Wednesday, September 30, 2009

Guarantee Property Investment method

There are 2 embedded messages in this insurance article (1) and this financial freedom (2) talk.

(1) Build a passive income instead of thinking how to keep an active one
(2) You don't need Money if you have a solid finance plan

This article is about how to achieve both using property investment. But before we proceed, you must agree with a few pre-requisite concepts that were explained by this site before;
Income is a pre-requisite to Personal Finance but NOT a part of it, so amount of income is irrelevant to the strength of a personal finance plan.

Passive Income is achieved when you use 1/100 effort for an income.

Personal Finance is NOT the same as finance, Personal Finance is simple, straight forward and usually there is an obvious single best method.
Here are the 2 things to focus on; ( and these are strict requirements )
  1. Buy a property with Other People Money ( OPM )
  2. Rent the property out higher than repayment amount
By OPM this means using absolutely NO MONEY from your own pocket at all ! That's RIGHT ! You should get 100% or more loan in order to buy a property. If you can't get that, it only means 2 things; you don't have the right property OR you haven't used the right method yet. When you break this rule, you will also bear the consequences that this deal may NO longer be a personal finance tool.

If you borrow money, you have to pay it back. Your rental income must be more than your repayment amount. If you cannot ensure such a condition before the purchase, it is a NO DEAL ! When you break this rule, you will bear the consequences that this deal may NO longer be a passive income tool.

Remember this is all done at personal level, nothing fancy like real estate business world - which is earning much more but as an active income.

Impossible to get 100% loan and rent so high you say ? Then this is NOT your cup of tea. Period.

Both of these can be achieved by looking at only ONE factor - the actual buying price.

When you find a property, first identify its real worth. If it is a standard property then just refer to market price. Once you are convinced on the tenant-ability, then buy the property below its worth. For example,
A property worth $ 130,000 renting at $600 per month.

A 5% interest on $130,000 for 30 years may result a monthly repayment of $700 - which fail rule #2. Every month you are paying out $100 from your own pocket for someone else to use your property.

If you borrow less loan ie. $100,000 your monthly repayment is less than $550 which has positive monthly cash flow but this fails rule #1. In short, you have to fork out $30,000 now in order to get back $50 a month.
The rule of thumb is always buy a property 20-30% lower than its worth. So you buy above property at $ 91,000. Bank values the property at $130,000 and may finance you 80% or $100,000. After deducting all the fees, you may get $5,000 cash up front and then $50 every month. If the property price goes up in future, capital gain is to your advantage. If it goes the other way round, the risk is shared by the bank. A rock solid plan personal finance plan !

The lowest finance one should accept is 100% ( example above is 110% ) and the lowest net rental income is ZERO. It is ok if you have to pay some lawyer fee and stamp duty to buy a property. It is also ok to have your tenant pay your monthly repayment in full. Anything worse than that, is NOT a personal finance method.

But how often can you buy a rentable property 20-30% lower than its market price ? Not very often, not very often at all. There is only 1% chance of this will occur.

Can normal people like you and I get it ? Absolutely !

The funny thing is most property investors are Active Income chaser. They do NOT follow these rules strictly. Sometimes they don't care about 100% financing, other times they don't care about renting. Most of the time, they just have no patient. So they don't really bother this 1% of the pie. ( An example of property investment that is highly relying on capital gain alone )

Other non property investors simply DO NOT believe such things exist, hence they are not grabbing this pie neither.

In Kuala Lumpur I can be offered such opportunities 4-5 times a year.

Finding such opportunity should take more creativity than hard work. As of exactly how and all the methods of how to find them .... are whole new topics that are even more complicated than stock investment. Which is why not covered by malpf.

Stock investment is the highest level personal finance tool malpf promotes, Property investment is NOT within the 1Picture system. A good personal finance solution is straight forward, repeatable and practical. Property investment has too big a room to play about and most people get deviated and get into debt instead.

But if you follow this fundamental property investment method strictly, the most often said location factor is now secondary. Anyone anywhere can obtain unlimited passive income no matter how little money he has to start with.

Monday, September 28, 2009

PKFZ vs Buy A Car in Malaysia

One of the messages this site insists on spreading is that "Buying NEW car is the BIGGEST killer to a Malaysian Personal Finance". Today lets look at this at national level.

One of the hottest money topics in Malaysia now is PKFZ where RM 12 billions people's money has gone 'somewhere' that you and I have no business in. And we are going to compare that with the cars you and I bought some years ago, recently and even soon again.

641 out of 1,000 Malaysian own a car. Rank #3 in the world ( USA is #1 ofcourse ). Can you imagine a developing country aka NOT a Developed nation, rank #3 as the top car owners in the whole wide world !? If car ownership by land size is a benchmark, Malaysia would have already been a Super Nation !!

In Malaysia, when you pay RM 100,000 for a new car, RM 55,000 goes to the car. The rest of the 45% goes to 'somewhere' you and I have no business in. Below show some examples of different car prices in USA and Malaysia;

Hyundai Elantra costs about USD 12,000 in Lexington and MYR 96,000 in Kuala Lumpur
Honda Civic costs about USD 15,000 in Pittsburgh and MYR 113,000 in Malaysia
Toyota Camry costs about USD 20,000 in New York and MYR 150,000 in Malaysia

Use exchange rate USD 1 = MYR 3.5, you may get these numbers in comparison;

Car 1 : MYR 42,000 in USA vs MYR 96,000 in Malaysia ( overpay 56% )
Car 2 : MYR 52,000 in USA vs MYR 113,000 in Malaysia ( overpay 54% )
Car 3 : MYR 70,000 in USA vs MYR 150,000 in Malaysia ( overpay 53% )

Although most of the times you may find Malaysia car price is more than 2X the foreign car price, but some costs and fees are legitimate so trust me for now that only 45% has gone 'missing', not the 50+%.

Malaysia has a population of 25 millions people, that means there are 16 millions cars have been purchased. ( 25 millions/ 1,000 x 641 = 16 millions ).

Takes average car price at RM 50,000 ( actual figure is RM 68,XXX), then there are a total of RM 800,000 millions car sold. ( 50,000 x 16 million = 800,000 millions )

45% goes to 'somewhere' you and I have no business in, that is a total of RM 360,000 millions or RM 360 billions.

