Averaging (DCA) Again

To continue with the previous post, let me show you an example to make the case lively.

Say like you are a Venetian merchant like Marco Polo. You travel to the east often to trade. Along the journey, there are many unknown and uncontrollable factors waiting for you, ie: pirates, rainstorm, hidden rocks underneath the sea, diseases….etc. As a leader of a merchant, will you initial a journey by a fix interval, say like every quarter, no matter the situation? Or is it more make sense to start the journey after evaluating all the possible risks and you are confident to handle all the risks? Yes, the journey to the east is never easy, for sure there would be many obstacles along the way. If you got the knowledge of how to handle these risks, isn’t increase the chance of success for your trade? Rather than sorely depend to the blind faith of start the journey fixed by interval? Of course, a successful leader must posses firm characters and very often they might be tagged as stubborn. This is because sometimes he has a different view which is totally against from popular view. This is a dilemma that he faces and sometimes he not even get the support from his beloved family or friends. But, this would not stop him from what he believes and with firm characters, it will prevent him stop half way from pursing his goal. Remember the lesson from Thomas Edison? A child tagged with a mark of problematic child becomes an outstanding inventor and also begins his business empire which lasted until today – General Electric (GE).

Technorati Tags: Dollar Cost Averaging, Marco Polo, Thomas Edison, General Electric, GE, DCA

Conventional Wisdom IV

4) Dollar Cost Averaging (DCA)

Definition of DCA: An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.

This is what a mutual fund salesman keen to promote to you: “By investing a fixed amount at set intervals, the investor buys more shares when the security price is low and less when it is high, theoretically reducing the overall cost of the investment.” Sound Ok? Doesn’t it? Since we do not know the trend where’s the market heads on, this is the most sensible strategy to adopt in order to reduce our risks.

Like my sharing posted in Critical Thinking, many times the things sound reasonable superficially but indeed it’s totally out of box of rationality. Put it this way: say like you want to purchase gasoline for your car, would you wait for the best time, meaning when the price of gasoline declines to buy more? Or you just purchase it in fix interval since the price of gasoline fluctuates? Which strategy is more sensible?

DCA is a strategy that already out of fame in the western investment world. But, this strategy gets a hot response especially in Asian countries. The problem underlying for these countries is whenever there is something from western world, they would accept it blindly and treat it like gold. This not only happens in investment world but in every aspect. Whenever your products or services is endorsed or conducted by westerners, the products or services you provide will sell like a hot cake. There is no wonder one of the western trainer says: “It’s very easy to earn from Asian.” Being Asian, pity huh? Though independence, the slave’s mind of colonialism still persist.

Technorati Tags: Dollar Cost Averaging, DCA

Critical Thinking

Today, an advertisement about real estate investment talk appears in the newspaper. In the ad, the main title is: “Create Wealth with Australian Property. How To Generate 500% Return in 10 Years”. Being curious, I look thoroughly into the ad. The ad gives an example of the return:

- Property Price A$300,000
- Loan Borrowed A$200,000
- Your Investment A$100,000
- Income Return A$ 10,000 per year

10 Years Scenario:
- Price Double A$600,000
- Income Return * 10 Years A$100,000
- Loan Left A$100,000
- Total Return A$500,000

Return of A$500,000 with A$100k Investment = 500%
---------------------------------------------------------------

Wow! Sound great! I could get 500% return in 10 years! Looking around, how many investments could generate such high return rate? But, wait!! There is no free lunch in the world. Thus, read the ad again and think deeply. Hmm…..the scenario becomes clearer.

Firstly, they ask you to place A$100,000 for the investment of A$300,000. That means your gearing is about 33,33%. Fine, that’s the norm for real estate investment where you could even gear up until 100% margin in some cases. Then, they tell you the income return per year is A$10,000, that would translate to 10% return rate per annum (A$10,000 / A$100,000 = 0.1). At this point, everything looks great. But, the real story comes behind:

They are assuming the appreciation will be 100% in 10 years where the price of the house soars from A$300,000 to A$600,000. At the same time, your rental income remains stable for the entire 10 years which gives you A$10,000 * 10 years = A$100,000. This amount would offset against the installment for the loan. Hence, they show you the return of the investment is $600,000 - $100,000 (your initial investment at the beginning) = A$500,000.

