Father Sez

Deep discount bonds are those which are sold at a big discount to their par values because they are zero coupon bonds (bonds that pay no interest), bonds with bad credit or suspect ability to pay, or a longer bond with a very low coupon requiring more yield in the form of a lower price.

The bonds that we have bought are of the 1^st variety, i.e. bonds that do not pay any income/ interest but have a thundering maturity value. My family has chosen these bonds in the form of gaharu trees. 

Last Thursday, we collected 100 trees from the Forest Research Institute of Malaysia (FRIM) where they grew these trees using a tissue culture process. They had thousands of these little plants growing in small plastic bags in a number of greenhouses. We were informed by the research folks at FRIM (and this is also confirmed by Wikipedia) that these trees (when they are around 5 years of age) have to be inoculated with a parasitc ascomycetous mould, Phaeoacremonium parasitica, a dematiaceous (dark-walled) fungus. (All these are still rocket science to me. I have to find out more over the next 5 years.)

As a response, the tree would produce a resin high in volatile organic compounds that aid in suppressing or retarding the fungal growth. While the unaffected wood of the tree is relatively light in colour, the resin dramatically increase the mass and density of the affected wood, changing its colour from a pale beige to dark brown or black. High quality resin comes from a tree’s natural immune response to the fungal attack. It is commonly known as agarwood #1 (first quality). An inferior resin is created using forced methods where aquilaria trees are deliberately wounded, leaving them more susceptible to a fungal attack. This is commonly called agarwood #2.The “trees” (as the picture shows, they are still teeny tots), are 10 months old now. We cannot transplant them in our rubber smallholding as they would be eaten or stepped upon by the local goats that somehow find their way into the smallholding. 

We have decided to build a small shelter for the trees at a corner of our goat farm and nurture them there for another few months or a couple of years if need be. (I am not sure of the growth rate of the trees.) Once they reach about my height, then they can be comfortably transplanted. We have been assured by the FRIM research people that soil that is good for rubber trees would be great for the gaharu trees.

Harvest time should be in about 9 years.  

The Malaysian Business, one of Malaysia’s premier business magazines wrote in December 2007, that a kilogram of the tree could fetch a price of about Ringgit 3,000 – Ringgit 25,000 (approximately USD900 – USD7500 at current exchange rates) depending on the grade.  

These trees, if properly looked after, should give us a good return. I am not sure of actual figures, but I think it’s safe to assume that one tree should easily yield more than a kilogram. 

I think these trees are as good as any deep discounted bonds that are in the market. Since there are 100 trees, they can be compared to diversifying our risks amongst 100 companies, though they are all in one industry.  

Each time my family visits the goat farm (which should be very often after the planned launch date of the 22^nd June), I would be able to show the trees to my children.

Hopefully these trees will repay our care and love for the next nine years or so in the form of super duper returns.

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Picture Credit: My son. The tall scrawny looking trees are the 1.5 year old rubber saplings. 

Yesterday, my son and I visited our rubber smallholding. 

The rubber saplings are growing well. They still have about 3.5 years or so, before they can be tapped for their latex. I have mentioned earlier that the land is hilly and we have cut terraces on which the rubber seedlings were planted. We originally planted about 2,100 trees. About 200 trees have died and new ones have been planted in their place.

The latest “census” indicates that another 300 trees can be planted in the spaces available. The walk around the smallholding was quite a tiring one, but the spectacular view from the top made the whole thing worthwhile. I had a deep feeling of satisfaction when I reflected back on the work that has been done on the land since mid 2006 (when my wife and I sighted the land for the first time.) 

And though this was not the first time, my son has climbed up this hill, somehow I felt a stronger sense of belonging and responsibility from him. 

Recently some friends of mine have talked about planting gaharu or agarwood trees. These trees are prized for their resin which is used in the manufacture of perfume. 

Some additional information on the tree is shown here.

Our Forest Research Institute of Malaysia (FRIM) sells these seedlings. I talked with one of the research scientists at FRIM and he mentioned that they had a waiting list for the seedlings till 2010!!! 

He also mentioned that the trees should be inoculated (wow!….I’ll find out about this later) when they are 5 years old, and they can be harvested when they are 7 years and later. And he also mentioned that the later the better. 

It seems that commercial planting of gaharu trees is a big business in Malaysia. So there are also a number of private planters from whom we can buy the seedlings.  

I’ll discuss this with my wife and then craft out a plan to buy and to plant the trees. And then I’ll follow up with an investment appraisal. For now, we’ll just plant for fun.

