Extra work

Not entirely TRUE in all aspects but nevertheless a great quote 

The Amount of Money

in your bank

at the time you Died

. . . 

is the EXTRA work you did

that wasn't Necessary

A Perfect World

In a perfect world, everyone produce something.

Farmers grow plants, feed chickens, fishermen catch fish, builder made homes etc. So we can sit together at night and enjoy a complete dinner in our nice homes. It was easy to know who is suppose to do what, who produces what.

When there are too many fish caught, it has to be sold out of town. The fisherman doesn't have time to travel that far. So a delivery boy is helping the fisherman. The fisherman save time, hence catch more fishes and therefore its worth him paying the delivery boy. It is a value added chain, so service has become a part of perfect world too where everyone produce something, everyone produce some values.

It gets a bit complicated cause service is not as easy to quantify as materials. But its still ok.

A $1 fish may cost $2 in out of town because there are delivery cost incurred.

Soon more delivery services are needed. It is not easy to decide which of the 100 delivery boys is most reliable. So a manager came and organize a delivery company. The fisherman no longer need to worry about delivery, the delivery company will handle and be 'responsible' for the delivery part. If any single delivery boy does not perform, the company will immediately replace with a better one. Fish still reach destination on time. The fisherman doesn't need to worry a thing. What the management provided is a service on a service, there is still value provided.

Now the fish is $3 in out of town. The manager needs to eat too.

The fisherman's business grow much larger thanks to the great leveraging techniques. One day, the fisherman's primary school friend drop by and have a nice chat with the fisherman, asking the fisherman to let him handle the delivery part. Because he is more trust worthy, that they have known each other for so long etc. The fisherman agreed, perhaps due to the drinks or due to the flowery talks.

The primary school friend simply take orders for the fisherman and pass to the delivery company. Jobs still get done as usual but while doing that, he has raised the fish price to $5 in out of town. He gets $1 just for the deal he made. The fisherman gets $1 extra simply by letting his primary school friend take over the delivery part. The delivery company has nothing to loose.

Now it gets really tricky.

What did the primary school friend produces ?

What value has he added ?

What service has he provided ?

You can't say he has done nothing. He is instead smart, creating something from nothing. Is creativity really worth nothing ? He capitalize his relationship into a real asset.

The fisherman gets more value ( money ), the primary school friend earn something, the delivery company didn't loose anything. So theoretically speaking, the primary school friend has added value to the fisherman and himself. So it doesn't really break the law of perfect world.

The smart you may have already spotted the difference.

But at whose price ? Out of town folks used to pay $3 for a fish. $1 for the fisherman, $1 for the manager to make sure fish reach them on time and $1 for the delivery boy. Now the fish is $5! What is the other $2 for ? Well, that has nothing to do with any value received by the people in out of town. That was just a deal made between a primary school friend and the fisherman. The fisherman and the friend gets the whole $2!

Smart yes, add value to one or two persons yes, nothing wrong was done yes .... but whatever the primary school friend did, should NOT be included in the formula of 'PERFECT WORLD'.

In a perfect world, everyone produce something

FOR EVERYBODY.

Sounds familiar yet ? If not, may be you haven't read about Malaysia's GST yet.

This article was suppose to be read in this sequence.

Malaysia's GST - a MAGIC !

Secrect of the MAGIC revealed !

a Perfect World !

What can we do ?

Personal Finance Portfolio should be dynamic

We often hear experts said

if you are young, you can take more risk, hence put your investment in equity.

then

if you are old, you should keep your capital in safer vehicle like bond etc.

But one important strategy they miss out is ... the dynamic of personal finance portfolio.

