2-3% Principal Guaranteed Investment

I know many of us have been trying to find places where we can put our money in-order to get better returns. At the same time, we don't want to take on too much risk and still get to grow our money. Good news! Just a few days ago, it was announced by the government and MAS that they are going to introduce something called the Singapore Savings Bonds programme to provide individual investors with a long-term savings option that offers safe returns. You might ask, how safe is safe? Are the returns high?


Details of the Singapore Savings Bonds Revealed

Bonds are normally considered safe investments especially when we talk about Singapore government bonds. They are almost risk free if you keep the bond all the way to maturity. You will get back the face value of the bond during maturity. In a way, as long as government bonds do not default (where the government goes bankrupt), we'll always somehow get our principle investment back.

However, the problem with normal government bonds is that it is still subjected to day to day price fluctuations. Yes, bond price can go up and down and if we sell it early, we could make a loss.

Now, this new savings bond is different from the normal government bonds which we often see. In my opinion, it is the safest investment which we can get while still earning decent returns. Here's why:

1. Principal Guaranteed

For this Singapore Savings Bonds, it is principle guaranteed. We can redeem the bond any time and we'll always get our investment amount back in full.

2. Monthly Issuance and flexible redemption

The bonds are issued monthly so we can buy the bonds monthly or redeem it monthly. It is so flexible that in case you really need the money, you can redeem it and still get back your capital without suffering any capital loss or penalty.

Best of all, any interest you get will be yours to keep.

3. Small investment amount

The minimum investment amount is $500 and thereafter in multiples of $500. There will be a maximum investment limit which will be announced later.

4. Step up Interest and term of 10 years

The interest rates paid are linked to the long term Singapore Government Securities (SGS) rates. Interest will be lower for the first year and will subsequently be higher for the next few years until year 10.

If we base on the prevailing SGS bond yield, on the first year, we should expect to get around 0.9%, on the second year around 1.5% and on the third year 2.4% and so forth. The actual rates will be given by MAS at a later date when the bonds are issued.

On average, you'll get around 2-3% (base on the current rate) if you hold the bond for 10 years. Interest rates can be lower or higher.


When will it be launched and How do I invest in it?

The Singapore Savings Bonds will likely be launched in the second half of 2015. MAS will provide more information on how to apply for the bonds at a later date.

I suppose applying for the bonds won't be that difficult. Probably we can do it through most of the major banks in Singapore or even apply it online.

In any case, this would be a good investment for those who want to get better returns for their money. It is principle guaranteed so there is practically no risks involved. I would definitely consider putting any of my spare cash into these bonds.

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Related Posts:
1. 4 things you should know before investing into bonds

The End of 2014 - POSB Invest Saver, POEMS Share Builders Plan and OCBC Blue Chip Invest Plan

The following is a guest post submitted by Young. In the post, he writes on the subject of passive investing in Index ETF. Read it below:

It has been a while since I submitted a blogpost. 2014 has been a pretty decent year so far even though there were some rough bumps along the way. 

A little more on POSB Invest Saver, POEMS Share Builders Plan and OCBC Blue Chip Invest Plan,

The POSB Invest Saver, POEMS Share Builders Plan and OCBC BCIP are in my opinion, designed to cater to new and younger investors as they can invest from as low as $100 a month.

You might be wondering, what can one buy with $100 a month? As described by the relative offers, it is none other than Index ETF’s. For POSB, they offer just 2; ABF Singapore Bond Index Fund and the Nikko AM STI ETF. As for OCBC, they offer similar to POSB, but includes 18 other individual counters like ComfortDelGro, Olam International and Wilmar International. POEMS also gives one the option of investing in 19 other individual counters such as CapitaCommercial Trust, SIA, ST Engineering and the like.

However, one thing that may be of interest is that POEMS offers the option to reinvest the dividends you earn back into your Regular Savings Plan. Neither POSB nor OCBC has such an option for now. 

POSB charges a 1% fee on each transaction which is invested into Nikko AM Singapore STI ETF and 0.5% for the ABF Singapore Bond Index Fund. OCBC however, charges 0.3% of each transaction which invested but has a minimum fee of $5 per counter. Unlike POSB, OCBC also charges 0.3% or $5 whichever is higher when you liquidate or sell your positions.

Lastly for POEMS, it depends on the investment amount and how many counters you’re investing. If the total invested amount is less than SGD1000, a flat rate of $6 is charged for 1 or 2 counters. But for 3 or more counters, the  fee is a flat rate of $10. If your investment amount is more than $1000, the charge is 0.2% or $10, whichever is higher. 

I hope I managed to present the above information in a clear and concise manner. Hopefully this will be easier for the younger readers to comprehend and perhaps help them get started! 

A big event that is coming is none other than the Chinese New Year! Be sure to have fun visiting friends and relatives but at the same time do note to not gamble too much! It is after all your hard earned money!

One thing I learnt in the month of December is that one should always be prepared. I did not prepare my funds and hence missed the boat for 2 very popular blue chips namely Keppel Corp and Sembcorp Marine. I feel that one should always be prepared no matter what as no one can predict what will happen in the coming weeks or even tomorrow. To the younger readers who are interested in investing, or would like to learn more about it, do check out the OCBC Blue Chip Invest Plan or the POSB Invest Saver.

Lastly, with the recently short terms rallies in some of the local counters in O&G industries, I’d like to urge all to exercise caution! A hearty congratulations to all who took a nice profit this week! May 2015 be better than ever!