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During my younger and much more financially and life ignorant days, my wife and I purchased a Timeshare.  

Then, the logic sounded good. For this one time payment + another yearly payment, my family had a choice of 7 or 8 properties in Malaysia where we could go for family holidays. As a large family we usually had to take 3 or even 4 hotel rooms. The Timeshare offered facilities like kitchen, a hall and 2 – 3 rooms. Perfect…it seemed.  

Alas! That was then! 

Now I think about the opportunity cost of the capital invested. This plus the yearly maintenance fee could pay for much more than what I was getting. 

Now I think about the resorts being booked solid during the times when my family would want to use it the most, i.e. school holidays, festive seasons and during other National holiday seasons.  

Now I think about how silly I was to have bought the Timeshare in the first place. 

Now I think about it being no wonder why there are so many ads for selling Timeshares at discounted and often deeply discounted prices. 

My wife has started renting out the Timeshare to her friends and other family members who may want to use it. The money received is used to defray the yearly maintenance charges.  Though the whole process is also quite cumbersome, at least part of the yearly outflow is being taken care off. 

We have often thought of selling off the Timeshare. Our local classifieds often have advertisements of these for sale. There are also some international web sites that claim to sell or rent Timeshares.

This situation of having to pay the yearly outflow whether we use the facilities or not is clearly an unnecessary financial pain. Something that is not in line with my present thinking of eliminating outflows that do not add any value. Something that should be taken care off immediately. 

I am going to advertise our Timeshare for sale. After all my investment is already sunk, if I can stop the continual bleeding, it should be enough. 

I have no back up plan.  However there seems to be an option to be able to donate the Timeshare.

My wife and I may donate this and hope that the recipients make more productive use of this Timeshare. 

PS:  

If any of my readers out there have any interest in a discounted and deeply at that,   Timeshare, please get in touch with me.   

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CL and I were colleagues for a few years. We used to exchange views on our personal financial positions. He had no investments, besides the house he stayed in, which had a very manageable mortgage. 

All his plans for providing for his family and his old age, was by way of insurance. He had endowment policies that he was contributing to. These policies would pay a lump sum of money should anything untoward happen to him. His idea was that so long as his children’s education was provided for, it should be okay. He used to complain that he had no money left over for savings. 

I used (with the little knowledge I had on pfm) to advise him that he should:- 

-         draw up his current net worth statement,  

-         set a goal that he would increase his NW by at least 5%,   

-         then think and come up with ways to earn or to save that extra 5%,  

-         that he should set all these in writing. 

-         And that this little victory would soon him set him on the way to keep improving his NW. 

(This was way before, I discovered pf blogs.) 

We met up for lunch last week to celebrate the birth of another colleague’s first child.  I was surprised, when he asked our mutual friend on his plans for savings for the child.

One thing led to another, and soon he was talking about his recent investment. He had bought an investment house in a locality well populated by private colleges. He had increased the number of rooms and bathrooms. And he was renting them out to students at a rate that was giving him a healthy positive cash flow monthly. 

This property had been fully let out within a couple of weeks and on top of that, he had a waiting list of interested tenants. And the house was about 25 minutes from where he lived, making the job of checking up on the property very easy. 

In addition he also had investments in Unit Trusts.  

All these were done in a period of about 8 months or so since our last meeting. 

I was impressed! What a turn around! 

I asked him what made him start. He told me that he had been thinking about investing for quite a while, and then it just happened. Of course, he had also done research, looked at a number of properties, talked to various banks on financing options etc. 

Is this the Law of Attraction at work?  Or has he learnt to do things in the certain way promoted by the 1910 book, The Science of Getting Rich.(not an affiliate link). Or has he found his wealth creation switch? 

It does not really matter. I am just happy that I have an additional friend in my peer group whom I can talk to on growing our wealth.  

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My wife and I dropped by the farm earlier today.

Whilst the goat shed is almost completed, there are still a number of items to be done. The fencing, the planting of geti and petai belalang trees, the store room, water tanks, electricity connections and general cleaning works should round it up.

The Napier grass will be planted next week and should be ready for harvest once the first intake of goats arrive.

The geti and petai belalang trees are in a nursery now and will be transplanted all around  the farm where bunds have been built. The leaves provide a rich source of food the goats love. (I could not find any web references for the geti trees. Both are local generic names).

So far the target date of 5th April 08 for the thanksgiving / opening “kenduri” appears to be on track.

