My Financial Planning Experience (Part 4)

My study loan of RM50,000 was charged at a flat rate of 9% where I was required to repay this principal and interest within 5 years after my graduation from university. The study loan was a flexible loan where I could repay more than the minimum monthly repayment or a whole lump-sum in order to save interest costs.

However, my 1^st year in work did not even make me to save at least RM10,000 as I was only paid RM750/month, so repayment of RM50,000 study loan seemed impossible. I once doubted that the ROI for my tertiary education could be negative. Fortunately my working income jumped few folds after I completed the graduate training programme and the bank hired me as the permanent staff.

With stable income and fat bonus from the bank, I was able to save close to RM30,000 in the 2^nd year of work and invested these savings into shares listed in Bursa. I was able to settle the study loan and its interest with full repayment after working for 3 years so I could move on to next phase for a plan to possess my own assets. Over the years in my 20s, there was peer-pressure of having a nice car, fancy gadgets, fantastic holidays, delicious food etc, but I resisted all temptations to overspend with the will of being financial freedom earlier before age 40.

As I have shared in the previous post that I took a 2-year break for full-time study of the CFA programme commenced in year 2008, where my investment portfolio and savings were amounting to RM150,000. During the 2-year study, I got a lot of free time, hence I also engaged in other businesses and activities and these almost exhausted of my investment and savings.

The expenses breakdown of the 2-year study were shown below:

Examination and registration fees for the CFA Programme= US$1,500 (approximately RM4,000 to RM4,500 for all 3 levels)

Extra curriculum class for the CFA Programme = RM11,000 (for Level II & Level III)

2-year living expenses = RM30,000++

Travelling expenses = RM10,000++ (1 month to Thailand and 3 weeks to China)

Prawn rearing business start-up costs = RM20,000

Acquisition costs for 2-acre vacant land = RM70,000

The prawn rearing business did not work well and it was eventually written off from my book, left only 2-acre vacant land which is turned into a banana estate. The reasons I bought the 2-acre land due to attractive price and also this land is nearby my home town house and thus my father who is a retiree can spend his spare time in plantation.

I completed the CFA programme in August 2010 where I only had left with some pocket money of less than RM5,000, I realised I was just back to square one in my finances and this was the similar situation when I graduated from the university 8 years ago. I was broke and need a job to re-build my financial goal again during the time when the world economy was just recovering from a financial crisis since year 2008.

To find MAS' missing plane MH370 with Bayes' Theorem?

Forward: 

An 18th century math equation may hold answer to finding missing plane, say scientists

http://www.themalaysianinsider.com/malaysia/article/an-18th-century-math-equation-may-hold-answer-to-finding-missing-plane-say

Scientists believe the solution to finding Malaysia Airlines flight MH370 may lie with a mathematical equation.

Speaking to Al Jazeera, they say that Bayes' Theorem, an 18th century mathematical equation, could help to locate the missing plane which dozens of authorities worldwide have not been able to after five days of search and rescue operations.

“It’s a very short, simple equation that says you can start out with hypothesis about something - and it doesn’t matter how good the hypothesis is,” said Sharon Bertsch McGrayne, who has authored a book explaining the method in layman's language, The Theory That Would Not Die.

And the hypothesis is subject to change, based on probability, but can still be used with the theorem. Pretty much based on the concept of learning from experience, one can say.

It is because of this character of the formula - forcing researchers to change their hypothesis with each new information - that the probability becomes more accurate.

According Lawrence D. Stone, chief scientist at Virginia-based consultancy Metron whose help was sought to apply Bayes’ Theorem in the Air France incident, Bayes’ Theorem “allows the organisation of available data with associated uncertainties and computation of the PDF (probability distribution function) for target location given these data".

In the past, Bayes’ Theorem, said to be discovered by an amateur mathematician in the 1740s and modernised by French scientist Pierre Simon Laplace, had helped locate German U-boats during World War II and spot Soviet submarines during the Cold War. More recently, it is used in Google's "driverless cars" project and in stock market predictions.

