Friday, August 21, 2009

Crash is King

After reading W.E.B's op-ed, I have some thoughts to share. Cash is really not king presently. Look at the returns of the following possible places to park your money:

All returns are quoted in per annum time basis

1. Cash - savings accounts - 0.1% to 0.25% (DBS)
2. Cash - fixed D - 0.1% to 0.7%
3. Money market fund - 1-2%
4. SGD treasury bonds - 15 yr bonds - 3%
5. Stocks dividend - roughly 5% (don't kill me over this figure pls, I know there are higher yield than this)

Considering a rough inflation rate of 3-4%, I think most of the places to park your money will give you negative real returns. Except of stocks that is. But this is not a blog post to ape W.E.B's op-ed cry out to buy buy buy. I'm just showing you how much you stand to lose by holding on to the false security of holding cash.

Some of the older folks are holding dear cash since forever, afraid that the stock market will eat up their money. Oh, that's undeniably true - stock market gives good returns and do note that it is also the ONLY one listed above that your capital can be eaten up too. The rest are more or less risk free and pretty much capital guarantee. It reminds me of the boiled frog parable - if you put a frog in boiling water, it'll jump out to safety. If you put a frog in water and warm the water up to boiling point, the small differences will not be perceived so readily by the frog and it will scorch to death.

This analogy extends to holding cash. It's rather easier to get 'eaten' by inflation at the rate of 3% per year passively than a one shot (possible) 5% loss punting the stock market actively.

Still, don't go out and just BUY BUY BUY. Ask yourself this: what to buy, when to buy and how to buy. The market is not your mother - it will snatch the milk bottle off your mouth, steal your toys, tempt you with poisoned sweets and maybe, there's a chance that it will reward you for taking that risk.

Thursday, August 20, 2009

The greenback effect by Warren E. Buffett

August 19, 2009
Op-Ed Contributor
The Greenback Effect


IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous
as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future
just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Thursday, August 13, 2009

Savings in life policy

I was looking at Tan Kin Lian's blog. He was lamenting on the poor returns of life policy (meaning whole life insurance). He mentioned that it will breakeven after 15 yrs and the returns are somewhat in the range of 3% to maybe 4%. I've some thoughts about it and I would stress that this post is not to criticize him, but rather to voice out my opinions on the same matter.

I totally agree with Mr.Tan that whole life returns is not fantastic. Buying a whole life insurance is certainly not the best way to maximise your returns. But I think those who buy whole life insurance to save up is missing the big picture. One of the most prominent advantage of using whole life, as opposed to term insurance, is that you are covered until til 100 yrs (plus minus), whereas term life covers you until age 60 (plus minus again). If you think that you only need to cover yourself until age 60, then why buy a whole life plan for? If you intend to cash out the returns from a whole life plan, then why buy a whole life plan for?

I believe no products are bad. It's just a mis-match between the problems that you intend to solve and the solutions you used to solve it. If you need better returns, then don't buy a whole life plan, buy something that gives you better returns. If you hire a maths tutor, but complain to the maths tutor that the science results are bad, I think you need to hire a science tutor, not a maths tutor.

Now, I would be totally pissed off if there is misrepresentation though. If the whole presentation during the sale of the whole life is about being about to save a PROJECTED 8% (for example only), then something needs to be done to the industry. Then again, projected returns are just's looking at a crystal ball and soothsaying what will happen in a very long timeframe. If it doesn't happen, too bad. Do you blame the soothsayer or the person who believes in them?

Tuesday, August 11, 2009

Driving test

Arggh, the blogger posting site is acting weird again, so it's just plain text from now on...again!

I passed my driving test last Friday, on 7/8/9 (nice numbers eh?). It was my second time taking the test and for those who had done it before, I'm sure you'll agree that driving test makes one a nervous wreck. I felt more relieved that happy after I'm over and done with it because I've promised my gf that I would pass once she passed. She the promise had to be fulfilled.

How much did I spend for that piece of elusive paper?

2.2k!! A total of 1 PDL renewal, 33 driving lessons, 2 tests and other misc. fees chalk up that astronomical sum. Okay, exaggerating a bit here. Considering that the license is a one time affair, 2.2k is a fair price to pay to be able to drive for life. Imagine those membership that you have to pay every year of your life...this is in the very okay range. Still, I can't help it that I could have used this amt to do a lot more useful things.

One of the things that people asked me after I passed is: when am I getting a car? I'm going to use my own 2 kahs for a longer period of time still, because I've got more pressing matters to attend to. If I ever get one, it'll be budgeted at 30k, and I'm not budging too far off that figure. There are some changes in my plan as plenty of months had passed since I first muse over the thought of getting myself a set of wheels. Got to put on hold for that one.

I reflected that there are some very good lessons in driving that can be applied to other areas in my life:

1. To succeed, you need to visualise and plan your success.

Since I last failed, I've been visualizing my passing. How? I visualize myself right from the start of the tester calling my name in the waiting room to eventually turning into the centre and getting the results. Though I've taken the test only twice, I've mentally taken the test don't know how many zillion times. The driving lessons are not exactly cheap, so I've been doing my mental driving lessons a few times every week and once before every real driving lessons.

In life, there are many possible variables. Your job is to reduce or eliminate those variables.

2. Shouting out to the universe what you want

I literally said aloud to myself that I'm going to pass this time round. What follows is nothing short of a series of miraculous coincidences. Amazing...this universe can hear your voice and echo it back to you. Believe it or not.

3. Join a competitive sport in school, it's more useful in life

Huh? What's this? I remembered this when laksa and a few others are debating on uniformed group as ECA (now called CCA) versus competitive sport. I joined competitive sport before and all the stress before the big match comes in. Your mind starts wandering into pessimistic scenarios, and when it does, your body will follow. That is the time to apply the correct breathing techniques, semi-meditation, semi-self hypnosis to induce a feeling of confidence and optimism in yourself so as to ease the pressure and stress before the big match. You need to feel relax, but it's easier said than done.

I'm glad I knew how to handle this kind of performance anxiety stress. I've seen a few others in the waiting room handling theirs. Some girls look so stressed up that they are willing to give up when the tester called their names.

4. If shit hits you, move on. If more shit hits you, still keep moving on.

I was getting into fights with my driving instructor the first time round. I can't stand his attitude and I still can't stand it now. However, I'm very amazed how he can forget about all the negativity and pretend nothing had gone on and still do his job. In the past, when I'm angry, I tend to focus on the angry stuffs but I had since learnt from my instructor how to move on.

Sunday, August 02, 2009

Wake me up when september ends

For those who is hoping to jump into the market, perhaps you can take a look at history. I posted this article on the seasonal effect of STI since 1985.

Based on historical data, average monthly returns for STI is pretty bad. But hey, the market is like a 1000 ml glass with 500 ml of water. It's half filled or half empty. It means either that you should start looking to re-balance your positions or you can start looking at some bargains for the things you've been eyeing for so long.

Of course, past data do not guarantee the future. Haha, I'm getting good at saying a lot without meaning anything :)