National Savings Bond by the Malaysian Government

Referring to the newspaper article by TheStar on RM5bil National Savings Bond on sale from April 14 , i was asked whether this investment is good or not, and whether should they invest in it.

The main features of the National Savings Bond is as below:

• Investment amount - ranges from RM 1,000 to maximum of RM 50,000, and in multiples of RM 100.
• Tenure - 3 years
• Frequency of interest payment - Quarterly
• Interest - 5% Guaranteed by the Government. So, it's "safer" than keeping money in the Bank.

Details of the Bond is available in BMN's website:

• News
• FAQ
• Key Features

So, back to the question, "Is it good?". The answer to this, depends on what you're comparing with.
"Is running fast?" That depends on whether you're comparing with walking, or driving.

Since Malaysian FD rates is going at 2.5% per year, then obviously this Bond is better.

However, is that the only choice we have for our money?

At 5% return, it'll take 14.4 years for our money to double (using the simple "Rule 72"). As our money earns interest (or returns), our money is also "eaten" up by inflation. Does it take 14.4 years for our expenses to doubled? I believe it'll take less than 14.4 years for goods to double in price due to inflation. I would estimate, between 8 to 12 years for goods to double in price.

Saying this, goods would double in price (due to inflation) BEFORE our money would double at the rate of 5% per year. I don't see anything safe about this. Infact, i don't see anything fun with getting poor slowly, but SURELY.

Most people would compare which product is better without understanding and knowing their needs. Truth is, which product, tools or medicine is better depends on your needs, and not on the product itself!

If you're having a headache, it doesn't matter whether Viagra is better, or Cialis is better. Both won't help much in your headache condition. What you need is a Panadol, and not choosing between Viagra or Cialis!

So, in what situation is this National Savings Bond good for you? I believe it's good if:

1. You need the money within these 3 to 4 years, or
2. You want to find a place to make your "Emergency Fund" earns higher return.
3. You have No Dependant, have set aside emergency and medical funding, knowing that your personal inflation rate is lower than 5% yearly, and have a Net Worth that is more than your remaining lifespan multipled by your current yearly expenses.
4. You know that you don't know how to invest, and don't trust anyone with your money. (Same analogy goes to driving a car: You know that you don't know how to drive, and don't trust any "driver" to drive you to Singapore, so.... you WALK from Penang to Singapore!")
5. Can't think of any other reasons why this is good.

However, i don't and won't invest in it because:

1. My needs within the next 3 to 5 years is in Bond Fund, which i will be using almost entirely within the next 3 months. So, the difference (if any), would be insignificant.
2. I'm happy with my current emergency fund, putting it in Bond Fund. And since my income is "safe", i feel comfortable with 2 month's expenses being set aside for emergency fund.
3. I don't have enough to retire on. I don't have RM 3.5 Million currently if my annual expenses is RM 50,000 and my remaining lifespan is 70 years.
4. I believe i know what i'm doing with my investments, and i choose something something which fits my long term needs. Just as Michael Schumacher believes he knows how to drive fast and safe, it doesn't mean that driving fast is not safe!
5. I trust Warren Buffett (thru Berkshire Hathaway) with more than 30% of my Net Worth, I trust Public Mutual with 90% of my Net Worth, and I also trust some of the CEO's of Public Listed Companies with my fractional ownership these companies.
6. I don't enjoy getting poor slowly but surely. I enjoy getting rich slowly but surely!.

Most important of all, I won't choose between Walking or Running if i want to travel from Penang to Singapore. I would rather choose between Firefly, AirAsia, MAS or Singapore Airlines (though i believe it doesn't make much difference in the speed and safety between them).

I don't foresee a need for more than 90% of my assets for the next 5 years or longer, so i rather choose other financial "vehicles" to reach my financial "destination".

What financial "vehicles" is the best for a person who won't be needing the money for the next 5 years? Definitely in Ownership (of Business, or Real Estate) ! I'll write more about it next time. :-)

Introducing my Father-in-law & my Wife. They're "models" in Personal Money magazine October 2005 Issue

Yes, my father-in-law and my wife were in the front cover of Personal Money magazine. That time, she was my girl friend, and her father, well.... let's just say that I used to live in their house most of the time.