Advocates of this theory said it was also used in the search for the black box of the ill-fated Air France flight 447, which crashed in the vast Atlantic Ocean in June 2009.

What took two years for other experts in the search for the black box, took only five days for consultants who applied the Bayes’ Theorem, to finally find the device 12,000 feet under water.

Stone told Al Jazeera that in the current search for flight MH370, it is “highly unlikely” that Bayes’ Theorem is being applied.

That is not to suggest it is totally absent.

Bayes' Theorem is pervasive, and those involved in the current search have applied a certain Bayesian flavour in their search, "but it then got upset when their prior calculations were incorrect,” said statistician Professor Bradley Efron of Stanford University, as quoted by Al Jazeera, referring to the conclusion by Malaysian authorities that the MAS plane could have ended up in the Strait of Malacca.

Bayes' Theorem, after all, is all about learning from experience, which is probably why Efron said one would need "reasonably accurate past experiences" for the theorem to work. In other words, to calculate accurately to locate the plane. – March 13, 2014.

==============================================

When I first read this news, I was wondering how can Bayes' Theorem can find the missing plane MH370?

The formula of the Bayes' theorem is stated below:

As mentioned in the press above, the sentence highlighted the key character of this formula is "forcing researchers to change their hypothesis with each new information - that the probability becomes more accurate".

By referring to the prior probability and feeding the posterior probability with new information to ascertain the location of the missing plane. This could be further supported by Laplace's Bayesian Probability, i.e. to make a reference analysis in determining the subjective probability and focus on zones that are within the circle of highest in Bayesian Probability.

I hope the Bayes' Theorem can be applied practically in the searching of the missing plane MH370.

My Financial Planning Experience (Part 3)

With all the plans in place, the next step was to set a financial target in the accumulation of a net worth of RM1 million. There are 2 key variables in the formula of wealth accumulation, i.e. annual savings and the investment return for the annual savings.

Initially in the 1^st scenario, I set an annual saving target of RM10,000 and together with an annual investment return rate of 10%, I realised I may not be able to achieve the mark of RM1 million within 20 years or before age 40. Below is the illustration that I could only achieve a networth of approximately RM640,000 within 20 years.

Scenario 1

In view of the above, I revised the variable on the annual savings from RM10,000 to RM20,000, and I would be able to reach the mark of RM1 million in year 18 as shown in 2^nd scenario below:

Scenario 2

Well, I was not content with the result of only achieving the mark of 1^st million net worth in year 18, I wanted to make this happens more earlier. So subsequent 2 more scenarios with the assumptions that I could up the higher annual rate of return to 20% and/or have my savings increment will inflate at a rate of 3% annually.

Scenario 3

Scenario 4

Looks like the 4^th scenario would be the ideal plan on meeting my 1^st pail of gold within 12 years. I was excited and started to dream that should I not only work hard so I would earn and save more and have salary/savings increment, but I would also spend time on doing lot of research in finding good investments with an annual return of 20%, then I would be able to be a millionaire when I’m at age of 32!

This year I’m at the age of 31, am I close to be a millionaire now? Well, things seem not going as planned.

My Financial Planning Experience (Part 2)

I was wondering how could I make a fortune of RM1 million when I began to work 10 years ago. What can I do to achieve the target? How would I execute plans to achieve the target? Should I work my ass out to be a top executive in a company so I would be rewarded high income salary and bonus? Should I become an entrepreneur in doing my own business or become an active investor? I had no idea at that juncture.

During the time I was staying at Wangsa Maju, I used to visit my best friend who was still studying his diploma at Kajang during the weekend. We always talked about what would be our future and 1 day he shared me a book and told me that this could be our future. The name of the book is ‘To be an intelligent investor’ (做个聪明的投资人) written by John Mark (麦青远). This is the book where I came to know Berkshire Hathaway, its CEO Warren Edward Buffet and value investing, to realise that I can be financial free by investing into good companies and to find out long-term investment holding is far more superior than short-term trading.