When you examine deeply, you will wonder how such return pops up? Firstly, your rental income of A$100,000 could only offset half of the remaining loan (A$200,000), which mean you are still owing bank for another A$100,000. Say, if you sold the house after 10 years, your return would be A$600,000 – (A$100,000 + A$100,000) = A$400,000 where 1st A$100,000 is your initial investment you laid down when you bought the house and the 2nd A$100,000 is the debt you owe to the bank.

You might argue that return of A$400,000 still impressive for 10 years. True, if it’s a case but the example shown miss out some important points. Firstly, they do not include financing costs, ie: legal fee, financing interest, management fee, broker fee, insurance fee….etc. Secondly, the appreciation of 100% within 10 years is solely their assumption. Whether the state could be reach is another consideration. Thirdly, they also assume the rental for the entire 10 years period will never have any empty period, meaning that for the entire 10 years, they guarantee there sure have tenants for your house. In the reality, is it a case? Think it rationally.

With so many questions in doubt, do you think it’s a great investment as claimed by the promoter? THINK IT TWICE….

Technorati Tags: Critical Thinking, Investment Return, Loan, Investment, Real Estate, Property

Conventional Wisdom III

3) Investment should leaves to professionals

We often been brainwashed by financial institutions and media that the investment should leaves to professionals. The reasons they give are:
i) Investment involves complicated things, such as charts, financial reports…etc that the ordinary people could not understand.
ii) Investment should have a long term perspective.
iii) Investment needs people who have financial background to deal with.
iv) Investment needs to be monitored day by day even minute by minute.
v) Market would be more stabilized when the investment is made by professionals and not retail investors.
….. and the list could go on and on.

While some reasons given are true, there are some reasons given LOOK TRUE but indeed are TOTALLY WRONG!! Put in an example: Investment needs to be monitored day by day even minute by minute. What are they mean? Are they mean you should sit in front of the screen to monitor the price changes all the times when the market open? (I am referring to the investment like equities, commodities, future or option market). When the price up, we chase it and when the price falls, we dump it like hell? Is this the practice of the so called professionals? The investment decision is driven by PRICE but not VALUE? There is no wonder Warren Buffett ever said: “There are too many people who knows everything about PRICE but nothing about VALUE.”

There are too many cases where the professionals that supposed to be forces of stability when market becomes panic, act the reverse – they are even worse than retail investors by creating more volatility. You would also notice that the investment decision of those professionals could be change in the shortest period. Today, they might buy ABC equity, tomorrow they can sell it, even at lost. This leaves me in puzzle -- The decision making could be change so rapid? Isn’t it an unsound decision? or there are hidden agenda underneath that we do not know?

Before we place our money to the professionals to manage, it’s very important to understand how’s the game works – where the interest of yours and your money managers. Are there any incentives for them to manipulate your money? How their income generates? By performance, asset value or other indicators? We should not fall prey into the trap of the predators waiting to “slaughter” you while at the same time you are assuming they are creating value for you. If this happens, that’s pity, isn’t it? And this happens days and nights…

Technorati Tags: Professional, Investment, Value, Net Asset Value, NAV, Price

Imelda Marcos

“I’m very simple.”

"I have never been a material girl. My father always told me never to love anything that cannot love you back."

With 3000 pairs of shoes, what could be described is only one word: Extravagance. I do not understand how “simple” align with the life with 3000 pairs of shoes and remember this is only a tip of the iceberg. Maybe we should feel fortunate as Imelda says, “Thank God, when they opened my closet, they found shoes not skeletons.”

Talks are always touching when it reaches to where the public wants to listen. Talks remain only talks. It would not change to a reality as talks proceed. As someone proclaim himself is a rich man does not mean he is a real rich man. Whether he is a real rich man is determined by his wealth, not by his words.