Happy New Year! 


My Thoughts:

Investing in Index fund is a good way to grow your money over the long term. I wrote on index fund investing previously in this article: Low Cost index fund investing (Passive Investing)

Index fund investing is also known as passive investing as you can just sign up for the plan and automate it to invest a certain amount on a monthly basis. Over the years, the price of the fund that you invest in will average out because you invest in it no matter when the price is up or down. For example, if you start investing now and the fund price is $3 but when the fund price drops to $2 and you're still investing in it monthly, the price averages out to less than $3. Over the long term when the fund price rises back up to $3 or even higher, you would have made a profit. The key is investing in it for the long term to see the effects of compounded growth.

For the case of Keppel Corp and Sembcorp Marine going down, it is actually an opportunity for those investors who have the capital on standby to deploy. Readers who've read my previous post on my Jakarta trip will know that I had personally invested a small amount in Sembcorp Marine when the price went below $3. This can be an opportunity fund that you set aside to take advantage of this kind of opportunities. Knowing how to allocate our investment capital efficiently can be the main factor to success and failure in investing. For myself, I would never invest all my money at once unless during extreme market pessimism. As what Warren Buffett says: "Be fearful when others are greedy and be greedy when others are fearful".

Have a good weekend ahead in the first week of 2015!

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How To Create Your Own Financial Plan Before You Start Investing?

You can lose money from investing. This is a fact which many seasoned investors may have forgotten while other newbie investors are afraid of. New investors are afraid of venturing into the stock market due to the many horror stories they have heard from other people. Others have burnt their fingers and it affected their confidence so much that they would not dare to invest again.

Why is it that some investors can make money while others lose money?

The differentiating factor of a good investor vs a poor investor lies in a financial plan. A good investor knows what he is doing and is aware of the risks involved. A poor investor mostly follow tips and is not aware of what is actually happening apart from the stock prices going up and down.

A good investor can buy a stock and see a decline of 30% but still make money in his overall portfolio. A poor investor who follows exactly what the good investor buys can still lose money even though the good investor makes tons of money later. Are you the good investor or the poor investor?


Before you start investing

The financial plan should come in way before you start investing. This is not about planning your life to the extent that it becomes boring and mundane but is more about making the financial plan as automatic as possible so you could live your life normally without your finances being in a mess. You don't have to track your expenses everyday for those who don't like it. The financial plan can be reviewed as little as once a year or 2 times a year.

Credit: commons.wikimedia.org

Let's move on to the four steps of a financial plan:

1. Know how much money you want by what age.

To be rich, you got to want to be rich. I've listened to a lot of motivational speakers talk about visualising your dream and so on and I have to tell you this concept really works. What do you see of yourself in 5, 10, 15 or even 30 years from now? Of course you don't have to just focus on money alone as life is not just about money. It works the same for your relationships. Do you visualise yourself to have a happy family? There are so many other things in life. Money is a part of it. Visualise yourself having 100K before the age of 30? Set it as a target and it will happen.

2. Allocate your income into different parts of your life

This is the main part of the financial plan. It may seem like a daunting task in the beginning but trust me, it gets easier over time once everything is in place. The first step is to work backwards and know much much you need to save a month to achieve your goals you set in point 1. If you want to achieve 100k in 5 years time, you need to save 20k a year which is $1666.66 a month. This gives you an idea of how you are going to achieve that goal.

Now, many of you may start to think saving 20k a year is impossible. This impossibility is actually the first step to financial success. Once you have this mindset, turn it around and ask yourself how you can achieve that 20k a year? You'll be surprised that with just a simple change of mindset, you'll start to have ideas coming in to help you achieve that goal. That is how our brain works.

Balance your life between spending and saving. Allocate some money for networking, improving yourself through books, courses, travelling, investing etc. You may have read about an article where Li Ka Shing, a successful entrepreneur in Hong Kong, talks about allocating your money into 5 separate set of funds.

First for living expenses, second for making friends, third for learning, fourth for overseas holiday and fifth for investment. This may be something to consider. Allocating your income into different funds don't have to be done manually every month. I've written an article previously to explain how you can do it automatically here.

3. Protect yourself

Protection comes before investing. It is the base of a financial plan. You've probably heard about the need for an emergency fund. This is the money you set aside for emergency use such as if you lose your job or for sudden medical expenses etc. Some people say 6 months of your income is enough, Other say you need at least 1 year. No right or wrong here. You have to decide.

The next part is insurance. Cover yourself in the event of death, critical illness and also be covered for hospitalisation expenses as this can come up to quite a big sum of money. Some may add in disability income insurance which provides income for you in the event you become disabled and cannot continue working. Some may also add in personal accident insurance.

Insurance is important but don't allocate too much of your money for insurance that you have problems paying the premiums later on. For me personally, separating insurance from investing or savings and it'll be fine.

4. Practice asset allocation in your investments

Now, back to the story of the good investor and the poor investor. A poor investor loses money from investing because he doesn't understand how to create a financial plan. He sees other people make money from the stock market and jumps right into it. A good investor will buy stock A using 5% of his money while a poor investor may use 50% of his money to buy the same stock A.