Isn't she pretty? She's getting prettier day by day. Take a look at her blog here.

Why are they in the front cover of Personal Money magazine holding money?. Well, they joined the Investment Game organised by the magazine (sponsored by Hwang DBS) together with me.

The contest lasted for 1 year, and the winner was decided based on the investor's return after deduction of all charges and transaction fees. My father-in-law was the Champion, and my wife was 4th. How about me? I got 6th position.



The top 25 is as below:

Special mention: The No. 14 winner, Tan Seok Luan is my good friend, and my 1st agent who joined me in Public Mutual. I informed her about the contest, and suggested her to join as soon as possible, and invest in a low cost Bond Fund with good past performance.
She took my advice, and she kept the winnings. :-)

A few things the 3 portfolios (my Father-in-law, my wife and mine) had in common:
1) We all lived in the same house at that time.
2) We used the same computer.
3) We ate dinner together most of the time... hehehe..
4) All the 3 portfolios were being "advised" by the same person. :-)

The position, total return, and the prize winnings of the 3 portfolios are as below:
1st - 15.26%, winning RM 80,000
4th - 10.40%, winning RM 20,000
6th - 9.23%, winning RM 3,000

Total Prize money won = RM 103,000.
Average return from the 3 portfolios : 11.63%

They interviewed the top 5 winners, and each has their own page story. I missed the Top 5 mark by 0.09%.

My Father-in-law's full page interview

My Wife's full page interview

The Winner's Circle. My name was mentioned, though i wasn't "promoted" as husband, yet.

What's interesting, is this small side article:

There were 2,326 unique participants, with 3,153 portfolios (some joined 2 or more entries). Since each person had an initial RM 100,000 virtual fund to start with, they as a group, managed RM 315 Million.

Average Losses for the 3,153 portfolio is -1.41% !!

Meaning, these 3,153 participants ended up with less than RM 315 Million after the contest ended. Mind you, that period, the KLCI went from 827.49 points on August 2nd 2004 (dropping to a low 804.89 points on August 24th 2004) to close at 937.39 on July 29th 2005, one of the highest KLCI points of the contest!

The results show:

1. These contestants will better off just by putting their money in FD. At least they won't get a -ve return.
2. In fact, they will be better off by not doing anything with the money (rather than simply buying unit trust funds). This way, the overall portfolio would be 0%, which is better than -1.41%!
3. Or it could simply mean that they took this contest for "fun", and thought that they could not possibly be among the top 25 (6th position to 25th will get RM 3,000 worth of Unit Trust by Hwang-DBS).

I know i did not take this contest for fun as there is real money at stake! Infact, all my money (then, now, and future) are serious money. I think carefully before I put my money anywhere. I always compare what I pay with what I get.

Being frugal is totally a different meaning compared to being a miser.

In one my future entries, maybe I would explain more about the 4th position portfolio 'Dynamic Asset Allocation' which I believe is supposed to shine out among the 3 portfolios.

Discrepancy in IOI Corp and IOI Properties Stock price

Today, i noticed a discrepancy in prices between those 2 shares. Since i can't take advantage of it, might as well i share it here in the hope that you'll learn a lesson or two, and take advantage of it, if the condition fits you.

Let me share some background info:

1. On 4th February 2009, IOI Corp issues a Voluntary Take-Over Offer to take over IOI Properties at:

• 0.6 shares of IOI Corp , and RM 0.33 CASH for every 1 share of IOI Properties.
  Full Details of the offer is here.

2. Then, on 30th March 2009, IOI Corp have already received (plus their own ownership in IOI Properties) in excess of 90% of the shares outstanding. Since they own more than 90%, the remaining shareholders of IOI Properties are "forced" to convert their shares to IOI Corp at above terms. Full Details of the 90% ownership of IOI Corp is here.

3. By 7th April 2009, IOI Properties would be delisted from Bursa Malaysia, and converted to IOI Corp shares at above terms.

So, the equation below must hold true.

1 IOI Properties share = 0.6 IOI Corp shares + RM 0.33 CASH

If the above equation differs by anything more than the brokerage fees involved (say, 1.5%), then arbitrage opportunity would arise.