Political animals are expert in influencing people mind by saying sweet words and giving out empty promises. As long as he keeps his people mind closed, he could keep his ruling until his death and robbed national treasures from his people. The scenario happens all over the world. For example, the Philippines was once a wealthy nation and its capital, Manila was a darling commercial centre in Asia in 60s. But, today as you notice, the Philippines is one of the poorest nation in Asia. Nations like Singapore, Taiwan, South Korea…etc that once far behind the Philippines in term of GDP already outpace many folds today. What’s the reason? Its leader would blame to the external economic crisis that out of his control. While at the same, Singapore which also located in same region as the Philippines, that’s in South East Asia, could emerges from a country that once its existence been threaten to diminished to a most powerful financial as well as logistic hub in the region, Bear in mind, a nation just had its independence in 1965 without any natural resources as the Philippines had that time. The conclusion could be made is the one who talk so much and channeled the money to the non-sense “investment” is doomed to failed. When fail, excuses will never less. While at the same time, a successor works more than talks.

In investment world, you will find a similar scenario. By unveiling a mega projects of his company, the CEO will show you how grand the project is and how much you could earn from the project. Of course, there is no less earnings projection prepared by his accountants, investment analyst that his project is a solid one. When you are convinced and pour out your money to invest, sooner or later, you will find out that the project seems a dead duck project – it does not bring out the result as promised. By that time, you only realiazed that your money already evaporated out of the air. As long as you learnt from this harsh reality, it’s ok. After all, all courses you attend need a tuition fee. But, if you repeat the same mistake twice, that’s your own problem, quote somebody saying: “Cheated once, shame on you; cheated twice, shame on me.”

Need for Speed – Formula 1 (F1)

A new season of Formula 1 began yesterday in Bahrain and the winner is Alonso who drives a Renault engine racing car. If you observe carefully, you would notice that the car is not the most powerful car in term of pick up, meaning that if the race is on the straight line course, the car will lose out in the race. This is because the most powerful car in term of pick up is a racing car powered by Mercedes engine. If Bahrain race course is a straight line course, without any curves, there will be no doubt that McLaren team will win in the race.

The observation could be apply in the investment world. Assuming the investment world is like a racing course and you are a driver of the car, by choosing the most powerful pick up car like Mercedes does not assure your winning. After all, the investment world is not straight line – it’s full of curves, holes, and your ride will never so smooth as riding on the well maintained tar road. Sometimes, you got to struggle on the dust road and when it’s a rainy season, the road will become more challenging as the road will full of mud. When this happens, insisting to drive F1 car on this road would be stupid or insane. Instead, you should change the car to 4 wheel drive car. By adhering to the blind faith would be disastrous. In the ever changing investment world, the one with Firm Character equipped with vast knowledge
would play a role – his investment objectives and visions would still intact but using his intelligence to suit the changing environment. Though, F1 is a race for speed but it does not mean you must accelerate all the times. By knowing when to break is as important as knowing when to accelerate. How to turn according to the curves is vitally important. When you go to stop pit to change the tyres, fuelling up the car are no less important. Only an experience driver knows this. Last but not least, knowing yourself whether possess a winning driver characters is important as well. The world is only one Alonso, if you want to win, leave the car to him. But, be careful if the driver’s interest is not aligns with yours.

Why we should invest in mutual fund?

1) It’s a good medium to tighten the relationships of our relatives and friends by purchasing the fund from them.
By purchasing from them, they get the commission from the sale. We are taught to be helpful and should try to please everybody, so we can become a friendly people and it’s possible to become an American Idol – a contest based on popularity.

2) It’s a good source to diversify. By not putting all the eggs in a basket, it could ensure our investment would not evaporate.
Hmmmm……..isn’t a mantra from the financial “expert”? By listening to the “professionals”, it wouldn’t go wrong.

3) It’s a good medium to entrust our money to the professionals.
I am so busy with my daily life: my work, my family…etc. I have no time to deal with such investment. By invest in mutual funds, I let the professionals to manage my money and I am sure that their performance is better than mine, if I choose to do so.

4) It’s proven that by invest in it for long term, it could outpace the return rate of putting money in the bank.
The salesman, financial adviser, chartered financial consultant always remind me about this.

5) It’s a good medium to assure that we are social animal – we follow what others do, we are not weird and not unfriendly.
Hmmm……it wouldn’t go wrong where the others head on, right?

6) It’s a good medium to feed those interested parties such as investment bankers, mutual fund managers, brokerage houses…etc. After all, if not doing so, the unemployment rate might be higher and cause social problems.
Since the unemployment rate become higher and higher, isn’t it good for me to take care of these people, so they wouldn’t create social problems?