When stock A drops, the good investor may continue buying stock A at a lower price using an additional 5% of his money. A poor investor may also continue to buy stock A using the rest of the 50% of his money at the same time. When stock A goes bankrupt, the poor investor loses all his money while the good investor loses only 10% of his money. The good investor still makes money from the rest of his other investments which may even cover the 10% loss. In the end, the good investor still makes money from his investments.

One of the distinct factors between success and failure lies in the understanding of risk in investments. We may say that the poor investor above will make a lot of money if stock A really goes up since he put 100% of his money in the investment. But, we have to always remember that the risk of losing all is always there. The poor investor may get lucky one time, two times or even 3 times but just one mistake and he could go back to ground zero. The poor doesn't understand risk and thus do not practice risk management.

Some investors will go further in asset allocation and not just invest their money into stocks. They could invest in different asset classes such as commodities, index fund ETFs, bonds, currency, real estate etc. Also, having an opportunity fund to take advantage of lower prices and invest during crisis is also a smart move. Learn how to allocate your assets like how the good investor always does.


Creating your own financial plan will differentiate you from majority of people out there. Investing should never be the first priority in your life. Get your life in order by using a financial plan, before you start investing.

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Related Posts:
1. Financial planning with your needs and wants
2. Buying the company on the streets (Part 2) - When to buy?
3. Why extreme savings is more powerful than investing

Why extreme savings is more powerful than investing

Very often, I receive a lot of emails from readers on how they should start investing. Somewhere and somehow, I suppose many of them heard that investing is important or investing can actually be an answer to a better life. This kind of question on how should I start investing was a question I asked myself a few years back. It was because I asked myself this question that gave me a clearer understanding of what investing is really about.

The myth of investment returns

Investing early is important as your money gets compounded over time. However, investing too early without sufficient capital will only yield a little return. Let's say you have a $5000 savings that you want to invest. If you're lucky enough to get a 10% return every year for the next 5 years, your capital will only grow to $8052.55. This is not going to make you rich in any way even if you had invested it for 20 years. Mind you we're talking about 10% return on investment here. On the other hand if you focused on saving money say $1000 per month, your money grows at an astonishing $12,000 per year. Invest this savings at a 8% return and you would have accumulated $100,000 in just 6 years. If you started saving this $1000 per month at the age of 24 and invest consistently, you would be worth a million dollars by the time you're 50.

Let's review the numbers again. $1000 saved every month and invested at a 8% return will make you a millionaire by age 50 if you start at age 24. At 8% return, it takes only 9 years for your money to double (72÷8). This is the rule of 72.

There will be people who will tell you that you can turn $1000 into $10000 in just a few weeks or even days trading Forex, Options, Futures etc. To me, that's just not realistic at all. From $1000 to $10000 is a crazy 1000% return. If you do not have enough money, quit thinking of using that little money you have and think that you can make a lot of money with it. It's just too much risk and you can lose everything and even more if you're trading using those leveraged products.

Let's face it. Investment returns depends on the market. You cannot and don't have the power to demand any returns from the market. If you're lucky, you get more than 10%. Not so lucky you get 5%. If you're unlucky, you get less than 2% or worse still you lose your hard earned money. Throughout history, the average returns for the average person is about 5-8%. Dreaming of a 20% return every year for the next 20 years is almost impossible. The reality is, investment returns are not as high as we thought it would be. On the other hand, savings is completely predictable and can be controlled by us. You decide where you spend that money on, you can try to earn more money. There's a certain level of control there.


Savings before investment

Your savings play a vital role in your accumulation of wealth. Retiring a millionaire is not a dream if we plan it correctly. Save $1000 per month at 8% return will give you 1 million dollars in 27 years. Save only $200 and you would require a 18% return to achieve the same 1 million dollars. It is very hard to achieve 18% return on investment for a long period of time.

If you manage to bump up your savings to $2000 per month and invest it at the same 8% return, then you would be able to achieve a million dollars in 20 years. This means if you start at the age of 25, you would become a millionaire by the age of 45. Savings is important. Investing is also important. Savings is the basic foundation in financial planning. Get the foundation right and your financial future is on the right track. Start saving first while you look at ways to increaseyour income. Focusing on only increasing your income is just one sided. Go for both increasing your income and start a savings plan at the same time.


P.S: Found out about a site ShopBack that gives you coupon codes and offers, on top of cashback. This allows you to save more when you shop. You can find merchants like Taobao, Aliexpress, Lazada and more on ShopBack.  You can even find groceries deals and offers too, with merchants like RedMart. (Updated in Jan 2016)


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Related Posts:
1. Save 75% of your income to retire in 7 years
2. Why it is hard for most Singaporeans to retire early?

SGX's very own stock screener - StockFacts

Are you confused on what are the stocks you should invest in? How to find the right ones among the hundreds of companies listed on the stocks exchange? I was playing around with SGX's very own stocks screener called StockFacts and its quite interesting. The screener provides quite a comprehensive screening criteria such as PE ratio, PB ratio, dividend yield, debt to equity and even 5 year revenue growth rate.

I used the below 5 criteria to screen for some stocks listed in Singapore and it returned 29 results. Quite a good selection of stocks to research on it further.

The screener definitely helps to screen out specific stocks which meets our investment criteria. Of course as investors, we don't just buy a stock base on valuations or even just base on dividends. We need to research more on what is the company about? Are its earnings sustainable? Basically, we need to know the business and how it operates. Nevertheless, this stock screener is good to use for a start.