How much have we lost in PKFZ again ? RM 12 billions !

Game Over ! The result is :
RM 12 billions vs RM 360 billions

Yet everyone buy cars, made someone else rich and NO major news reporting this fundamental flaw. Ever heard of Slow Boil Frog's story ? Its happening right now right here everyday to everyone .... our daily lives ....

Lets make some sense out of this RM 360,000 millions.

16 millions of us own cars, so our car prices were to be normal all this while, Each and Everyone of us would actually get back MYR 22,500 ( 360,000 millions / 16 millions = 22,500 )

Most should know that Malaysia as a country earns money from Petroleum. In 2007, our export minus import net profit is MYR 129,000 millions. Still 50% less than all the money we 'contribute' by buying cars.

My friends always ask me why I wasn't shock when I heard the 12 billion PKFZ case. Well, I buy cars in Malaysia and that gives away 30X more than the PKFZ case ...

Other related topics

Sunday, September 27, 2009

A Glimpse of the Monetary Policy (in Action)

So, what rules did Bernanke break when he tossed out the rule book?

Here is a story about the reduction in the Treasury’s Supplemental Financing Program that no one probably read because the few who understood it did not have to read it and the rest would not get it. According to Bloomberg:
The U.S. Treasury Department plans to cut back its borrowing on behalf of the Federal Reserve as it seeks to keep government debt under a legal limit ... The Treasury will reduce the outstanding borrowing in its Supplementary Financing program to $15 billion “in the coming weeks,” the department said in a statement in Washington. The Treasury has been keeping the account, set up last year to give the central bank more flexibility as it undertook unprecedented lending, at about $200 billion.
Note the critical phrase “on behalf” in the opening sentence – the Treasury is planning to cut back its borrowing on behalf of the Federal Reserve. That is an accurate characterization of the program, although the phrase does not appear in the Treasury communiqué that announced the inauguration of SFP. The dreary language of the announcement precludes the use of simple phrases such as “on behalf” and that is a good thing, because the phrase invites inquiry.

What does on behalf mean?

It means that the Treasury is borrowing money not for its own needs but at the instruction, and for the benefit of, the Federal Reserve.

As any loan officer would tell you, that cannot be done; you cannot borrow money on behalf of anyone. In this particular case, there are added complexities.

The Department of the Treasury represents – stands for – the U.S. government in financial markets. Only it, and no other entity, can borrow as, and on behalf of, the U.S. government. That is another way of saying that any borrowing by the U.S. Treasury is, per se, borrowing by the U.S. government, regardless of the intent and the use of funds. You can see this in the Bloomberg story. The Treasury is curtailing the program in order to reduce the U.S. government debt [which was reaching it legal limit of $12.1 trillion]. So the Treasuries issued “on behalf of the Fed” were clearly counted as part of the U.S. government's debt.

But why the need for this arrangement? Can't the Fed borrow money itself?

The answer is, No, it cannot. It is prohibited by law from doing so. Earlier this year it tried to change that law , but ran into opposition and a wall of technical complexities. Some insiders also did not like the idea of the Fed issuing its own debt, but I was enthusiastically for it. I wanted to see how this debt would be priced against the Treasuries.

The Fed, you see, cannot borrow as the U.S. government because it is not the U.S. government – or any part of it. It is not a part of the executive branch. It is not a part of legislative branch. And it most certainly is not a part of the judiciary.

The Fed was incorporated as an entity in 1913. It is comprised of private banks and follows an “independent" monetary policy – independent in the sense that it operates without regards to the economic policies of the government. That is another way of saying that it runs its business as it sees fit no matter who or what party is in charge.

The Fed’s business, among other things, is issuing Federal Reserve Notes, commonly known as money. If you take a bill from your pocket you will see that at top of the side which has the picture of a dead president, it says: Federal Reserve Note. The authority of issuing money and conducting “monetary policy” is vested in the Federal Reserve. The Treasury – that would be the U.S. government – has no say in it.

Why is an “incorporated entity” in charge of the nation’s money supply and monetary policy is a topic for another occasion. We were considering whether the Treasury could borrow money “on behalf” of a non-governmental entity and we saw that the answer was no. The U.S. government could guarantee a borrower – whether explicitly like Ex-Im bank credit lines or implicitly, like old Fannie Mae and Freddie Mac – but it cannot borrow under its name and turn over the funds for the use of others. Yet, as the Treasury secretary, Paulson agreed to this arrangement and Geithner continued with it. Bernanke was not the only one tossing out the rule book.

Why does the Fed which controls money and money supply need the Treasury Dept to arrange borrowing on its behalf?

The answer is that the purpose of the SFP is not so much getting money into the Fed as it is siphoning it out of the system.

Historically, the Fed had strict requirements for the so-called “Fed eligible” securities that the banks could pledge in return for cash. After Lehman, those rules were tossed out and the Fed began taking in junk synthetic securities as collateral that were trading as low as 22 cents on a dollar. However, it accepted them at much higher values than the market, at times close to par, because that is where the banks had financed the securities. If you had $5 and borrowed $95 to buy a $100 security whose price subsequently dropped to $40, you still owed $95. The market did not pay more than $40 for it, but you needed $95. The Fed came in and took your junk for $95. After all that talk, for more than 30 years, about the critical role of the markets in price discovery and fair pricing, the fair market value was likewise tossed out. That was the mother of all rule violations, a replay of the worst excesses of the most unscrupulous mortgage-brokers: valuing the underlying collateral higher than its market price.

In this way, between the summer of ‘07 and January ‘09, the balance sheet of the Fed increased from just above $700 billion to over $2 trillion. The quality of its assets moved in the opposite direction.

The flooding of markets with so much money, above and beyond the value of securities “in play”, risked inflation. To counter that, the SFP was created to take the money out of the system. The Treasury Dept sold Treasuries to take in the money that the Fed had provided to the market in return for junk collateral. Presumably, the monetary policy gurus at the Fed thought that that would be the end of the cycle. But capital is a thing in motion. There is no end point in its circulation. The financial institutions which bought the Treasuries pledged them again with their counterparts for the cash. And the Fed, in order to keep interest rates low and the money flow going, began “quantitative easing”, a code for buying the Treasuries! So, here is the full cycle: giving money away, siphoning it out of the system through the sale of the Treasuries and then introducing it to the system by buying the Treasuries! That is the monetary policy for you.

