Father Sez

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!

My stock investing skills and past record may be classified as a tad better than “losing my pants or taken to the cleaners.”  

The last couple of years, however, I have tried to instill some discipline and have enjoyed better results. However, these last few years have also been exceptionally good years for stock markets in general.  

I do not want to be lulled into the dangerous state of mind that I am a clever investor, and the recent stock market gyrations have given me an opportunity to sort of stress test my investing philosophy.  

The saying that when the DJ sneezes, the world gets a cold is true, at least in our part of the world. As I write this, our Malaysian Composite Index is down almost 1%. The Japanese Nikkei has dropped by 1.85%. 

Some time ago, I had written down my investment philosophy. As usual, this was after reading some book which motivated me, I think it was the Intelligent Investor, with parts from other books. 

I relooked at this, which goes :- 

a)    Value Invest – Buy when values are below intrinsic values, and sell when it is clear that values are overated,  

b)    Do not go against the main trend,  

c)     Always keep 30% cash in hand, 

d)    Never try to time the market and 

e)    Always buy with a margin of safety. 

Notice that I have not written anything about diversifying and all that. Well, like I said, I am a novice. 

Then I refreshed myself with some statistics. CNN listed the DJIA’s 52 week range as being from 11,939.61 – 14,198.10, a spread of 18.9%. Yesterday’s close of 13,432.77 had brought it down 5.39% from the high. Giving up about 30% of your gains, does not seem all that bad to me. 

I went through the history of the DJIA. Its biggest one day losses by points as well as percentages, reactions to world events, reactions during recessions etc. Yes, there are down years, but the long term trend is up. 

Then I read again, the famous reassuring story of Mr. Market, by Warren Buffet. 

What is going on in my mind now? 

1.                The main trend for the US may not be all that great. I cannot fully understand, why the bad mortgages given can result in so many billions written off by so many banks, and the “experts” are saying that it is still not over.  

2.                I do understand that the US is the world’s biggest customer, and the good old US population loves to buy things, even if they have to borrow. They can’t keep on borrowing and buying forever, though. 

3.                China, India and other countries like Vietnam are showing a rise in the growth of their middle class and adding a lot more customers to the equation. 

4.                My stocks whilst they are not amongst the bluest of the blue, were not exactly bought based on tips by my mechanic. I did do some research on the stocks before I bought them and I believe that the companies bought have reasonably sound business models whose revenues should not collapse in the event of a US recession. 

5.                I have no idea how the markets are going to react tomorrow, or next week or next month. Neither do I know if the US is going to go into a recession.  

6.                I do know that markets may rise, markets may fall, but the ultimate trend is up.     

So what should I do? 

1.    Am I losing sleep over my investments? This is a great test. I liked the way the Simple Dollar articulated his thoughts on this. Though there were a busload of comments for and against this, my stand is if it makes me lose sleep then I get out. Right or wrong, time will sure tell me. 

2.    Should I ask someone what to do? No, I have given up on this long ago. I remember vividly one of our local newspaper’s story quoting a Malaysian expert who had said that we should all buy stocks now, as they were “really cheap” or something like that. The next day, which was when the story hit the streets, stocks were given a pummeling like what my generation had never ever seen. 

Secondly, the huge Banks and brokers who are writing off gazillions in losses now, should have had more than their fair share of experts and “tools”. Look at where this got them.  

And thirdly, I must express my thanks to I Paid for this Twice Already, who expressed very succinctly my feelings on this. 

3.    There has been a huge amount of wealth arising from the oil prices boom. All these money should be looking for places to invest and things to buy.  

4.    Will I be able to live with the downside? If the markets plunge tomorrow, what will happen to me? Will it wipe me out? No, I think not. I may be walking around like a bear with a sore head, but I’ll live. 

I’ll wait and watch, and keep reading the blogs for the latest.  

PS:  The unit trusts (or mutual funds as some may call them) are left alone, and regularly invested on a “dollar cost averaging basis”. This post is only about my investment in individual stocks.     

Most townfolks don’t list agriculture very highly in their list of “investment must haves”.  

We have one such an investment, though it did not happen quite the way we had originally planned. This is our tale.  