Here's the link to it: http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/stockfacts

P.S: Here's another good post on the stock screener by a fellow blogger, GV. You can read it here: 3 Easy Steps to Find 83 Value Stocks using SGX Screener in 20 Mins • Giraffe Value Investing

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4 keys to better stocks investing

Many of us want to invest for many different reasons. Some want to make money through buying stocks, others think that the bank's interest rates are too low so they seek to find ways to earn more interest. In other words, the trigger point for most people to invest is making more money. Those who're not interested in making money may never even think of investing in the first place. There are a few exceptional cases where investing is taught at home. Warren Buffett is one of them where his father was a stock broker so Warren Buffett was exposed to the world of stock market at a very young age. He went on to have many mentors such as Benjamin Graham and Philip Arthur Fisher who taught him the essence of value investing.

But for most of us, we're not so fortunate to have people to guide us on investment. Many of us put our hard earn money into stocks without much knowledge. In an effort to make more money, we instead lose money then start learning through the hard way. It seems like a natural process which every investor has to go through before succeeding.

However, if you're a new investor and want to start investing, today i'll share 4 keys you need to know before you start investing. Hopefully this will reduce your risk and make your investment journey a smoother one.


1) Financial ratios do not make sense if you don't understand it

Many new investors try to find the holy grail in investing. They learn a few financial ratios such as PE and PB ratio then try to find out at what levels to buy a stock. PE ratio below 10 means buy? PB ratio below 1 means buy? All these do not make sense unless you understand the concept behind these ratios. Try to understand the ratios instead of relying on a fix number to invest.

2) Understanding how a business operate is important

Investing is not about gambling or buying blindly. You need to know how a business generate its profit. If you can't figure out this source, don't invest in that company. If a business can't generate profits, then putting your money into that company is highly risky. 

3) Know the financial health of a company

Is the company spending too much or borrowing too much money? We know that as individuals, if we spend more than we earn, we'll run out of money one day. If we take debts more than we can handle, we may go bankrupt one day. It is the same with a business. A company which is spending more than it earns or borrows too much money is the one you should avoid investing in.

4) Learn the language of business

The language of business is accounting. I cannot stress enough the importance of accounting knowledge in investing. Do you know how to read the 3 financial statements namely the income statement, balance sheet and cash flow statement? Do you know how to refer to the notes to the financial statement to look deeper into each individual entries?

For example, the revenue in the income statement will show you how much money the company made selling its goods and services. However, to know where the revenue comes from, we can refer to the notes to see the breakdown of revenue from different sources.

Let's see an example from Breadtalk's financial statement. In 2013, Breadtalk's revenue was $536,530,000 as seen in the income statement below.

Adapted from Breadtalk 2013 Annual report

Click to enlarge

To see the breakdown of the revenue, we can look at the notes to the financial statement at the back of the financial report. It is indicated as notes 3 so this gives us the exact page to go to. Below shows how the notes look like.

Adapted from Breadtalk 2013 Annual report

Click to enlarge

From the notes to the financial statement under 3, we can see the revenue breakdown. The entries recorded are bakery sales which supposedly is from its Breadtalk bakery, restaurant sales from its Din Tai Fung, Ramen Play and other restaurants which it might have, sales to franchise, franchise income and lastly its food court income from its food republic. Now we know where most of its income comes from which is from its bakery sales. It's food court income comes in second. 

There are many more interesting things we can find from a business if we understand the language of business which is accounting. The good news is accounting can be self learnt and as investors, we don't have to know everything. We just have to know a few key stuffs. Hopefully, the 4 keys above will guide you to the right track in your investments. Understanding how to invest makes it more interesting than just investing without knowledge. Remember, as a shareholder, you own part of the company. An owner will want to know what is happening in his or her company.

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Related Posts:
1. Understanding financial statements (Part 1) - The income statement
2. How to pick stocks (Part 2) - The profitability of a business

How would an investor and a businessman fight a war?

Investing is business and business is investing. They are synonymous to one another. They are related in terms of the characteristics they have. Let me explain further.


From employee to employer

Many people would say that doing business is the way to get rich since being an employee and a slave to your company will only make the company richer but not yourself. I would say there is some truths in this but of course we know only a few businesses succeed in the end. You either make it or lose it. Older people would say doing business is risky. Young people who have got nothing much to lose are willing to take that risk. If they succeed, the rewards are extremely great.

From employee to shareholder

Some other people would say invest in the stock market and you can get rich. Being a shareholder in a company makes you effectively higher than the managers, the vice president, the managing director and even the CEO in the company. No? Try going to a company's AGM and ask the CEO questions. In fact, the company's top management knows they are working for the shareholders.

Investing in the stock market is risky too. You may have heard your grandparents or your parents caution you to avoid the stock market. They are right in a way. Invest in the right company and you will make money but invest in the wrong one and you can potentially lose all your money. So which is more risky? Doing business or investing in the stock market?


Putting business and investing together

Many people separate business and investing which in my opinion is a wrong way to look at it. How do people separate it?

Firstly, some businessman say investing is risky and they are afraid to invest now as the market looks like its going to crash. But at the same time, they are still doing their business. Won't their business be affected when the market crashes? Yes it would affect but they have backup plans and they are prepared for it.

Secondly, some investors say doing business is risky and we shouldn't start a business now because the economy doesn't look too good. But at the same time, they are still invested in the stock market. Won't their investments be affected when the economy declines? Again, the answer is yes but they too have backup plans and they are prepared for it.