Says you are 25 years old, you will need a sum of money at 35 years old. Hence you can invest into equity. However, you must learn something about the equity market you are entering into. For example, you know that for every 10 years in your equity market, there will be a peak and a bottom. So perhaps by 3-4 years before your maturity date, ie. 31-32 years old. You should start considering withdrawing your equity investment and keep them in a money market or bond fund. This will preserve your capital and secure you from unexpected last minute change, ie. a sudden equity collapse.

for example;

age 25 : 90% equity, 10% bond

age 27 : 80% equity, 20% bond

age 32 : 40% equity, 60% bond

age 34 : 10% equity, 90% bond

Keeping a non dynamic portfolio expose you to risk the whole time. If bad luck hits you, you may lost all your 9 years of earning in the 10th year. So one must keep ones personal finance portfolio dynamic.

value for money - linear or exponential ?

Value for Money ( short for V4M ) is basically how much values you get from the money you paid. It is often irrelevant how much is the price of an item or service. Whether or not a person pay for something is simply because of how he perceives the values he is getting.

If a person perceive values more than its price, he would paid for it !

If a person perceive values less than the price, he would NOT paid for it.

There are 3 types of V4M perceptions. This article will cover 2.

Linear model of V4M is basically thinking all features are alike. Hence for every feature the person is looking for, he would be willing to pay some price for it. But if a particular feature is substantially higher price, he would think its NOT worth it.

For example, a person is looking for a phone that has Wifi feature and cool-look feature. A typical wifi phone may cost him $500, a cool looking wifi phone may cost $2,000. A linear V4M guy will go for the typical Wifi phone.

Exponential type of V4M model describes a person who values most on perfection. He understands that many providers can easily give an average services / products but it is very rare for a provider to provide a perfect solution. Hence he is willing to pay any price for one particular feature especially when such feature is not easily available elsewhere.

An exponential V4M guy would have go for the cool looking wifi phone as per above example.

One will always find Linear V4M guy a FRUGAL person. He analyses well before making a purchase. He may go for 2nd hand goods as long as they still work well. Such a person is always the next door millionaires whom you never knew.

Exponential V4M guy on the other hand is the high society type of person. The only way he can sustain his life style is by being filthy rich. His perception on values is also the main driving force for him to stay rich. Such a person is always a very high cash flow fellow but often unable to retain a net profit.

There is no right or wrong in either V4M models. But it is important for you to recognize your own V4M model and then focus on living that life. Problems arise when an exponential V4M model guy thinks he is frugal OR when a linear v4M model guy keeps over pay.

What is your V4M model ?

There is NO such thing as Passive Income !?

21st century personal finance is moving away from saving and focus into the income arena. In short, the gurus are now educating public that saving is NOT good enough, hence sourcing for passive incomes on the another hand is a BETTER solution, than just saving alone.

While the concept is definitely true and correct but unfortunately as the hypes go bigger and bigger, the idea of passive income has been abused and more scams started to appear in the market, as if they were the gurus as well. Except the 'passive income' they refer to is barely promoting their own original same old products. The personal finance market has become so competitive that even some real gurus have no choice but to go beyond the line in their marketing effort - Robert Kiyosaki is no exception in spreading "Saving is bad".

Although passive income is very well defined here using income ratio 1:100 but is there really such thing as Passive income ? When I looked up dictionary, these words come up

PASSIVE : not participating, inactive, not reacting, inert or quiescent.

None of these words correctly describe a well implemented passive income. I use my best judgement to find a good location, a value property and a pay master tenant. I setup a profit take target and an exit strategy in my investments before I leave and let them auto pilot. All of these are very participating, actively applying my knowledge and experience, reacting appropriately when necessary etc.

The word "Passive" also gives people a psychology of No Need To Do Anything; As if an easy to get rich scheme with a better cover.

Hence this article wants to pursue all readers to stay away from the term Passive Income. Its negative, misleading and now abusive by the over-stress marketing effect. Instead, think of Smart Income !

There is no hard and fast rules for Smart Income. Any income can be earned the regular way or the Smart way !

An employee can use minimum of his time effectively to earn the highest salary or benefits. A self employ can easily leverage on Internet to earn income repeatedly. A business owner can employ a system to run his business. An investor can setup an autopilot mechanism.