7) Mutual fund is approved by government, backed with well established financial institutions and managed by those professionals with the titles like “Financial Adviser”, “Chartered Financial Consultant”…etc. It wouldn’t go wrong since the titles so glamour.


8) It’s a good medium to support the people we admire by purchasing more, so can send him to a hall of fame of “Million Dollar Round Table” (MDRT).

9) The Magic Formula of the fund managing industry: 100 – your age = the percentage of your money that could be invest in equities.
Wow! Do not know since when and where this Magic Formula been created? Whether it falls from the sky, or the Formula been discovered from the Great Pyramid of Egypt. After all, those sophisticated pyramids could be built because of the intelligence of the Egyptian based on the formula. If this formula followed, Warren Buffett should only invest 24% of his net worth in equities since he is 76 years old now. By following this formula, maybe Warren is no longer the 2nd richest person in the world after Bill Gates.

Conventional Wisdom II

2) Equity is risky

The risk is always there. The most dangerous risk is not outline externally, but internally – that’s when you are ignorant.

People been brain-washed by their parents, peers, media….etc. Often, people telling you who is bankrupt because of his failure in equity investment while the media especially those producing drama or movie features a character jump down to the street after he lost all his investment in equity market. There is no surprise for such scene – after all, if the story is not as hot as this, will the film attracts people to pour out money and buy a ticket to watch it? This is the perception we got about equity market – IT’S VERY RISKY.

The perception we got sometimes does not represent the reality. As far as Great Depression 1929, there were no people lining up to conduct suicide because of the crash, though there were many people laid off because of high unemployment rate.

Another cause people have a perception of equity market is risky is because they hear or see the equities they bought plummet like a falling stone. The problem underlying here is their attitude rather than the equity is risky. When you act like a person in Las Vegas betting for his fortune in a casino, that’s buying something that you do not understand or even care to understand, this would put you in a risky position – no matter what you invest, being it equity, commodities, real estate and so forth.

If you really do your homework – studying an equity that you intend to invest deeply, I see no reason why equity is a risky investment. Of course, this also depends on your firm character, knowledge and experience as well. In every market, there is no lack of predators waiting for the innocent and ignorant lambs to become their dishes. By investing in the largest, well established bank-backed funds does not mean it will give you a superb return. The ugly part in fund managing industry is sometimes your interest does not align with their interest. If this happens, whose interest your fund managers will protect? You? Or their boss? That’s why I always I advise people if you really want to invest, no matter in equity, mutual fund (unit trust in Commonwealth countries), commodities, real estate….etc, first thing first you need to do is to have Firm Character, followed by having vast knowledge and with ample time. If you have all three, congratulations! You are the one who decide your own fortune and I see no reason why you could lose out to others in the long run. If you do not posses ALL, yes, I mean ALL of this, the best thing you could do is to find out the person who has ALL of it. But, be careful that the person you choose must posses another trait that is VITALLY important when managing others people money (OPM) – INTEGRITY.

Easy credit -- Another 97/98 Asian Financial Crisis?

While one of the factor that caused the meltdown of "Asian Tigers Miracle" back to 90s was easy credit obtained by the corporations, is a similar crisis soon to happen as this time the easy credit shifted from corporations to individuals? An article worth a read, click here.


Any indication for you?

Conventional Wisdom I

There are many conventional wisdoms in the investment world. The wisdoms become urban legend that implanted into most people mind and influence their investment decision either consciously or unconsciously. Let us examine it one by one:

1) Real estate value is always appreciate.

For sure nearly all stuffs in this world appreciate in their pricing. Take a look for the price you pay for a burger sold today and 10 years back. How about the price you pay for a movie ticket? A cup of coffee in café? The only difference is the rate of appreciation. No matter what investment vehicle choice is, the ultimate goal is to beat the inflation rate. If price of burger appreciates 100% in 10 years time and a price of a cup of coffee appreciates same rate, the investment you made must exceed the rate. Otherwise, you are losing – meaning that your purchasing power is lost. While you could buy 100 burgers 10 years back (assuming a burger cost $1 then) with $ 100, today you only manage to buy 50 burgers (assuming a price of burger today is $ 2). If your investment gives you 50% return for the same duration, you are still losing the game. Why? You might ask, after all my $ 100 10 years back become $ 150 today. That’s the trick of the game: inflation gives you an illusion of wealth. Putting same example, a burger cost $ 2 today, how many burgers could you buy with $ 150 in today value? 75, exactly! 75 burgers! That means you lose out 25 burgers if you use the same amount and bought the burgers 10 years back.