My wife and I have been interested in starting a goat and cow farm for a long time.  In line with this goal, we had been looking for relatively cheap agricultural land. And along came this opportunity to buy a 11 acre piece for, let’s just say, RM 1,000.  

(RM is the acronym for Ringgit Malaysia, the official currency of my country, Malaysia. Approximate value now is about RM3.50 to the USD. I am using 1,000 to represent the cost so that other related expenses can be expressed as a % easily. I am also a little shy about disclosing actual figures about my finances). 

We went to see the land (about an hour easy drive away), and it was fully covered with thick secondary undergrowth. The advantage was that it was roadside land. Though it appeared hilly, we decided to go ahead and buy anyway.  

Well, it turned out hilly alright. No way could the land be used as an animal farm.  So we decided to plant it with rubber.

See here and here for some background facts on rubber trees. 

The trees take about 5 – 6 years to mature and should start yielding rubber latex from the 5^th year onwards. We got a contractor to clear the land, cut terraces and plant the seedlings. We appointed another contractor, to take care of upkeep and maintenance.  

The final costs from purchase of land to planting came to RM 1,285. Additional costs for maintenance and upkeep for the 5 years, till the trees start yielding would be RM240, bringing the total cost to RM1,525. 

We have estimated our earnings to be approximately RM105 – 220 per annum, net of all expenses, starting from year 6 onwards. (We have assumed that, when the time comes, we’ll appoint a contractor to tap the rubber. The present norm is to share the yield 50:50. The amounts represent our 50%). 

Is this a good investment? Let’s see.

Rate of Return Using the rule of 72.

This investment gives us a compounded annual return of 3.60% - 5.76%, depending on market prices for rubber. (I am taking current prices as the maximum).  

The inflation factor should be taken care off in the appreciation of the land.  

Liquidity – Nope. Land is usually considered as non liquid.  

Do I have any regrets? I have to answer an emphatic no. I would not normally participate in illiquid investments with this rate of returns. 

However, our entry cost was relatively low, and it has been an enjoyable experience overall. I love the countryside, anyway. 

There have been some good lessons learnt. 

i) The principal lesson would have been to make sure the land “was what we had in mind”.  (I need to learn this. Now you know the reason for my dismal investment skills.)

ii) During the course of this exercise of clearing and planting, etc., we found out, (too late for us,though) that there were people who would have done all the work for free, provided we allowed them to grow cash crops such as bananas for a period of 2 -3 years. As this does not bother the rubber trees at all, it is a great win-win situation.  

Now that we have the land planted, we do not intend to just wait. We are looking into inter planting with cash crops. Perhaps we can increase the rate of returns, after all.  

As many other aspiring billionaires, I have read and been fascinated by the many books that espouse theories on making money on properties. 

However my wife and I have never really tried “property investing”.  

A good family friend, Kalai, has tried and made money. He has been a “fixer upper” and made decent money on 2 properties. He has bought and sold properties. He has been a property agent and sold a number of properties. He has also a dud on his hands now. His stories have always fascinated me.  

I accept that property is a major asset class and learning about investing in them can only be a plus in our journey to financial freedom. 

So when a local financial and property “guru”, Milan Doshi, announced his upcoming class, I was interested got up my daughter and nephew to sign up. 

The course promises a number of things, related to improving our financial IQ and learning about RE investment. 

Of course, neither my wife nor I expect our daughter (the second, the first is studying in Wales) to return from the course with Donald Trump’s skills.

What then do we expect? 

a)    My nephew and daughter will get to understand at least some of the nitty gritty and be given an introduction to the world of RE investing and the related matters, like tenant issues, types of property, pitfalls to look out for, financing, calculating returns etc. 

b)    My nephew and daughter will get to meet other course participants who should have the same interests and maybe, form a peer group with some of them. (See this great article on the advantages of peer groups). 

Besides, my daughters forming a peer group is one of my goals for 2008.  

c)     My daughter is close to my nephew and there is no reason why they should not form a 2 member peer group to start off with. 

d)    My nephew is a very sensible young man and I am sure his presence at the course and as my daughter’s peer group member will be of great help to her. 

e)    My daughter is not out of University yet, but my nephew has been working for a few years now. He works with our country’s Central Bank, and thus has his fair share of friends in the banking industry. This should be a plus for them.

f)      I have read Milan’s books and I think he gives a fair representation of the industry. It is not “just buy property and become rich”. It is also about gain knowledge, study your property carefully and buy. And that making mistakes in RE investment can be a long painful affair to unravel.