According to the official statement, the termination of the SFP would have no adverse effects on the Fed actions. The Fed officials stated that that they have other policy levers at their disposal.

I bet they do.

Automatic Save First case study

A case study was raised in Automated Saving article

this is the practice I implement for myself with CIMB bank:
1. open one Basic Saving account type2 as "income account"
2. open one Air Asia Saving account as "budget account"
3. open one Basic Saving account type2 as "expense account"

income acct is my receive the $$$ I earn
budget acct is where I keep my 3-6 mth emergency fund and budget for any annual expense.
every month, the standing instruction from income to budget and from budget to expense is automated.
and I only keep expense ATM card with me, so my spending capability is limited to what I have in the expense acct.
whatever left in the income acct will be used for investment purpose.
if I ever want to buy something in future, I just add the SI into the flow I had above.

would my practice contradict to "pay yourself first" idea? what is the loophole/drawback in my practice?

Analysis is in progress now ..... What do you think about this ?

Pardon the delay in reply. When I first read this, my first thought was Great, Superb, Excellent ! But that was only as a comparison to others who do not save at all. So the discipline of setting this up is worth congratulating !!

The reason I didn't respond immediately that way thou ... was because I felt something wrong too but I couldn't identify what it was. Now that I sit down and look it through ... the only small potential pit fall is the investment part. You were saying you will use your "Income" money to do investment. Now investment usually comes with risk and it could earn as well as lose you money. Losing money from your #1 income account is not a soothing idea. So its best to allocate aside some money for investment purpose. I am guessing you haven't really started any big time investment yet, that's why you were just briefly thought of it. So its ok, not that big a deal.

Basic Saving Account in CIMB pays 0.25% interest which is relatively better than others account which pays 0%. However Mudharabah pays around 1%. Although not a fix rate scheme but it evidently will continue to pay higher interest than other saving accounts.

So one of the ways to improve an ASS or automated saving system is to keep the saving at the highest interest account. This may not be feasible now since your salary is already paid into the Basic Saving Account. You can change now or wait till next career change or major promotion.

Air Asia account on the other hand, although seems pretty attractive now, but I personally do not like this kind of marketing account as my 'saving' accounts. It is designed mainly for frequent flyer and it should be roll under expense category. I live long enough to see this kind of accounts come and go not lasting very long. This Air Asia account is also tight to Tune Money and a Visa card. In short, this account will tempt you to spend money a lot in months to come. Then in a couple of years, this account will be de-prioritized when CIMB partners with another merchant. By then the interest will drop to Zero etc.

If you are sure you wouldn't use the ATM, Tune Money, Visa Card and online features that comes with Air Asia Account, you may keep it to enjoy the higher than BSA interest now. But I DO NOT recommend keeping emergency fund and annual expense in this account.

Ok, generally this is my recommendation:
1. Keep your 6 months emergency fund and annual expense in your "Income" account.
2. Use your Air Asia account as your "Expense" account
This way you reduce one SI and keep more money in your "Income" account. So if you also move your "Income" account to higher interest at one shot you also earn more effective money too.
3. If investment is still needed, setup a dedicated account for that.
As for the investment account, you can use existing "expense" account for that purpose. If you are serious about investment ie. investment is more important than expenses or investment is the door to your future etc. then you should SI from your Income account to the Invest account. Otherwise, if it is still too early to talk about investment, ie. I don't mind invest some when I don't use up my expense money. Then you can transfer investment money from your left over expense account from time to time ( no need SI ).

However in real life, usually once you fix an investment method, they will have an 'account' for you too. So in general you just transfer the money straight to that investment account and not to another saving account. For example, I open an account to invest in stock market with Jupiter, so I transfer my investment money from my bank saving account straight to Jupiter's account. This is why I was guessing you haven't really started investing yet.

Using bank account to save first before actually investing is ok too. In that case, you may also consider Fix Deposit which gives much higher interest and you are not sure when you will use the money yet.

The rest of the recommendation are optional;
4. Use a higher interest account like Mudharabah as your 'income' account

5. Or keep your 'income' account but SI your saving into Mudharabah to store your 6 months emergency. Leave annual expenses in 'income' account.

6. Once you achieve 6 months emergency fund, move them into a monthly re-invested FD.
Annual expense is another topic worth mentioning. Basically this year you are saving for your next year annual expense. Then by this year end, the fund is moved to the 'expense' account for next year use.

MalPF's method was simpler and cover less categorization ... all it says is once you get your income ( time1:salary ), save a FIX portion up immediately ( ie. time2:using SI ). Then its up to you what you do with the rest of your money.

Remember this is just a blog post in Internet, I do not know you and your real condition. Use your own best judgement what to agree and what not. Afterall a paid consultants will always say, "Lets meet up" and spend 8 hours asking all about your ancestors before giving you advice - "Yes! You did good and now you should also open this and that accounts too with my partners."

Hope this helps some ...

Saturday, September 26, 2009

Big vs Small Finance Size

An old man said, "My business's transaction is used to be more than $1 million a day, you think I can't earn $100 now?"

A sale man said, "I have been earning $100,000 annually all by myself, I can easily earn $1million by hiring 10 people!"

Both of them failed miserably after that, why ?

While it may be common sense that a small scale system may not be easily upgraded into a large scale arena, but actually it is also as challenging the other way around - large solution cannot easily fit into small problem. Simply put, they just DON'T MATCH ! They are Different !!

The old man used to have thousands of employees, super computers and special linkage to FBI, CIA etc. He executed his idea at the speed of one phone call and see result immediately so that he could make the next move. Now that he has retired, there are no one answering his call now. Although with the same great mind, the best he could do now is 'talk about' what the world could do in a leisure coffee shop. Without all the facilities he had before, he couldn't even earn a fresh $100 now ...

