so you don't have a GOAL ?

I mentioned before even if you don't have a goal, you should still do step 1 and 2 which are compulsory in Personal Finance.  All other steps are optional and subject to discussion, debate and negotiation ... The compulsory steps are;

1.  Earn an Income

2.  Setup an Automatic Saving Mechanism ( ie. Standing Instruction )

That will at least make you a millionaire when you retire. ( millionaire by the time you retire is not as much as what you think know )  Or that will help you 'lost less' by cutting the inflation effect by half !

If you want to move on to 'save more', you will have to have goals.  Else not only you may not 'earn more', you may even lose the firm fundamental ground you have built from step 1 and 2.

However, I am still not going to talk about goal yet.  Let's talk about Life instead ...

First draw a circle to represend your life ...

Then write down all the big events that Should Happen in your life ...  It doesn't matter what they are.  Just write down whatever that comes to your mind now.  They don't have to be correct and you can change later.  But you must write something down !

There you go !  You have a picutre representation of your life !

So next start think about what you like to do with your life.  What you love to do now !  Will you still do it in future ?  What are the things that you wish to do but you are not doing now ?  Start putting them into your Life Line too !

So what's next ?  Good question !  But don't ask me, ask yourself !  What do you want to get out of your own Life Line that you have just drawn.  I started this but YOU WILL HAVE TO ANSWER THIS LAST QUESTION NOW ...

...

Those who don't like circle can also draw life line in a straight line.  It doesn't matter how you draw the line, as long as you write down the big events and what you love to do now and future.

So what does your Life Line looks like and what did you get out of it ?

Myth of Diversification -> Eggs and Baskets

In last post, I claim that stock market is the backbone of a country's economy.  That post was not very well written as I was trying to combine 3 articles into 1.  There are actually 3 angles or point of views how stock market can be viewed as a country's economy.  If you still don't agree, please let me know, I shall write more on that.  But if you do agree, then let's move on ...

All investment vehicles eventually go to stock market.  Bank invests your money in stock market, gains 12% ( assumption ) and share only 3% back to you in your FD.  Its fair because your 3% is guarantee but his 12% is not.

First bank does a lot of analysis and selects the BEST business in stock market.  Then bank buy its shares and wait.  As the business grows in time, bank shares the benefits.  As time goes, bank has more money too.  There will come a stage bank can no longer buy the shares of the BEST business.  Because bank only wants to lend money to the company, bank DOES NOT WANT TO RUN THAT BUSINESS.  So the maximum shares a bank should buy is 49%.  So what does the bank do then ?

Bank buys the shares of 2nd BEST business in stock market.  So eventually bank would have bought quite a lot of shares of a lot of businesses.  Sometimes thats call diversification or Don't Put All Your Eggs in One Basket.

Similarly in your own finanace planning, you have already filled up the bottom part of your pyramid (previous post: now Finance Planning starts) and you still have extra money.  So you should buy some shares too.  But wait a minute ....

Which is the BEST share you should buy ?

What analysis to perform to find out the BEST share ?

You can check what the bank has bought and you saw a list of stocks that the bank has bought.  You can just buy according to that list and you will earn as much as the bank, Right ?  If you buy the same or similar list, you are also spreading your eggs in different basket, Right ?  You are diversifying your risk ...

WRONG !!  As a matter of fact, ABSOLUTELY WRONG !!

Remember I said stock market is a good example of finance creation ?  Such stable existence MUST come with certain unchangable LAWs.  In short, you MUST follow exactly what the bank has done (the process) !  You can NEVER skip any steps.  And you should NEVER copy result.

How to Buy Stock will come soon but for now, think of it this way.

You have one egg.  Can you put that egg into two different baskets ?  No !  ONE egg can only goes to ONE basket !  And you need to pick which basket to put in.  Only when you have your 2nd egg, then you can consider putting it into the same basket as before or put it in a new basket !

When you start buying stock with limited fund, you should only buy one stock.  And thats better be the BEST one you can ever find !  If you don't know how to find that BEST stock yet, then its not the time to buy yet.  Do you think Bank will simply buy a list of stocks just because another bank buys too ?

Don't Put All Eggs in One Basket

is not the same as

Put your Egg in all baskets

The right way to diversify is :

1. Analyse what you like and what the business does.

2. Pick the BEST one to invest in

3. When you have had enough with #2, then pick the 2nd Best, 3rd, 4th etc ....

4. Revise constantly on this 'Who's BEST' list

In Malaysia, assuming your minimum 0.42% brokerage fee is RM 40,

then ONE EGG is equivalent to RM 10,000

Stock market is the back bone of a country's economy

Back to fundamentals ... we last talk about inflation, BLR and how bank works ...