As I came to click with the idea of investment as a way to achieve financial freedom, but I didn’t have any capital to roll for an investment portfolio. Then I came across to books related to financial planning. "The Millionaire Next Door" by Thomas J.Stanley and William D. Danko is one of the many books that shaped my philosophy in financial planning.

I did try to explain and educate my friends about the the lifestyle to live below our mean. For example, if I have a salary income of RM3,000 so I can afford to buy a local 'Proton', I'd still keep using public transportation such as LRT. If my income is RM6,000 and I can afford to buy a foreign branded car like 'Vios', but I choose to own a local 'Myvi'. Indeed, I had only bought a car when I turned 30 in year 2012 (which was 10 years after I started my first job) and changed to a job that requires me to drive for meeting at outstations. Having said so, I will only drive my car for meetings that not beyond 300 KM away from my PJ house otherwise I'd demand the company to pay me to take on flight, and I still regularly take LRT with free shuttle GO KL to my office. I only pakai my car when I need travel outstation, going back hometown or meeting friends. Even until today after 18 months I bought the car, the mileage of my car is lower than 9,000 KM.

Another practice I adopt to manage my finances is to 'pay myself first'. Whenever I get paid of my salary, I will put aside a portion of my net salary in a different savings account from the account that I use to receive my salary. When I start to apply this practice, the portion I put aside was 10% of my net salary, I adjust the percentage according to the scale of my disposable income. Currently I'm working in a non-profit organisation and thus getting much lesser income, but I still practise 'paying myself' with 30% out of my current salary income. Should I still continue to work in the commercial, I'd have higher disposable income up and hence would be able to 'pay myself' up to 50%.

With these practices, I nurture a habit that allow me to save for future spending or investment disregard I'm earning high or low income. When I save enough emergency fund which is about 6-month of my monthly expenses, the subsequent savings would be allocated to another savings account just to get myself prepare to grasp any investing opportunities. When we have the bullet, it's time to go for hunting.

My Financial Planning Experience (Part 1)

When I graduated from Victoria University of Wellington in December 2003, I had only NZ$300 left in my pocket. I spent NZ$200 to treat my friends a good meal and bought them farewell gifts before I returned to Kuala Lumpur (KL) the next day after I attended the graduate ceremony. In addition, I graduated with a study loan of RM50,000 which would require me to commit for monthly repayment 1 year after my graduation. At that moment, I was just a naïve 20-year old fresh graduate without knowing which direction I would be heading to.

In KL, I was staying with my elder brother who was still studying in Help College and we were staying at Damansara Heights (DH). Rental expenses in DH was as high as RM500/room. My brother took care of the rental, then I took care my own spending on meals, transportation and other spending. My first job was financial planning attached with AIG and I quit the job in 2 months as I realized I couldn’t do sales of insurance. During these 2 months, my new cell phone and expenses in meal cost me close to RM1,000, which exceeded my remain leftover NZ$100 (approximately RM200), so I had to borrow from my father to cover the short change.

Eventually I was offered to be a Graduate Trainee Officer (WTF, GTO!?) in April 2004  by the Securities Commission (SC) and attached to the corporate finance department of a merchant bank. As a GTO, I did not receive salary but allowance of RM750 from the SC, and this GTO program lasted for a year. Few months after I commenced the work as GTO, my brother graduated from his study and he was moving out from DH. By then, I had to support myself in KL with a pathetic allowance of RM750.

I subsequently shifted to Wangsa Maju and rented a place to sleep at a cost of RM100/month. I shared a room with 4 fellows. Life was tough, but I was still able to save RM50/month for repayment to my dad. Until today, I'm still proud that I could save RM50 with an income of RM750 only, and most of my friends didn’t believe of my RM50 savings/month.

I still recalled the breakdown of living expenses during the time when I was earning RM750. There was no EPF because the amount was allowance instead of salary income.