The sale man hired 10 staff and soon discovered he needed a training system. But the 2 years rental contract is pressuring for cash flow. He had to stop replicating his skill on his staff and went out there to make some income. The staff never become as good as he was. Salary payout further deteriorate last years wealth before he called it a quit. Better settle with what he could handle before digging too deep. Without a proper business system, he couldn't grow his business size.

'Finance' is a concept, hence sometimes may be it is hard to feel the differences. Lets take an analogical example;

.. .. .. ..

Mathew is an experience construction worker. He built himself a GREEN home and even appeared on news a few times. 4 months ago, he accepted a job to build 44 houses. He just couldn't do it. The suppliers are not right, workers not discipline, he doesn't even know what are the available solutions for some of the heavy duty tasks ....

.. .. .. .. ..

Tan is the CEO of a huge property development company. He has built thousands of houses. Last week he and his son went camping on Yellowstone river. While building the tent from nature resources, he realized he didn't have the right tools. Even the rope is not strong enough to sustain a slightly stronger wind. They ended up living in a cabin.

The earlier you know the size that is suitable for you, the better chance you can focus on getting what you really want. Income is a pre-requisite to personal finance but it is irrelevant to a solid finance plan.

Friday, September 25, 2009

malpf feature on New York street ...

malpf - not noticed by a walk by .....

FREE lunch at Melaka and Penang

Jupiter is one of the cheapest online trading brokers in Malaysia. Partnering with Bursa Malaysia they are organizing seminars on stock market talks. LUNCH and TEA provided, FREE registration !!

3 October 9am to 4 pm
Avillion Legacy Melaka, 146 Jalan Hang Tuah, MELAKA

24 October 9 am to 4 pm
Northam All Suites Hotel, 55 Jalan Sultan Ahmad Shah, PENANG

More good news – ZERO BROKERAGE for one month for all who open a new online trading account with Jupiter Securities Sdn Bhd during our Bursa Malaysia Market Chat 2009

REGISTER NOW. Please call 03-2026 9691 or send an email to Bring your friends along.

If you plan to buy sell a lot this coming month, this should be a good opportunity. Else just go for the free fried mee.

Wednesday, September 23, 2009

Investment Link Insurance products

Insurance is an industry that is most dedicated to the complete picture of our personal finances. This has become even more apparent when Investment Link Products (ILP) are introduced to the market.

There is really nothing new to ILP other than it actually reveals the elements of insurance to agents and buyers. Which used to be secrets and all they told you was "Don't worry, we will be able to pay you 6% interest every year".

Now with ILP, agents and insurance buyers can decide
1. What elements to put in their policies
2. How much of each element to put in
3. to change the allocation from time to time
This can go either way, good or bad, for you. Before there was ILP, the proffesionals inside the insurance company decide all these for you. In return they can vaguely promise you a 6% return ( in quotation but not in policy ). So in the simplest term, if you can DO BETTER than the pro, then ILP is better for you. Else you may not even get the return like others who are just paying premium, without the need to understand anything else, as in a truly 'passive' tool.

There are 4 to 5 important elemetns to understand in ILP but for simplicity we can group into 2 first; protection elements and invesments.
Protection element in ILP is almost the same as Term Insurance.
Investment element in ILP is the same as mutual fund.
So basically ILP = Buy Term Invest The Rest, which is one of the best ways to build your personal finance portfolio.

Since the elements are configurable now and that the agents are trained but most buyers have not caught up to the idea yet, the agents can configure in a way that;
High Protection Low Investment ~~> Cheaper than Traditional Products
Low Protection High Investment ~~> Gives Better Return than Traditional Products
without properly educating on the side effects
High Protection Low Investment ~~> May Not have enough cash value to keep the policy alive in future
Low Protection High Investment ~~> Not enough protection for initial years
So if the buyer is only stressing on one aspect only ie. Low Price OR High Return, then very likely the buyer may be getting an un-balance ILP, which carries a higher-than-you-can-take kind of risk. In addition, such a buyer may as well;
High Protection Low Investment ~~> Buy Term Insurance
Low Protection High Investment ~~> Buy Mutual Fund
The justifying detail factors may be too much to share here but generally in developed nations, one can expect to use 0.8 to 0.9 times of traditional insurance premium to achieve a good balance ILP. However, in developing nations, one may need to use 1.5 to 2x of traditional insurance premium in order to build a safe and solid ILP.

Do you agree with this rule of thumb ? Why or why not ?

Sunday, September 20, 2009

Is Gold Pawning ALL BAD ?

There was an article that says gold pawning is strategically disadvantaged, usually by a 0.X% This implies that you will most probably lose out when you pawn more often (1) longer of time (2). So does that mean gold pawning is an all bad thing ?

The answer is NO!

There are 2 words in relation, Gold and Pawn. Gold is an investable commodity. As a matter of fact, gold could be viewed as the god of all commodities. There is an old saying "When you don't know what to do with your money, buy gold!". Gold is a well known hedge against inflation. So overall if there is Gold involved, it cann't be too bad.

Pawn on the other hand is a not-so-good-thing in general. Basicaly you exchange your valuable items for cash. Your item will be safe kept for a certain period. You can buy back your item before an expiration date. Usually total buying back is lower than initial surrender price so that the pawn shop can earn a profit. On cases where the opposite may happens, the pawn shop enforces a safe keeping fee to minimize loses.

Although pawning is not a good thing, as in you have cash flow problem and you pay extra fee to safe keep your own stuff, but if there is anything a person should pawn it is Gold and Silver.

So gold pawning is not bad at all.

Rob has Rich Dad in his life, as a matter of fact I went through a similar life path as his, but I have Rich Friend instead of Rich Dad. From where I grew up, gold pawning is a way of life. My Rich Friend runs a gold pawn shop. Despite the fact pawning is disadvantaged both strategically and psychologically but over the years we cann't ignore another fact that some people who pawn their golds are still surviving and some doing pretty well indeed.

Lets review some facts again, a 0.X% disadvantaged investment is still better than gambling, borrow money from illegal sources ( Ah Long ), over draft, credit card interests etc.

