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Money, Money, Money!

Money, Money, Money!

How is it possible that I can be so confident (some say silly) to afford giving away interest rates of 4% per annum to my parents when I pool funds together for investing in stocks?  Are there some uber secret techniques that I am using?  Or am I just plain crazy?  If it is true, then show me how to make MONEY, MONEY, MONEY!

Most folks do not realize the true returns and sources of revenues that a good stock is able to generate for you that does not require you breaking a sweat!  Here is the breakdown:

1. Capital Returns – Also refers to gain in share price.  This annual return is anywhere between 2% to 12% of purchase price in the Singapore markets.  Normally, the average benchmark for capital returns should be the same as the annual economy growth of Singapore.

2. Dividends – The average blue chip dividend should beat the average 2% fixed deposit interest rates of banks.  Else, most folks would rather put their money in banks than invest in companies.  Hence the annual return is approximately 2% to 7% of purchase price in Singapore.

3. Rental revenues– Most people did not know that they can rent out the shares they own.  However, the problem with this scheme offered by the Central Depository of Singapore (CDP) is that you need to hold at least 50,000 shares to participate.  However, the returns are very decent should anyone wants to borrow your shares.  It is currently priced at 4% of the prevailing price of your stock. So assuming that you manage to rent out your shares for only 3 months in an entire year, you could get about about 1% income.

So in a nutshell, if you stock is performing badly due to the market circumstance (and no fault of its own), you should be able to get at least 4% returns annually.  In a best case scenario where you could also rent out your stocks, you are possibly looking at returns of up to 20% per annum!

So if you pay out 4% interests to your parents in an average performing investment market, and assuming you are making 10% returns, you can effectively increase your returns by almost 6% using other people’s money!  This gives you a net return of 16% (if you include your own portion).

In the event that things do turn for the worse, and you do not make capital returns, the dividends and rental incomes can cushion the fall.  Hence this mindset of investing can allow you to take risks with good potential returns, but with controlled downside.

Hence, it is beginning to sound very true that money makes even more money!  Hence I do recommend kick-starting your efforts to raise capital to begin investment!

For those who are born after the ABBA hit song – “Money, Money, Money”, here is the video clip to inspire you…less the gambling Monaco part.

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Consider Ethics

Consider Ethics

My dear friends. I understand that some of you might have reservations about my previous article’s suggestion to raise capital for investments from family and close friends. Some voiced concerns that it is bothering on being unethical as we are placing our loved ones’ hard earned cash at risk at 0% interest rates.  Logically, compared to taking a loan from anyone to buy luxury items like a car or to go on a holiday, borrowing to invest is extremely ethical.

 

If this still bothers you, and that you strongly believe in no free lunches, here are some suggestions to structure a loan program from family and close friends that I am personally using.

 

1. Matching Funds – To build trust, place a dollar for every dollar you loan into a fund pool. The fund should then be used only for investments and not allowed to be withdrawn unless mutually agreed with your debtors.

 

2. Attractive Interest Rates – give interest rates better than any fixed deposit but lower than prevailing loan rates. For me, I figured I was able to give 4% interest based on amount invested with me.

 

3. Capital Guarantee – I guarantee the capital invested along with the interest rates agreed. So in the event my investments fair poorly, I am still obligated for my pay outs. Hence the burden to perform is on me.

 

4. Annual Cash Out – all who invested has a chance to cash out once a year with no questions asked. But only once a year. On the flip side, they must stay with the fund for at least 1 year minimum.

 

 

Having the loan approved is only the beginning. The following instructions are harder to manage with these family linked debtors. However, if you can adhere to them, you will go a long way:

 

1. Invest wisely– this is your responsibility given the generosity of your loved ones. This also imply taking it like a man and do the right thing! No lazy investor ever got rich. Do your homework and have loads of patience.

 

2. Report performance yearly and no sooner – While this seems to run contrary to point 1, this is not so. All good intentions are often ill timed. So you owe it to them to focus on your investments and not be distracted by constant nagging from them. While they may operate on herd mentality, you need to be Joe cool under all circumstance to see opportunities others missed.

