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 

Formula for a retirement fund

In my opinion, the amount of retirement fund should be formulated as follows:

= Yearly Expenses / Expected Annual Return Rate (%)

Giving an example by assuming yearly expenses for a family of 3 (parents and a new born kid) to retire comfortably in Kuala Lumpur to be RM100,000 (approximate RM8,300 monthly) which include repayment of housing and car loans, and also the most prudent annual return rate of the fund for the family depends on fixed-deposit rate of 3%, then the family should accumulate a retirement fund of RM3.33 million, which is about 33 times of their yearly expenses (1/3%).

From the formulated I quoted above, should you be able either reducing yearly expenses or increasing expected annual return rate, then you would only need a smaller fund for retirement. Remember, the smaller the retirement fund, then the easier to achieve and retire earlier.

How to estimate future growth rate? 如何预测未来增长率？

当我们要预测未来的增长率，有好几种方法，通常比较准确的会用复杂的定量方法(Quantitative Methods)比如时间序列(Time Series)来估计未来值。

http://en.wikipedia.org/wiki/Time_series

时间序列(Time Series)有很多种方法，最常见的有5种：

指数平滑法(Exponential Smoothing，ES)

http://en.wikipedia.org/wiki/Exponential_smoothing

自回归滑动平均模型(Autoregressive Moving Average, ARMA)

http://en.wikipedia.org/wiki/Autoregressive_moving_average

差分自回归滑动平均模型(Autoregressive Integrated Moving Average, ARIMA)

http://en.wikipedia.org/wiki/Autoregressive_integrated_moving_average

自回归条件异方差模型(Autoregressive conditional heteroskedasticity model, ARCH)

http://en.wikipedia.org/wiki/Autoregressive_conditional_heteroskedasticity

广义自回归条件异方差模型(Generalized Autoregressive Conditional Heteroskedasticity, GARCH)，

http://en.wikipedia.org/wiki/GARCH#GARCH

这些方法都是根据统计系统观测得到的数据估计法，并纠正了统计数据里的一些样本容量误差(Sample Size Error)，异常值(Outlier)和周期性的变化(Seasonal Volatility)。

但我认为以上那些方法太过复杂耗时，因此还是用比较简单的统计法比如简易平均值法(Simple Average)来算出未来值。

用个例子以过去5年营业额(Revenue)增长率再用Simple Average值来算出未来的增长率：

2009 = 5%

2010 = 6%

2011 = 80%

2012 = -1%

2013 = 12%

Future Growth Rate = (5% + 6% + 80% - 1% + 12%)/5 = 20.4%

由于2011年的增长率为80%可被认为是反常的异数(Abnormal，Outlier)，那也可以将2011年的数据排除以得出未来增长率。

Adjusted Future Growth Rate = (5% + 6% - 1% + 12%)/4 = 5.5%

5.5%视乎较为合理的反映未来的增长。然而我认为Simple Average有个不足的一点是因为它是等权重(Equally Weighted)，意味着过去5年的每一年增长率都是对未来值的影响程度是对等的，这可有点不够实用。我认为最近几年的数值对未来值的影响最大，而较远之前的数值的影响最小，就想到了用加权平均法(Weighted Average)来估算未来值。Weighted Average的算法是为每年各自设定能反映它们对未来的比重因子(Weighted Factor)，将各自的比重乘于它们各自的增长率，然后将这些加权增长率总和算出未来值。以下是Weighted Average的算法:

2009 = 5% (Weighted Factor = 1)

2010 = 6% (Weighted Factor = 2)

2011 = 80% (Weighted Factor = 3)

2012 = -1% (Weighted Factor = 4)

2013 = 12% (Weighted Factor = 5)

Total Weighted Factor = (1 + 2 + 3 + 4 + 5) = 15

Future Growth Rate = [(1 * 5%)/15] + [(2 * 6%)/15] + [(3* 80%)/15] - [(4 * 1%)/15] + [(5 * 12%)/15] = 20.87%

如果将2011年异常的80%增长率排除出去，那调整的Weighted Average算法如下：

2009 = 5% (Weighted Factor = 1)

2010 = 6% (Weighted Factor = 2)

2011 = 80% (Weighted Factor = 0)

2012 = -1% (Weighted Factor = 3)

2013 = 12% (Weighted Factor = 4)

Total Weighted Factor = (1 + 2 + 3 + 4) = 10

Adjusted Future Growth Rate = [(1 * 5%)/10] + [(2 * 6%)/10] + [(0 * 80%)/10] - [(3 * 1%)/10] + [(4 * 12%)/10] = 6.2%

可以看出Adjusted Weighted Average算出的未来值是6.2%跟Adjusted Simple Average算出的5.5%是有些差距的。我认为Adjusted Weighted Average算出来的数值能反映出现实中较能持续的数值，所以我将这种未来估计法称为‘可持续加权平均法’(Maintainable Weighted Average)。

还有我要强调的就是统计学毕竟是以过去数据为依据来算出未来值，但是如果公司面临着结构性的改变就意味着以往所经历过的数据不一定会在将来重复，所以请勿死板的用方程模式来算未来值，要懂得变通做出弹性的调整。请记住约翰.梅纳德.凯恩斯(John Maynard Keynes)曾说过‘我宁愿要模糊的正确也不要精确的错误'("It's better to be roughly right than precisely wrong")。