Some of the key reasons why quite a number of people can make it through their whole lives simply by pawning golds are;

1. Gold's trend growth is REALLY more than inflation rate and
2. Gold provides an excellent cash flow facility today.

If you are earning an interest that is higher than inflation rate, then minus it with a 0.X% disadvantage by adopting some not-so-good strategy ( pawning ), the worst it gets is you are still hurt a bit by the inflation. Relatively, most people do not save at all! Hence,

Earning Gold trend - pawning disadvantage rate > Not doing anything at all

After all, that is why there is the saying when you don't know what to do, just buy gold ! But there is NEVER a saying "Pawn your gold to get Rich".

The delusion of pawning gold strategy is because it does actually increase cash flow. And sometimes some people mistakenly take extra cash flow as wealth. Pawning gold is also a very valid leverage technique. Hence combining its leveraging 'fun' and extra 'cash flow', people easily mistaken it as a way of 'wealth path'.
Gold is an excellent tool to hedge againsts inflation,
Gold can provide you great cash flow especially at bad times,
but pawning will lower all the advantages you get above although in small scale only.

Pawning your gold is not an all bad thing but its NEVER going to be the best thing you can do in your personal finance.

Saturday, September 19, 2009

Some of Robert Kiyosaki's sayings ...

Below are some of Robert Kiyosaki ( Rich Dad ) sayings and my thumbs UP or DOWN as a respond ...

"The recession is NOT over ... it has been Glossed over ..."
I was calling it the PM effect - (Prime Minister). I knew for sure Obama and Najib could have brought some effect but never did I know that they can really pull it off until today. Anyway, a nice 'gloss' they did indeed ...

"I park my money in gold, silver, oil commodities that goes up as USD goes down ..."
I agree but then again, don't forget in forex trading, USD down could easily be hedged by trading reverse currency pair too. I don't know if Rob knows about forex.

"Gold will crash in October November down to $800 range ..."
I was thinking December but there about share the same philosophy of gold trend.

"Market will be volatile for years to come, this means traders wins over long term investors."
I agree with the volatile part. Duh ... what market is not volatile in today's finance ? By traders Rob meant the speculators. This is the part why clearly Rob fails to make money from stock market for the past 40 years ( Not really true, but relatively it is true especially when compares to his passion in real estate). In a market that is more volatile than you, the higher frequency of transactions imply higher chance of losing. The only time when a speculator earn money in a volatile market is when the speculator's ability is still beyond the volatility, or in other words, to such a speculator, the market is not that volatile yet. This is a big topic and could probably be the last thing I can ever share in this blog but it will come eventually. But basically Rob gets this part in reverse and hence stock market is never his cup of tea.

"Stock market is not the place to invest for long term."
Its quite funny reading some of his views in stock market in his latest book Conspiracy Of the Rich to be published tomorrow. He was quoting the lows and the highs of Dow Jones. Then shows how bad it is going from the Highest to the Lowest. He also shows after one big cycle of Lowest to Lowest, there is really not much left. Although what he shared is true but nevertheless Definitely is NOT the complete picture. If a person is so smart spotting the cycles and patterns of ANY investment vehicle, why cann't he make use of it to his advantage ? That ... will always be my biggest puzzle to Rob's life story unless he admits he has personal preference to real estate and thats about all.

"Saving is bad."
This is a OMG respond some of the gun you sucker Rob kind of protest from me. USA is going through a very special kind of transformation in its finance today. So it may be ok to say savings is bad of USA folks but it ABSOLUTELY DOES NOT APPLY to the rest of the world.

Lets face the simple truth;
Spending less is better than spending too much,
Saving is better than NOT saving,
Able to INVEST with higher return is better than saving.
and lets review today's personal finance status;

Most personal investments produce an average return of less than fix deposit guarantee interest. Only 30% of such investments provides a positive returns, this means 70% lose money. And only 10% of them make a significant return in comparison with mutual fund return.

Although the title is 'Don't Save', but what Rob is really saying is 'Invesment is better than saving'. Which I agree with the content of the whole chapter. But the title is so misleading that it actually damage many young minds. All they see is the title and they stop saving and start spending ! They spend to lose, not spend to win. They would thought they are spending as to invest but as there is certain way that a human mind would work best - instinct - more and more fail just because our global personal finance guru, Mr. Robert Kiyosaki said that Saving is BAD.

The biggest conspiracy in "Conspiracy of the Rich" is Rob in need of making more money by abusing his global influence and cross the ethical line in his new book marketing ....


nevertheless still a good book to keep. Other than the crazy 'Don't Save' stupid marketing talks, there are a lot of useful contents inside ...

Tuesday, September 15, 2009

Looking Back in Incomprehension

It is the anniversary of Lehman’s demise and everyone is looking back for “lessons learned”. The passage of time has not helped. The usual nonsense about greed, bad management, etc. is being regurgitated, with a new spin making the rounds: that Lehman’s demise prevented even bigger collapses. Goldman’s Blankfein was first to float this nonsense.
“A bailout of Lehman Brothers might have provoked a public backlash, causing the government “to let the next institution fail” instead, Blankfein said ... “It might have been a much bigger one with much more dire consequences.”
Joe Nocera of the New York Times picked up the same theme in a front page article claiming that if Lehman had been saved, a much bigger firm such as Merrill might have collapsed.

The claim can be neither proved nor refuted. It is an idle conjecture. Nocera’s Merrill example shows how little he knows about the markets. Merrill was bigger in terms of assets. But Lehman was a far more “connected” – systemically important, if you will – firm. It was one of the largest issuers of commercial paper. It was the freezing of the CP market, after Lehman had filed for bankruptcy, that triggered the crisis.

The spin tries to make the boys who let Lehman down look less bad. Nice try, gentlemen.

The how of Lehman’s collapse is a technical matter involving the business model of a highly leveraged broker-dealer. I described it in detail in the Credit Woes series, especially parts 9 and 10.

The why of Lehman collapse – why Geithner, Paulson and Bernanke allowed it to happen – cannot be known without a full confession from the said individuals. But I doubt that malice, in the sense of involving calculations and plot, played any role. That would be giving these men credit for what had to be a complicated chess move.

The truth is more banal. I think I came close to it when I described why Lehman was allowed to fail. Read it here and judge for yourself.

Looking back, I also think that I grasped the significance of the event better than others. Read it and judge for yourself.