The development budget for the farm has been exceeded. I am not that concerned, as none of the people involved, Zai, my wife or myself have ever set up a farm in our lives. I always had this contingency in mind from day one.

Operating expenses have been budgeted at a base of 1000 per month. Our cash breakeven would be selling about 5- 6 goats per month, something that we feel can be reasonably easily done.

In my mind, more important than this financial target are the operating targets. Like setting up and adhering to clear cut and understood systems for bringing in the goats, feeding them, tending them when sick, tending to pregnant goats and deliveries, looking after the young, maintaining goat records per goat and maintaining farm daily records.

And of course, marketing, logistics and sales.

I am using my Ghana experience as a benchmark. Despite all our initial studies, we still got taken in by a number of small issues that most people would overlook in doing feasibility studies. Like all payments to be in cash and not by cheques. Like payment for house rental one year in advance. As our ground knowledge increased, so did our ability to negotiate better and much more reasonable terms.

The rest of the year from 5th April 08 shall be dedicated to honing our skills in these activities.

We are intending to bring in only 20 - 30 females and 2 males to start with, whilst our learning process is going on.

To ramp up capacity once we are comfortable should be relatively easy to do. 

The side or non monetary benefit of the farm is that all, or rather, most children like visiting farms and playing with young animals. Today, our son, Abang came with us for the visit and we are sure the younger two girls will also join us from time to time.  At least this takes away their attention from video games and such and allow them additional outdoor activities.

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I have written about our goat farm. The land is being developed now and our target date for “opening” the farm is 5^th April 08. 

In some lesser developed countries like India, people with extra funds would buy goats and hand them to goatherds to tend. The goatherd would take care of the herd, feed them, give them medicine if needed etc. The offspring were shared 50:50. 

It was a win-win situation for both the investor and the goatherd. The difficulty was in matching goatherds with investors. This was done by word of mouth as trust was a very important factor in this equation. 

In Malaysia, a group of people have brought technology to this age old practice. 

They have set up a website, offering matchmaking services for the investors and the goat farms. (The website is in Bahasa Malaysia.) They have prepared a “prospectus” showing the indicated rate of returns on investment, risks involved, minimum investment required etc. 

This is a great idea, as it takes away the nitty gritties of running the farm for the investors interested in goat rearing and provides capital for others who are keen to physically embark on goat rearing. 

As in any other investment, there are risks. The returns quoted  of almost 1300% per annum over 6.75 years appears to place the risk level at a high level. 

This is a great example of creating a business opportunity. Using technology to improve or facilitate an age old business practice.  

My wife and I will be registering our farm with e-pawah.com.my and offer to act the role of the traditional goatherd for the investor. Let’s see how this works out.

It would be interesting to hear the views of readers on this investment.

Popularity: 13% [?]

The five mistakes we have talked about so far are:- 

-         Not paying myself first  

-         Not forming or joining a correct peer group

-         Not having a written budget  

-         Not managing my career properly and

-         Not getting the best deals on my mortgages 

There is more.

The next one is “foolishly selling my long term investments without proper evaluation and soul searching”. 

Ever since I realized that I should start savings for retirement and for our children’s education, I have made monthly contributions to a unit trust or mutual fund as some people call them. My wife and I chose the UT reasonably carefully. We did not delve into diversification and asset allocations and such. 

In Malaysia, we have something called the Employee Provident Fund, where all employees and employers are required by law to contribute 11% and 12% respectively of gross salaries. This EPF is administered by a body set up under the Ministry of Finance and the Fund pays yearly dividends. 

You are allowed to withdraw a part of your EPF savings and invest them in approved UT’s. I also withdrew from my EPF account and invested in UT’s. (When we sell these UT’s then the money has to be reinvested back with the EPF). 

So over the years we had built up a reasonable nest egg.  

The mistake I made 

We had what can only be called a mind blowing bull-run in equities in 1992/1993 which as per text book rules ended in a spectacular collapse. The market then drifted slowly upwards and downwards.  

In 1997/1998 there was another equally mind blowing collapse due to internal political uncertainties followed by the famous Asian currency crisis. 

Against this backdrop, you may have guessed that my UT did not perform particularly well. There were years when no returns were paid and there were also years of losses. 

In 2003, I did something that I still regret. I sold off the bulk of the UT’s. 