 

3. Pay out what you promised promptly – You do not know what lengths your family may have gone through just to raise that capital for you. It should be up to them to decide if they want to re-invest or enjoy the dividends. This is also a matter of trust. Deal fairly.

 

Thus with this method, I managed to build a fund for investing with relatively cheap cost of money with a very clear responsibility structure that builds mutual trust and understanding.

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Money No Enough

It was over a nice relaxing coffee session with a good friend of mine that we happen to chance on the topic about investments.  I was rather animated and very excited (probably compounded by the fact I just had a double shot of espresso) about the great variety of bargain stocks currently available.  She sighed and lamented the fact that she was saving for a house and thus had little spare cash to invest.

Raising the Titanic

Raising the Titanic

Somehow I get the feeling that raising capital is a serious barrier to getting into equity investments.  I calmly said it was never “Money No Enough”, but rather “Not Enough Effort”.  My friend then had a look on her face that implied that raising the Titanic was probably a much easier feat than raising capital!  In order to repay my friend for a cup of coffee she so generously paid for me, I decided to share how easy raising capital can be.

Here are some methods to consider:

  1. Personal Savings (0% interest rate) – Take 10% of your current savings to invest.  It should be used rather than allowing it to sit idle in the banks drawing a miserable 0.2% annual interest rate and suffering losses from inflation.  Seriously, most folks can hardly notice a difference with 10% less in their cash savings
  2. Father-Mother Loans (Usually 0% interest rate)– Seriously, most parents never ask their kids for interests on any loans (secured or otherwise).  The only thing is that you need to justify your investments and learn to be prudent.  These are afterall your loved ones hard earned cash.  Did I mention interest free?
  3. Insurance Policy Loans (4% to 8% interest rate)– It is a capital raising tool that is frequently forgotten by most insured people.  Did you know that you can borrow up to 90% of the cash value of your insurance policies?  Hence, if you had a policy that is worth $10k in cash value (or otherwise known as surrender value), you can borrow up to $90k at 4% to 8% interest rate per annum.  The good part is that you are still insured by your policy as you take this loan from your cash value.  Superb!
  4. Credit Card Loans  (Nett 4.5% interest rate) – There are cheap loans on credit cards available that allows borrowers to repay the loan in 24 months.  These loans can amount to 2 times your monthly drawn salary and usually come disguised as “Interest Free Loans”.  Just remember to read the font size 1 terms and conditions to calculate the nett interest rates.
  5. Housing Loans (3% to 6% interest rate) – This is a rather complex, but interesting capital raising tool for people who owns property.  The key is to take a housing loan that is bigger than what you need.  The excess funds will then be available for us pegged at the housing loan rates, which are one of the most attractive interest rates in town.  While this sounds attractive compared to Lines of Credit loans or the complicated Car Loans, the complexity and paperwork is quite prohibitive for me.  Only recommended for home owners with huge properties or numerous properties.

The above is listed in the order of preference with the following criterias:

  1. Low interest rates – the lower the better
  2. Low consequences in the case of default
  3. Long repayment period
  4. Ease of approval

While the list I mentioned is not exhaustive, it should get most people started.

My friend then proceeded to look amazed and asked why would she get herself in debt to invest?  I then explained the reality.  There is good debt and bad bebt.

BAD DEBT

Most folks can easily find money to buy cars that depreciate 30% in value the moment you drive out of the showroom, or fund holiday trips to exotic destinations only to be miserable for months to pay off the hotel bills.  So anything debt that does not generate a positive return of cash to you can be considered bad debt.