The FIRST Life insurance - a Whole Life Plan

Although Buy Term Invest the Rest is a better option but generally the first life insurance you should buy is a Whole Life Plan.

Typically such a plan runs until you die so its an insruance for them, not for you. One of the facts that some may overlook is that you will have to pay the premium your whole life too. However, the quotation is usually presented in a way that you pay a number of years and then the policy will be able to substain itself. Traditional policy would actually take a loan from yourself by paying interest to the insurance company. Which is usually viewed as a big disadvantage in personal finance planning. However in this article, it works towards our advantage, at least for 'most of us'.

Lets start by reviewing Buy Term Invest The Rest (BTITR), although it works best ideally but in real life when will it work and more importantly when will it NOT work ?

Statistically and historically, most people who practises BTITR starts with buying term insurance and almost certainly did not ends with investing the rest. Everyone has ups and downs in their lives. During the downs time, almost everybody's 'Buy Term' is stopped not to mention there is no such thing as '... The Rest' when cash flow is tight.

What is the ONLY requirment in BTITR to make it a success ? DISCIPLINE ! And guess what human nature is lack off ? DISCIPLINE !!

So if you have been having discipline your entire life up to this point, congratulation, you can start your first life insurance as BTITR. Else, buy a whole life insurance plan instead. You can always BTITR for your subsequent plans and just in case when lack of discipline really screw you in future, you still have at least one plan you can always fall back to - as a safety net.

This way, the worst it could become is you earn less but you are almost guarantee a fail safe approach. Strategically it puts you in a very good position even to start with.

If you are one of those who asked, "Term insurance premium increases as age increases" then you should buy the Whole Life Plan instead. Because you didn't really understand BTITR where the 'Invest The Rest' part should have ironed out this problem.

If you asked, "Should I buy term insurance until age 50 ro 60" then BTITR is also not for you. the 'Invest The Rest' part should usually take over the 'insurance' part after 15-20 years. If you didn't see that in your thoughts, you should be better off with a simply assuring whole life plan, although slightly more expensive.

Today Investment Link policy can also be quoted as a whole life plan. The good thing of investment link whole life plan is the elimination of policy loan - taking money out from your own plan to pay your future premium does not cost too much extra than just the unit price calculation. However, a badly configured link policy can lapse by itself when the market price goes too low. So a traditional whole life plan is implicitly having more assurance than investment link whole life plan.

Another rule of thumb to make your life easier, if you can pay high premium for your first policy, take investment link whole life plan. If you plan to pay minimum premium, then go for a traditional whole life plan.

Lastly, if you know you haven't been discipline but you are sure that you can be and will be from now on, do me a favor, buy a whole life plan now and then do the BTITR thing a couple of years later. 20 years later if your BTITR really does better than your whole life plan, come claim the 2 years differences from me.

British Starts educating finance in Primary School

One of the nicer effects left over from Lehman's trigger on world finance crisis is that now British starts to teach finances even in primary school. All the kids are taught what finances are all about, how to start a business and the importance of accountings etc.

The timing couldn't be more right especially when Internet has changed the way business can be.

Although there will be doubts on who can be teaching all these and what syllabus are considered 'correct' ? Afterall it is still hard to say if the world greatest finance is evil or saint. There isn't exactly a blue print to be based on. Don't forget not too long ago, Lehman is the exact blue print for everyone else to follow ...

This is nevertheless an exciting start. If I were to have a say, I would just recommend they should focus on "personal" finance first rather than the big 'finance' subject. If a person can manage himself well, the risk of a failing like Lehman would be greatly reduced ...

Sunday, September 13, 2009

Functionaries (passed off) as Revolutionaries

I was at the start of my vacation when Bernanke was reappointed. In terms of newsworthiness, then, the story is a tad dated. But this is not a news site, and there are important points about the reappointment that I would like to write about.

Ben Shalom Bernanke secured a second term as the chairman of the Board of the Federal Reserve because he played ball in his first term. He played ball obediently and unquestioningly.

In the ceremony announcing the reappointment, President Obama said that Bernanke’s “bold action and out-of-the-box thinking” helped save the economy from free fall. That was the agreed-upon line on Bernanke that the media had been promoting for over a year: a bold and unconventional thinker and doer – a veritable revolutionary, in other words, of the kind that these crisis times demanded. Google “Bernanke + rule book” and see how many sources, from the New York Times to the National Public Radio, approvingly talk of Bernanke “throwing out” or “tossing out” the rule book – the rule book being the policies of the Federal Reserve.

Rule books spell out the details and boundaries of actions in organizations. They are written to be followed. Anyone who has ever worked in an organization knows that ignoring the rules, to say nothing of tossing them out altogether, would be committing career suicide. In many cases, it would be a criminal offense. Imagine a pilot violating the rules of aviation. Or an accountant ignoring generally accepted accounting principles. Or a bank compliance officer not reporting suspicious transactions. Such conduct is so predictably ruinous that if willful and intentional, must to be pathological.

For Bernanke, this pathology was presented as heroic and as the evidence of his courage. The trick worked thanks to the perversion of the social frames of reference, of the kind that Shakespeare said make foul fair, black white, wrong right, base noble and coward valiant.

Let us begin with the “tossing out” part, that not-playing-by-the-rules shtick that is invoked to conjure up the go-it-alone ways of the heroes the Western movies. Hollywood was instrumental in creating the link between such “mavericks” and the frontiersmen who built the U.S. In the American psyche, patriotism and individualism – the latter connoting non-conformity – are thus linked.

The American individualism, however, always had a commercial base, even when it took the form of exploring the nature. The “enterprising” men and women could go off the well traveled paths and take whatever risks they chose, as long as their goal remained pursuit of money, which the Founding Fathers somewhat defensively called “the pursuit of Happiness”. That kind of individualism was encouraged, promoted and admired because it was in line with the guiding principles of the country.

Individualism, if it involved questioning the guiding principles which were codified in law, was strictly discouraged because the “common good” was supposed to trump individual interest. Those who went against these principles, whether for personal gains or out of concern for others, were branded outlaws and dealt with accordingly.