You save money with bank.  Bank promised you 3%.  Bank lends money to businesses and gain 6% from them.  As you can imagine, bank must do a good job lending the money to 'good' businesses who can repay back the loan else bank may lose money.  'Good' businesses are those who make good use of the money to 'grow' bigger and earn more.

When a business grows big enough, it can borrow money from a better source - stock market.  Once a business is listed in a stock market, its total worth is converted to shares.  For example;

Company A worth $1 million now and it get listed in KLSE for 1 million shares, so each share is $1 each.

By the way, 'share' is just a piece of paper stating that its worth $1.  Company A did not really pay $1 out from its pocket.  On the contrary, if you like Company A and its business, you can buy that share and pay $1 for it.  Company A will have $1 extra and you will have 1 share.  It also mean you own 1 out of 1 million of Company A.  When you owns 51% of the shares, you literary own Company A.  Pretty cool huh !

So assuming all 1 millions shares are sold out instantly, that means Company A suddenly receive extra $1 million, IN ADDITION to its original worth.  If the business do well next year says its worth becomes $2 million, divided by the 1 million shares it issued.  Each share is worth $2 now.  So you have gain 100% profit from $1 to $2.

So Stock Market consists of a list of businesses 

that have been proven having substainable growth in the past, 

and relatively having large net worth.

So Bank buy stocks directly from stock market too as if it lends the money out.  Where else but stock market which already have so many 'good' businesses for them to lend their money to.  And usually get a much better than BLR return - if they continously choose the right stocks.

In a mature market, all the big businesses are listed in stock exchange ( place where you buy and sell shares ).  And all these businesses group together can represent the whole of economy.  Because whatever you eat, do and buy ... you get it from small sellers who eventually get the items from the bigger players, ie. the listed businesses.

So however small or big an economy issue is, it will be reflected in the stock market.

This is also the 1st example of "Creating Something From Nothing", a good one indeed!  Assuming 'Most' of the listed companies are 'good' companies then this Stock Exchange will continue to exist.  Everybody earns something.  Banks have more choices to lend the money to and therefore earns more.  Businesses can raise more money than before without committing to pay any interest.  General public can own the businesses they like at a very small fraction that they can afford.  Its a wonderful picture ...

As long as 'most' of the listed companies 

continue to be 'good' companies ...

Car Loan vs House Loan interest rate

This may be a little bit too technical for some but definitely useful for those who really care about their money and has something to do with or going to have car loan.

In Malaysia, vehicle loan rate is calculated flat, forward sum to the future.  For example,

You borrow RM 100,000 vehicle loan for 7 years at 3%.  Your total repayment for the whole period is 100,000 x ( 1 +  7 x 0.03 ) = RM 121,000.  There are 84 months in 7 years, so every month you have to pay 121,000 / 8 = RM 1,440

Don't get confuse with this 3% car loan rate with the Fix Deposit rate, or BLR or House Loan interest rate.  Because the calculation method is different, they are not comparable to each other.

In short, in order to compare your car loan interest rate to your house loan rate, you need to convert the car loan rate into a compound rate.

Table below is a reference for such conversion.

For example, the highlighted in yelow says that.  If your Car Loan interest rate is 3% and you are taking a 3 years loan, then it is equivalent to 5.68% house loan interest rate.

My rule of thumb on this topic is :  Simply multiply car loan rate by 1.9 to convert them into a house loan interest rate.

Have fun continue to be puzzled and confused by above table ..  have a great weekend !!

The above table and figures are one of the TOP SECRET in personal finance that even most 
Bankers don't have, not to mention your financial planner, insurance or mutual fund agent.  But if they do, please let me know ...

2008 Recession ?

Quite a handful friends complain to me that I keep talking about fundamentals while the market crashes like he!! and they are in deep sh!t.  They even curse me as a NATO ( No Action, Talk Only ) and they wouldn't give up until I give them "Real" guidelines what they should do NOW.

I ignored them for quite a long time and the reason is that it violates with the purpose of my sharing - you NEED to know the fundamentals before you go on with the fancy stuff.  (You don't have to do all the fundamental stuff, but you NEED TO KNOW them )  But then again, the fact is that they were already IN and it would be unfair for me to continue ignoring them.  It will be very hard to discuss about current situation without speculating the future  .... but I will try.

You have heard about Buy Low Sell High and may have get bored with it.  So if I say that again, it may not catch your attention.  So let me try this then ... this is Exactly what you should DO !

Low ?  Buy !   High ?  Sell !