The balance UT’s that I still held have performed as follows:-

As at:-

31 December 04 -       Taken as base 

31 December 05  -       Increased by 21%

31 December 06  -       Increased by 40%

31 December 07  -       Increased by 54%

The above returns include my monthly contributions (which I continued, thankfully). I am still astonished at the returns after even accounting for my contributions. Even though the last few years have been spectacularly good years for equities, the returns are nothing to be ashamed of.

What I should have done

Equities have their cycles of ups and downs. I was well aware of this, having been through a number of them. I also knew that these cycles could take years but just like clockwork, sooner or later the markets would move up again. And the time to turn around was not too far off.

UT’s offered a great way to diversify amongst a number of stocks.

In addition the UT company managing the fund we had selected was one of the better operated ones.

Since we were using the “dollar averaging method”, we had been bulking up on cheaper units as the markets languished.

I should have weighed all these factors and made an unemotional decision on whether to stay invested or to sell out.

Instead, I got influenced by the fact that there were no returns, without objectively analyzing the reasons why. I also never revisited the reasons why I had invested in UT’s in the first place.

Don’t repeat my mistake, please

Long term investments are just that….long term. They should not be influenced by the market fluctuations that happen daily, monthly or even the bigger swings (like what we are going through now) every once in a while. 

Investments in UT’s have the advantage of professional management and diversification amongst a wide array of stocks. Dollar cost averaging does give us an advantage in down markets, as we end up buying more units.  

Had we maintained our investments, my wife and I would be very, very much further ahead in our quest for retirement savings.  

Though I am not losing any sleep over it now, this selling off decision is something that I have regretted and will regret for a long time.  

And it is something I’ll keep repeating to my children never to make! 

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Patrick at Cash Money Life wrote that our greatest asset is an intangible, i.e. our ability to generate income. I am in complete agreement with this view. 

In fact, almost all the methods of valuation of businesses are tied, in one way or another, to the ability of the business to generate income.  Even if we do have an asset that generates income by the busloads, it was “our ability to generate income” that resulted in us owning the asset in the first place. 

Pinyo over at Moolanomy has also given his views on how to protect this “greatest asset” of ours. 

How then should we nurture this asset so as to reap its fullest dividends?

Our ability to generate income is largely dependent on :- 

Our educational levels 

This is pretty much self explanatory. Having said that, we have to take proactive steps to ensure that our education is in tune with current day market requirements. This does not just apply to those of us in careers, but also to our ability to generate income from investments, trading, arbitraging etc. The informal part refers to knowledge gathered from books, blogs, trade shows etc. 

And of course, our continuing education. Many Internet entrepreneurs are products of this.

Our Past Experiences 

Our past experiences will have a direct impact on our ability to generate income. Almost all higher level jobs require “experience”.  And we all value the advice of experienced experts in the fields of investing, money management, real estate etc., over the inexperienced ones.  

Mistakes made and the lessons earned hone our skills and ability to generate income. 

Our network of Friends and Family 

Our ability to generate income would be almost directly proportionate to the strength, depth and coverage of our network. A person who has a network of close and trustworthy friends in the banking, real estate, stock broking and investment banking fields would most probably have a far better success rate in investing than one who starts out alone.  

Our travels 

Travel broadens the mind. Even though globalization has made the world a smaller place, not all parts of the world are the same. For example, certain parts of Asia may be comparable to that of the UK, say, 25 years ago. So if someone from the UK visits that particular part of Asia, he / she may think about how the UK has progressed and bring those changes to Asia.  

Let us think MacDonalds in Kuala Lumpur, Starbucks in Jakarta, etc. 

To nurture our greatest asset, we have to nurture these four areas continuously.

Where should we focus our reviews 

When we draw up this list for our personal individual situation and seek to identify a unique opportunity, we should remember the following.   Business opportunities are created when we have a service or product that :- 

a)    makes people money, 

b)    saves people money, 

c)     makes people feel more secure, physically or emotionally,  

d)    makes people feel better, physically or emotionally,  

e)    saves people time.

I am sure, there are others, but these broad areas should be good enough. When you put these two together, we should be able to see that a job or a career need not be our only option.  

Whether we take a job and work on the other options part time is not the issue. The fact is that the door is now open wider, and we should be in a better position to, at least see, how we can generate more income.

For me, this exercise has given me ideas on two book projects.

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I have acknowledged that 2007 was a year of a paradigm shift for me. 

With this has come the drive to be a lot more frugal, a lot more organized in managing our finances, and a stronger drive to earn more money. 

Two plans have been set in motion in 2008. 