With the rise of speculative capital, the balance between the individual and the common good – between the narrow and general interests – was shaken in favor of the narrow interest. Speculative capital is an expansionary force. Expansion is the condition for its preservation. Constant expansion naturally brings it into conflict with the myriad of laws and regulations which inhibit its growth. So it strives to eliminate them. In Vol. 1, I wrote at length on the dialectical relation of speculative capital to law and regulation, which produced, starting with the Carter presidency up to current times, the longest running orgy of deregulation in the history.
Speculative capital abhors regulation. Regulations interfere with the cross-market arbitrage that is its lifeline. If speculative capital cannot freely operate, it cannot generate profits and must cease to exist. The opposition of speculative capital to regulation is thus not a matter of some technical or tactical disagreement but a question of life and death.

The attack of speculative capital on regulation is not indiscriminate. Though generally suspicious of regulation, speculative capital singles out only those regulations which directly or indirectly hinder its free flow across the markets. The same speculative capital, meanwhile, supports and pushes for the passage of sweeping laws. In so opposing the regulation and supporting the law, speculative capital distinguishes between the two in ways few philosophers of law could.
But how could the idea of dismantling laws that protected the common interests be sold to the public? The trick was in framing the issue “properly”, which is to say, emotionally, by personalizing it. Whilst originally the “common good” trumped individual interests, now the concern for the individuals was used as the pretext for discarding the rules for the common good.

Focusing on the individual is the secret and foundation of storytelling in which Hollywood excelled. So beginning in the early ‘70s, parallel to the rise of speculative capital, we see the appearance of Clint Eastwood as “Dirty Harry”, a sadistic and criminal cop who shot and tortured suspects but the audience was made to cheer for him because his actions were in defending the “rights” of the victims. A torrent of vigilante movies and “tough but fair” cops followed, all with a similar theme but progressively more violent and more lawless characters. The culmination of that trend is the current TV show “24” where torture is sold as advisable and even normal.

To what extent this indoctrination – now supported and reinforced by the radio talk shows, newspaper columns and the TV commentaries – has succeeded in making foul fair can be seen from the comments of Antonin Scalia, the justice of the Supreme Court of the United States about the fictional character of “24”.
Senior judges from North America and Europe were in the midst of a panel discussion about torture and terrorism law, when a Canadian judge’s passing remark—“Thankfully, security agencies in all our countries do not subscribe to the mantra ‘What would Jack Bauer do?’ ”—got the legal bulldog in Judge Scalia barking.

The conservative jurist stuck up for Agent Bauer, arguing that fictional or not, federal agents require latitude in times of great crisis. “Jack Bauer saved Los Angeles. … He saved hundreds of thousands of lives”...

The real genius, the judge said, is that this is primarily done with mental leverage. “There’s a great scene where he told a guy that he was going to have his family killed,” Judge Scalia said. “They had it on closed circuit television—and it was all staged. … They really didn’t kill the family.”
Jack Bauer saved Los Angeles. He saved hundreds of thousands of lives!

These words about a fictional TV character from someone charged with interpreting the U.S. Constitution.

(Read the last paragraph again and pay attention to the tone, narrative, the use of “great scene” and the way Scalia articulates what he has seen on TV: “There’s a great scene where he told a guy that he was going to have his family killed. They had it on closed circuit television—and it was all staged. … They really didn’t kill the family.” If this quote is accurate, the man’s mental capacity can be no more than that of a 7-year old.)

It is within this environment that Bernanke’s throwing out the rule book “to save the financial system” was sold to the public as a heroic, albeit slightly unconventional, act – in the manner of Jack Bauer saving Los Angeles from a nuclear attack. The president had little choice. They had him on the run with the same rhetoric and a not-so-subtle threat, in case he did not get the hints:
A top White House official said Mr. Obama had decided to keep Mr. Bernanke at the helm of the Fed because he had been bold and brilliant in his attempts to combat the financial crisis and the deep recession ... Some analysts caution that the economy is still so fragile that financial markets would react badly if President Obama decided to install new leadership at the Fed anytime soon.

“He’s the best person for the job,” John Makin, a senior fellow at the American Enterprise Institute, said of Mr. Bernanke. “Why would anyone want to change the Fed chairman now?”
Why, indeed. That would be like changing Superman just when General Zod had broken into Daily Planet.

Three questions remain. One concerns Bernanke’s boldness. One of the main criticisms directed at Ibsen’s feminist manifesto, A Doll’s House , is Nora’s quantum psychological leap that takes her from being a “silly bird” of a housewife to a woman able to leave her husband – all within the span of 48 hours. The criticism is a valid one. In real life, people who have been meek all their lives would not disturb a comfortable status quo to face uncertainty and danger. How, then, did a meek academic, whom the New York Times described as “a quiet and often unprepossessing person” – and was installed at his position because of those qualities – become so bold so as to throw out the Federal Reserve rule book?

The second question is, how did he know what he was doing, after he had tossed out the rule book, was the right thing to do?

Finally, who was behind Bernanke? Who promoted and passed him off as a bold and revolutionary thinker and doer?

The answer to all three questions is: speculative capital.

Among the official press, the New York Times alone sensed the need to explain the source of Bernanke's uncharacteristic courage; it implied it came from the firm conviction of knowing the right way, itself the result of first-rate scholarship.
Mr. Bernanke was a leading scholar of the Depression who had broken important ground on the links between financial crises and the real economy. In his work on what he called the “financial accelerator,” Mr. Bernanke argued that a run on banks or other disruptions in financial markets could turn a relatively mild downturn into a severe one.
In truth, the quality of Bernanke's academic work is on par with his academic peers: overdone on technical details, dreadfully shallow, almost childish in depth. Here is a single, albeit telling, line from one of his main speeches just before the onset of the financial collapse that shows his grasp of finance.
As emphasized by the information-theoretic approach to finance, a central function of banks is to screen and monitor borrowers, thereby overcoming information and incentive problems.
The central function of banks is to screen and monitor borrowers – this according the “information-theoretic approach to finance”, which he approvingly quotes.

The same year that he spoke of this central function, the U.S. banks sent 5 billions credit card offerings to about 112 million U.S. households – roughly about one credit card per week per household. That is screening borrowers for you.