The mystery of the backup plan

To eliminate risk, we need to have proper risk management. The backup plans are part of the risk management procedures which successful business owner and investors have. The 2 different backup plans are actually similar in concept.

Business people still do business even though they may expect the economy to deteriorate next year. They just reduce their exposure of risk by managing their expenses. As profits can hurt badly during an economic crisis, businessman can hold more cash and moderate expansion plans in anticipation of the crisis. When crisis hits, they will be able to tide it out and even find opportunities for expansion at much cheaper prices.

Similarly, investors still invest even though they may expect the economy or market to deteriorate next year. Investors reduce their risk by moderating their purchase of stocks and hold more cash in anticipation of the crisis. When crisis hits, they will still be able to live normally and also find opportunities to buy good companies at much cheaper prices.

Timing the market

It is impossible to time the market. No one can be certain of what will happen in the future. Even the best economist or the best financial/business analyst can have their predictions wrong. If we are always waiting for the right time to start a business or start investing, most likely we'll never even start at all. In 10 years time, you'll still be waiting.

The correct way is to start now but always have a backup plan in case a crisis hits. Don't throw all your money in to start a business or invest in stocks. Always have a stash of cash ready to deploy when crisis comes. Even in wars, generals do not send all their soldiers all out at once. If all get killed, they have nothing left. They send out troops assigned to do different task in different batches. This way, their chances of winning will be much higher. This is the art of war.

The art of doing business and investing lies in asset allocation. Your cash is like the soldiers which you can deploy. Break them down into different troops and deploy in batches. No matter what, always have one reserve troop on standby. This will only be used when the enemy is at its weakest point and the battle is a sure win. This is like a war chest which we keep to deploy when the market crashes and there are lots of opportunities to buy good companies at extremely cheap prices.

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Related Posts:
1. The benefits of investing when you're young
2. Buying the company on the streets (Part 1) - Discovery stage

Beware of potential scams when investing. Trouble is a friend or foe?

There has been a small discussion on potential scams recently. I've written first on Gold scams in the past here. There was even a family that lost close to a Million in the Gold scam.

So you may ask how do we know if it's a potential scam?

One thing to take note is these companies may not look like scams at first. They actually promise the payout to investors and many got their promised interest. It's only after awhile that the whole thing collapse. Maybe that's their way of attracting more potential victims before disappearing into thin air.

Most of these potential scams offer high return rates on investment. They can be in the range of 12% to 24% return in the period of 1-2 years. I can only say if something is too good to be true, then most likely it is. When faced with this, always question where they invest the money and how are they able to generate the returns? Is the business sustainable?

Take the example of past scams like the popular sunshine empire. It promised high rates of return and you could get back all your investment capital within 10 months. That is a 100% return in 10 month. Sound too good to be true?

One thing you can do is to check if the company is under the MAS alert list here: http://www.mas.gov.sg/IAL.aspx?sc_p=A

According to MAS:
"The Investor Alert List provides a listing of unregulated persons who, based on information received by MAS, may have been wrongly perceived as being licensed or authorised by MAS."

What i can say is do not be greedy in investing. If there are doubts, question them and if you do not get satisfactory answers, its safer to stay out. There has been many overseas property investments recently which promised returns of 12% a year or even 24%. Some of these companies are on the MAS alert list too. I will not state them out but if you do encounter them, take extra caution.

A nice song to end this post. Coincidently i was listening to this song and it sort of relates to this post. Enjoy!

Trouble is a friend or foe? Don't let trouble be your friend.

)

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The benefits of investing when you're young

During secondary school days, I always remember we have to do maths question on simple interest and compound interest. As my maths was not very good during my younger days(often failing my exams), i only understood simple interest but cannot seem to understand the concept of compound interest. I remembered I spent a lot of time looking at the question, putting the numbers in my calculator just to find out how compound interest works. Through the patience of a good maths teacher in secondary school, i manage to get quite a reasonable grade during my O levels and it grew my love for numbers.

Fast forward to today, compound interest is still a concept which is important in our lives. Understanding how compound interest works may probably change your life once and for all. Compound interest works through time. The longer the time period, the faster the compounding effect.

Let's illustrate with examples of 2 scenarios:

1) Suppose you have zero savings now and you want to achieve 1 Million dollars in 20 years, how much do you need to save per month? The answer is 4166.66 per month. Saving this amount is quite hard for most people unless you have very high pay.

2) However, if similarly you have zero savings now and also want to achieve 1 Million dollars in 20 years, you can actually just save $2000 per month. If you invest $24000/year($2000x12) and let the money compound at 8% per year(with interest reinvested), you would have achieve 1.19 Million by the end of 20 years. Now saving $2000 per month may be more achievable. The key is you must invest your money and let it compound. In fact, if you think 8% return is too high, even at 7%, you would similarly have achieved 1 Million dollars(1.05 Million to be exact) in 20 years. The 8% interest can come in the form of dividends from stocks. Reinvest the dividends to let it compound.

Some people may say 20 years is too long. Yes it is if you start investing late. If you start investing at the age of 25, 20 years later you are just 45 which is still not too old for many. Achieving 1 Million dollars is possible for most average income earners.

Start investing when you are young to experience the benefits!

Watch the following video to understand how investing can compound your money in an unimaginable rate:

If you would like to learn how to start investing, read this post which i've written sometime back last year: Investing basics - How do I start investing?