Launch our goat farm 

My wife and I have long wanted to start this. Procrastination came naturally as we consoled each other that we had not found the “right piece of land”. In late 2007 all the pieces fell in place. 

A piece of land owned by relatives of my wife came available. This was the only “asset” the family had, so we did not make any attempts to offer to buy. Rather we proposed a joint venture and it was accepted. 

My wife and I provide the capital to start up and operate the farm. Zai, my wife’s cousin brother, (who had been planting mangoes on the land before this), will be handling the work on the ground and manage the farm when completed. 

The farm is taking shape now. The land has been cleared, fenced, access roads improved and the goat sheds are now in progress.  

We have targeted 1^st April 08 as the completion date and have marked 5^th April 08 as a date where we’ll have a small “kenduri or thanksgiving prayers” to launch the farm. 

A little on Zai and his family.  

His family consists of his grandma, his mother, his 3 sisters (one elder and 2 younger), his nephew and his children(two boys and a girl). His family has always been very close to us. His grandmother stayed with us and helped nurse our son and the little girls when they were born, whilst his mother is one of my wife’s closest confidants. (They have kindly agreed that the farm be named after my mother). 

My wife and I both know that Zai will do his best to make the farm a success. On our part, we have to make sure that there is adequate funding for the farm, and assist in marketing etc. 

Once a week, I drop by (about an hour drive from our home) to see the progress. So far it is looking good. 

The company in which I was literally gifted a 25% stake, has secured a  project in Indonesia. (I am writing this post from Jakarta).

This project is for the building and leasing of common telecommunication towers for the telecommunication operators in Indonesia.  

There are still a number of issues to be resolved, and the prospects look great. God Willing, we should be starting work around the same time as the farm is launched, i.e. beginning April 08.  

We have done our business plans for both these projects and there are some spin offs that can be created once these two take off. There is a lot to be done and 2008 looks like it is going to be a busy one. And also looks good for the wallet.  

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A number of years ago, I was holding a senior level management post in a PLC.

During my tenure, the company I worked for issued out several large tenders. The winners of one of the tenders was a company, we shall call “A”. Though I was not involved in the technical and financial evaluation of the tenders, nor in deciding on the final recommendations leading to the award, by virtue of my position, outsiders would have inferred that I was a major influencing figure. 

I left this PLC before the final recommendations were made to award to “A”. One of the directors and shareholders of this “A” was, shall we say, Mr. B. During the tender period and process, I had interactions with Mr. B and I liked and respected him, but the relationship sort of tapered off after I left. 

About 2 – 3 years later, I received a call from Mr. B. He had sold off his shares in “A” and was about to invest in another small company and wanted me to join him as a fellow director and shareholder. 

Whilst I had faith in the business model and prospects of this company, I had no money to invest.  

And Mr. B offered me an interest free 5 year loan for the full investment. 

This was at that time, the biggest loan I had ever been offered, about 1.5 times my mortgage. This was the biggest monetary amount I would have had in any investment, even bigger than the value of the house my family was living in. And it was the only interest free loan that had ever been offered to me.  

I took him up on his offer. 

And just look at the returns I received from this investment and what I did with that: 

a)    The loan from Mr. B was paid back in full, though I went slightly over the 5 year period, 

b)    My mortgage was paid off, 

c)     This company, in partnership with others, secured a contract in Ghana and this gave rise to my working stint in West Africa. The first time I had ever been to Africa. 

d)    The 3 years in Africa was my best ever working experience.  

e)    The interactions with my Ghanaian colleagues somehow led to me writing a book titled with the long name of “We wish we knew these 20 years ago”. This book was meant to be a guide to my children. Working on this book created changes in me, changes which I consider “paradigmic”, if there’s such a word.   

f)      When that Ghana contract ended, one of our partners offered me a job which took me to India, where I spent 2 and half very eventful years. 

I can go on with quite a few more returns. And it is still ongoing.  

The point, I am trying to make is, what is really my best investment? 

i)                  Is it the investment in this company? 

ii)                Or is it the investment I had made in myself? The investments that given me certain qualities and values. Qualities and values which had made Mr. B offer the interest free loan to me, so that I could be his fellow shareholder. 

You tell me. 

I have never asked Mr. B, why? Neither has he ever volunteered to tell me. Though I have thanked Mr. B profusely, I guess he may never ever fully realize what a great opportunity and favor he has done me, my family and a host of other people, who have benefited indirectly. 

Thanks a million, again, Mr. B!

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