Like wise, it also follows with ...

Lower ?  Buy More !  Lowest ? Don't Buy All ...

Higher ?  Don't Sell yet .. 

Highest ?  Sell a bit ...  

Too High !?  Take a break ...

If I share with you that I withdraw all my investments back in March, you may curse me even more.  ( But when I did that you laughed at me, remember ? )  Anyway, I decided not to say too much and let someone famous speak indeed.  Dr. Lim is a famous X Malaysia politician who happen to earn some money from stock markets too ...

Ok, if you are patient enough to read till here, here goes ...

1.  Access each investment and ask yourself, 

"Is this the kind of business I want to do myself, in long run ?"

2.  If not, cut them lose.  If yes then calculate their Future Worth in future.  

( How much will this business earn if it goes according to my plan, its already my own business remember ? )

3.  Backdate the Future Worth from #2 to Today's Price assuming a growth rate.

4.  Compare that price to actual price today, add a safety margin to determine sell, keep or buy.

Too much ?  In that case, try these then ...

1.  If you need money now, sell them.

2.  If you don't need money now, keep them.

3.  Either way, find more money to prepare to go in again

Ok ok, lastly what I would do for myself ...

Its not bottom yet.  The fundamental flaw for today's problem ( USA mainly ) is 'creating something from nothing'.  Unfortunately this time it fails to hold real substance in our world before the finance creation become self-substain.  Hence, what was 'created' $2 (loan amount) is now only $1 (property value).  Read financialindependent.blogspot.com for Sub Prime issue.  Then chain reaction follows through.

The way I look at this is ... no financial institutes are having problem.  Its just that NO ONE WANTS TO TAKE UP THE RESPONSIBILITY.  When one of your business ideas fail, and IF your company structure is setup 'Correctly', Bankrupcy is one of the methods to end the failed business.

Goverment taking money out to 'support' market is just a smoke screen, it will NOT help substain the market AT ALL.  The good way to end this recession ( if this is one ) is to close down all those BIG institutes who played with fire before.  Acquisitions are fine too but may have bigger monopoly in future.  What I hope to see is a New Generation of Banking should surface out during this crisis.  Some small business start some 'make sense' banking facilities and slowly take over the old tranditional banking pratices.  If none of this happen, I doubt if it is bottom.

Having said that, I don't wait for bottom neither.  I started keeping my fund in liquidity and eyeing on the best vehicle I should get on now.  Since my fund is limited, I can only go in 1 or 2.

Don't get me wrong, I am not perfect neither.  ALL my USA stocks are affected.  My decisions are to keep them as they were never within my radar anyway.  The reason they were affected is also because they were not within my radar.

For those who got burn, think of if this way.  When your investment value drops from $2 to $1, you lost 50%.  But when your investment goes back from $1 to $2, you earn 200% !!

All you need to do, in order to enjoy above scenario, is to put in the same amount of investment money when it was $2, as in now when it is $1.

Like wise, $2 to $0.50 is 75% lost and the reverse is 400% gain.

============= added 20081006 00:56

Just read from Tun Mahathir's blog that he agrees too ..

3. The failures are all due to playing with money, selling mortgages, selling papers and all kinds of financial dealings which have been invented by the finance houses in order to make huge sums of money out of nothing. Currency trading is one of them.

 

Rule of 72 - a quick calculation check

There are only 3 numbers involved:

1. 72

2. Interest rate

3. Number of years to Double your money

(Number of years to Double your money) = 72 / (interestRate)

or

(interestRate) = 72 / (Number of years to Double your money)

For example, back in the last posting where it says :

CAR is the BIGGEST Threat in Malaysia Personal Finance Planning

There are one of the calculation says $3 in 1995 to $11 in 2008 is 10%.

Basically there are about 14 years from 1995 to 2008.

$3 double once is $6 and $6 double again is $12 (close to $11).

So it takes $3 to double Twice  in 14 years or 

it doubles every 7 years !

72 /  7 = 10

So doubling every 7 years means the interest rate is about 10% !!

The Biggest Killer in Malaysia Personal Finance Planning

I did start this blog with Malaysia in mind.  All previous postings are general in concepts and may apply everywhere.  Now let's look at specific challenge in Malaysia.

Remember that the inflation I care about is MY OWN INFLATION, not any numbers released by goverment nor bank nor any other expert.  ( read last post )

So let's talk about CAR ... one of my daily routine item ...

I bought a 2nd hand car in 1995 for $10,000 and eventually scrap it in 2005.  

So $10,000 divided by 10 years of usage is about $1000 a year.  

Divide it further by 365 days is roughly $3 a day.

