How to grow our money

Recently one of my friends asked me about my opinion on endowment fund and unit trust as she wanted to invest some of her spare cash. I fully understand her concern. I recall myself doing all sorts of things to grow my money too. Cash in bank generates paltry, if not, negligible return. Some expect the return can be big enough to supplement their main income, or perhaps contribute to their retirement savings. While some others who are savvy enough are able to leverage the concept of passive income & use it to fully pay their annual expenditures – in other words: being financially independent. Ultimately, the main goal here is how to make our money work, as hard, or even better, work harder than us.

At this point, I think it’s crucial to introduce several key concepts:

  1. Time value of money & compound interest – Time is money. Albert Einstein once said that compound interest is the 8th wonder of the world.

    “He who understands it, earns it … he who doesn’t … pays it.”

    In short, interest as a double-edged sword. Most people on the streets like to borrow money from banks to purchase consumption goods, such as the latest IT gadgets or HDTV set. Yet, credit card companies encourage us only to pay the minimum sum monthly instead of fully pay our bill. There’re too many stories on people trapped in debt unable to even settle their interest charges. On the other hands, savvy people would know that every $1 invested with 10% annual return compounded would double our investment in 7.2 years. This leads us to the next concept:

  2. Rule of 72 – the rule simply says that in order to double your money, it would take (72/x) years, where x is the compounded annual rate of return (%). If you manage to find an investment that gives you 6% annual return, it would take 12 years to double your money. Ultimate question is how much is your expected return? Also the key here is where to find such investment vehicles. Most importantly, it has to be a safe vehicle. This leads up to yet the next concept:
  3. Risk and assets volatility – risk is generally proportional to the reward. The higher the risk we’re willing to take, the higher the rewards. That’s why fixed deposit generates higher return than regular savings account. And that’s why unit trust is expected to generate higher return than fixed deposit.
  4. Different types of asset class & their corresponding fees – I believe there is no such thing as free lunch in this world., management fees & transaction costs are the expenses that we need to consider when choosing our investment vehicle. Some unit trusts charges as high as 2% for initial fee and between 0.5% – 2% for annual fees. In addition, usually there will be some costs incurred as well for every buying or selling transaction we make. We just need to ensure that our annual return does not get eaten out by these fees.
  5. Differentiate between investment and insurance – There are some products in the market that claim to give us both insurance protection and good investment return. However, most of the time, the reality doesn’t paint the same picture. We have to know what we want to achieve from the beginning.

At the end of the day, we should not delegate our money management to someone else. Fail to adhere to this and we will learn some expensive lessons guaranteed. It is much better that we learn slowly by accumulating sufficient knowledge & then dipping our feet into the market rather than being too rashly aggressive chasing for the highest return available. There is no one else in the world who cares about our money more than we ourselves.




How to Identify Fraudulent Companies

20170711 thief

The last thing investors wants to see is losing their hard-earned money in the stock market. But wait, there’s an even worse situation. That’s when they lose their hard-earned money invested in fraudulent companies with no way to recoup their investments. We have witnessed many examples in US stock markets, who doesn’t remember about the Enron & Worldcom scandal?

Closer to the region, in Singapore, there are many vivid cases on how failed companies ruined people’s life, mostly their minority shareholders. The so-called retail investors are always at the receiving end of the bad news when it imploded. Sometimes without any avenues to reclaim their original investment. Who are these fraudulent companies? For the uninitiated, more than 90% of frauds are caused by S-Chips. Hence, the ultimate question for investors is: “How to detect for any red flags?” In other words, how to leave the “parties” before the music stops abruptly?