I believe that my nephew and daughter will get a balanced view of the positives and negatives of RE investing. 

Ultimately, we hope that my nephew and daughter will learn from this course and be more enlightened about the specifics of RE investment.

We hope that they will look up and study a lot more on RE. And we hope they’ll consider RE investment as one of their vehicles in their journey for financial independence. 

Kalai has also talked to my daughter about his experiences, relating both his good and bad ones. He dwelled upon the need to carefully study the property and suggested that she should start with something “small and manageable.” 

I am bristling with so called ideas on what my nephew and daughter should do. I have to and must restrain myself. This is their journey.  

Maybe I should just ask for their idea of a 5 year plan on their RE investments.  

I have been losing money in stocks and shares ever since I started “investing”. However, I never kept track of my investment losses (or the very few and very far in between gains).  

In late 2004, I decided that this was not on and formulated a system to keep track of my investment activities. 

First, I thought about and wrote down my investment strategy. 

Second, I opened a separate bank account (joint account with my wife), for this purpose and deposited the seed money into this account. 

Three, I used an Excel file and created 4 sheets. 

a)    One for my monthly balance sheet and benchmark comparisons. The items in this sheet are:-

Benchmarks   

i)                  Monthly closing of the KLSE Composite Index, 

ii)                Monthly change in the Index (%) 

iii)             Cumulative change in the index for the year to date (%), 

iv)              Monthly % change in my “Investment shareholder funds”, which is (ix) below plus or minus the realized and unrealized gains / (losses)  

v)                Cumulative change of (iv) for the year to date.  

This shows me where I stand every month against the benchmark index as well as against my targeted investment returns goals.    

Balance Sheet 

vi)              My account, which would represent drawings from or extra contributions to the bank account,(excludes the seed capital) 

vii)           Bank account  

viii)         Cost of shares/stocks owned at month end

          a.    Add / Deduct Marking to Market 

ix)              Start up capital (my seed money)

         a.    Add / Deduct Profit / (Loss) – Realised

         b.    Add / Deduct Profit / (Loss) Unrealised, i.e. marked to market. 

b)    Sheet Two shows the details of the bank account, all deposits from sales of shares/stocks as well as additional contributions or withdrawals I make. This also includes dividends and interest received. 

c)     Sheet Three is for the details of my account 

d)    Sheet Four is on monthly stock transactions I make.

    This sheet shows:- 

    i)        Date of transaction,

    ii)       Stock Name,

    iii)     Number of shares bought and at what unit price,

    iv)     Total cost,

    v)      Market price as at end of month,

    vi)     Profit / (Loss) for sales done during the month 

At the end of each month, I close off the month’s transactions by inserting a new sheet and naming it by month. The profit/(loss) for the month + the balance as at the end of the previous month is carried into the balance sheet as realized P & L.  

All these may seem cumbersome and complicated, but it takes me only about ten minutes a month to complete the recording for the month. After all I do not have many trades a month.  

My records and benchmark comparisons are based on the month ending closing buying prices. I ignore brokerage and stamp duty for purposes of balance sheet. 

This system has resulted in some changes in my investment management. Seeing the index’s change against the changes in my “investment shareholder’s funds” gives me a clear indication on where I stand for the month. In fact, it is a snap to do this at the end of any day I choose.  

And knowing where we are is clearly the first step to getting to where we want to go.       

At the end of the year, I just close off the year’s results by deciding how much I should use as the opening seed capital for the next year. The difference between the amount of seed money for this year and the decided seed money for the next year is knocked off against my account.

If I have a credit, then I withdraw the amount and it is banked into other accounts, like paying off our mortgage or car loan etc, or a small celebration. 

This is the system I have followed since 1^st January 2005 and it has proven very useful. This includes details of every stock transaction that I have done since the above date. 