That means I had been paying $3 a day for that car.

Then I bought a Wira in 1998 for $55,000 and today its worths about $15,000.

Following similar calculation, I have been paying $11 every day for this car.

So I used to pay $3 for my vehicle back in 1995,

Now I have to pay $11 for the same in 2008.

This alone is more than 10% compounded infation !!

I haven't mentioned I bought a Hyundai for $90,000 in 2003 and now its worth about $20,000.  That is more than $38 / day !!

Ok ... some of you could be smart enough to see the flaw in above calculation.  I am still using my Wira and Hyundai.  So as time goes, the average cost of ownership should go lower.  It is TRUE BUT don't forget the car resale value also becomes lower as time goes.  So give and take, its still not much difference.

I haven't included car loan in above calculation.  The actual total price I paid is more than $68,000 and $110,000 for Wira and Hyundai respectively.

For every car you buy in Malaysia, you pay more than Double the car's value. That means at the moment you buy an imported new car, you lost half of your money instantly !

This is due to various ways how goverment increases the car price in the name of protecting national own pride, make of our own cars.  I was in Total Support IN THE BEGINNING !  And that was more than 20 years ago ...

Right or Wrong put aside.  Buying car in Malaysia is the #1 killer in Personal Finance Planning.  No matter how little your income is, if you do NOT own a car, you probably can still have a great solid finance ground.  And no matter how rich you are, the cars you own are burning big holes in your pocket, an easily 10%-30% depreciation rate.

Lastly, if owning car is a MUST like me, think of it as paying for the experience.  So the next time you get in your own car, be happy ... because you are getting more out of what you already paid.  Else you lost both your money and the enjoyment.  Drive Safely ... and Happily !!

How to Buy Car in Malaysia ( personal finance point of view )

1.  Try your best to buy car with CASH only

2.  Get the loan with the Smallest Amount and Shortest Time possible

3.  If possible, go for limited edition super famous car.  That way, it may become a capital that may appreciate.

Inflation vs BLR

In my Personal Finance make simple, there are only 2 big numbers :  Inflation and BLR.

Inflation tells you how much more expensive your daily routine cost is going to get.  Or how much your money will worth less in future.

BLR or Base Lending Rate is used by bank as reference how much they should charge you when they lend you money.

Both Inflation and BLR were created in Free Market, and therefore perfectly suitable for the Free Market - a trading ground that has Total Freedom.

However, Total Freedom also welcome frauds and scams.  Hence, in order to protect 95% of the population, controls have to come in.  Since then, Inflation and BLR have become more complicated.

Forget about what the goverment say, 

What is YOUR OWN Inflation ?

1. List down all your "daily routine" items and their costs

2. Determine what quantity / amount of each item is consumpt over a fix period of time

3. Sum up the total cost for that period

That would be your Living Cost !

After you have done the above for sometime, you can compare your living cost.  For example, last year was $1000 per month and this year is $1100/month, then your inflation rate this year compare to last year is 10%.  ( It doesn't have to be exact but if you do the exercise above, you will have a pretty good idea )

And this is the Real and Only Inflation Rate that you care about, 

not any other numbers experts tell you.

I don't borrow money from Bank,

Why should I care about BLR ?

First of all, all personal finance money goes to bank.  It doesn't matter if you buy insurance or mutual fund or stocks, you pay to a bank !  You may write a seller's account number but you still "pay to" the bank.  And Bank has ALL our money.  

Bank takes your money and lend it to others.  Bank promises you an interest rate and the Lender promises bank a higher rate.  The difference between the interest rates is what Bank earns.  Bank uses BLR to govern the lending rate to the money borrower.

So BLR can be used as an indicator to how well economy is doing ( again, actually much more complicated than this, but bear with me first ).  Actually the effect could be reverse, raising or lowering BLR can affect economy growth.

BLR Trends

Rules Of Thumb

1.  Your "Saving" should earns more than your inflation.

2.  Your "Income" should grow as much as BLR if not higher.

footnote : This post is written by a layman for the layman friends.  Hence quite a lot of terms used here may cause discomfort to many economists.  Don't curse and shout yet, just stick around a bit longer.  Eventually things will get clearer

Scenario : Passive Investor

" This DOES NOT apply to me because I am already doing GREAT with my Investment ! "

Not quite ....

A Good investor knows that A Good Investment is one that can continously compound return for you, but carry the risk of losing big time overnight, if not everything.

So if you are a Good and Rational investor, you WILL set aside some of the current return and practise like a Young Work Force.

That way, no matter what happens to your current investment, be it losing everything.  Its ok, because you have the capital to restart the legend again.