So no matter which income quadrant you are in, it is possible for you to turn that income into a smart one. Its a matter of HOW you earn your income, NOT WHAT you do.

Are you pursuing smart income ?

21st century Economy Politic Quadrant

The Economy-Political Quadrant may seems like telling where to keep or invest your money despite good or bad time.

It indeed works very well during 20th century. Unfortunately comes to 21st century, not only has the year changed, personal finance arena has changed drastically as well.

Gold has been speculated so much that it MAY no longer be the standard of money.

There used to be only 'property' in the city. Now there are satellite towns, suburbs ... agriculture lands and even dust bins ( recycle ) have become valuable estates too. While property remains the right category to invest into whenever economy is booming, but predict the right future seems like tougher than buying lottery.

Government bonds used to be de-Facto action when a country is stable. But in today's world, a country is as smart as a taicon's finance. One day they are the LARGEST, the next day they are GONE.

Stock market used to be the back bone of a country's economy. However, the market of derivatives has become so HUGE that the REAL and PHYSICAL is NO LONGER more real than VIRTUAL

So in 21st century, the element of Stock-Property-Funds-Gold is really questionable. However, one fundamental that doesn't change is that

you will have to identify what to do at what time that is BEST for YOU !

Hope you will find your own very best Economy-Political Quadrant soon !

Economy Politic Finance Quadrant

There are 2 BIG main external factors affecting our investment decisions

• Economy
• Politic

When the time is really bad (economy downturn and politically unstable), its best to park your money under something that is really stable, ie Gold. Which is by definition usable anywhere you go in anytime.

When its good time, invest direct to the stock market would yield very good return.

When the economy is not so good in a strong country, the government bonds or related money market would be able to yield higher return than just gold.

However, the most dispute solution in good economy unstable country is investment in property. This is mainly due to easier rental and higher chance of capital gain.

By simply moving money around depends on the political and economy situation, one was able to achieve more than 12% compound return for the past 20 years. That is equivalent to a 10X return.

But by no mean this is easily done. Some of the concerns include;

• how would one know exactly when economy/politic turns good/bad ?
• is Gold the ONLY option ?
• property may not easily liquidated
• how to choose which property or stock market ?

. . . which can be explored further.

Traits of Successful Traders

I was clearing up my junk images and found this one.  I forgot if I have shared this before but it is a great reminder anyway ... and I forgot what the source is, sorry to owner.

The key difference between a self employed and a real business is that business has a proven running system despite who operate the system.

Same goes with investment, you either invest for fun or serious about earning an income

Allianz Power Saver Guaranteed 4% = 0.28%

note : updated content found at the bottom of this post 

Copy from Lowyat forum that :

Allianz Power Saver gives guaranteed 4% interest return. Every year invest certain amout of money on it and on the 5th year, the 4% return will be given out. Maturity of 30 years For example,

For RM100,000 sum asured (Every year payment of RM20,000. So total of RM100,000)

So in the 5th year, payment of RM4k will be given out for 26 years. So total collection of RM104,000 over the years.

Hmm wondering if this power saver is really the best in the market? For sure it is a lot better than the current FD rate.

If I understand it correctly, then it should be like below spreadsheet.



click here to view the spreedsheet

It is like you save into a Fix Deposit who pay you 0.28% interest rate ONLY !!

Far from 2.X % that is paid by most banks now ! Not to mention the calculation above is compounding yearly while real FD accounts compound monthly

Ofcourse they will pay you more money at the end of 30th year. That will boost up your effective interest rate but want to bet ? As shown in earlier posts in Capital guarantee plan ? and 2,400 get 800 = 33% ? Whatever the guaranteed maturity value is, the final effective rate will be less than 3%.

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

do correct any of the info here if mistake found, all confrontation welcome for the good of all.