GOOD DEBT

Taking a small loan/debt as a form of raising capital for good investments can be considered good debt.  This is because a wise investment can bring additional cash into your pockets and increase your individual net worth.  Hence a prudent investment can generate yearly returns from 10% to 20% from buying these investments!  This is a trick used by the rich.  Borrowing money to make even more money…

The assumption here is that she has the capacity (like a day job) to pay off the loan via installments over a 6 to 24 months period.  Thus she would be taking a loan to invest.  While she is paying off the loan, the investment would immediately start making money for her.  So in a scenario where she makes 12% returns on the investment and she had to pay an average of 6% on interest due to the loan, she would have a nett a respectable income of 6% on her investment.  This is in addition to the fact that she now owns a financial vehicle that will generate more returns in the years to come without having to lift another tiny finger.

Even in the event of the possible loss of value of the initial capital invested in a well chosen stock, the dividend should buffer the fluctuations, and also since you own the stock after 6 to 24 months, you do have long term holding power to wait for the value to rise to acceptable range again.

Stay tuned on what can potentially be a wise and prudent investment…

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When an investor uses fancy technical charts to buy and sell financial instruments (or stocks) frequently within the same trading day, it is commonly understood as Day Trading. I would broaden that scope to include frequent trading within a short period of time.

 

Accident

I come from a school of thought that follows Warren Buffett – there’s no quick and easy money. Day trading is like a driver engaging in frequent over-taking attempts on a crowded highway at high speeds. Yes you can definitely reach your destination faster, provided nothing goes wrong. But something always go wrong. Eventually the odds will be stacked against you and it is likely fatal. I personally do not recommend day trading for beginners.

 

Dark Side

However, having said that, day trading can be very seductive, powerful, enticing and exhilarating to the unsuspecting investors. Lucky for us, Darth Vader was not a stock broker or the famous scene on Cloud City from Star Wars will play out very differently:

 

Vader: Luke! Join me and I will complete your training with my technical analysis charts! With our combined strength, we can take over the stock markets by reaping indecent profits from quick and frequent trades!

Luke: I’ll never join you!

Vader: If you only knew the power of the dark side of day trading!

Luke: Yoda told me you will ruin my financial returns and fortunes!

Vader: Luke! I am your broker!

Luke: No…no…it’s not true! That’s impossible. I know each time I trade, I would incur a fee of approximately 2% of the total transacted value. Trade 10 times in a month, and I would lose 20% in transaction fees! Look, it already cost me a hand!

Vader: Search your feeling and you know it’s true…Luke! We can beat the stock market and rule the financial world…It is your destiny. Join me and we will rule as broker and investor!

At this point, much to the credit of Luke, he resisted the temptation to join his broker and escaped.

 

While I understand that you can reach your financial goals through day trading, buying and selling often, but the risks of failing far outweighs the potential gains. So choose wisely and stay invested for a long period of time without fattening the wallets of your favourite trading house. Instead, make yourself rich the slow and steady way.

 

ps. For those not familiar to the scene from Star Wars above, see the video below…

 

 

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10% Please!In a not so known earlier adventures of Indiana Jones, he once sought and found the lost book of richest ancient empire of Babylon. The secret of its wealth resided in “The Book of Wealth“. After braving many dangers, booby traps, Nazis and all the special effects the movie director can throw at him, he finally found the much sought after treasure.

As he traveled in the safety of his truck sending him home, he opened and read the ancient book in 4 seconds. Subsequently, he tossed the book out of the truck thinking that even if the Nazis were to find this book, they would do the same.

As we now know, Indiana Jones did not take the advise in the book as he had to subsequently come out of retirement just to make more movies to earn more money to sustain his lavish lifestyle. Poor guy…

Was he really loosing his nuts to have tossed that valuable ancient book? We can decide for ourselves. Shortly after, this book was discovered and found to contain only 4 pages. It was publicly examined, but “experts” found so much common sense in them (though uncommonly applied) that it was not deemed worthy of a place in any museum!

Here are the FULL contents of the 4 pages in big bold letters:

  1. Earn More
  2. Spend Less
  3. Grow Savings
  4. Protect Savings

Would you have done the same as Indiana Jones and suffer the same fate?