*All figures above are denominated in Singapore dollars 

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1. How the economy works? - A must watch video
2. Buying the company on the streets (Part 1) - Discovery stage

How banks make their money and why we should learn from them?

When we play the game monopoly, we know that the bank is rich and everyone pays to the bank when they buy a deed of land. In our real world, we know that banks are rich as almost everyone deposits money in the bank. So how do banks make money?  Banks lend out money and earn from the interest. This is the primary business of a bank.

The business of the bank

Banks do the same thing over and over again. Take the money they have, lend it out with interest, get back the money with interest and lend it out with interest again. This creates a consistent cash flow for them. Of course banks do other things with the money the have for example investing it in bonds etc. But come to think of it, isn't investing in bonds lending out money with interest too?


How we can be like the bank?

Lending out is a good business. We can also be like the bank and create consistent cash flows for ourselves. Take the money we have, lend it out with interest, get back the money with interest and lend it out with interest again. So who do we lend it to? The answer is we can lend it out to the financial markets.

The financial market is created to facilitate the transactions between lenders and borrowers. With the financial market, borrowers can seek funding from lenders and lenders can lend out money to borrowers in a fast and efficient manner. The stock market and the bond market are part of the financial market.

In the bond market, corporations or the government can borrow money through the issuing of bonds. When we buy a bond, we are lending money to the corporation or government who issued the bond. By lending money to them through bonds, we are paid interest for it. We become like the bank who lend money out to others. However, before investing in bonds, you should know how it works and how interest is paid out etc. Read: 4 things you should know before investing into bonds

In the stock market, companies who need more money to expand their business can seek for people to invest in their companies. When we invest in a company through the stock market, we effectively own a part of the company. This is even better than lending out money only. Owning a part of the company entitles you to dividends that the company pays. This is like the company paying you a share of their profits. As the company earns more money, dividends are expected to increase. Of course sometimes it does not increase and that's where we have to look out for.


How to choose who to lend out to?

Choosing who we lend our money to is important. Choose the wrong person and you may lose all your money. We can learn from the bank on how to choose the correct person to lend out to.

Banks do a detailed report of a person before deciding if they will lend to an individual. Some deciding factors are:

1. Does the person have a stable income and how much income?
2. Does he have many other outstanding loans?
3. Is that person over leveraged on debt?
4. Does he have any assets?
5. Does he have any prior bad financial report ie. failure to repay loans or bankruptcy

I'm sure there are other factors but well i hope you get a rough idea. Using the above profile, we can do a detailed profile of the company we want to invest in too. Some factors to look out for in a company are:

1. How much profit does the company have and is it consistent?
2. Does the company have huge debt? Is it manageable?
3. Does the company have any assets?
4. Does the company allocate capital efficiently?

These are just some simple factors to consider. This is not enough when evaluating a company as companies are more complicated than individual persons. I have written a series of post on how to pick stocks. You can read it up to learn more here. 

A risk to take note

Banks have collapsed before and the most famous one is Lehman Brothers which collapsed during the 2007/08 global financial crisis. Why did it fall? The answer is that it was over leveraged. To say it simply, it actually lend out more money than it had. Reports say that Lehman Brothers has a leverage ratio of 44:1. This means that every $44 it lend out, only $1 was from its own pocket. 

When we invest, do not invest using money which you do not have. Using borrowed money to invest is dangerous. In stricter sense, do not even invest money which you will need for paying bills or for emergency. 

Conclusion 

By learning from the bank, we can be like the bank. Use the money we have, lend it out or invest it with interest or dividend yield, get back the money with interest and dividends then lend it out or invest it again. Repeat the process correctly and you will become rich one day. We may not have people depositing money with us but we can deposit money into ourselves. This is the art of savings. Using this money we deposited into ourselves, lend it out or invest it. Put it in the correct place and see it grow. However, put it in the wrong place and it will wither away.

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Related Posts:
1. Buying the company on the streets (Part 1) - Discovery stage
2. Investing is like water that flows out
3. How to pick stocks (Part 2) - The profitability of a business

Buying the company on the streets (Part 2) - When to buy?

In the previous post, the companies on the streets were discovered in our everyday lives. I have said that even though we have discovered them, we should not buy them immediately. In this post, I'll touch on some simple ways we can value a company.

Knowing the nature of a business is important before anything else. What business does the company engage in? How much does that product contribute to the company's profits? For example, we know G2000 is partly owned by Wing Tai. Wing Tai has a retail business but they also engage in building properties. G2000 is an established brand with good sales record. However, Wing Tai only owns 45% of G2000 and this only contributes to a small portion of its income. The main income comes from its property business. So no matter how successful G2000 may be or how long the queues you see outside G2000, the impact on Wing Tai's profit is very minimal.

Now, even before you start investing, i would suggest you forget about the stock price. The stock price the company is trading at now does not mean anything. You are not buying the stock price but buying a part of the business. Look at the company with the eyes of a business owner.

When to buy?

This is a question a lot of people ask. To be honest, there is no perfect entry point to buy a stock. In fact, most of the time when investors buy the stock, its price will most likely go down. Does it sound shocking to you? Of course you do not want to be buying at the high also and don't want to be paying a high price for what the company is actually worth. It'll be good if you can buy the company at a discount of its fair value.