Income: RM750

Rental: (RM100)

Food: (RM360)

Phone/Internet: (RM50)

Transportation/LRT: (RM90)

Fund to parents: (RM50)

Insurance: (RM50)

Net Savings: RM50

Everything seemed settled except my study loan coming due for monthly repayment in year 2005. As my family was poor and my parents are retiree and not able to lend any more financial support to me, I had to find my way out or else I'd be in financial woe.

Forward: Warren Buffett’s Brand-New Advice on How to Get Rich

http://www.fool.sg/2014/03/03/warren-buffetts-brand-new-advice-on-how-to-get-rich/?source=s76yhocs0070001

Two small investments Warren Buffett made more than two decades ago can teach us all something about how we should view our money.

Each year, investors anxiously await the annual report from Berkshire Hathaway, which contains a letter from Buffett that contains indispensable insight into the decisions he’s made both over the last year and his entire life.

His letter for 2013 has just been released over the weekend and in it, Buffett outlines how two small real estate investments he made more than 20 years ago that can prepare everyone for a future of success.

The investments

Buffett describes his 1986 purchase of a 400-acre farm 50 miles north of Omaha, Nebraska, in the USA. Just a few years prior, farmland in Nebraska and the entire Midwest was booming, but a bursting of the bubble caused prices to decline rapidly. Buffett was able to buy the land for US$280,000, which was “considerably less” than what a failed bank valued it a few years earlier.

While Buffett notes he “knew nothing about operating a farm,” he enlisted the help of a son – who was an avid farmer himself – and the two estimated the return on the investment would be 10% annually.

He then describes the purchase of a “small investment” – the price wasn’t mentioned – of a retail property in New York City that was next to New York University in 1993. He joined two other friends to buy the property following the collapse of the commercial real estate bubble and once again estimated he could earn about 10% each year.

As typical with Buffett, he is somewhat muted on what he has actually made from the initial investments, but notes, “The farm has tripled its earnings and is worth five times or more what I paid,” and he now receives 35% of his initial investment in the real estate property annually in the form of distributions.

Although the investments were small – Berkshire Hathaway had a book value of more than US$2 billion in 1986 and almost US$9 billion in 1993 – and he has never seen the property in New York and visited the farmland only twice, Buffett notes that “the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.”

The lessons

First, Buffett says, “You don’t need to be an expert in order to achieve satisfactory investment returns,” and a recognition of personal limits while ensuring things are kept simple navigating along a “course certain to work reasonably well” is critical.

He adds that when an investment decision is made, it’s always critical to evaluate “future productivity” to determine if it’s a worthwhile investment. If an investor is unable to gauge a“rough estimate” of what the future return of the investment is, Buffett says the best step is to simply “forget it and move on.”

Buffett continues by highlighting that he focuses on productivity, not price, which is a critical distinction. Often investors are lulled into thinking it’s only the price that matters, but prices are merely speculations of a value, whereas the productivity of a business is where the actual value is created.

The final lesson Buffett extols from these two small investments is that he didn’t consider the broader macroeconomic or market predictions from others because those “may blur your vision of the facts that are truly important.”

Next, he says speculation surrounding future price and daily prices are superfluous when making a decision. Again, he harps on the truth that he “thought only of what the properties would produce and cared not at all about their daily valuations.”

Changing your life

In all five points, Buffett highlights things that can be taught to all investors, both those in real estate and those preparing for retirement through the stock market.

Investments are to be made in businesses that generate returns to their investors, not simply the names and numbers of stock tickers. For instance, the great multi-bagger returns over the past 22 years from blue chips in Singapore like Keppel Corporation(SGX: BN4), Jardine Cycle & Carriage (SGX: C07) and United Overseas Bank (SGX: U11) did not happen in isolation; they came about due to great growth in profits (i.e. an increase in the businesses’ productivity).

While it is easy to be swayed by daily trends, long-term investments at reasonable prices are always a winning formula. And if that sounds too daunting or difficult, Buffett says a very low-cost index fund is a wonderful solution.