Blogged with the Flock Browser

---

2009 03 13

Allianz personel showed up in the forum above and provided more info and complete picture.  First of all this is the full illustration provided :

One very important fact shared is that the life coverage in this plan is a Reducing Term Average which means the life coverage reduces as it approaches the end of 30th year.  I can safely assume the Sum Assured is $100,000 and as the SA reduces, the guarantee $4,000 pay out will eventually make up to the reduced Sum Assured.  So sum it all up, you will get back your $104,000 whether you die early or you don't die at all.

If you scroll to the right in the spreed sheet at the beginning of this article, this plan basically gives a 2.93% to 3.47% non guarantee return.  Although its NOT guarantee but looking at today's recession ( entry time ) and a period of 30 years ( exit time ), its almost no brainer this return can be easily paid out as promised.  So not exactly as FD but can be as safe as FD.

I hope this exercise benefits some people.  First of all, guarantee return is usually not able to be higher than Fix Deposit.  2nd of all, we cann't really assess a plan correctly until we get the full info and quotation.  As mentioned by this blog before, analyse the actual numbers, not the rate published by the promoter or sellers.

Calculate How Much is Worth buying a stock !

http://klsmihosting.com/pfp/
stockValue.malpf.com

I have just come up with a system that can calculate how much a stock is worth and therefore what is the suitable purchase price. It is based on the concept describe in this old post : when to buy at what price ?

In short, it is using past history record to project future price. Then depends on your target return rate, today's worth can be calculated.

EPS and PE are 2 critical data needed to use that system. In case you don't know where to get these data, refer to one of my old post here : where to get EPS, PE data

some of the old posts can also be used as examples or case studies : IOICorp, KNM

For those who are more curious to ask why more than just using the system, an old post explain slightly why use EPS and PE in stock valuation ?

I haven't published this system yet and only using it on my own now. But if you are interested, you can also use it from here ...

http://klsmihosting.com/pfp/

stockValue.malpf.com

I am thinking to publish it once an anonymous browser can sign up as an user in order to use it ....

Dollar Cost Averaging

I thought I already shared this before but apparently a lot of people thought they knew but yet they DO NOT apply this method correctly to earn profit ...  

Dollar Cost Averaging or Ringgit Kos Purata basically says you should invest the SAME Amount of money Periodically. 

Just to remind all that in fundamental investment, you Buy Low Sell High. 

So this is the Key Message :

when you don't know

when is the Lows and

when is the Highs

then you simply invest in

using Dollar Cost Averaging method

( wait for the next part )

Even if we don't know anything, we probably know an interesting market is either going up or down.  

Let's say we invest $1,000 monthly into a dropping market from $10 to $1 in 10 months, we will lost a total of $7,071.03

Do the same in a rising market from $1 to $10 earns $19,289.68

So if you 'think' the chance of market going up and down is 50-50 ( meaning you don't know the market), then you are deciding between losing $7,000 and earning $19,000 from your $10,000 capital.

For some of you who invested before, you would know normally there is not such thing as invest $1,000 monthly.  Most investment vehicles count in units.  Meaning you can buy 200 units every month by "Default" but not the fix amount of money.

Let's see what happened,

1) your capital sum is $11,000 not just $10,000

2) you either lost $9,000 or earn $9,000

so if you think the up and down chancees are 50-50 ie. you don't know the market, then the decision to invest into this particular finance vehicle is still 50-50

( continue from above statements )

is lower risk than simply doing anything

and better than doing Nothing

and better than investing in constant units

Lastly you can further test the scenarios ie.

1) market goes down and then up

2) market goes up and then down

and the numbers tell me that I either lose $2,000 or earns $12,000

Put in your own scenarios that you think is related to you, then sum up all the "potential" returns or lost.  In above spreadsheet, you can see that I have a chance of earning $22,000 even if I don't know the timing and simply invest in $1,000 monthly for 10 months. 

If you are VERY EXCITED about the large numbers then don't be, it is unlikely to have any investment tool that goes from $1 to $10 or $10 to $1 in 10 months.  In practice if you apply Dollar Cost Averaging correctly, you can expect 6-12% from Mutual Fund and 8-15% from Stock Market.

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 ...

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.