Let me show you a real life example. A house bought 15 years ago with price tag $ 110,000. After adding all necessary expenses, let’s assume the cost of the house is $ 120,000. Today, if you decide to sell the house in a secondary market, the buyer will offer you $ 270,000. Wow! Sound good, because I gain $ 150,000 ($ 270,000 - $ 120,000). When you use financial calculator to count for the yield, you would find out it only gives you a mediocre return, with 5.56% yearly compounded return. How much you will get if you invest in another vehicle which gives you 12% annual compounded return for same period? $ 660,000!! Instead gaining $ 150,000, you could reap $ 540,000 ($ 660,000 - $ 120,000). See the difference?

People might argue that besides capital gain, a wonderful part of real estate investment is its rental income. Let’s examine it again with the mentioned example. The monthly rental today is $900. That means over the period of 15 years, the total rental income generated from this investment is $ 162,000 ($ 900 * 12 * 15). Adding the capital gain of $ 150,000 with the total rental income, this means you will get $ 312,000 in total ($ 150,000 + $ 162,000), which translates into 6.58% annual compounded return. Bear in mind, for the sake of simplification, I already assume the rental income in higher end, which is fall in the later part of the period (In reality, the monthly rental is less than $ 900 15 years back). Not to forget is the calculation is based on the assumption that you purchased the house with cash, without financing. If you choose to put 10% down payment, the financing cost and other related costs would eat up most parts of your return, where the financing rate fluctuated around 6.5% to 10% over the period. Do not forget about the taxation effect. Depending on your income bracket, your rental income also constitutes your income tax. By adding this extra cost, your return on your real estate investment would be lower.

The example shown here is a landed residential property and located 10 km from the city centre. The brokers always proclaim: “Location, Location, Location.” as a paramount importance in order to make a good investment, from the example, it seems not.

Do your maths and think it independently, is real estate really a good choice of investment to hedge against inflation? The conventional wisdom might true, might not, depend to the situation. When seeking opinion, choose the right candidate, not the interested parties. Like somebody saying: “Cheated once, shame on you; cheated twice, shame on me.”

Investing as a career III

Is investing a career of choice specifically for a genius with high IQ? Not at all! A genius with high IQ not necessary guarantee a success in his investment. Everybody knows Sir Isaac Newton? We all read about his discovery of three laws of motion in our physics textbook during our secondary school days. Undeniable he is a genius. But, he could not resist to the madness of the crowd and invest his money in South Sea, which later on proved it was just an another bubble. He lost a lot and explaining later, “I can calculate the movement of the stars, but not the madness of men.”

A teacher, mechanic, technician, farmer…etc, no matter what’s your current career, you have a chance of beating down those so called professionals in Wall Street, provided you posses two crucial factors: Firm Character and Knowledge. The sequence of two do matter, where without first, second factor will only do harm to you in your investment.


Firm character is a crucial factor with paramount importance in order to succeed in the investment. The character needs you to stay outside from the crowd with a independence and critical thinking. Though, you opinion might against conventional wisdom and you might be tagged with “Stubborn”, this is a first step to ensure your investment success. The judgment you make is based on “Right because of FACTS, not because of popularity.”

Knowledge could be gained through many sources and experiences. Take an example, though analyzing a bookkeeping of a company is a must before we invest, at the same time, we could gain a lot of useful information when we shop. Whenever you shop, we will notice some brands might be selling fast while the others might be not. From there, it gives you some ideas what’s going on in the field. How about the transaction made day by day? Are they still using cash or credit / charge cards become prevailing? Do people stop consuming poultry products in the long run because of bird flu scare? Through observation and on field knowledge, it gives you a valuable info for your investment judgment.

All in all, investment is a game of Substance over Form. Only people who make an investment based on this could succeed. Since when you see Warren Buffett needs to have luxurious paintings on his office wall to show he is the greatest investor in the world? Or, does he need an assurance from others to have an office located in a downtown Manhattan and run by thousand of staffs?