Bernanke knows finance no more than Scalia knows law – or the reality.

So, no, it was not Bernanke’s knowledge that showed him the way and the strength to act. It was the demand of speculative capital.

Speculative capital is constantly in motion. Whether in expansion during “economic growth” or in retraction during crisis, it naturally finds the most profitable path for itself. Because the public at large has been made to see the events from the viewpoint of speculative capital, the path that speculative capital chooses appears as the only viable, logical option. Alternative options, if they are noticed at all, seem non-workable, irrelevant or radical.

In this way, the course of action becomes preordained and if the rules stand in the way, so much the worse for the rules.

In this environment, functionaries rise to fame. By virtue of unquestioningly executing the diktat of speculative capital, they are thrust upon the center stage as bold thinkers and doers – bold because they discard the existing rules. In doing so, they become the instrument of the destruction of the old system and the creation of a new one in which speculative capital holds sway even more extensively.

But speculative capital is self destructive. It destroys itself and the environment in which it operates, only that each phase of destruction is more intense and violent.

That is where we stand now. The “financial markers” seem to be gradually stabilizing but the Federal Reserve, in circumvention of all the laws and regulation that created it and defined its operations, is saddled with over $2 trillion of junk securities.

When a pilot deviates from the aviation rules or an accountant violates the accounting principles, the consequences are immediately clear. The consequences of the Federal Reserve issuing U.S. treasuries for junk is not immediately transparent. I will return to this topic in later entries and in Vol. 4.

In the mean time, Bernanke’s children and grandchildren will tell tall tales about how Grandpa Ben singlehandedly saved the world from the brink.

Friday, September 4, 2009

Rich Dad : The Best 20th century Personal Finance

Just want to make sure that you know Robert has a site that teaches people all about personal finance for FREE, it is one of the most comprehensive resources as well ... its called RichDadWorld.

Even if you don't like this old type of personal finance concepts, you should still sign up and browse through the resources briefly. Its a good way to counter check if you have missed anything. Its almost a guarantee you can find some eye opener concepts there or some key concept you already knew but forgot.

Basically it says you record down how much you earn and spend then set a goal and achieve what you really want in life.

Some may ask why is this called last century's methods ? Well, lets look at some facts ...

1. Starting such an exercise is exhausting
2. Keep doing until it becomes a habit is even tougher
3. 90% or Most people WILL NOT be able to do it
4. The Rich didn't really do this before they become rich
Come on, lets face it, as much as I personally a great fan of Rob, his first book is all about his passion. Dying to share what he has done right especially in property investment. Since then, all other works he did are all about business. So for NOW, if you ever approach Rob hoping him to change your life, keep your fingers cross. His aim is in expanding his bussiness. With that note, it is still SUPERB to work something out with Rob if what you have in mind is 'business'.

Ok, I felt bad already making such a comment. So lets add another positive note. Among all the Riches in the world, Rob is the ONLY person I know who are willing to share his failure openly. May be you need to buy him a few more beers before he opened up but relatively he did open up so much more willingly than .... and the person who is so scare to share his faiulre - Mr. Trump.
With the above 4 points, I mark his site a 20th century personal finance. The only thing missing from 20th century personal finance to 21st century is psychology. Intuitively human are lazy, when not paying attention and close focus, we tends to always choose the easiest path. 21st century personal finance is all about securing a solid personal finance without trying too hard ... by using the right ways ( easiest and laziest path possible ).

Lastly I need to re-emphasize ... there is nothing wrong with 20th century personal finance. Here comes another fact ... if you can do all things mentioned in 20th century personal finance persistently, you are almost "guarantee" a success in your personal finance. However, statistically only 10% of the people would be able to make it. If you think you are the 10%, by all mean go do it! Another great point is ... there is really nothing to lose. Even if one day you found out you are not the 10%, its perfectl OK! You have gained a superb experience. Then it is still not too late to explore 21st century personal finance ... after all, there are 91 years for your to catch up ....

Tuesday, September 1, 2009

What you can do with mutual fund's high fee ?

It was mentioned that Mutual Fund is one of the few personal finance tools that can provide highest return passively. (A) There are a lot of other venues that can provide higher return but they require much more active effort than mutual fund. (B) There are also a lot of other tools that is more passive than mutual fund, but their returns are not high. (C) There are also some solutions that provide both high return passively but they are NOT personal tools.

However, even the best tool in the world can be a disaster when used wrongly. Mutual fund is no exception. The right way to use mutual fund in your personal finance is;

2. choose the largest or most active fund ( In Malaysia, the only choice is Public Mutual )
4. adopt Buy and Keep, not Buy and Sell. Buy and Switch, however, is a good alternative between the two.

Any activities other than above may stop you from using mutual fund to

1. provide the highest return
2. passively
3. personal tools

With that in place, the only challenge left is its high fee. Although there are many justification on the fee, the future for mutual fund industry is actually the continous effort to streamline this service charge. There are 2 ways to do that;

1. Provide more values from the same high fee or
2. Cut to lower fee by streamlining distribution channels.

The good news in Malaysia is, there are already distinctive winners in both strategies. Public Mutual will continue to provide more values to its investors, the significant threshold is MYR 100,000 where you become a Mutual Gold member to rip those benefits out of the service charges you paid.

On the other hand, Fundsupermart is the winner in low fee funds. However, Fundsupermart is NOT a fund manager. They only provide a trading platform for fund managers to distribute their low fee funds. Buying and Selling funds in fundsupermart is a totally whole new concept comparing to traditional methods. Hence do take sometime to learn and realize what you have given away when paying the lower fee. Whatever result you get in future is the action you take now, its all you now and no one else to blame.

What else can you do if you want to invest with mutual fund but want to minimize the high fee impact ?

Join the industry to promote mutual fund as an agent. All agents get paid in commissions. If you buy from yourself, part of the service charges you paid goes back to yourself. It may not be easy as this actually require a lot more effort to get qualify etc. But the knowledge and experience stay with you.

So in contrast to mutual fund's service charges, you can;
1. rip more values from your fund managers - Public Mutual Gold
2. buy lower fee funds - Fundsupermart
3. buy from yourself - ...

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