Buffett concludes by reminding readers of his oft-repeated but immensely valuable advice he learned from his professor and mentor Ben Graham: “Price is what you pay; value is what you get,” which is something everyone must remember when making any investment.

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Forward: DREAM COME TRUE! Buying a Ferrari for the price of a VW

SINGAPORE - Forget market trends. Forget market timing. If one believes that the global economy will be stronger in five years' time, the present is always the best time to invest in shares.

That view comes from someone who remains fully invested in stocks even as volatility roils markets around the world.

For Mr David Kuo, chief executive of Motley Fool Singapore - a portal that offers stock market and investing information - the ability to recognise a good company, one that is run by strong management, is more important than timing investment market trends.

With that skill, the investor is always ready to jump in when a stock looks undervalued.

Unlike investors who believe that only high-growth companies can generate exceptional returns, Mr Kuo watches out for businesses that are "valued by the market at 50 cents, but are really worth a dollar".

As he puts it, he is "looking for a Ferrari that's selling for the price of a Volkswagen".

"That rarely happens when the market is trending higher, which probably makes me a contrarian."

The secret to high returns…

Is compounding capital growth and reinvested dividends.

I have a portfolio of good stocks that gives me plenty of opportunities to add money to.

Any cash that I don't need for the next five to seven years is generally put to work in the stock market. I just keep adding money to the companies that I like.

I am fully invested, which means that the only cash in my portfolio comes from regular dividends.

I am not a fan of fixed income, and property is too troublesome to manage.

Property can take too long to liquidate and can't be easily sold, brick by brick.

My only exposure to property is through Reits (real estate investment trusts) and the roof over my head.

My investment strategy is…

I started investing in stocks in my 20s. At the time, buying and selling were done over the phone, and getting information about companies took ages. But poring over company accounts in annual reports was a good learning experience.

Most people start out trying various investing techniques before settling on one particular style that suits their temperament and personality.

I was no different and, in my case, it turned out to be income investing. To me, it is logical, it can be rewarding and, if you pardon the pun, it pays dividends.

Investing is a business…

I am a great believer in capitalism, in allocating capital in an efficient way to achieve an acceptable rate of return.

Not many of us will have the opportunity or the resources to run our own business. But when I invest in a business, I become a part-owner. I am not involved in the day-to-day running of the business, but that doesn't mean I can't be interested in how the business is being run or enjoy the rewards when the business does well.

What should one do or have to be a successful investor?

Investing is not difficult.

The one skill to attain is how to recognise a good company when you see one. When you do, don't ever let it go, whatever the market might say.

Likewise, having the patience and the ability to stick to an investment strategy is important.

Some of the most boring and mundane companies can generate some of the most lucrative returns - if you are patient.

Within the Straits Times Index, firms such as Keppel Corp, Sembcorp Industries and SIA Engineering have delivered, on average, annual double-digit returns since the turn of the millennium.

During the dotcom boom, I mistakenly believed that the world was entering a new paradigm and invested in a company that eventually went bust.

The point is, there is no such thing as a new paradigm. The old rules always apply. If a company has too much debt or if it is making losses, then chances are it will go bust.

Many think they can dance in and out of the market and use fancy mathematical formulas and theorems to profit from shares.

It just doesn't work. The most profitable investment is the one that you understand best.

What shouldn't one do?

Never borrow money to buy shares. Leveraging - using other people's money - can amplify your gains, but it can also magnify your losses; the market can stay irrational longer than you can stay solvent.

Overtrading is another thing to avoid. Buying and selling incur costs, and every cent of cost paid out is a cent that could be earning you money in the market. -Asiaone

Full article: http://www.malaysia-chronicle.com/index.php?option=com_k2&view=item&id=235951:dream-come-true-buying-a-ferrari-for-the-price-of-a-vw&Itemid=3#itemCommentsAnchor#ixzz2utgm7r8J