Billionaire's Life

What will you do if your net worth is $ 40 billion ($ 4,000,000,000 where if you distribute this amount evenly, you could create 4,000 millionaire at glance)?

Some might think of:
1) A beach front resort
2) Private jet
3) Few luxurious cars such as Ferrari, Porsche, Mercedes Benz...etc.
4) A private island. A man-made island in The World, Dubai is on sale which the price tag starts from $ 6.85 million. With $ 40 billion on hand, such amount is just a peanut for you.
5) Invest in a row of commercial shotlots in Fifth Avenue in New York,Champs-Élysées in Paris, Piccadilly in London...etc.
6) Retire from the current job.

Sound reasonable. After all, this is a life as a billionaire. But, one of the billionaire does not have such life. He neither invest in a row of commercial shotlots to receive rental nor own a dream car like Ferrari. What he drives is a Lincoln TownCar where its plate is printed with a word "THRIFTY"

Investing as a career II

Investing is a time consuming, labor intensive career. To ensure a successful investment, practically you need know almost all the known knowledge in the world, from economics, accounting, politics, psychology, meteorology…etc. After all, this knowledge is influential in determining 2 crucial factors that judging the up and down of the pricing, these two factors are Demand and Supply and Human Psychology.

To make a picture clearer, let me take you an example. If you intend to invest in McDonald’s equity, you not only need to know its figures shown in the book keeping, you ought to know other factors which are crucial as well. This could be the knowledge in animal husbandry such as how the cows and chicken been reared? What happen if the feed cost for the chicken raised when the price of corn and soybean rise in the commodity market? How about the change of climate would affect the price of those raw materials for the feed? What happen when the consumers are more health conscious? Will it affect revenue for the company in the Islamic countries since McD is a symbol of Americanism?

Though we need not to know the exact answer for those questions, we need to have an ability to relate all those seem unrelated issues into the judgment we make for the investment. This ability, for my opinion, is unlike other professional jobs which you could obtain through training, is far more like gifted talent. Professionals such as doctors, lawyers, engineers or even accountants are good in their professional career, but without this gifted talent, his investment, based on his training in his professional life will give him not a spectacular result but mediocre or even disastrous result. Investing, unlike other professional career, need not a professional but a commonist, someone who has vast knowledge in many areas and of course without a Firm Character, will not ensure his success in investment.

Dubai -- A Darling Star for the Next?

Hydropolis

The world 1st underwater luxury resort, is situated 66 feets under the surface of Persian Gulf which scheduled to be opened in late 2007.





Burj Dubai

A mixed-use of this building which house shops, offices, residences and entertainment venues. It will be the world tallest building when it open in 2009.
























The World

The 250 man-made islands which range from 250,000 to 900,000 square feet, with a staggering price tag starts from $ 6.85 million.

There is no road between the islands. The only way is through boat or yatch.

The Masterpiece of Antoni Gaudi

Antoni Gaudi (1852 – 1926) was a famous architect in Spain. One of his famous architecture which is still under development is La Sagrada Familia (Holy Family Church) in Barcelona. It is declared by UNESCO in 2005 as one of the World Heritage.

The cathedral is the present of Gaudi to God. The architecture resembles a concept of jungle while its pillars are resembles the trees in the jungle. Because of his love of the nature, most of his designs resemble elements from the environment. In order to develop his enormous architectonic work, Gaudí gathered an exceptional set of collaborators, such as architects, sculptors and craftsmen.
In his early years, he spent most of his time in his house by observing the nature and its design because of rheumatism. In his education life, he only able to obtain a mediocre result though it did not stop him from becoming one of the greatest architect for the later part. During his graduation ceremony, his director of the school, Professor Elias Rogent after present him a degree, proclaim,” I don’t know whether we are graduating a genius or a fool.”

Gaudi devoted himself 40 years in the developing of his last and beloved masterpiece, La Sagrada Famila before he hit by a tramway. The most pitiful was after he was hit down, none giving out their helping hands to help him to a hospital. Because of his ragged attire and empty pockets, taxi drivers refused to do so for the fear he is unable to pay the fare. Eventually, he was a taken to a hospital but died after 3 days. With his leaving, the masterpiece remained unfinished and the developing is scheduled to complete in 2020.