Though my “funds” were down by 10.91% against the index’s decline of 1.90% for 2005, they were up 95.45% against the index’s 21.83% gain for 2006. Thankfully, 2007 also looks good so far.  

The absolute amounts involved, will not put me amongst the “markets movers and shakers”, anytime soon…..Sigh H

However, this ability to see and gauge my actual performance against benchmarks and against my internal targets has made a difference in my investment “luck”.

Many PF blogs explain various methods of saving money and reducing expenses. Some of these posts are really good, showing ways to reduce expenses without affecting quality of life in any way.

See The Simple Dollar’s series on “One Hour Projects.” 

Others need a lot more commitment, things like baking our own bread, cooking for a week and storing them, sewing our own clothes, etc. 

We all can agree that the Number 1 cause for a terrible financial position is “living beyond our means.” So managing expenses and controlling them is a must. 

The debate on “whether we should pay down loans (hence reducing interest expense or invest to increase income” is a hot one. I don’t think there is any one single “right” answer.

We have mathematical arguments, talking about comparing the amounts and % that we expect to save and make, and then making our call.  Others who appear to be more risk adverse take the position that interest savings are clearly determined, while investment income is risky and unknown. This, I call, the “bird in hand vs the bird in the bush theory.” 

The Simple Dollar argues that the answer depends on one’s own goals and lists some of the benefits a debt free life can offer. He also calls the debt payment a psychological investment.  

Yahoo Finance drives home the point that :-

First, no one ever spent a sleepless night because she had millions in the bank and stocks but didn’t have her home paid off. On the other hand, if you pay off your mortgage and deprive yourself of liquidity, you could be in for some miserable times. As I see it, if money is even the slightest bit tight, hold onto it and pay off the mortgage month by month. There’s nothing magically good about having a paid-off mortgage, but there’s something seriously bad about not having ready liquid assets even if your home is paid for. 

Others comment that women and men have different approaches to this. They take the view that women are more risk averse, so they would more likely than not, chose to get rid of debt as soon as possible.  

Yet another interesting version to this “save or invest” is that presented by KC Lau. He presents the view that we can only save “that much”, whilst investment income is theoretically unlimited. 

So exactly what should we do? Whilst there is no simple answer,

I agree with KC Lau and the Simple Dollar. There has to be alignment to one’s own goals and feelings, i.e. basically doing what we feel most comfortable with.

However, the basic principles would more or less be similar. 

a)    get our basics anchored down first,

       a.    spend less than we earn,

       b.    build up our emergency fund,

       c.     pay off all our high interest rate debt, 

and, after having made our financial foundation solid,   

b)    invest as wisely as we can.  

Get Rich Slowly carried a very interesting post on “building wealth with a virtual employer”. 

The gist of the story, is that James (a guest blogger on GRS), disguised his income. His actual salary went into one Money Market account, which had automated instructions to transfer amounts predetermined by James to his checking and savings accounts. 

The checking and savings accounts were used for paying bills and ATM withdrawals, while the balance in the Money Market account went on merrily earning for James, first by creating his emergency fund, and later for his investments.  

James treated the checking and savings accounts as his “true salary” and lived within that. Raises and bonuses from his employer were ignored and retained in his MM account. 

James worked out the “raises” he felt that he should get and paid himself by adjusting the automatic transfers from his MM accordingly. Over a period of 15 years, he built up a sizeable nest egg from a net debt position.  

It is not as easy as it seems.

Throughout the period, James exercised great discipline and lived within his means. Always spending less than he “made”. 

The advantages of setting up this “James plan” are many. It creates forced savings. This plan will greatly assist in not allowing our expenses to automatically rise as our earnings rise. Overtime, we should get used to living within our “salaries”.  

Can we do it? Is this James plan for all? 

I suggested the James plan to a colleague who has just been offered another job, with a 20% increase in salary. I told him to speak to his new employers and ask them to automatically transfer to a savings and investment account an amount equivalent to the difference between his new pay and old pay. 

Since he was already used to living within his old pay (despite the occasional complaints and mumblings about insufficient income), he should be able to continue to do so. He could give himself a “raise” one year later. 

Will he follow this advise? Or will the tried and tested devil of expenses creeping up to meet income prevail?  

Time will tell. I’ll check with him 6 months down the road.