Now, to determine the value of the company, we can look at 2 things:

1. Intrinsic value
2. Assets the company owns

Intrinsic Value

You might have heard of this term called the intrinsic value. Investopedia defines intrinsic value as "The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors". So how do we calculate the intrinsic value of a company?

Cash flow can be used in the calculation of intrinsic value. Cash flow is a more accurate measure of a company's worth than earnings. It is the real cash that the company generates every year. To know more about cash flow, read: Understanding Financial Statements (Part 3) - The Cash Flow Statement

The most common valuation that investors use to calculate intrinsic value is called the discounted cash flow model. It factors in the estimated future cash flow growth rate of the company and discount it to the present value. Intrinsic value is therefore the present value of all expected future net cash flows to the company. This will give a rough gauge of how much value the company is worth today based on the predicted cash flow growth. 

Not to worry if you do not understand what i wrote above. I know sometimes it is not easy to understand the finance concepts if you're not a finance student. There is a free intrinsic value calculator you can use provided free by Bigfatpurse.com. You can download the free intrinsic value calculator here. 

Assets the company own

Assets have value and this is especially important for companies that deal with or own properties. We can do a simple valuation of property stocks using the Price to Book(PB) ratio. Book value is similar to what we call Net asset value(NAV). The NAV of a stock is derived by taking the total Assets minus the total liabilities. The NAV shows us the total net assets the company has. The PB ratio is derived by taking the stock price per share divided by the NAV per share. A PB ratio of less than 1 means the stock is trading less than its NAV per share.

Let's say Capitaland stock price is now at $2.50. Assuming it's NAV per share is $5, the PB ratio would be 0.5 ($2.50 divided by $5). If you buy its stock at $2.50 now, you would have bought at less than it's actual value based on its assets. Isn't that a good value that you have found?

Margin of Safety(MOS)

Buying a company below its intrinsic value gives us a margin of safety. This will somewhat limit the downside risk if the market turns bearish. Buying 25% below the company's intrinsic value is a safe margin. However, the stock price can fall even lower and when that happens, it should be good news for value investors like us. This also means that we should always have extra money on reserve no matter what. This is to take advantage to buy at lower prices when Mr market decides to have a bad mood. Unless if i can find many stocks trading at more than 50% lower than it's intrinsic value, then maybe i will be invested fully. When the crash comes it takes courage to invest. Will you be in the game when it happens?

Conclusion

This ends the 2 part series on buying the company on the streets. Next time when you go shopping, remember to look around to find companies which you can potentially buy. Then, research on the company based on its economic moats, profitability of its business, strong balance sheet, intrinsic value and assets. This is what Warren Buffet says to buy good companies at undervalued prices.

It's bad to go to bed at night thinking about the price of a stock. We think about the value and company results; The stock market is there to serve you, not instruct you. -Warren Buffet, 2003 

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Related Posts:
1. Buying the company on the streets (Part 1) - Discovery stage
2. Understanding financial statements (Part 1) - The income statement

Buying the company on the streets (Part 1) - Discovery stage

Introducing the company on the streets

Everyday we go to work, we go to school, we hang out with friends and we go shopping. What if i tell you that you can actually own the shopping malls you go to, own the restaurants you patronise, own the retail outlets you buy clothes from, own the hospitals you visit, own the bus and MRT you ride everyday and even own the airlines you travel on? It is possible through a financial intermediary called the stock market. 

When a company is listed on the stock market, it becomes a public company. Many shareholders collectively own a part of the company and are entitled to a share of the income through dividends distribution. It is no longer a private company once it is listed. The surprising thing is all these companies on the stock market are actually all over the streets which we walk on. Well, maybe not so surprising to people who already know but it is to people who live everyday without knowing. 

Many people ask how do i know which company to invest in if i want to start investing? Do i look through the SGX website and scan from A to Z? The answer is no. You don't have to do that. You just have to open your eyes to see it on the streets. 

Which are the companies on the streets?

Imagine how you would live your daily life. You get out of your house and take the bus. It's a sbs transit bus. This company is owned by comfort delgro. 

You reach the MRT station and transfer to take the MRT. The MRT is operated by SMRT.

You buy a straits times newspaper and proceed to read the daily headline news. The newspapers are published by Singapore Press Holdings(SPH).

Your mobile phone rings and you pick up a call. This service is managed by either of the three telcos in Singapore, Singtel, Starhub and M1. 

You reach your office and make your daily favourite 3 in 1 coffee. The coffee sachet has the word super on it. This coffee is manufactured and produced by Super group Your company is kind enough to buy you some curry puffs for breakfast. Those are from old chang kee.

During lunch time, your company catered buffet from Stamford catering. This catering service is provided by Select group.

After work, you meet your friends for dinner at Din Tai Fung. This company is owned by Breadtalk.

You go shopping at G2000 and Uniqlo after dinner. These 2 companies are owned by Wing Tai.

You're at the newly opened Bedok Mall. This shopping centre is owned by CapitaMalls Asia.

You're so tired after a long day and hailed a taxi to go back home. The taxi is called comfort and it is again owned by comfort delgro, similiar to the morning bus that you took.

Does this life sound familiar to you?

Throughout just that one day, you had used the service and products of the following 10 companies:

• Comfort Delgro
• SMRT
• SPH
• Singtel/M1/Starhub
• Super Group
• Old Chang Kee
• Select group
• Breadtalk
• Wing Tai
• CapitaMalls Asia

 

 
 
 

That's it. You have just found 10 companies without even looking at the stock price on SGX or any stock screens on your computer or TV. 