Let us examine each point accordingly:

  1. Earn More – Every rich person has good earning capacity. They earn the money and riches they have. So if you are lazy, and not even bothering to earn your riches, you can never be rich or wealthy. You would be very lucky not to be poor at all! What about those who inherited their fortunes? Well, unless they learn their earning skills from their parents of benefactors fast, they too will loose their wealth just as fast!
  2.  

  3. Spend Less – Accumulation of wealth simply means earning more than you spend. Notice that it refers to everyone, and not just to the rich. So that means that even when you are earning a modest salary, you too can begin accumulating wealth just be spending less than you earn! The general rule of thumb is to have the discipline to save 10% of your earnings every time. nothing more, nothing less. This applies even in debt, which I will talk about in another time.
  4.  

  5. Grow Savings – When you have saved enough money, it would mean that you should use this sum of money to grow it rather than letting it stay dormant. So use money to earn more money! So the rich do get richer!
  6.  

  7. Protect Savings – Set aside 6 months of your salary savings in cash. This is an emergency fund that should always be protected and never touched. All excess cash should be invested wisely to bring about accelerated returns. The key word is “wisely” so as to never lose money in all investments. Hence we need to always be cautious and careful. More of that topic later.
  8.  

There is true wisdom in uncommonly applied common sense…

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SnowballIt may surprise many, but even humongous things probably began as a small and insignificant item.  Imagine being smashed on the face by a snowball thrown by a snow monkey.  Not much damage given the size of the snowball.  However, do not attempt to annoy the same monkey when it is armed with the same snowball at the top of a snow covered mountain.   

 

AvalancheA small snowball, given sufficient time and momentum, is able to gather in force and size that it becomes a monstrous force of nature.  This frightening force of nature, also known as an avalanche, can be so immense that it is capable of destroying an entire town!  All the mayhem and destruction started life as an insignificant snowball!  So what does this have to do with investment, savings or even wealth? 

 

Most folks grumble and belittle the small amount of savings that they are able to put aside each month.  But little do they realise, that this “insignificant” savings can be accumulated into a significant sum money.  Coupled with compounded interests across a good period of time, with wise re-investments of dividends and interests, this gradually accumulates momentum into a rather significant wealth.

 

For example, at 12% compounded annual interest rates, doubles every 6 years of investment.  So with only just $10,000 savings, it becomes approximately $320,000 in just 30 years.  Did I mention only basic math and no physical labor required! 

 

No wonder the rich gets richer!  What are you waiting for?  Start your very own saving avalanche now!

ps.  No snow monkey was harmed during the writing of this article.

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Sounds like I have just gone bonkers!  However, the concept is very simple.  Start with an end goal in mind.  Can you know how to begin if you don’t where you are going?  You might end up like a dog chasing its own tail.  Going around in circles.  Lots of sweat and work involved, but leading to precisely NOWHERE.

So when you retire at 60, do you want to:

  1. Be bankrupt and full of debt – leaving your next few generations of descendants to work as slaves to pay your debt.
  2. Be worth millions in value – asset rich but cash poor. You may have to start eating your valuable house at some point when you grow hungry as you have no money left to buy food.
  3. Be worth millions in cash and have a valuable home – live off your money in style! You will definitely be the favourite dad/mom where all your kids are dying to win your favor for obvious reasons.

Assuming your choice is option 3, then calculate how much income you need at 60 years to live comfortably in a preferred lifestyle. For example:

  1. I have 30 years to retirement
  2. Assuming that my current lifestyle costs me S$10,000 per month to be comfortable
  3. We need to factor inflation at say 3% per year for the next 30 years
  4. Using an calculator, S$10k multiplied by 103% by the power of 30 years, we need approximately S$25,000 per month (or S$300,000 per year) to have that lifestyle 30 years later

So if an investment pays 10% annual interests or dividend rates, we need to have at least S$3 million in investments just to have the lifestyle we want.  So how far are you from that retirement dream?

The thing is, most folks leave these important life calculations and decisions to either the government, or some proclaimed investment banker/adviser. Take charge of your life NOW!

Later in my articles, I will explore how to live comfortably of your annual interests or dividends and still die a millionaire (and not exhausting your savings)!

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