As of this writing (4.30 pm on 31st March 2009), you can buy IOI Properties at RM 2.50 per share, and you can sell IOI Corp at RM 3.80 per share. Fitting it to the equation above:

Left Side : 1 IOI Properties share = RM 2.50

Right Side: 0.6 IOI Corp shares + RM 0.33 CASH = RM 2.61

That's a difference of 11 cents, or 4.4% !. Seeing this, I can buy 100,000 shares of IOI Properties at RM 2.50, and "sell" 60,000 shares of IOI Corp at the same time.

This way, i'm making a nearly risk free return of at least 3.4% in a week (that's the holding period for my IOI Properties shares to be converted to IOI Corp shares). After my IOI Properties shares is being converted to IOI Corp shares, i'll "return" the IOI Corp shares back to cover my short selling position.

Nice Arbitrage Opportunity? Too bad Short selling is not allowed in Malaysia since 1998. :-(.

However, if you own IOI Corp shares, you can sell those shares, and buy IOI Properties shares (with the above proportion). 1 week later, you'll have back the same number of IOI shares, and make at least 3.4% profit (assuming total brokerage fee is 1% both sides).

I know i would do that if i manage a portfolio of a few hundred Millions like a mutual fund. :-).

Would i just buy IOI Properties (without short selling IOI Corp at the same time), in the hope that i can sell IOI Corp shares at that above price 1 week later to make 3.4% profit?.
No, i won't. That involves risk, and possibly i might lose money. To me, this way is Speculation (and not Investing). Read the difference between Investing and Speculating here.

The Crisis of Credit Visualized

The best, simplest explaination of current Financial Crisis. Must Watch !


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Is BNM doing the right thing to reduce interest rates?

Seeing The Star newspaper today, i couldn't help but to blog on the "Your Opinions" column by one of the reader through sms. His title is "Have a heart". Below is his sms:

BANKS should not lower FD interest from 3% to 2.5%!. How do you expect retirees to survive? Heave a heart! BNM, please look into the matter. [adjusted for short form]

I do have a few comments regarding his comment:

1. Who "forced" that person to put his money in FD? Obviously, the answer is nobody, and yet, why is he blaming the Government for getting that kind of return? If he's not happy with that return, then why is he still putting it there?

2. If money is important, why didn't that person learn how to let his money work hard for him? If money is not important, then why does he send that sms in the first place?

3. When he wrote that sms, he's looking from his point of view (only, which i find it selfish), while BNM looks from the overall point of view for the benefit of the overall country! When a country is in recession/depression/ financial mess, BNM's main objective is to bring the economy back to stability, which means, to :

1. Encourage spending - so that businesses continue, which gives employment to people.
2. Encourage business growth - so that businesses will hire people, which ultimately reduces unemployment rate of the country.

Which situation would encourage spending (or discourage savings) more than the other ?
A) When interest rate is high (say, at 10% per year), or
B) When interest rate is low (say, at 2% per year)

So, to encourage spending, should the government increase interest rate, or reduce interest rate? I hope the answer is obvious to everyone.

Now, when interest rate drops, lenders (or called depositors, who lends money to the Bank) earns lower interest. On the other hand, borrowers pays lower interest! This again would encourage consumer spending, which helps businesses, who provides employment to the general public.

I believe businesses is one of the main borrowers of money. When interest rates drops, their cost of borrowing is therefore reduced. This would encourage business expansion as their risk of losing money is reduced because of lower cost (which would mean lower break-even, and higher profit). When businesses expand, they create employment to the public.

In conclusion, do not depend on the Government (or anybody to take care of you). Take responsibility, learn about Economics, Finance, Business and Investing. Then, you would know that :

1. Owning the Casino is better than gambling in the Casino.
2. Owning Tobacco companies is better than smoking Tobacco, and lastly,
3. Owning the Bank is better than keeping money in the Bank!
   (assuming you're buying a RM 1 business for RM 0.80 or lesser)
   

How We Think About Market Fluctuations - by Warren Buffett

This article was extracted from Warren Buffett's letters to Berkshire Hathaway's shareholders in 1997. It's available at : http://www.berkshirehathaway.com/letters/1997.html



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A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.


But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.


For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners' indirect savings program will be.


Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.


At the end of every year, about 97% of Berkshire's shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.


So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: "Every putt makes someone happy.")


We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.