The good news here is: You can own a part of all the above companies. In just one day, you would have discovered 10 listed companies in Singapore if you had looked carefully enough. Some people would even have used the services and products of more than 10 companies in a day.

Think about it, wouldn't it be good that you can receive a part of the expenses you spend on back into your pockets? This is just like having rebates and discounts for the things you buy. In actual fact, when it is done correctly, you can even enjoy the things free of charge for many years to come. But hold on, you don't just go back and buy the company through your stock broker immediately. There's more to it. We'll get to it later. 

This is the power of investing. You can own a part of your everyday life!

Is it possible to get free products and services for many many years?

This idea of investing by looking at companies on the streets was introduced by Peter Lynch in his book "One up on wall street". He wrote about how his wife was commenting on how good a departmental store was and later on this company's stock price went up many many times. 

Let's look at some companies in Singapore which you might potentially have free stuffs for many many years if you've bought their stocks.

Breadtalk

This is a company we're familiar with. I first heard of it as a bread that talks. They were rapidly expanding and more and more stores opened up. When the company was first listed on the Singapore stock exchange in 2003, its offer price was 24cents. Now the price is 90cents which means it has increased by almost 4 times. Putting it in numbers, this means a $5000 invested in 2003 will become $18,750 now. This is a profit of $13,750. How many breads can you buy with this money? The answer is around 9000 breads if each bread cost $1.50 on average.

Breadtalk Chart

Comfort Delgro

This company owns the popular comfort taxi, the comfort driving centre and 75% of the SBS buses that we take. What you may not know is this company not only operates transport services in Singapore but also other parts of the world. This includes, UK, China, Australia, Malaysia, Ireland and Vietnam. If you had bought their shares in 2011 at the low of $1.10, now you would have made almost double your money. A $5000 investment in 2011 will become almost $10,000 in 2013. This $5000 profit would have more than offset the many fare increases over the years. Maybe if everyone had invested in the transport operator and got dividends as well as profits, they wouldn't have complaint on the fare increase.

Comfort Delgro Chart

Old Chang Kee

Who would have thought that a small store selling curry puffs can be so successful today? They are literally seen everywhere in Singapore now. Don't you agree? Its share price in 2011 was 19cents at the low. Now, its share price is worth 80cents. That's a 4 times increase in about 3 years. A $5000 invested in Old Chang Kee in 2011 will become $20,000 today. That's a profit of $15,000. Curry puffs getting more expensive? Not to worry, that $15,000 can buy you many many curry puffs for many years ahead. Not forgetting dividends are still paid every year which means more free curry puffs. 

Old Chang Kee Chart

Wing Tai

As stated earlier, Wing Tai owns G2000 and the Uniqlo retail outlets. To be exact, Wing Tai owns 45% of G2000 and 49% of Uniqlo. It's shares was trading at a low of 73cents in 2011. Currently the price is around $1.80. That's a 2.5 times increase. The profits from the investment can buy you lots of office wears for work, winter clothes for your holidays and even your everyday casual wears. 

Wing Tai Chart

The Stock that went up 50 times

Super Group

This is the company that made the 3 in 1 instant coffee. I've read their success story somewhere before. Maybe i'll write up on its success story in another blog post. Now, this stock went up 50 times which means a $5000 investment in 2011 would have become $250,000 now. Who says there are no 50 baggers among Singapore stocks? 

However, to realised the whole value of the 50 bagger, you'll have to wait for 10 years. If you did not have patience to wait through 10 years and sell beforehand, it would most probability be a 4 or 5 bagger only. Some people may say its already very good!

Super Group Chart

Is it that easy to make money?

The profits listed above are exaggerated. The truth is very few people are able to buy at the bottom and sell at the top. These are just some examples of everyday companies which would have made you lots of money even if you did not buy at the bottom or sell at the high. The fact is investors do not try to buy at the bottom. They accumulate along the way as long as the company's fundamentals remain intact and outlook remains positive. Any weakness in the market itself presents an opportunity to buy more.

We've discussed on how to pick the companies on the streets. We've discussed on the free stuffs you can potentially get. Now the most important question is when do i buy them? Once you discover the companies, you should not just buy them immediately at the current price. The key is in finding the value of the company and buy at a discount to its value. This is what we call the margin of safety(MOS). This I will discuss more in depth after the Chinese new year holidays.

Research is important in investing. I've written a series of post on how to analyse a company based on its economic moats and its profitability. You can read it here:

1. How to pick stocks (Part 1) - Economic Moats
2. How to pick stocks (Part 2) - The profitability of a business

I have also written on how to read and interpret company's financial statements. You can read it here:

1. Understanding financial statements (Part 1) - The income statement
2. Understanding Financial Statements (Part 2) - The Balance Sheet
3. Understanding Financial Statements (Part 3) - The Cash Flow Statement

In the next part of this series on buying the company on the streets, we'll evaluate how much a company is actually worth? Is it worthwhile to buy the company at the current price? How to buy the company at a discount? Stay tune!!

Read Part 2 of this series here: Buying the company on the streets (Part 2) - When to buy?

In the meantime, enjoy the Chinese New Year celebrations with good bonding time with your family and friends as well as all the good food. Here's wishing everyone a prosperous chinese new year ahead. May we HUAT(prosper) even more in the year of the horse!!


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