Firstly, let’s do a quick line-up on what are the list of proven fraudulent companies in the context of SGX (Singapore stock exchange) universe. They are as follows:

20170711 Schips

Secondly, how can an investor detect for any red flags in any of these companies mentioned above? The following are the top 13 identified – in no sequential order:

  1. Significant levels of cash & cash equivalents, yet unwilling to pay dividends
  2. Dividends not declared despite net profit position
  3. Major shareholder selling off shares below IPO price
  4. Right issue at a price way below cash value of the company
  5. Right issue despite significant huge cash balance in the balance sheet
  6. Draw down of bank credit lines even when there is a positive cash balance
  7. Net non-cash settlement of trade debts and payable
  8. Trade receivables long outstanding (not converted to cash)
  9. Non-proportional increase of trade receivables compared to increase in sales
  10. Significant capital expenditure with no apparent upgrade in P&E or increase in production capacity
  11. Profits generated not translating to “net cash from operations”
  12. Sudden resignation of independent auditor in the absence of any disagreements with management
  13. Sudden resignation of CFO

Finally, as an investor, how can we avoid such pitiful situations in the first place? There are few critical steps here:

  1. Look at the company history… generally companies with longer history (>20 years) are less-susceptible to such fraud
  2. Look at the independent auditor’s report at the Annual Report… whether auditor issues any qualified opinion. We need to dig deeper in case the auditor issues qualified opinion.
  3. Look at the company’s customers profile… are there any big company names? Big companies generally already have a due-diligence process (i.e. KYS – Know Your Supplier) in place for their suppliers.
  4. Attend its AGM (Annual General Makan), I mean Annual General Meeting… whether the CEO and board of directors are willing to answer shareholders’ questions? Are they friendly or hostile? Or, they don’t even bother to attend the AGM?

These are the four easy steps that a beginner investor can use to avoid putting themselves into such mess. In the end, it’s our hard-earned money. If not we ourselves, who else will look after?


Chris’ approach in managing personal finance

20170623 budget

Back in 2007 when I first started tracking my personal finance, I created a simple excel file called “Monthly Personal Budget.” It was meant for me to track my monthly spending in more systematic way. I did not realize it back then. But later on I discovered that the method I used was actually mimicking how corporations, big and small, manage their financial health too.

In the corporate world, every division lives by its own P&L (Profit & Loss). Every team is given its own budget to manage every year. How much to spend, how much sales target they need to achieve. Performance is measured based on what they achieve (actual) versus the initial target set at the beginning of the year. To summarize the ultimate benefit of doing budgeting: it helps you plan & prioritize your spending. After all, you cannot control what you do not know.

Looking back, these are the steps I took:

  1. Start from something, then improve it – my starting point was one simple table that shows how much I earn monthly versus how much money spent. Subsequently, I started to categorize the type of earnings: whether it comes from salary, or from other sources (such as interest, dividend, so on). On the expenses side, I tried to split the expenses into four categories: Fixed, Other Committed, and Discretionary. Recently I’ve added one more category: Child Related & Education. “Fixed” are basically all expenses that we can’t live without (housing, food, tax). While “Other Committed” refers to those that we always spend monthly but we have certain degree of control to reduce it (such as groceries, electricity bill, clothes, hand phone bills, medical bills, and transportation cost). “Discretionary” refers to expenses that we can live without. They are things that make us feel good, such as: eating out, cinema, books/magazine subscription, vacation, personal care.
  2. Be disciplined – This rigorous method might not work for other people. But I receive some degree of comfort by knowing that I do not overspend each month. By tracking how much $ I spent on each purchases, I’ll have some idea why on certain month I tend to splurge and on which items I splurge. After doing this for a year, I knew that I used to spend a lot on eating out in fancy restaurants especially during birthday months.
  3. Keep exploring other areas – Monthly budgeting is the foundation. Then I move on to other areas: preparing my personal balance sheet and calculating my net worth (by listing all assets & liabilities), creating the investment portfolio, tracking their performance, calculating the tax payable, planning for house purchase, etc.

In short, we all know that someone is sitting in the shade today because someone planted a tree a long time ago. It’s never too late to start. Start tracking, or start saving. No matter how small it is our effort, with time and effect of compound interest, it will grow bigger and bigger.

20170623 oak tree